1

ROMEO P. BUSUEGO, CATALINO F. BANEZ and RENATO F. LIM, petitioners, vs. THE
HONORABLE COURT OF APPEALS and THE MONETARY BOARD OF THE CENTRAL
BANK OF THE PHILIPPINES, respondents.
DECISION
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking a reversal
of the Decision[1], dated September 14, 1990, of the Court of Appeals in CA-G.R. CV No. 23656.
As culled from the records, the facts of the case are as follows:
The 16th regular examination of the books and records of the PAL Employees Savings and Loan
Association, Inc. ("PESALA") was conducted from March 14 to April 16, 1988 by a team of CB
examiners headed by Belinda Rodriguez. Following the said examination, several anomalies and
irregularities committed by the herein petitioners; PESALA's directors and officers, were uncovered,
among which are:

On July 29, 1988, PESALA's Board of Directors sent to Director Lirio a letter concerning the 16th
regular examination of PESALA's records.
On September 9, 1988, the Monetary Board adopted and issued MB Resolution No. 805 the
pertinent provisions of which are as follows:
"1. To note the report on the examination of the PAL Employees' Savings and Loan Association,
Inc. (PESALA) as of December 31, 1987, as submitted in a memorandum of the Director,
Supervision and Examination Section (SES) Department IV, dated August 19, 1988;
2. To require the board of directors of PESALA to immediately inform the members of PESALA of
the results of the Central Bank examination and their effects on the financial condition of the
Association;
xxx
5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato Lim in the
Sector's watchlist to prevent them from holding responsible positions in any institution under
Central Bank supervision;

1. Questionable investment In a multi-million peso real estate project (Pesalaville)

2. Conflict of interest in the conduct of business
3. Unwarranted declaration and payment of dividends

6. To require PESALA to enforce collection of the overpayment to the Vista Grande Management
and Development Corporation and to require the accounting of P12.28 million unaccounted and
unremitted bank loan proceeds and P3.9 million other unsupported cash disbursements from the
responsible directors and officers; or to properly charge these against their respective accounts,
if necessary;

4. Commission of unsound and unsafe business practices.

On July 19, 1988,, Central Bank ("CB") Supervision and Examination Section ("SES")
Department IV Director Ricardo. F. Lirio sent a letter to the Board of Directors of PESALA inviting
them to a conference on July 21, 1988 to discuss subject findings noted in the said 16th regular
examination, but petitioners did not attend such conference.
On July 28, 1988, petitioner Renato Lim wrote the PESALA's Board of Directors explaining his
side on the said examination of PESALA's records and requesting that a copy of his letter be
furnished the CB, which was fortwith made by the Board. [2]

7. To require the board of directors of PESALA to file civil and criminal cases against
Messrs. Catalino Banez, Romeo Busuego and Renato Lim for all the misfeasance and
malfeasance committed by them, as warranted by the evidence;
8. To require the board of directors of PESALA to improve the operations of the Association,
correct all violations noted, and adopt internal control measures to prevent the recurrence of
similar incidents as shown in Annex E of the subject memorandum of the Director, SES
Department IV;"[3]
xxx xxx xxx

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On January 23, 1989, petitioners filed a Petition for Injunction with Prayer for the Immediate
Issuance of a Temporary Restraining Order [4] docketed as Civil Case No. Q-89-1617 before Branch
104 of the Regional Trial Court of Quezon City.

1248; 90-1249; 90-3031; 90-3032; 90-1837; 90-1834, pending the final resolution of the case at bar
xxx." However, in the Resolution[11] dated September 9, 1992, the court denied the said motion.
The petition poses as issues for resolution.

[5]

On January 26 1989, the said court issued a temporary restraining order enjoining the
defendant, the Monetary Board of the Central Bank, (now Banko Sentral ng Pilipinas) from including
the names of petitioners in the watchlist.
On February 10, 1989, the same trial court issued a writ of preliminary injunction [6], conditioned
upon the filing by petitioners of a bond in the amount of Ten Thousand (P10,000.00) Pesos each. The
Monetary Board presented a Motion for Reconsideration [7] of the said Order, but the same was
denied.
On September 11, 1989, the trial court handed down its Decision, [8] disposing thus:
"WHEREFORE, judgment is hereby rendered declaring Monetary Board Resolution No. 805 as void
and inexistent. The writ of preliminary prohibitory injunctions issued on February 10, 1989 is deemed
permanent. Costs against respondent."

I
WHETHER OR NOT THE PETITIONERS WERE DEPRIVED OF THEIR RIGHT TO A NOTICE
AND THE OPPORTUNITY TO BE HEARD BY THE MONETARY BOARD PRIOR TO ITS
ISSUANCE OF MONETARY BOARD RESOLUTION NO. 805.
II
WHETHER OR NOT THE RESPONDENT BOARD IS LEGALLY BOUND TO OBSERVE THE
ESSENTIAL REQUIREMENTS OF DUE PROCESS OF A VALID CHARGE, NOTICE AND
OPPORTUNITY TO BE HEARD INSOFAR AS THE PETITIONERS' SUBJECT CASE IS
CONCERNED.
III

The Monetary Board appealed the aforesaid Decision to the Court of Appeals which came out
with a Decision[9] of reversal on September 14, 1990, the decretal portion of which is to the following
effect:
"WHEREFORE, the decision appealed from is hereby reversed and another one entered dismissing
the petition for injunction."
Dissatisfied with the said Decision of the Court of Appeals, petitioners have come to this Court
via the present petition for review on certiorari.
On June 5, 1992, petitioners filed an "Urgent Motion for the Immediate Issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction against the Secretary of Justice and the City
Prosecutor of Pasay"[10] stating that several complaints were lodged against the petitioners before the
Office of the City Prosecutor of Pasay City pursuant to Monetary Board Resolution No. 805; that the
said complaints were dismissed by the City Prosecutor and the dismissals were appealed to the
Secretary of Justice for review, some of which have been reversed already. Petitioners prayed that a
Temporary Restraining Order and/or Writ of Preliminary Injunction issue "restraining and enjoining the
Secretary of Justice and the City Prosecutor of Pasay City from proceeding and taking further actions,
and more specially from filing Informations in I.S. Nos.-90-1836; 90-1831; 90-1835; 90-1832; 90-

WHETHER OR NOT MONETARY BOARD RESOLUTION NO. 805 IS NULL AND VOID FOR
BEING VIOLATIVE OF PETITIONERS' RIGHTS TO DUE PROCESS.
With respect to the first issue, the trial court said:
"The evidence submitted preponderates in favor of petitioners. The deprivation of petitioners' rights in
the Resolution undermines the constitutional guarantee of due process. Petitioners were never
notified that they were being investigated, much so, they were not informed of any charges against
them and were not afforded the opportunity to adduce countervailing evidence so as to deserve the
punitive measures promulgated in Resolution No. 805 of the Monetary Board. xxx [12]
The foregoing disquisition by the trial court is untenable under the facts and circumstances of the
case. Petitioners were duly afforded their right to due process by the Monetary Board, it appearing
that:
1. Petitioners were invited by Director Lirio to a conference scheduled for July 21, 1988 to
discuss the findings made in the 16th regular examination of PESALA's records. Petitioners did not
attend, said conference;

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2. Petitioner Renato Lim's letter of July 28, 1988 to PESALA's Board of Directors, explaining his
side of the controversy, was forwarded to the Monetary Board which the latter considered in adopting
Monetary Board Resolution No. 805; and
3. PESALA's Board of Director's letter, dated July 29, 1988, to the Monetary Board, explaining
the Board's side of the controversy, was properly considered in the adoption of Monetary Board
Resolution No. 805.
Petitioners therefore cannot complain of deprivation of their right to due process, as they were
given ample opportunity by the Monetary Board to air their Submission and defenses as to the
findings of irregularity during the said 16th regular examination. The essence of due process is to be
afforded a reasonable opportunity to be heard and to submit any evidence one may have in support
of his defense.[13] What is offensive to due process is the denial of the opportunity to be heard.
[14]
Petitioners having availed of their opportunity to present their position to the Monetary Board by
their letters-explanation, they were not denied due process [15].
Petitioners cite Ang Tibay v. CIR[16] and assert that the following requisites of procedural due
process were not observed by the Monetary Board:
1. The right to a hearing, which includes the right to present one's case and submit
evidence in support thereof;
2. The tribunal must consider the evidence presented;
3. The decision must have something to support itself;
4. The evidence must be substantial;

Contrary to petitioners' allegation, it appears that the requisites of procedural due process were
complied with by the Monetary Board before it issued the questioned Monetary Board Resolution No.
805. Firstly, the petitioners were invited to a conference to discuss the findings gathered during the
16th regular examination of PESALA's records. (The requirement of a hearing is complied with as
long as there was an opportunity to be heard, and not necessarily that an actual hearing was
conducted.[17]) Secondly, the Monetary Board considered the evidence presented. Thirdly, fourthly and
fifthly, Monetary Board Resolution No. 805 was adopted on the basis of said findings unearthed
during the 16th regular examination of PESALA's records and derived from the letter-comments
submitted by the parties. Sixthly, the members of the Monetary Board acted independently on their
own in issuing subject Resolution, placing reliance on the said findings made during the 16th regular
examination. Lastly, the reason for the issuance of Monetary Board Resolution No. 805 is readily
apparent, which is to prevent further irregularities from being committed and to prosecute the officials
responsible therefor.
With respect to the second issue, there is tenability in petitioners' contention that the Monetary
Board, as an administrative agency, is legally bound to observe due process, although they are free
from the rigidity of certain procedural requirements. As held in Adamson and Adamson,
Inc. v. Amores[18]:
"While administrative tribunals exercising quasi-judicial functions are free from the rigidity of certain
procedural requirements they are bound by law and practice to observe the fundamental and
essential requirements of due process in justiciable cases presented before them. However, the
standard of due process that must be met in administrative tribunals allows a certain latitude as long
as the element of fairness is not ignored. Hence, there is no denial of due process where records
show that hearings were held with prior notice to adverse parties. But even in the absence of previous
notice, there is no denial of procedural due, process as long as the parties are given the opportunity
to be heard."

5. The decision must be rendered on the evidence presented at the hearing, or at least
contained in the record and disclosed to the parties affected;

Even Section 28, (c) and (d), of Republic Act No. 3779 ("RA 3779") delineating the powers of the
Monetary Board over savings and loan associations, require observance of due process in the
exercise of its powers:

6. The tribunal or body or any of its judges must act or its or his own independent
consideration of the law and facts of the controversy and not simply accept the view of a
subordinate in arriving at a decision;

xxx

7. The board or body should, in all controversial questions, render its decision in such a
manner that the parties to the proceedings can know the various issues involved, and the reason
for the decision rendered.

(c) To conduct at least once every year, and whenever necessary, any inspection, examination or
investigation of the books, and records, business affairs, administration, and financial condition of any
savings and loan association with or without prior notice but always with fairness and
reasonable opportunity for the association or any of its officials to give their side of the case. x x x

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(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for
unsafe and unsound practices or for reason of insolvency. x x x
x x x.
(f) To decide, after appropriate notice and hearings any controversy as to the rights or obligations of
the savings and loan association, its directors, officers, stockholders and members under its charter,
and, by order, to enforce the same;
x x x" (italics supplied)
Anent the third issue, petitioners theorize that Monetary Board Resolution No. 805 is null and
void for being violative of petitioners' right to due process. To support their stance, they cite the trial
court's ruling, to wit:
"A reading of Monetary Board Resolution No. 805 discloses that it imposes administrative sanctions
against petitioners. In fact, it does not only penalize petitioners by including them in the watchlist to
prevent them from holding responsible positions in any institution under Central Bank supervision,' it
mandates the PESALA Board of Directors as well to file Civil and Criminal charges against them 'for
all the misfeasance and malfeasance committed by them, as warranted by the evidence.' Monetary
Board Resolution No. 805 virtually deprives petitioners their respective gainful employment, and at
the same time marks them for judicial prosecution. The crucial question here is that were petitioners
afforded due process in the investigations conducted which prompted the issuance of Monetary
Board Resolution No. 805?

virtually depriving them of the opportunity to seek employments in the field which they can excel and
are best fitted." According to them, the Monetary Board is not vested with "the authority to disqualify
persons from occupying positions in institutions under the supervision of the Central Bank without
proper notice and hearing" nor is it vested with authority "to file civil and criminal cases against its
officers/directors for suspected fraudulent acts."
Petitioners' contentions are untenable. It must be remembered that the Central Bank of
the. Philippines (now Bangko Sentral ng Pilipinas), through the Monetary Board, is the government
agency charged with the responsibility of administering the monetary, banking and credit system of
the country[19] and is granted the power of supervision and examination over banks and non-bank
financial institutions performing quasi-banking functions, of which savings and loan associations, such
as PESALA, form part of[20].
The special law governing savings and loan association is Republic Act No. 3779, as amended,
otherwise known as the "Savings and Loan Association Act." Said law authorizes the Monetary Board
to conduct regular yearly examinations of the books and records of savings and loan associations, to
suspend, a savings and loan association for violation of law, to decide any controversy over the
obligations and duties of directors and officers, and to take remedial measures, among
others. Section 28 of Rep. Act No. 3779, reads:
"SEC. 28. Supervisory powers over savings and loan associations. - In addition to whatever powers
have been conferred by the foregoing provisions, the Monetary Board shall have the power to
exercise the following:
xxx

x x x Although the Monetary Board is free from the rigidity of certain procedural requirements, it failed
'to observe the essential requirement of due process' (Adamson and Adamson, Inc. v. Amores, 152
SCRA 237) specifically its failure to afford petitioners the opportunity to be heard. In short, there is a
clear showing of arbitrariness resulting in an irreparable injury against petitioners as the Resolution
certainly affects their 'life, liberty and property.'
Monetary Board Resolution No. 805 Violates basic and essential requirements. It must therefore be,
as it is hereby, declared, as void and inexistent because among other things, it openly derogates the
fundamental rights of petitioners."
Petitioners opine that with the issuance of Monetary Board Resolution No. 805, "they are now barred
from being elected or designated as officers again of PESALA, and are likewise prevented from future
engagements or employments in all institutions under the supervision of the Central Bank thereby

(c) To conduct at least once every year, and whenever- necessary, any inspection, examination or
investigation of the books and records, business affairs, administration, and financial condition of any
savings and loan association with or without prior notice but always with fairness and reasonable
opportunity for the association or any of its officials to give their side of the case. Whenever an
inspection, examination or investigation is conducted under this grant of power, the person authorized
to do so may seize books and records and keep them under his custody after giving proper receipts
therefor; may make any marking or notation on any paper, record, document or book to show that it
has been examined and verified and may padlock or seal shelves, vaults, safes, receptacles or
similar containers and prohibit the opening thereof without first securing authority therefor, for as long
as may be necessary in connection with the investigation or examination being conducted. The official
of the Central Bank in charge of savings and loan associations and his deputies are hereby

5
authorized to administer oaths to any director, officer or employee of any association under the
supervision of the Monetary Board;
xxx
(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for
unsafe and unsound practices or for reason of insolvency. The Monetary Board may likewise, upon
the proof that a savings and loan association or its board or directors or officers are conducting and
managing its affairs in a manner contrary to laws, orders, instructions, rules and regulations
promulgated by the Monetary Board or in a manner substantially prejudicial to the interest of the
government, depositors or creditor, take over the management of the savings and loan association
after due hearing, until a new board of directors and officers are elected and qualified without
prejudice to the prosecution of the persons responsible for such violations. The management by the
Monetary Board shall be without expense to the savings and loan association, except such as is
actually necessary for its operation, pending the election and qualification of a new board of directors
and officers to take the place of those responsible for the violation or acts contrary to the interest of
the government, depositors or creditors;

The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as investigations
or examinations may be conducted with or without prior notice "but always with fairness and
reasonable opportunity for the association or any of its officials to give their side." As may be gathered
from the records, the said requirement was properly complied with by the respondent Monetary
Board.
We sustain the ruling of the Court of Appeals that petitioners' suspension was only preventive in
nature and therefore, no notice or, hearing was necessary. Until such time that the petitioners have
proved their innocence, they may be preventively suspended from holding office so as not to
influence the conduct of investigation, and to prevent the commission of further irregularities.
Neither were petitioners deprived of their lawful calling as they are free to look for another
employment so long as the agency or company involved is not subject to Central Bank control and
supervision. Petitioners can still practise their profession or engage in business as long as these are
not within the ambit of Monetary Board Resolution No. 805.
All things studiedly considered, the court upholds the validity of Monetary Board Resolution No.
805 and affirms the decision of the respondent court.

xxx
(f) To decide, after appropriate notice and hearings any controversy as to the rights or obligations of
the savings and loan association, its directors, officers, stockholders and members under its charter,
and, by order, to enforce the same;

WHEREFORE, the petition is DENIED, and the assailed Decision dated September 14, 1990 of
the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.

xxx
(l) To conduct such investigations, take such remedial measures, exercise all powers which are now
or may hereafter be conferred upon it by Republic Act Numbered Two Hundred sixty-five in the
enforcement of this legislation, and impose upon associations, whether stock or noti-stock their
directors and/or officers administrative sanctions under Sections 34-A or 34-B of Republic Act Two
Hundred sixty-five, as amended."

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines) and
MERCURIO RIVERA, petitioners, vs. COURT OF APPEALS, CARLOS EJERCITO, in
substitution of DEMETRIO DEMETRIA, and JOSE JANOLO, respondents.
DECISION
PANGANIBAN, J.:

From the foregoing, it is gleanable that the Central Bank, through the Monetary
Board, is empowered to conduct investigations and examine the records of savings and loan
associations. If any irregularity is discovered in the process, the Monetary Board may impose
appropriate sanctions, such as suspending the offender from holding office or from being employed
with the Central Bank, or placing the names of the offenders in a watchlist.

In the absence of a formal deed of sale, may commitments given by bank officers in an
exchange of letters and/or in a meeting with the buyers constitute a perfected and enforceable
contract of sale over 101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of apparent
authority apply in this case? If so, may the Central Bank-appointed conservator of Producers Bank
(now First Philippine International Bank) repudiate such apparent authority after said contract has
been deemed perfected? During the pendency of a suit for specific performance, does the filing of a

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derivative suit by the majority shareholders and directors of the distressed bank to prevent the
enforcement or implementation of the sale violate the ban against forum-shopping?
Simply stated, these are the major questions brought before this Court in the instant Petition for
review on certiorari under Rule 45 of the Rules of Court, to set aside the Decision
promulgatedJanuary 14, 1994 of the respondent Court of Appeals[1] in CA-G.R. CV No. 35756 and the
Resolution promulgated June 14, 1994 denying the motion for reconsideration. The dispositive portion
of the said Decision reads:
WHEREFORE, the decision of the lower court is MODIFIED by the elimination of the damages
awarded under paragraphs 3, 4 and 6 of its dispositive portion and the reduction of the award in
paragraph 5 thereof to P75,000.00, to be assessed against defendant bank. In all other aspects, said
decision is hereby AFFIRMED.

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of P400,000.00 for
and by way of attorneys fees;
6. Ordering the defendants to pay the plaintiffs, jointly and severally, actual and moderate damages in
the amount of P20,000.00;
With costs against the defendants.
After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to sur-rejoinder, the
petition was given due course in a Resolution dated January 18, 1995. Thence, the parties filed their
respective memoranda and reply memoranda. The First Division transferred this case to the Third
Division per resolution dated October 23, 1995. After carefully deliberating on the aforesaid
submissions, the Court assigned the case to the undersigned ponente for the writing of this Decision.

All references to the original plaintiffs in the decision and its dispositive portion are deemed, herein
and hereafter, to legally refer to the plaintiff-appellee Carlos C. Ejercito.
The Parties
Costs against appellant bank.
The dispositive portion of the trial courts [2] decision dated July 10, 1991, on the other hand, is as
follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants as follows:
1. Declaring the existence of a perfected contract to buy and sell over the six (6) parcels of land
situated at Don Jose, Sta. Rosa, Laguna with an area of 101 hectares, more or less, covered by and
embraced in Transfer Certificates of Title Nos. T-106932 to T-106937, inclusive, of the Land Records
of Laguna, between the plaintiffs as buyers and the defendant Producers Bank for an agreed price of
Five and One Half Million (P5,500,000.00) Pesos;
2. Ordering defendant Producers Bank of the Philippines, upon finality of this decision and receipt
from the plaintiffs the amount of P5.5 Million, to execute in favor of said plaintiffs a deed of absolute
sale over the aforementioned six (6) parcels of land, and to immediately deliver to the plaintiffs the
owners copies of T.C.T. Nos. T-106932 to T-106937, inclusive, for purposes of registration of the
same deed and transfer of the six (6) titles in the names of the plaintiffs;
3. Ordering the defendants, jointly and severally, to pay plaintiffs Jose A. Janolo and Demetrio
Demetria the sums of P 200,000.00 each in moral damages;
4. Ordering the defendants, jointly and severally, to pay plaintiffs the sum of P 100,000.00 as
exemplary damages;

Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines;
petitioner Bank, for brevity) is a banking institution organized and existing under the laws of the
Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal age
and was, at all times material to this case, Head Manager of the Property Management Department of
the petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee
of original plaintiffs-appellees Demetrio Demetria and Jose Janolo.
Respondent Court of Appeals is the court which issued the Decision and Resolution sought to be
set aside through this petition.

The Facts
The facts of this case are summarized in the respondent Courts Decision, [3] as follows:
(1) In the course of its banking operations, the defendant Producer Bank of the Philippines acquired
six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rosa, Laguna, and
covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The property used to be owned
by BYME Investment and Development Corporation which had them mortgaged with the bank as
collateral fora loan. The original plaintiffs, Demetrio Demetria and Jose O. Janolo, wanted to purchase
the property and thus initiated negotiations for that purpose.

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(2) In the early part of August 1987 said plaintiffs, upon the suggestion of BYME Investments legal
counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of the Property Management
Department of the defendant bank. The meeting was held pursuant to plaintiffs plan to buy the
property (TSN of Jan. 16, 1990, pp. 7-10). After the meeting, plaintiff Janolo, following the advice of
defendant Rivera, made a formal purchase offer to the bank through a letter dated August 30,
1987 (Exh. B), as follows:
August 30, 1987

Attention: JOSE O. JANOLO Dear Sir:

Dear Sir:
Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, Laguna
(formerly owned by Byme industrial Corp.). Please be informed however that the banks counter-offer
is at P5.5 million for more than 101 hectares on lot basis.
We shall be very glad to hear your position on the matter.

The Producers Bank of the Philippines

Makati, Metro Manila

Best regards.

Attn. Mr. Mercurio Q. Rivera

Manager, Property Management Dept.

(4)On September 17, 1987, plaintiff Janolo, responding to Riveras aforequoted reply, wrote (Exh.

Gentlemen:

September 17, 1987

I have the honor to submit my formal offer to purchase your properties covered by titles listed
hereunder located at Sta. Rosa, Laguna, with a total area of 101 hectares, more or less.

Producers Bank
Paseo de Roxas
Makati, Metro Manila

TCT NO. AREA

Attention: Mr. Mercurio Rivera
T-106932 113,580 sq.m.
T-106933 70,899 sq.m.
T-106934 52,246 sq.m.
T-106935 96,768 sq.m.
T-106936 187,114 sq.m.
T-106937 481,481 sq.m.

Gentlemen:
In reply to your letter regarding my proposal to purchase your 101-hectare lot located at Sta. Rosa
Laguna, I would like to amend my previous offer and I now propose to buy the said lot at P4.250
million in CASH.

My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00) PESOS, in
cash.
Kindly contact me at Telephone Number 921-1344.
(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by letter
which is hereunder quoted (Exh. C):
September 1, 1987
J-P M-P GUTIERREZ ENTERPRISES
142 Charisma St., Doa Andres II
Rosario, Pasig, Metro Manila

Hoping that this proposal meets your satisfaction.

(5) There was no reply to Janolos foregoing letter of September 17, 1987. What took place was a
meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-President of
defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting. Two days later,
or on September 30, 1987, plaintiff Janolo sent to the bank, through Rivera, the following letter (Exh.
E):
The Producers Bank of the Philippines
Paseo de Roxas, Makati
Metro Manila
Attention: Mr. Mercurio Rivera

8
Re: 101 Hectares of Land in Sta. Rosa, Laguna

This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your 101-hectare lot
located in Sta. Rosa, Laguna, and which are covered by TCT No. T-106932 to 106937.

Gentlemen:
Pursuant to our discussion last 28 September 1987, we are pleased to inform you that we are
accepting your offer for us to purchase the property at Sta. Rosa, Laguna, formerly owned by Byme
In-vestment, for a total price of PESOS: FIVE MILLION FIVE HUNDRED THOUSAND
(P5,500,000.00).

From the documents at hand, it appears that your counter-offer dated September 1, 1987 of this
same lot in the amount of P5.5 million was accepted by our client thru a letter dated September 30,
1987 and was received by you on October 5, 1987.

Thank you.

In view of the above circumstances, we believe that an agreement has been perfected. We were also
informed that despite repeated follow-up to consummate the purchase, you now refuse to honor your
commitment. Instead, you have advertised for sale the same lot to others.

(6) On October 12, 1987, the conservator of the bank (which has been placed under conservatorship
by the Central Bank since 1984) was replaced by an Acting Conservator in the person of defendant
Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote plaintiff Demetria the
following letter (Exh. F):

In behalf of our client, therefore, we are making this formal demand upon you to consummate and
execute the necessary actions/documentation within three (3) days from your receipt hereof We are
ready to remit the agreed amount of P5.5 million at your advice. Otherwise, we shall be constrained
to file the necessary court action to protect the interest of our client.

Attention: Atty. Demetrio Demetria

We trust that you will be guided accordingly.

Dear Sir:

(8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing letter and
stated, in its communication of December 2, 1987 (Exh. I), that said letter has been referred x x x to
the office of our Conservator for proper disposition. However, no response came from the Acting
Conservator. On December 14, 1987, the plaintiffs made a second tender of payment (Exhs. L and L1), this time through the Acting Conservator, defendant Encarnacion. Plaintiffs letter reads:

Your proposal to buy the properties the bank foreclosed from Byme Investment Corp. located at Sta.
Rosa, Laguna is under study yet as of this time by the newly created committee for submission to the
newly designated Acting Conservator of the bank.
For your information.
(7) What thereafter transpired was a series of demands by the plaintiffs for compliance by the bank
with what plaintiff considered as a perfected contract of sale, which demands were in one form or
another refused by the bank. As detailed by the trial court in its decision, on November 17, 1987,
plaintiffs through a letter to defendant Rivera (Exhibit G) tendered payment of the amount of P5.5
million pursuant to (our) perfected sale agreement. Defendants refused to receive both the payment
and the letter. Instead, the parcels of land involved in the transaction were advertised by the bank for
sale to any interested buyer (Exhs. H and H-1). Plaintiffs demanded the execution by the bank of the
documents on what was considered as a perfected agreement. Thus:
Mr. Mercurio Rivera
Manager, Producers Bank
Paseo de Roxas, Makati
Metro Manila
Dear Mr. Rivera:

PRODUCERS BANK OF
THE PHILIPPINES
Paseo de Roxas,
Makati, Metro Manila
Attn.: Atty. NIDA ENCARNACION Central Bank Conservator
Gentlemen:
We are sending you herewith, in-behalf of our client, Mr. JOSE O. JANOLO, MBTC Check No.
258387 in the amount of P5.5 million as our agreed purchase price of the 101-hectare lot covered by
TCT Nos. 106932, 106933, 106934, 106935, 106936 and 106937 and registered under Producers
Bank.
This is in connection with the perfected agreement consequent from your offer of P5.5 Million as the
purchase price of the said lots. Please inform us of the date of documentation of the sale
immediately.

9
Kindly acknowledge receipt of our payment.
(9) The foregoing letter drew no response for more than four months. Then, on May 3, 1988, plaintiff,
through counsel, made a final demand for compliance by the bank with its obligations under the
considered perfected contract of sale (Exhibit N). As recounted by the trial court (Original Record, p.
656), in a reply letter dated May 12, 1988 (Annex 4 of defendants answer to amended complaint), the
defendants through Acting Conservator Encarnacion repudiated the authority of defendant Rivera and
claimed that his dealings with the plaintiffs, particularly his counter-offer of P5.5 Million are
unauthorized or illegal. On that basis, the defendants justified the refusal of the tenders of payment
and the non-compliance with the obligations under what the plaintiffs considered to be a perfected
contract of sale.
(10) On May 16, 1988, plaintiffs filed a suit for specific performance with damages against the bank,
its Manager Rivera and Acting Conservator Encarnacion. The basis of the suit was that the
transaction had with the bank resulted in a perfected contract of sale. The defendants took the
position that there was no such perfected sale because the defendant Rivera is not authorized to sell
the property, and that there was no meeting of the minds as to the price.
On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar Hernandez
and Gatmaitan, filed a motion to intervene in the trial court, alleging that as owner of 80% of the
Banks outstanding shares of stock, he had a substantial interest in resisting the complaint. On July 8,
1991, the trial court issued an order denying the motion to intervene on the ground that it was filed
after trial had already been concluded. It also denied a motion for reconsideration filed thereafter.
From the trial courts decision, the Bank, petitioner Rivera and conservator Encarnacion appealed to
the Court of Appeals which subsequently affirmed with modification the said judgment. Henry Co did
not appeal the denial of his motion for intervention.
In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in
place of Demetria and Janolo, in view of the assignment of the latters rights in the matter in litigation
to said private respondent.
On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and
several other stockholders of the Bank, through counsel Angara Abello Concepcion Regala and Cruz,
filed an action (hereafter, the Second Case) -purportedly a derivative suit - with the Regional Trial
Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against Encarnacion, Demetria
and Janolo to declare any perfected sale of the property as unenforceable and to stop Ejercito from
enforcing or implementing the sale. [4] In his answer, Janolo argued that the Second Case was barred
by litis pendentia by virtue of the case then pending in the Court of Appeals. During the pre-trial
conference in the Second Case, plaintiffs filed a Motion for Leave of Court to Dismiss the Case
Without Prejudice. Private respondent opposed this motion on the ground, among others, that
plaintiffs act of forum shopping justifies the dismissal of both cases, with prejudice. [5] Private
respondent, in his memorandum, averred that this motion is still pending in the Makati RTC.
In their Petition[6] and Memorandum,[7] petitioners summarized their position as follows:

I.
The Court of Appeals erred in declaring that a contract of sale was perfected between Ejercito (in
substitution of Demetria and Janolo) and the bank.
II.
The Court of Appeals erred in declaring the existence of an enforceable contract of sale between the
parties.
III.
The Court of Appeals erred in declaring that the conservator does not have the power to overrule or
revoke acts of previous management.
IV.
The findings and conclusions of the Court of Appeals do not conform to the evidence on record.
On the other hand, private respondents prayed for dismissal of the instant suit on the
ground[8] that:
I.
Petitioners have engaged in forum shopping.
II.
The factual findings and conclusions of the Court of Appeals are supported by the evidence on record
and may no longer be questioned in this case.
III.
The Court of Appeals correctly held that there was a perfected contract between Demetria and Janolo
(substituted by respondent Ejercito) and the bank.
IV.
The Court of Appeals has correctly held that the conservator, apart from being estopped from
repudiating the agency and the contract, has no authority to revoke the contract of sale.

10
The Issues
From the foregoing positions of the parties, the issues in this case may be summed up as
follows:
1) Was there forum-shopping on the part of petitioner Bank?
2) Was there a perfected contract of sale between the parties?
3) Assuming there was, was the said contract enforceable under the statute of frauds?
4) Did the bank conservator have the unilateral power to repudiate the authority of the bank
officers and/or to revoke the said contract?
5) Did the respondent Court commit any reversible error in its findings of facts?

The First Issue: Was There Forum-Shopping?

In order to prevent the vexations of multiple petitions and actions, the Supreme Court
promulgated Revised Circular No. 28-91 requiring that a party must certify under oath x x x [that] (a)
he has not (t)heretofore commenced any other action or proceeding involving the same issues in the
Supreme Court, the Court of Appeals, or any other tribunal or agency; (b) to the best of his
knowledge, no such action or proceeding is pending in said courts or agencies. A violation of the said
circular entails sanctions that include the summary dismissal of the multiple petitions or complaints.
To be sure, petitioners have included a VERIFICATION/CERTIFICATION in their Petition stating for
the record(,) the pendency of Civil Case No. 92-1606 before the Regional Trial Court of Makati,
Branch 134, involving a derivative suit filed by stockholders of petitioner Bank against the conservator
and other defendants but which is the subject of a pending Motion to Dismiss Without Prejudice. [9]
Private respondent Ejercito vigorously argues that in spite of this verification, petitioners are
guilty of actual forum shopping because the instant petition pending before this Court involves
identical parties or interests represented, rights asserted and reliefs sought (as that) currently pending
before the Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the issues in the two
cases are so intertwined that a judgment or resolution in either case will constitute res judicata in the
other.[10]
On the other hand, petitioners explain[11] that there is no forum-shopping because:
1) In the earlier or First Case from which this proceeding arose, the Bank was impleaded as a
defendant, whereas in the Second Case (assuming the Bank is the real party in interest in a
derivative suit), it was the plaintiff;

2) The derivative suit is not properly a suit for and in behalf of the corporation under the
circumstances;
3) Although the CERTIFICATION/VERIFICATION (supra) signed by the Bank president and attached
to the Petition identifies the action as a derivative suit, it does not mean that it is one and (t)hat is a
legal question for the courts to decide;
4) Petitioners did not hide the Second Case as they mentioned it in the said
VERIFICATION/CERTIFICATION.
We rule for private respondent.
To begin with, forum-shopping originated as a concept in private international law, [12] where nonresident litigants are given the option to choose the forum or place wherein to bring their suit for
various reasons or excuses, including to secure procedural advantages, to annoy and harass the
defendant, to avoid overcrowded dockets, or to select a more friendly venue. To combat these less
than honorable excuses, the principle of forum non conveniens was developed whereby a court, in
conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most convenient or
available forum and the parties are not precluded from seeking remedies elsewhere.
In this light, Blacks Law Dictionary [13] says that forum-shopping occurs when a party attempts to
have his action tried in a particular court or jurisdiction where he feels he will receive the most
favorable judgment or verdict. Hence, according to Words and Phrases, [14] a litigant is open to the
charge of forum shopping whenever he chooses a forum with slight connection to factual
circumstances surrounding his suit, and litigants should be encouraged to attempt to settle their
differences without imposing undue expense and vexatious situations on the courts.
In the Philippines, forum-shopping has acquired a connotation encompassing not only a choice
of venues, as it was originally understood in conflicts of laws, but also to a choice of remedies. As to
the first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence personal
actions where the defendant or any of the defendants resides or may be found, or where the plaintiff
or any of the plaintiffs resides, at the election of the plaintiff (Rule 4, Sec. 2 [b]). As to remedies,
aggrieved parties, for example, are given a choice of pursuing civil liabilities independently of the
criminal, arising from the same set of facts. A passenger of a public utility vehicle involved in a
vehicular accident may sue on culpa contractual, culpa aquiliana or culpa criminal - each remedy
being available independently of the others - although he cannot recover more than once.
In either of these situations (choice of venue or choice of remedy), the litigant actually shops for a
forum of his action. This was the original concept of the term forum shopping.
Eventually, however, instead of actually making a choice of the forum of their actions, litigants,
through the encouragement of their lawyers, file their actions in all available courts, or invoke all
relevant remedies simultaneously. This practice had not only resulted to (sic) conflicting adjudications

11
among different courts and consequent confusion enimical (sic) to an orderly administration of justice.
It had created extreme inconvenience to some of the parties to the action.
Thus, forum-shopping had acquired a different concept - which is unethical professional legal
practice. And this necessitated or had given rise to the formulation of rules and canons discouraging
or altogether prohibiting the practice.[15]
What therefore originally started both in conflicts of laws and in our domestic law as a legitimate
device for solving problems has been abused and misused to assure scheming litigants of dubious
reliefs.
To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already
mentioned, promulgated Circular 28-91. And even before that, the Court had proscribed it in the
Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several cases [16] the
inveterate use of this insidious malpractice. Forum-shopping as the filing of repetitious suits in
different courts has been condemned by Justice Andres R. Narvasa (now Chief Justice) in Minister of
Natural Resources, et al. vs. Heirs of Orval Hughes, et al., as a reprehensible manipulation of court
processes and proceedings x x x.[17] When does forum-shopping take place?
There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party seeks a
favorable opinion (other than by appeal or certiorari) in another. The principle applies not only with
respect to suits filed in the courts but also in connection with litigations commenced in the courts
while an administrative proceeding is pending, as in this case, in order to defeat administrative
processes and in anticipation of an unfavorable administrative ruling and a favorable court ruling. This
is specially so, as in this case, where the court in which the second suit was brought, has no
jurisdiction [18]
The test for determining whether a party violated the rule against forum-shopping has been laid
down in the 1986 case of Buan vs. Lopez, [19] also by Chief Justice Narvasa, and that is, forumshopping exists where the elements of litis pendentia are present or where a final judgment in one
case will amount to res judicata in the other, as follows:
There thus exists between the action before this Court and RTC Case No. 86-36563 identity of
parties, or at least such parties as represent the same interests in both actions, as well as identity of
rights asserted and relief prayed for, the relief being founded on the same facts, and the identity on
the two preceding particulars is such that any judgment rendered in the other action, will, regardless
of which party is successful, amount to res adjudicata in the action under consideration: all the
requisites, in fine, of auter action pendant.
xxx xxx xxx
As already observed, there is between the action at bar and RTC Case No. 86-36563, an identity as
regards parties, or interests represented, rights asserted and relief sought, as well as basis thereof, to

a degree sufficient to give rise to the ground for dismissal known as auter action pendant or lis
pendens. That same identity puts into operation the sanction of twin dismissals just mentioned. The
application of this sanction will prevent any further delay in the settlement of the controversy which
might ensue from attempts to seek reconsideration of or to appeal from the Order of the Regional
Trial Court in Civil Case No. 86-36563 promulgated on July 15, 1986, which dismissed the petition
upon grounds which appear persuasive.
Consequently, where a litigant (or one representing the same interest or person) sues the same
party against whom another action or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is a bar
to the others; and, a final judgment in one would constitute res judicata and thus would cause the
dismissal of the rest. In either case, forum shopping could be cited by the other party as a ground to
ask for summary dismissal of the two [20] (or more) complaints or petitions, and for the imposition of the
other sanctions, which are direct contempt of court, criminal prosecution, and disciplinary action
against the erring lawyer.
Applying the foregoing principles in the case before us and comparing it with the Second Case, it
is obvious that there exist identity of parties or interests represented, identity of rights or causes and
identity of reliefs sought.
Very simply stated, the original complaint in the court a quo which gave rise to the instant petition
was filed by the buyer (herein private respondent and his predecessors-in-interest) against the seller
(herein petitioners) to enforce the alleged perfected sale of real estate. On the other hand, the
complaint[21] in the Second Case seeks to declare such purported sale involving the same real
property as unenforceable as against the Bank, which is the petitioner herein. In other words, in the
Second Case, the majority stockholders, in representation of the Bank, are seeking to accomplish
what the Bank itself failed to do in the original case in the trial court. In brief, the objective or the relief
being sought, though worded differently, is the same, namely, to enable the petitioner Bank to escape
from the obligation to sell the property to respondent. In Danville Maritime, Inc. vs. Commission on
Audit,[22] this Court ruled that the filing by a party of two apparently different actions, but with the same
objective, constituted forum shopping:
In the attempt to make the two actions appear to be different, petitioner impleaded different
respondents therein - PNOC in the case before the lower court and the COA in the case before this
Court and sought what seems to be different reliefs. Petitioner asks this Court to set aside the
questioned letter-directive of the COA dated October 10, 1988 and to direct said body to approve the
Memorandum of Agreement entered into by and between the PNOC and petitioner, while in the
complaint before the lower court petitioner seeks to enjoin the PNOC from conducting a rebidding and
from selling to other parties the vessel T/T Andres Bonifacio, and for an extension of time for it to
comply with the paragraph 1 of the memorandum of agreement and damages. One can see that
although the relief prayed for in the two (2) actions are ostensibly different, the ultimate objective in
both actions is the same, that is, the approval of the sale of vessel in favor of petitioner, and to
overturn the letter-directive of the COA of October 10, 1988 disapproving the sale. (italics supplied)

12
In an earlier case,[23] but with the same logic and vigor, we held:
In other words, the filing by the petitioners of the instant special civil action for certiorari and
prohibition in this Court despite the pendency of their action in the Makati Regional Trial Court, is a
species of forum-shopping. Both actions unquestionably involve the same transactions, the same
essential facts and circumstances. The petitioners claim of absence of identity simply because the
PCGG had not been impleaded in the RTC suit, and the suit did not involve certain acts which
transpired after its commencement, is specious. In the RTC action, as in the action before this Court,
the validity of the contract to purchase and sell of September 1, 1986, i.e., whether or not it had been
efficaciously rescinded, and the propriety of implementing the same (by paying the pledgee banks the
amount of their loans, obtaining the release of the pledged shares, etc.) were the basic issues. So,
too, the relief was the same: the prevention of such implementation and/or the restoration of
the status quo ante. When the acts sought to be restrained took place anyway despite the issuance
by the Trial Court of a temporary restraining order, the RTC suit did not become functus oflcio. It
remained an effective vehicle for obtention of relief; and petitioners remedy in the premises was plain
and patent: the filing of an amended and supplemental pleading in the RTC suit, so as to include the
PCGG as defendant and seek nullification of the acts sought to be enjoined but nonetheless done.
The remedy was certainly not the institution of another action in another forum based on essentially
the same facts. The adoption of this latter recourse renders the petitioners amenable to disciplinary
action and both their actions, in this Court as well as in the Court a quo, dismissible.
In the instant case before us, there is also identity of parties, or at least, of interests represented.
Although the plaintiffs in the Second Case (Henry L. Co. et al.) are not name parties in the First Case,
they represent the same interest and entity, namely, petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct personal interest in the
matter in controversy. They are not principally or even subsidiarily liable; much less are they direct
parties in the assailed contract of sale; and
Secondly, the allegations of the complaint in the Second Case show that the stockholders are
bringing a derivative suit. In the caption itself, petitioners claim to have brought suit for and in behalf
of the Producers Bank of thePhilippines.[24] Indeed, this is the very essence of a derivative suit:
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein
he holds stock in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; italics supplied).
In the face of the damaging admissions taken from the complaint in the Second Case,
petitioners, quite strangely, sought to deny that the Second Case was a derivative suit, reasoning that
it was brought, not by the minority shareholders, but by Henry Co et al., who not only own, hold or
control over 80% of the outstanding capital stock, but also constitute the majority in the Board of

Directors of petitioner Bank. That being so, then they really represent the Bank. So, whether they
sued derivatively or directly, there is undeniably an identity of interests/entity represented.
Petitioner also tried to seek refuge in the corporate fiction that the personality of the Bank is
separate and distinct from its shareholders. But the rulings of this Court are consistent: When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.[25]
In addition to the many cases[26] where the corporate fiction has been disregarded, we now add
the instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise
blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court
processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously
prosecuting or defending corporate causes and in using and applying remedies available to it. To rule
otherwise would be to encourage corporate litigants to use their shareholders as fronts to circumvent
the stringent rules against forum shopping.
Finally, petitioner Bank argued that there cannot be any forum shopping, even
assuming arguendo that there is identity of parties, causes of action and reliefs sought, because it
(the Bank) was the defendant in the (first) case while it was the plaintiff in the other (Second Case),
citing as authority Victronics Computers, Inc. vs. Regional Trial Court, Branch 63, Makati, etc. et al.,
[27]
where the Court held:
The rule has not been extended to a defendant who, for reasons known only to him, commences a
new action against the plaintiff - instead of filing a responsive pleading in the other case - setting forth
therein, as causes of action, specific denials, special and affirmative defenses or even counterclaims.
Thus, Velhagens and Kings motion to dismiss Civil Case No. 91-2069 by no means negates the
charge of forum-shopping as such did not exist in the first place. (italics supplied)
Petitioner pointed out that since it was merely the defendant in the original case, it could not
have chosen the forum in said case.
Respondent, on the other hand, replied that there is a difference in factual setting
between Victronics and the present suit. In the former, as underscored in the above-quoted Court
ruling, the defendants did not file any responsive pleading in the first case. In other words, they did
not make any denial or raise any defense or counter-claim therein. In the case before us however,
petitioners filed a responsive pleading to the complaint - as a result of which, the issues were joined.
Indeed, by praying for affirmative reliefs and interposing counter-claims in their responsive
pleadings, the petitioners became plaintiffs themselves in the original case, giving unto themselves
the very remedies they repeated in the Second Case.

13
Ultimately, what is truly important to consider in determining whether forum-shopping exists or
not is the vexation caused the courts and parties-litigant by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions being
rendered by the different fora upon the same issue. In this case, this is exactly the problem: a
decision recognizing the perfection and directing the enforcement of the contract of sale will directly
conflict with a possible decision in the Second Case barring the parties from enforcing or
implementing the said sale. Indeed, a final decision in one would constitute res judicata in the other.[28]
The foregoing conclusion finding the existence of forum-shopping notwithstanding, the only
sanction possible now is the dismissal of both cases with prejudice, as the other sanctions cannot be
imposed because petitioners present counsel entered their appearance only during the proceedings
in this Court, and the Petitions VERIFICATION/CERTIFICATION contained sufficient allegations as to
the pendency of the Second Case to show good faith in observing Circular 28-91. The lawyers who
filed the Second Case are not before us; thus the rudiments of due process prevent us from motu
propio imposing disciplinary measures against them in this Decision. However, petitioners themselves
(and particularly Henry Co, et al.) as litigants are admonished to strictly follow the rules against forumshopping and not to trifle with court proceedings and processes. They are warned that a repetition of
the same will be dealt with more severely.
Having said that, let it be emphasized that this petition should be dismissed not merely because
of forum-shopping but also because of the substantive issues raised, as will be discussed shortly.

The Second Issue: Was The Contract Perfected?

The respondent Court correctly treated the question of whether or not there was, on the basis of
the facts established, a perfected contract of sale as the ultimate issue. Holding that a valid contract
has been established, respondent Court stated:
There is no dispute that the object of the transaction is that property owned by the defendant bank as
acquired assets consisting of six (6) parcels of land specifically identified under Transfer Certificates
of Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the bank intended to sell the
property. As testified to by the Banks Deputy Conservator, Jose Entereso, the bank was looking for
buyers of the property. It is definite that the plaintiffs wanted to purchase the property and it was
precisely for this purpose that they met with defendant Rivera, Manager of the Property Management
Department of the defendant bank, in early August 1987. The procedure in the sale of acquired
assets as well as the nature and scope of the authority of Rivera on the matter is clearly delineated in
the testimony of Rivera himself, which testimony was relied upon by both the bank and by Rivera in
their appeal briefs. Thus (TSN of July 30, 1990. pp. 19-20):
A: The procedure runs this way: Acquired assets was turned over to me and then I published it in the
form of an inter-office memorandum distributed to all branches that these are acquired assets for

sale. I was instructed to advertise acquired assets for sale so on that basis, I have to entertain offer;
to accept offer, formal offer and upon having been offered, I present it to the Committee. I provide the
Committee with necessary information about the property such as original loan of the borrower, bid
price during the foreclosure, total claim of the bank, the appraised value at the time the property is
being offered for sale and then the information which are relative to the evaluation of the bank to buy
which the Committee considers and it is the Committee that evaluate as against the exposure of the
bank and it is also the Committee that submit to the Conservator for final approval and once
approved, we have to execute the deed of sale and it is the Conservator that sign the deed of sale,
sir.
The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying the
property, dealt with and talked to the right person. Necessarily, the agenda was the price of the
property, and plaintiffs were dealing with the bank official authorized to entertain offers, to accept
offers and to present the offer to the Committee before which the said official is authorized to discuss
information relative to price determination. Necessarily, too, it being inherent in his authority, Rivera is
the officer from whom official information regarding the price, as determined by the Committee and
approved by the Conservator, can be had. And Rivera confirmed his authority when he talked with the
plaintiff in August 1987. The testimony of plaintiff Demetria is clear on this point (TSN of May 31,
1990, pp. 27-28):
Q: When you went to the Producers Bank and talked with Mr. Mercurio Rivera, did you ask
him point-blank his authority to sell any property?
A: No, sir. Not point blank although it came from him. (W)hen I asked him how long it would
take because he was saying that the matter of pricing will be passed upon by the
committee. And when I asked him how long it will take for the committee to decide and
he said the committee meets every week. If I am not mistaken Wednesday and in
about two weeks (sic) time, in effect what he was saying he was not the one who was
to decide. But he would refer it to the committee and he would relay the decision of the
committee to me.
Q: Please answer the question.
A: He did not say that he had the authority(.) But he said he would refer the matter to the
committee and he would relay the decision to me and he did just like that.
Parenthetically, the Committee referred to was the Past Due Committee of which Luis Co was the
Head, with Jose Entereso as one of the members.
What transpired after the meeting of early August 1987 are consistent with the authority and the
duties of Rivera and the banks internal procedure in the matter of the sale of banks assets. As
advised by Rivera, the plaintiffs made a formal offer by a letter dated August 20, 1987 stating that
they would buy at the price of P3.5 Million in cash. The letter was for the attention of Mercurio Rivera
who was tasked to convey and accept such offers. Considering an aspect of the official duty of Rivera

14
as some sort of intermediary between the plaintiffs-buyers with their proposed buying price on one
hand, and the bank Committee, the Conservator and ultimately the bank itself with the set price on
the other, and considering further the discussion of price at the meeting of August resulting in a formal
offer of P3.5 Million in cash, there can be no other logical conclusion than that when, on September 1,
1987, Rivera informed plaintiffs by letter that the banks counter-offer is at P5.5 Million for more than
101 hectares on lot basis, such counter-offer price had been determined by the Past Due Committee
and approved by the Conservator after Rivera had duly presented plaintiffs offer for discussion by the
Committee of such matters as original loan of borrower, bid price during foreclosure, total claim of the
bank, and market value. Tersely put, under the established facts, the price of P5.5 Million was, as
clearly worded in Riveras letter (Exh. E), the official and definitive price at which the bank was selling
the property.
There were averments by defendants below, as well as before this Court, that the P5.5 Million price
was not discussed by the Committee and that it was merely quoted to start negotiations regarding the
price. As correctly characterized by the trial court, this is not credible. The testimonies of Luis Co and
Jose Entereso on this point are at best equivocal and considering the gratuitous and self-serving
character of these declarations, the banks submission on this point does not inspire belief. Both Co
and Entereso, as members of the Past Due Committee of the bank, claim that the offer of the plaintiff
was never discussed by the Committee. In the same vein, both Co and Entereso openly admit that
they seldom attend the meetings of the Committee. It is important to note that negotiations on the
price had started in early August and the plaintiffs had already offered an amount as purchase price,
having been made to understand by Rivera, the official in charge of the negotiation, that the price will
be submitted for approval by the bank and that the banks decision will be relayed to plaintiffs. From
the facts, the amount of P5.5 Million has a definite significance. It is the official bank price. At any rate,
the bank placed its official, Rivera, in a position of authority to accept offers to buy and negotiate the
sale by having the offer officially acted upon by the bank. The bank cannot turn around and later say,
as it now does, that what Rivera states as the banks action on the matter is not in fact so. It is a
familiar doctrine, the doctrine of ostensible authority, that if a corporation knowingly permits one of its
officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him
out to the public as possessing power to do those acts, the corporation will, as against any one who
has in good faith dealt with the corporation through such agent, he estopped from denying his
authority (Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of Appeals, 94 SCRA 357, 369370; Prudential Bank v. Court of Appeals, G.R. No. 103957, June 14, 1993). [29]
Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as
follows: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the
contract; (3) Cause of the obligation which is established.
There is no dispute on requisite no. 2. The object of the questioned contract consists of the six
(6) parcels of land in Sta. Rosa, Laguna with an aggregate area of about 101 hectares, more or less,
and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however, a dispute
on the first and third requisites.
Petitioners allege that there is no counter-offer made by the Bank, and any supposed counteroffer which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by the

Bank, there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept. [30] They
disputed the factual basis of the respondent Courts findings that there was an offer made by Janolo
for P3.5 million, to which the Bank counter-offered P5.5 million. We have perused the evidence but
cannot find fault with the said Courts findings of fact. Verily, in a petition under Rule 45 such as this,
errors of fact -if there be any - are, as a rule, not reviewable. The mere fact that respondent Court
(and the trial court as well) chose to believe the evidence presented by respondent more than that
presented by petitioners is not by itself a reversible error. in fact, such findings merit serious
consideration by this Court, particularly where, as in this case, said courts carefully and meticulously
discussed their findings. This is basic.
Be that as it may, and in addition to the foregoing disquisitions by the Court of Appeals, let us
review the question of Riveras authority to act and petitioners allegations that the P5.5 million
counter-offer was extinguished by the P4.25 million revised offer of Janolo. Here, there are questions
of law which could be drawn from the factual findings of the respondent Court. They also delve into
the contractual elements of consent and cause.
The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of apparent authority, with special reference to banks, was laid out in Prudential Bank vs.
Court of Appeals,[31] where it was held that:
Conformably, we have declared in countless decisions that the principal is liable for obligations
contracted by the agent. The agents apparent representation yields to the principals true
representation and the contract is considered as entered into between the principal and the third
person (citing National Food Authority vs. Intermediate Appellate Court, 184 SCRA 166).
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of
dealings of the officers in their representative capacity but not for acts outside the scope of their
authority (9 C.J.S., p. 417). A bank holding out its officers and agents as worthy of confidence will not
be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of
their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking corporation
is liable to innocent third persons where the representation is made in the course of its business by
an agent acting within the general scope of his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other
person, for his own ultimate benefit (McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR
1021).
Application of these principles is especially necessary because banks have a fiduciary relationship
with the public and their stability depends on the confidence of the people in their honesty and
efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and
supervision of its employees, resulting in prejudice to their depositors.

15
From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent
or implied authority to act for the Bank in the matter of selling its acquired assets. This evidence
includes the following:

memoranda that purport to show his limited actual authority, of which private respondent cannot be
charged with knowledge. In any event, since the issue is apparent authority, the existence of which is
borne out by the respondent Courts findings, the evidence of actual authority is immaterial insofar as
the liability of a corporation is concerned.[33]

(a) The petition itself in par. II-1 (p. 3) states that Rivera was at all times material to this case,
Manager of the Property Management Department of the Bank. By his own admission, Rivera was
already the person in charge of the Banks acquired assets (TSN, August 6, 1990, pp. 8-9);

Petitioners also argued that since Demetria and Janolo were experienced lawyers and their law
firm had once acted for the Bank in three criminal cases, they should be charged with actual
knowledge of Riveras limited authority. But the Court of Appeals in its Decision (p. 12) had already
made a factual finding that the buyers had no notice of Riveras actual authority prior to the sale. In
fact, the Bank has not shown that they acted as its counsel in respect to any acquired assets; on the
other hand, respondent has proven that Demetria and Janolo merely associated with a loose
aggrupation of lawyers (not a professional partnership), one of whose members (Atty. Susana Parker)
acted in said criminal cases.

(b) As observed by respondent Court, the land was definitely being sold by the Bank. And during the
initial meeting between the buyers and Rivera, the latter suggested that the buyers offer should be no
less than P3.3 million (TSN, April 26, 1990, pp. 16-17);
(c) Rivera received the buyers letter dated August 30, 1987 offering P3.5 million (TSN, 30 July 1990,
p. 11);
(d) Rivera signed the letter dated September 1, 1987 offering to sell the property for P5.5 million
(TSN, July 30, p. 11);
(e) Rivera received the letter dated September 17, 1987 containing the buyers proposal to buy the
property for P4.25 million (TSN, July 30, 1990, p. 12);
(f) Rivera, in a telephone conversation, confirmed that the P5.5 million was the final price of the Bank
(TSN, January 16, 1990, p. 18);
(g) Rivera arranged the meeting between the buyers and Luis Co on September 28, 1987, during
which the Banks offer of P5.5 million was confirmed by Rivera (TSN, April 26, 1990, pp. 34-35). At
said meeting, Co, a major shareholder and officer of the Bank, confirmed Riveras statement as to the
finality of the Banks counter-offer of P5.5 million (TSN, January 16, 1990, p. 21; TSN, April 26, 1990,
p. 35);
(h) In its newspaper advertisements and announcements, the Bank referred to Rivera as the officer
acting for the Bank in relation to parties interested in buying assets owned/acquired by the Bank. In
fact, Rivera was the officer mentioned in the Banks advertisements offering for sale the property in
question (cf. Exhs. S and S-I).
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et al., [32] the Court,
through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by similar
circumstances surrounding his dealings with buyers.
To be sure, petitioners attempted to repudiate Riveras apparent authority through documents
and testimony which seek to establish Riveras actual authority. These pieces of evidence, however,
are inherently weak as they consist of Riveras self-serving testimony and various inter-office

Petitioners also alleged that Demetrias and Janolos P4.25 million counter-offer in the letter
dated September 17, 1987 extinguished the Banks offer of P5.5 million. [34] They disputed the
respondent Courts finding that there was a meeting of minds when on 30 September 1987 Demetria
and Janolo through Annex L (letter dated September 30, 1987) accepted Riveras counter offer of
P5.5 million under Annex J (letter dated September 17, 1987), citing the late Justice Paras, [35] Art.
1319 of the Civil Code[36] and related Supreme Court rulings starting with Beaumont vs. Prieto.[37]
However, the above-cited authorities and precedents cannot apply in the instant case because,
as found by the respondent Court which reviewed the testimonies on this point, what was accepted
by Janolo in his letter dated September 30, 1987 was the Banks offer of P5.5 million as confirmed
and reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their meeting on
September 28, 1987. Note that the said letter of September 30, 1987 begins with (p)ursuant to our
discussion last 28 September 1987 x x x.
Petitioners insist that the respondent Court should have believed the testimonies of Rivera and
Co that the September 28, 1987 meeting was meant to have the offerors improve on their position of
P5.5 million.[38] However, both the trial court and the Court of Appeals found petitioners testimonial
evidence not credible, and we find no basis for changing this finding of fact.
Indeed, we see no reason to disturb the lower courts (both the RTC and the CA) common finding
that private respondents evidence is more in keeping with truth and logic - that during the meeting on
September 28, 1987, Luis Co and Rivera confirmed that the P5.5 million price has been passed upon
by the Committee and could no longer be lowered (TSN of April 27, 1990, pp. 34-35). [39] Hence,
assuming arguendo that the counter-offer of P4.25 million extinguished the offer of P5.5 million, Luis
Cos reiteration of the said P5.5 million price during the September 28, 1987 meeting revived the said
offer. And by virtue of the September 30, 1987 letter accepting this revived offer, there was a meeting
of the minds, as the acceptance in said letter was absolute and unqualified.
We note that the Banks repudiation, through Conservator Encarnacion, of Riveras authority and
action, particularly the latters counter-offer of P5.5 million, as being unauthorized and illegal came
only on May 12, 1988 or more than seven (7) months after Janolos acceptance. Such delay, and the
absence of any circumstance which might have justifiably prevented the Bank from acting earlier,

16
clearly characterizes the repudiation as nothing more than a last-minute attempt on the Banks part to
get out of a binding contractual obligation.
Taken together, the factual findings of the respondent Court point to an implied admission on the
part of the petitioners that the written offer made on September 1, 1987 was carried through during
the meeting of September 28, 1987. This is the conclusion consistent with human experience, truth
and good faith.
It also bears noting that this issue of extinguishment of the Banks offer of P5.5 million was raised
for the first time on appeal and should thus be disregarded.
This Court in several decisions has repeatedly adhered to the principle that points of law, theories,
issues of fact and arguments not adequately brought to the attention of the trial court need not be,
and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first time
on appeal (Santos vs. IAC, No. 74243, November 14, 1986, 145 SCRA 592). [40]
xxx It is settled jurisprudence that an issue which was neither averred in the complaint nor raised
during the trial in the court below cannot be raised for the first time on appeal as it would be offensive
to the basic rules of fair play, justice and due process (Dihiansan vs. CA, 153 SCRA 713
[1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty & Development Corp. vs. CA, 157
SCRA 425 [1988]; Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029, August 30,
1990).[41]
Since the issue was not raised in the pleadings as an affirmative defense, private respondent
was not given an opportunity in the trial court to controvert the same through opposing evidence.
Indeed, this is a matter of due process. But we passed upon the issue anyway, if only to avoid
deciding the case on purely procedural grounds, and we repeat that, on the basis of the evidence
already in the record and as appreciated by the lower courts, the inevitable conclusion is simply that
there was a perfected contract of sale.

x x x Of course, the banks letter of September 1, 1987 on the official price and the plaintiffs
acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of sale.
They are however clear embodiments of the fact that a contract of sale was perfected between the
parties, such contract being binding in whatever form it may have been entered into (case citations
omitted). Stated simply, the banks letter ofSeptember 1, 1987, taken together with plaintiffs letter
dated September 30, 1987, constitute in law a sufficient memorandum of a perfected contract of sale.
The respondent Court could have added that the written communications commenced not only
from September 1, 1987 but from Janolos August 20, 1987 letter. We agree that, taken together,
these letters constitute sufficient memoranda - since they include the names of the parties, the terms
and conditions of the contract, the price and a description of the property as the object of the contract.
But let it be assumed arguendo that the counter-offer during the meeting on September 28,
1987 did constitute a new offer which was accepted by Janolo on September 30, 1987. Still, the
statute of frauds will not apply by reason of the failure of petitioners to object to oral testimony proving
petitioner Banks counter-offer of P5.5 million. Hence, petitioners - by such utter failure to object - are
deemed to have waived any defects of the contract under the statute of frauds, pursuant to Article
1405 of the Civil Code:
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by
the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of
benefits under them.
As private respondent pointed out in his Memorandum, oral testimony on the reaffirmation of the
counter-offer of P5.5 million is aplenty -and the silence of petitioners all throughout the presentation
makes the evidence binding on them thus:
A - Yes, sir. I think it was September 28, 1987 and I was again present because Atty.
Demetria told me to accompany him and we were able to meet Luis Co at the Bank.
xxx xxx xxx

The Third Issue: Is the Contract Enforceable?

Q - Now, what transpired during this meeting with Luis Co of the Producers Bank?
A - Atty. Demetria asked Mr. Luis Co whether the price could be reduced, sir.

The petition alleged:

[42]

Even assuming that Luis Co or Rivera did relay a verbal offer to sell at P5.5 million during the meeting
of 28 September 1987, and it was this verbal offer that Demetria and Janolo accepted with their letter
of 30 September 1987, the contract produced thereby would be unenforceable by action - there being
no note, memorandum or writing subscribed by the Bank to evidence such contract. (Please see
Article 1403[2], Civil Code.)
Upon the other hand, the respondent Court in its Decision (p. 14) stated:

Q - What price?
A - The 5.5 million pesos and Mr. Luis Co said that the amount cited by Mr. Mercurio Rivera
is the final price and that is the price they intends (sic) to have, sir.
Q - What do you mean?
A - That is the amount they want, sir.
Q - What is the reaction of the plaintiff Demetria to Luis Cos statment (sic) that the
defendant Riveras counter-offer of 5.5 million was the defendants bank (sic) final offer?

17
A - He said in a day or two, he will make final acceptance, sir.
Q - What is the response of Mr. Luis Co?
A - He said he will wait for the position of Atty. Demetria, sir.

A - It was not discussed by the Committee but it was discussed initially by Luis Co and the
group of Atty. Demetrio Demetria and Atty. Pajardo (sic), in that September 28, 1987
meeting, sir.
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]

[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 18-21.]
----0---Q - What transpired during that meeting between you and Mr. Luis Co of the defendant
Bank?
A - We went straight to the point because he being a busy person, I told him if the amount of
P5.5 million could still be reduced and he said that was already passed upon by the
committee. What the bank expects which was contrary to what Mr. Rivera stated. And
he told me that is the final offer of the bank P5.5 million and we should indicate our
position as soon as possible.
Q - What was your response to the answer of Mr. Luis Co?
A - I said that we are going to give him our answer in a few days and he said that was it.
Atty. Fajardo and I and Mr. Mercurio [Rivera] was with us at the time at his office.
Q - For the record, your Honor please, will you tell this Court who was with Mr. Co in his
Office in Producers Bank Building during this meeting?
A - Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.
Q - By Mr. Co you are referring to?
A - Mr. Luis Co.
Q - After this meeting with Mr. Luis Co, did you and your partner accede on (sic) the counter
offer by the bank?
A - Yes, sir, we did. Two days thereafter we sent our acceptance to the bank which offer we
accepted, the offer of the bank which is P5.5 million.
[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]
---- 0 ---Q - According to Atty. Demetrio Demetria, the amount of P5.5 million was reached by the
Committee and it is not within his power to reduce this amount. What can you say to
that statement that the amount of P5.5 million was reached by the Committee?

The Fourth Issue: May the Conservator Revoke

the Perfected and Enforceable Contract?
It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of
the Philippines during the time that the negotiation and perfection of the contract of sale took place.
Petitioners energetically contended that the conservator has the power to revoke or overrule actions
of the management or the board of directors of a bank, under Section 28-A of Republic Act No. 265
(otherwise known as the Central Bank Act) as follows:
Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a non-bank financial intermediary performing
quasi - banking functions is in a state of continuing inability or unwillingness to maintain a state of
liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may
appoint a conservator to take charge of the assets, liabilities, and the management of that institution,
collect all monies and debts due said institution and exercise all powers necessary to preserve the
assets of the institution, reorganize the management thereof, and restore its viability. He shall have
the power to overrule or revoke the actions of the previous management and board of directors of the
bank or non-bank financial intermediary performing quasi-banking functions, any provision of law to
the contrary notwithstanding, and such other powers as the Monetary Board shall deem necessary.
In the first place, this issue of the Conservators alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition - as this was not litigated in the
trial court or Court of Appeals. As already stated earlier, issues not raised and/or ventilated in the trial
court, let alone in the Court of Appeals, cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process. [43]
In the second place, there is absolutely no evidence that the Conservator, at the time the
contract was perfected, actually repudiated or overruled said contract of sale. The Banks acting
conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria and
Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who took over
from Romey after the sale was perfected on September 30, 1987 (Annex V, petition) which
unilaterally repudiated - not the contract - but the authority of Rivera to make a binding offer - and
which unarguably came months after the perfection of the contract. Said letter dated May 12, 1988 is
reproduced hereunder:
May 12, 1988

18
Atty. Noe C. Zarate
Zarate Carandang Perlas & Ass.
Suite 323 Rufino Building
Ayala Avenue, Makati, Metro Manila

Acting Conservator

Dear Atty. Zarate:

This pertains to your letter dated May 5, 1988 on behalf of Attys. Janolo and Demetria regarding the
six (6) parcels of land located at Sta. Rosa, Laguna.
We deny that Producers Bank has ever made a legal counter-offer to any of your clients nor
perfected a contract to sell and buy with any of them for the following reasons.
In the Inter-Office Memorandum dated April 25, 1986 addressed to and approved by former Acting
Conservator Mr. Andres I. Rustia, Producers Bank Senior Manager Perfecto M. Pascua detailed the
functions of Property Management Department (PMD) staff and officers (Annex A), you will
immediately read that Manager Mr. Mercurio Rivera or any of his subordinates has no authority,
power or right to make any alleged counter-offer. In short, your lawyer-clients did not deal with the
authorized officers of the bank.
Moreover, under Secs. 23 and 36 of the Corporation Code of the Philippines (Batas Pambansa Blg.
68) and Sec. 28-A of the Central Bank Act (Rep. Act No. 265, as amended), only the Board of
Directors/Conservator may authorize the sale of any property of the corporation/bank.
Our records do not show that Mr. Rivera was authorized by the old board or by any of the bank
conservators (starting January, 1984) to sell the aforesaid property to any of your clients. Apparently,
what took place were just preliminary discussions/ consultations between him and your clients, which
everyone knows cannot bind the Banks Board or Conservator.
We are, therefore, constrained to refuse any tender of payment by your clients, as the same is
patently violative of corporate and banking laws. We believe that this is more than sufficient legal
justification for refusing said alleged tender.
Rest assured that we have nothing personal against your clients. All our acts are official, legal and in
accordance with law. We also have no personal interest in any of the properties of the Bank.
Please be advised accordingly.
Very truly yours,
(Sgd.) Leonida T. Encarnacion
LEONIDA T. ENCARNACION

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to
the conservator of a bank, it must be pointed out that such powers must be related to the
(preservation of) the assets of the bank, (the reorganization of) the management thereof and (the
restoration of) its viability. Such powers, enormous and extensive as they are, cannot extend to
thepost-facto repudiation of perfected transactions, otherwise they would infringe against the nonimpairment clause of the Constitution. [44] If the legislature itself cannot revoke an existing valid
contract, how can it delegate such non-existent powers to the conservator under Section 28-A of said
law?
Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that
are, under existing law, deemed to be defective - i.e., void, voidable, unenforceable or rescissible.
Hence, the conservator merely takes the place of a banks board of directors. What the said board
cannot do - such as repudiating a contract validly entered into under the doctrine of implied authority the conservator cannot do either. Ineluctably, his power is not unilateral and he cannot simply
repudiate valid obligations of the Bank. His authority would be only to bring court actions to assail
such contracts - as he has already done so in the instant case. A contrary understanding of the law
would simply not be permitted by the Constitution. Neither by common sense. To rule otherwise would
be to enable a failing bank to become solvent, at the expense of third parties, by simply getting the
conservator to unilaterally revoke all previous dealings which had one way or another come to be
considered unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested
interests of the third parties who had dealt with the Bank.

The Fifth Issue: Were There Reversible Errors of Fact?

Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of
fact by the Court of Appeals are not reviewable by the Supreme Court. In Andres vs. Manufacturers
Hanover & Trust Corporation,[45] we held:
x x x. The rule regarding questions of fact being raised with this Court in a petition for certiorari under
Rule 45 of the Revised Rules of Court has been stated in Remalante vs. Tibe, G.R. No. 59514,
February 25, 1988, 158 SCRA 138, thus:
The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari under
Rule 45 of the Revised Rules of Court. The jurisdiction of the Supreme Court in cases brought to it
from the Court of Appeals is limited to reviewing and revising the errors of law imputed to it, its
findings of the fact being conclusive [Chan vs. Court of Appeals, G.R. No. L-27488, June 30, 1970,
33 SCRA 737, reiterating a long line of decisions]. This Court has emphatically declared that it is not
the function of the Supreme Court to analyze or weigh such evidence all over again, its jurisdiction
being limited to reviewing errors of law that might have been committed by the lower court (Tiongco v.
De la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona vs. Court of Appeals, G.R. No.

19
L-62482, April 28, 1983, 121 SCRA 865; Baniqued vs. Court of Appeals, G.R. No. L-47531, February
20, 1984, 127 SCRA 596). Barring, therefore, a showing that the findings complained of are totally
devoid of support in the record, or that they are so glaringly erroneous as to constitute serious abuse
of discretion, such findings must stand, for this Court is not expected or required to examine or
contrast the oral and documentary evidence submitted by the parties [Santa Ana, Jr. vs. Hernandez,
G.R. No. L-16394, December 17, 1966, 18 SCRA 973] [at pp. 144-145.]
Likewise, in Bernardo vs. Court of Appeals,[46] we held:
The resolution of this petition invites us to closely scrutinize the facts of the case, relating to the
sufficiency of evidence and the credibility of witnesses presented. This Court so held that it is not the
function of the Supreme Court to analyze or weigh such evidence all over again. The Supreme Courts
jurisdiction is limited to reviewing errors of law that may have been committed by the lower court. The
Supreme Court is not a trier of facts. x x x
As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction
and Development Corp.:[47]
The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the inference
made is manifestly absurd, mistaken or impossible; when there is grave abuse of discretion in the
appreciation of facts; when the judgment is premised on a misapprehension of facts; when the
findings went beyond the issues of the case and the same are contrary to the admissions of both
appellant and appellee. After a careful study of the case at bench, we find none of the above grounds
present to justify the re-evaluation of the findings of fact made by the courts below.
In the same vein, the ruling of this Court in the recent case of South Sea Surety and Insurance
Company, Inc. vs. Hon. Court of Appeals, et al.[48] is equally applicable to the present case:
We see no valid reason to discard the factual conclusions of the appellate court. x x x (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both the trial
court and the appellate court on the matter coincide. (italics supplied)
Petitioners, however, assailed the respondent Courts Decision as fraught with findings and
conclusions which were not only contrary to the evidence on record but have no bases at all,
specifically the findings that (1) the Banks counter-offer price of P5.5 million had been determined by
the past due committee and approved by conservator Romey, after Rivera presented the same
for discussion and (2) the meeting with Co was not to scale down the price and start negotiations
anew, but a meeting on the already determined price of P5.5 million. Hence, citing Philippine National
Bank vs. Court of Appeals,[49] petitioners are asking us to review and reverse such factual findings.

The first point was clearly passed upon by the Court of Appeals, [50] thus:
There can be no other logical conclusion than that when, on September 1, 1987, Rivera informed
plaintiffs by letter that the banks counter-offer is at P5.5 Million for more than 101 hectares on lot
basis, such counter-offer price had been determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs offer for discussion by the Committee x x x.
Tersely put, under the established fact, the price of P5.5 Million was, as clearly worded in Riveras
letter (Exh. E), the official and definitive price at which the bank was selling the property. (p. 11, CA
Decision)
xxx xxx xxx
xxx. The argument deserves scant consideration. As pointed out by plaintiff, during the meeting of
September 28, 1987 between the plaintiffs, Rivera and Luis Co, the senior vice-president of the bank,
where the topic was the possible lowering of the price, the bank official refused it and confirmed that
the P5.5 Million price had been passed upon by the Committee and could no longer be lowered (TSN
of April 27, 1990, pp. 34-35) (p. 15, CA Decision).
The respondent Court did not believe the evidence of the petitioners on this point, characterizing
it as not credible and at best equivocal, and considering the gratuitous and self-serving character of
these declarations, the banks submissions on this point do not inspire belief.
To become credible and unequivocal, petitioners should have presented then Conservator
Rodolfo Romey to testify on their behalf, as he would have been in the best position to establish their
thesis. Under the rules on evidence, [51] such suppression gives rise to the presumption that his
testimony would have been adverse, if produced.
The second point was squarely raised in the Court of Appeals, but petitioners evidence was
deemed insufficient by both the trial court and the respondent Court, and instead, it was respondents
submissions that were believed and became bases of the conclusions arrived at.
In fine, it is quite evident that the legal conclusions arrived at from the findings of fact by the
lower courts are valid and correct. But the petitioners are now asking this Court to disturb these
findings to fit the conclusion they are espousing. This we cannot do.
To be sure, there are settled exceptions where the Supreme Court may disregard findings of fact
by the Court of Appeals.[52] We have studied both the records and the CA Decision and we find no
such exceptions in this case. On the contrary, the findings of the said Court are supported by a
preponderance of competent and credible evidence. The inferences and conclusions are reasonably
based on evidence duly identified in the Decision. Indeed, the appellate court patiently traversed and
dissected the issues presented before it, lending credibility and dependability to its findings. The best
that can be said in favor of petitioners on this point is that the factual findings of respondent Court did
not correspond to petitioners claims, but were closer to the evidence as presented in the trial court by
private respondent. But this alone is no reason to reverse or ignore such factual findings, particularly
where, as in this case, the trial court and the appellate court were in common agreement thereon.

20
Indeed, conclusions of fact of a trial judge - as affirmed by the Court of Appeals - are conclusive upon
this Court, absent any serious abuse or evident lack of basis or capriciousness of any kind, because
the trial court is in a better position to observe the demeanor of the witnesses and their courtroom
manner as well as to examine the real evidence presented.

Epilogue
In summary, there are two procedural issues involved - forum-shopping and the raising of issues
for the first time on appeal [viz., the extinguishment of the Banks offer of P5.5 million and the
conservators powers to repudiate contracts entered into by the Banks officers] - which per se could
justify the dismissal of the present case. We did not limit ourselves thereto, but delved as well into the
substantive issues - the perfection of the contract of sale and its enforceability, which required the
determination of questions of fact. While the Supreme Court is not a trier of facts and as a rule we are
not required to look into the factual bases of respondent Courts decisions and resolutions, we did so
just the same, if only to find out whether there is reason to disturb any of its factual findings, for we
are only too aware of the depth, magnitude and vigor by which the parties, through their respective
eloquent counsel, argued their positions before this Court.
We are not unmindful of the tenacious plea that the petitioner Bank is operating abnormally
under a government-appointed conservator and there is need to rehabilitate the Bank in order to get it
back on its feet x x x as many people depend on (it) for investments, deposits and well as
employment. As of June 1987, the Banks overdraft with the Central Bank had already reached
P1.023 billion x x x and there were (other) offers to buy the subject properties for a substantial
amount of money.[53]
While we do not deny our sympathy for this distressed bank, at the same time, the Court cannot
emotionally close its eyes to overriding considerations of substantive and procedural law, like respect
for perfected contracts, non-impairment of obligations and sanctions against forum-shopping, which
must be upheld under the rule of law and blind justice.
This Court cannot just gloss over private respondents submission that, while the subject
properties may currently command a much higher price, it is equally true that at the time of the
transaction in 1987, the price agreed upon of P5.5 million was reasonable, considering that the Bank
acquired these properties at a foreclosure sale for no more than P 3.5 million. [54] That the
Bank procrastinated and refused to honor its commitment to sell cannot now be used by it to promote
its own advantage, to enable it to escape its binding obligation and to reap the benefits of the
increase in land values. To rule in favor of the Bank simply because the property in question has
algebraically accelerated in price during the long period of litigation is to reward lawlessness and
delays in the fulfillment of binding contracts. Certainly, the Court cannot stamp its imprimatur on such
outrageous proposition.
WHEREFORE, finding no reversible error in the questioned Decision and Resolution, the Court
hereby DENIES the petition. The assailed Decision is AFFIRMED. Moreover, petitioner Bank is

REPRIMANDED for engaging in forum-shopping and WARNED that a repetition of the same or
similar acts will be dealt with more severely. Costs against petitioners.
SO ORDERED.

THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners,

vs.
COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.
May a Monetary Board resolution placing a private bank under receivership be annulled on the
ground of lack of prior notice and hearing?
This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867 entitled
"The Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon. Jose C. de Guzman and Triumph
Savings Bank," promulgated 26 September 1986, which affirmed the twin orders of the Regional Trial
Court of Quezon City issued 11 November 1985 1 denying herein petitioners' motion to dismiss Civil
Case No. Q-45139, and directing petitioner Ramon V. Tiaoqui to restore the private management of
Triumph Savings Bank (TSB) to its elected board of directors and officers, subject to Central Bank
comptrollership. 2
The antecedent facts: Based on examination reports submitted by the Supervision and Examination
Sector (SES), Department II, of the Central Bank (CB) "that the financial condition of TSB is one of
insolvency and its continuance in business would involve probable loss to its depositors and
creditors," 3 the Monetary Board (MB) issued on 31 May 1985 Resolution No. 596 ordering the closure
of TSB, forbidding it from doing business in the Philippines, placing it under receivership, and
appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3 June 1985. 4
On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed as
Civil Case No. Q-45139, against Central Bank and Ramon V. Tiaoqui to annul MB Resolution No.
596, with prayer for injunction, challenging in the process the constitutionality of Sec. 29 of R.A. 269,
otherwise known as "The Central Bank Act," as amended, insofar as it authorizes the Central Bank to
take over a banking institution even if it is not charged with violation of any law or regulation, much
less found guilty thereof. 5
On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB Resolution
No. 596 "until further orders", thus prompting them to move for the quashal of the restraining order
(TRO) on the ground that it did not comply with said Sec. 29, i.e., that TSB failed to show convincing

21
proof of arbitrariness and bad faith on the part of petitioners;' and, that TSB failed to post the requisite
bond in favor of Central Bank.
On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the relief
sought and denied the application of TSB for injunction. Thereafter, Triumph Savings Bank filed with
Us a petition for certiorariunder Rule 65 of the Rules of Court 6 dated 25 July 1985 seeking to enjoin
the continued implementation of the questioned MB resolution.
Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the
complaint before the RTC for failure to state a cause of action, i.e., it did not allege ultimate facts
showing that the action was plainly arbitrary and made in bad faith, which are the only grounds for the
annulment of Monetary Board resolutions placing a bank under conservatorship, and that TSB was
without legal capacity to sue except through its receiver.7
On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui to
restore TSB to its private management. On 11 November 1985, the RTC in separate orders denied
petitioners' motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its
elected board of directors and officers, subject to CB comptrollership.
Since the orders of the trial court rendered moot the petition for certiorari then pending before this
Court, Central Bank and Tiaoqui moved on 2 December 1985 for the dismissal of G.R. No. 71465
which We granted on 18 December 1985. 8
Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of Appeals
on a petition for certiorari and prohibition under Rule 65. 9 On 26 September 1986, the appellate court,
upheld the orders of the trial court thus
Petitioners' motion to dismiss was premised on two grounds, namely, that the
complaint failed to state a cause of action and that the Triumph Savings Bank was
without capacity to sue except through its appointed receiver.
Concerning the first ground, petitioners themselves admit that the Monetary Board
resolution placing the Triumph Savings Bank under the receivership of the officials of
the Central Bank was done without prior hearing, that is, without first hearing the side
of the bank. They further admit that said resolution can be the subject of judicial
review and may be set aside should it be found that the same was issued with
arbitrariness and in bad faith.

The charge of lack of due process in the complaint may be taken as constitutive of
allegations of arbitrariness and bad faith. This is not of course to be taken as
meaning that there must be previous hearing before the Monetary Board may
exercise its powers under Section 29 of its Charter. Rather, judicial review of such
action not being foreclosed, it would be best should private respondent be given the
chance to show and prove arbitrariness and bad faith in the issuance of the
questioned resolution, especially so in the light of the statement of private respondent
that neither the bank itself nor its officials were even informed of any charge of
violating banking laws.
In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view
such argument as being specious, for if we get the drift of petitioners' argument, they
mean to convey the impression that only the CB appointed receiver himself may
question the CB resolution appointing him as such. This may be asking for the
impossible, for it cannot be expected that the master, the CB, will allow the receiver it
has appointed to question that very appointment. Should the argument of petitioners
be given circulation, then judicial review of actions of the CB would be effectively
checked and foreclosed to the very bank officials who may feel, as in the case at bar,
that the CB action ousting them from the bank deserves to be set aside.
xxx xxx xxx
On the questioned restoration order, this Court must say that it finds nothing
whimsical, despotic, capricious, or arbitrary in its issuance, said action only being in
line and congruent to the action of the Supreme Court in the Banco Filipino Case
(G.R. No. 70054) where management of the bank was restored to its duly elected
directors and officers, but subject to the Central Bank comptrollership. 10
On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this petition
under Rule 45 of the Rules of Court praying that the decision of the Court of Appeals in CA-G.R. SP
No. 07867 be set aside, and that the civil case pending before the RTC of Quezon City, Civil Case
No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred
(1) in affirming that an insolvent bank that had been summarily closed by the
Monetary Board should be restored to its private management supposedly because
such summary closure was "arbitrary and in bad faith" and a denial of "due process";

22
(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a
complaint to annul a Monetary Board receivership resolution under Sec. 29 of R.A.
265 "may be taken as . . allegations of arbitrariness and bad faith"; and
(3) in holding that the owners and former officers of an insolvent bank may still act or
sue in the name and corporate capacity of such bank, even after it had been ordered
closed and placed under receivership. 11
The respondents, on the other hand, allege inter alia that in the Banco Filipino case, 12 We held that
CB violated the rule on administrative due process laid down in Ang Tibay vs. CIR (69 Phil. 635)
and Eastern Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice and hearing
be afforded to all parties in administrative proceedings. Since MB Resolution No. 596 was adopted
without TSB being previously notified and heard, according to respondents, the same is void for want
of due process; consequently, the bank's management should be restored to its board of directors
and officers.13
Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases
involving bank closures should not be required since in all probability a hearing would not only cause
unnecessary delay but also provide bank "insiders" and stockholders the opportunity to further
dissipate the bank's resources, create liabilities for the bank up to the insured amount of P40,000.00,
and even destroy evidence of fraud or irregularity in the bank's operations to the prejudice of its
depositors and creditors. 14 Petitioners further argue that the legislative intent of Sec. 29 is to repose
in the Monetary Board exclusive power to determine the existence of statutory grounds for the closure
and liquidation of banks, having the required expertise and specialized competence to do so.
The first issue raised before Us is whether absence of prior notice and hearing may be considered
acts of arbitrariness and bad faith sufficient to annul a Monetary Board resolution enjoining a bank
from doing business and placing it under receivership. Otherwise stated, is absence of prior notice
and hearing constitutive of acts of arbitrariness and bad faith?

Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing
before a bank may be directed to stop operations and placed under receivership. When par. 4 (now
par. 5, as amended by E.O. 289) provides for the filing of a case within ten (10) days after the
receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should
precede the filing of the case. Plainly, the legislature could not have intended to authorize "no prior
notice and hearing" in the closure of the bank and at the same time allow a suit to annul it on the
basis of absence thereof.
In the early case of Rural Bank of Lucena, Inc. v. Arca [1965], 17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that the
correctness of the Monetary Board's resolution to stop operation and proceed to liquidation be first
adjudged before making the resolution effective. It is enough that a subsequent judicial review be
provided.
Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing
before the Monetary Board can implement its resolution closing a bank, since its action is subject to
judicial scrutiny as provided by law.
It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial
institution placed under receivership of the opportunity to be heard and present evidence on
arbitrariness and bad faith because within ten (10) days from the date the receiver takes charge of
the assets of the bank, resort to judicial review may be had by filing an appropriate pleading with the
court. Respondent TSB did in fact avail of this remedy by filing a complaint with the RTC of Quezon
City on the 8th day following the takeover by the receiver of the bank's assets on 3 June 1985.
This "close now and hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank's assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders and the general public.
In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that

15

Under Sec. 29 of R.A. 265, the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the condition of any bank, and finding such condition to
be one of insolvency, or that its continuance in business would involve probable loss to its depositors
or creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and
shall designate an official of the CB or other competent person as receiver to immediately take charge
of its assets and liabilities. The fourth paragraph, 16 which was then in effect at the time the action was
commenced, allows the filing of a case to set aside the actions of the Monetary Board which are
tainted with arbitrariness and bad faith.

. . . due process does not necessarily require a prior hearing; a hearing or an

opportunity to be heard may be subsequent to the closure. One can just imagine the
dire consequences of a prior hearing: bank runs would be the order of the day,
resulting in panic and hysteria. In the process, fortunes may be wiped out and
disillusionment will run the gamut of the entire banking community.
We stressed in Central Bank of the Philippines v. Court of Appeals 20 that

23
. . . the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people
and the revenues of the state (9 CJS 32). Banks are affected with public interest
because they receive funds from the general public in the form of deposits. Due to
the nature of their transactions and functions, a fiduciary relationship is created
between the banking institutions and their depositors. Therefore, banks are under the
obligation to treat with meticulous care and utmost fidelity the accounts of those who
have reposed their trust and confidence in them (Simex International [Manila], Inc., v.
Court of Appeals, 183 SCRA 360 [1990]).
It is then the Government's responsibility to see to it that the financial interests of
those who deal with the banks and banking institutions, as depositors or otherwise,
are protected. In this country, that task is delegated to the Central Bank which,
pursuant to its Charter (R.A. 265, as amended), is authorized to administer the
monetary, banking and credit system of the Philippines. Under both the 1973 and
1987 Constitutions, the Central Bank is tasked with providing policy direction in the
areas of money, banking and credit; corollarily, it shall have supervision over the
operations of banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art. XII, 1987
Constitution). Under its charter, the CB is further authorized to take the necessary
steps against any banking institution if its continued operation would cause prejudice
to its depositors, creditors and the general public as well. This power has been
expressly recognized by this Court. In Philippine Veterans Bank Employees UnionNUBE v. Philippine Veterans Banks (189 SCRA 14 [1990], this Court held that:
. . . [u]nless adequate and determined efforts are taken by the
government against distressed and mismanaged banks, public faith
in the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the
bank depositors, creditors, and stockholders, who all deserve the
protection of the government. The government cannot simply cross
its arms while the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of the Central Bank in
such an event to step in and salvage the remaining resources of the
bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a
situation where the procedural rights invoked by private respondent would take precedence over the
substantive interests of depositors, creditors and stockholders over the assets of the bank.
Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and
drain its assets in days or even hours leading to insolvency even if the bank be actually solvent. The
procedure prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the
depositors, creditors and stockholders, the bank itself, and the general public, and the summary
closure pales in comparison to the protection afforded public interest. At any rate, the bank is given
full opportunity to prove arbitrariness and bad faith in placing the bank under receivership, in which
event, the resolution may be properly nullified and the receivership lifted as the trial court may
determine.
The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual
circumstances therein which are not attendant in the present case. We ruled in Banco Filipino that the
closure of the bank was arbitrary and attendant with grave abuse of discretion, not because of the
absence of prior notice and hearing, but that the Monetary Board had no sufficient basis to arrive at a
sound conclusion of insolvency to justify the closure. In other words, the arbitrariness, bad faith and
abuse of discretion were determined only after the bank was placed under conservatorship and
evidence thereon was received by the trial court. As this Court found in that case, the Valenzuela,
Aurellano and Tiaoqui Reports contained unfounded assumptions and deductions which did not
reflect the true financial condition of the bank. For instance, the subtraction of an uncertain amount as
valuation reserve from the assets of the bank would merely result in its net worth or the unimpaired
capital and surplus; it did not reflect the total financial condition of Banco Filipino.
Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate the
bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be. Clearly,
there was in that case a manifest arbitrariness, abuse of discretion and bad faith in the closure
of Banco Filipino by the Monetary Board. But, this is not the case before Us. For here, what is being
raised as arbitrary by private respondent is the denial of prior notice and hearing by the Monetary
Board, a matter long settled in this jurisdiction, and not the arbitrariness which the conclusions of the
Supervision and Examination Sector (SES), Department II, of the Central Bank were reached.
Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and reiterate Our
pronouncement therein that

24
. . . the law is explicit as to the conditions prerequisite to the action of the Monetary
Board to forbid the institution to do business in the Philippines and to appoint a
receiver to immediately take charge of the bank's assets and liabilities. They are: (a)
an examination made by the examining department of the Central Bank; (b) report by
said department to the Monetary Board; and (c) prima facieshowing that its
continuance in business would involve probable loss to its depositors or creditors.
In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented;
hence, We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the
Constitution in the exercise of police power of the state. Consequently, the absence of notice and
hearing is not a valid ground to annul a Monetary Board resolution placing a bank under receivership.
The absence of prior notice and hearing cannot be deemed acts of arbitrariness and bad faith. Thus,
an MB resolution placing a bank under receivership, or conservatorship for that matter, may only be
annulled after a determination has been made by the trial court that its issuance was tainted with
arbitrariness and bad faith. Until such determination is made, the status quo shall be maintained, i.e.,
the bank shall continue to be under receivership.
As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is, to
echo the respondent appellate court, "asking for the impossible, for it cannot be expected that the
master, the CB, will allow the receiver it has appointed to question that very appointment."
Consequently, only stockholders of a bank could file an action for annulment of a Monetary Board
resolution placing the bank under receivership and prohibiting it from continuing
operations. 22 In Central Bank v. Court of Appeals, 23 We explained the purpose of the law
. . . in requiring that only the stockholders of record representing the majority of the
capital stock may bring the action to set aside a resolution to place a bank under
conservatorship is to ensure that it be not frustrated or defeated by the incumbent
Board of Directors or officers who may immediately resort to court action to prevent
its implementation or enforcement. It is presumed that such a resolution is directed
principally against acts of said Directors and officers which place the bank in a state
of continuing inability to maintain a condition of liquidity adequate to protect the
interest of depositors and creditors. Indirectly, it is likewise intended to protect and
safeguard the rights and interests of the stockholders. Common sense and public
policy dictate then that the authority to decide on whether to contest the resolution
should be lodged with the stockholders owning a majority of the shares for they are
expected to be more objective in determining whether the resolution is plainly
arbitrary and issued in bad faith.

It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to 25
July 1987 when E.O. 289 was issued, to be effective sixty (60) days after its approval (Sec. 5). The
implication is that before E.O
. 289, any party in interest could institute court proceedings to question a Monetary Board resolution
placing a bank under receivership. Consequently, since the instant complaint was filed by parties
representing themselves to be officers of respondent Bank (Officer-in-Charge and Vice President),
the case before the trial court should now take its natural course. However, after the effectivity of E.O.
289, the procedure stated therein should be followed and observed.
PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867
is AFFIRMED, except insofar as it upholds the Order of the trial court of 11 November 1985 directing
petitioner RAMON V. TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its
elected Board of Directors and Officers, which is hereby SET ASIDE.
Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to
determine whether the issuance of Resolution No. 596 of the Monetary Board was tainted with
arbitrariness and bad faith and to decide the case accordingly.
SO ORDERED.
Narvasa, C.J., Cruz, Padilla, Bidin, Grio-Aquino, Regalado, Davide, Jr., Romero, Nocon, Campos,
Jr. and Quiason, JJ., concur.
Feliciano and Melo, JJ., took no part.

# Footnotes
1 Penned by Judge Jose C. de Guzman, RTC, Br. 93, Quezon City.
2 Rollo, pp. 29-34.
3 Id., p. 5; see also Minutes of Meeting of the Monetary Board of 31 May 1985,
Annex "D", Petition, CA-G.R. SP No. 07867.
4 Id., p. 93.

25
5 Id., p. 30.

including, but not limited to, bringing suits and foreclosing mortgages in the name of
the bank or non-bank financial intermediary performing quasi-banking functions.

6 Triumph Sayings Bank vs. Hon. Jose de Guzman, G.R. No. 71465.
7 Rollo, pp. 30-31.
8 Brief for Petitioners, p. 4; Rollo, p. 70.
9 Central Bank of the Philippines vs. Hon. Jose de Guzman, CA G.R. SP No. 07867,
penned by Melo, J., concurred in by De Pano, Jr., and Chua, JJ.; Rollo pp. 29-34.
10 Rollo, pp. 31-32, 34.
11 Id., p. 7-8.
12 Banco Filipino Savings and Mortgage Bank vs. Monetary Board, Central Bank,
G.R. No. 70054, and companion cases, G.R. Nos. 68878, 77255-58, 78766, 78767,
78894, 81303, 81304 and 90473, 11 December 1991; 204 SCRA 767.
13 Rollo, pp. 54-56.
14 Rollo, p. 70.
15 Sec. 29. Proceedings upon insolvency. Whenever, upon examination by the
head of the appropriate supervising or examining department or his examiners or
agents into the condition of any bank or non-bank financial intermediary performing
quasi-banking functions, it shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the department head concerned
forthwith, in writing, to inform the Monetary Board of the facts. The Board may, upon
finding the statements of the department head to be true, forbid the institution to do
business in the Philippines and shall designate an official of the Central Bank or a
person of recognized competence in banking or finance, as receiver to immediately
take charge of its assets and liabilities, as expeditiously as possible collect and
gather all the assets and administer the same for the benefit of its creditors, and
represent the bank or through counsel as he may retain in all actions or proceedings
for or against the institution, exercising all powers necessary for this purposes

16 The provisions of any law to the contrary notwithstanding, the actions of the
Monetary Board under this Section, Section 28-A, and the second paragraph of
Section 34 of this Act shall be final and executory, and can be set aside by the court
only if there is convincing proof that the action is plainly arbitrary and made in bad
faith; Provided, That the same is raised in appropriate pleading filed before the
proper court within a period of ten (10) days from the date the conservator or receiver
takes charge of the assets and liabilities of the bank or non-bank financial
intermediary performing quasi-judicial functions or, in case of liquidation, within ten
(10) days from receipt of notice by the said bank or
on-bank financial intermediary of the order of its liquidation. No restraining order or
injunction shall be issued by the court enjoining the Central Bank from implementing
its actions under this Section and the second paragraph of Section 34 of this Act,
unless there is convincing proof that the action of the Monetary Board is plainly
arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or
judge of the court in which the action is pending a bond executed in favor of the
Central Bank, in an amount to be fixed by the court. The restraining order or
injunction shall be refused or, if granted shall be dissolved upon filing by the Central
Bank of a bond, which shall be in the form of cash or Central Bank cashier's check, in
an amount twice the amount of the bond of the petitioner or plaintiff conditioned that it
will pay the damages which the petitioner or plaintiff may suffer by the refusal or the
dissolution of the injunction. The provisions of Rule 58 of the New Rules of Court
insofar as they are applicable and not inconsistent with the provisions of this Section
shall govern, the issuance and dissolution of the restraining order or injunction
contemplated in this Section.
17 G.R. No. L-21146, 29 September 1965, 15 SCRA 67, 72 and 74, citing Sec. 29,
R.A. 265; 12 Am Jur. 305, Sec. 611; Bourjois vs. Chapman, 301 U.S. 183, 81 Law
Ed. 1027, 1032; American Surety Co. vs. Baldwin, 77 Law Ed. 231, 86 ALR 307;
Wilson vs. Standefer, 46 Law Ed. 612.
18 Banco Filipino Savings and Mortgage Bank v. Monetary Board, Central Bank, and
companion cases, supra, p. 798, citing Rural Bank of Bato vs. IAC, G.R. No. 65642,
15 October 1984, Rural Bank vs. Court of Appeals, G.R. 61689, 20 June 1988, 162
SCRA 288.

26
19 G.R. No. 61689, 20 June 1988, 162 SCRA 288, 302.
20 G.R. Nos. 88353 and 92943, 8 May 1992, 208 SCRA 652, 684, 685.
21 G.R. No. 61689, 20 June 1988, 162 SCRA 288, 302.
22 As amended by E.O. 289, then par. 4, now par. 5, reads: ". . . [T]he actions of the
Monetary Board under this Section . . . shall be final and executory, and can be set
aside by a court only if there is convincing proof, after hearing, that the action is
plainly arbitrary and made in bad faith; Provided, That the same is raised in an
appropriate pleading filed by the stockholders of record representing the majority of
the capital stock of the institution before the proper court within a period of ten (10)
days from the date the receiver takes charge of the assets and liabilities of the
bank . . . .
ANTHONY S. YU, ROSITA G. YU and
JASON G. YU,
Petitioners,

G.R. No. 177549

Present:

- versus JOSEPH S. YUKAYGUAN, NANCY L.

YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L.
YUKAYGUAN, [on their own behalf and on
behalf of] WINCHESTER INDUSTRIAL
SUPPLY, INC.,
Respondents.

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
Promulgated:

June 18, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, which seeks to
reverse and set aside the Resolutions dated 18 July 2006 [2] and 19 April 2007[3] of the Court of Appeals in CAG.R. SP No. 00185. Upon herein respondents motion, the Court of Appeals rendered the assailed Resolution
dated 18 July 2006, reconsidering its Decision [4] dated 15 February 2006; and remanding the case to the
Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the
Decision[5] dated 10 November 2004 of the RTC which dismissed respondents Complaint in SRC Case No. 022CEB. Herein petitioners Motion for Reconsideration of the Resolution dated 18 July 2006 was denied by the
appellate court in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the
wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan
(Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and
Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc.
(Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply
and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting,
Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records
and Accounts[6] before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and
as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual
background of the Complaint was stated in the attached Affidavit executed by respondent Joseph.
According to respondents,[7] Winchester, Inc. was established and incorporated on 12 September 1977,
with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.
[8]
Petitioner Anthony paid for the said shares of stock with respondent Josephs money, thus, making the former
a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000
shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan, [9] Siao So Lan, and John S.

27
Yu.[10] Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester,
Inc., still in petitioner Anthonys name.

petitioners use of corporate funds for personal and family expenses, were in fact signed and approved by
respondent Joseph.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators,
excluding petitioner Anthony, their accumulated 8,500 shares in the corporation. [11] Subsequently, on 7
November 1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents
Nancy, Jerald, and Jill; and petitioners Rosita and Jason.[12]

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory
Counterclaim that respondents had no cause of action against them.Respondents Complaint was purely intended
for harassment. It should be dismissed under Section 1(j), Rule 16[16] of the Rules of Court for failure to comply
with conditions precedent before its filing. First, there was no allegation in respondents Complaint that earnest
efforts were exerted to settle the dispute between the parties. Second, since respondents Complaint purportedly
constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available
remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation
Code. And third, given that respondents Complaint was also for inspection of corporate books, it lacked the
allegation that respondents made a previous demand upon petitioners to inspect the corporate books but
petitioners refused. Prayed for by petitioners, in addition to the dismissal of respondents Complaint, was
payment of moral and exemplary damages, attorneys fees, litigation expenses, and cost of suit.

Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer
in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it
were their own family business. Petitioner Rosita handled the money market placements of the corporation to
the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also
misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal
and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for
the same. Respondents attached to the Complaint various receipts[13] to prove the personal and family expenses
charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock
in petitioner Anthonys name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate
books and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents inspection;
(2) render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse
the personal and family expenses which petitioners charged to Winchester, Inc., as well as the properties of the
corporation which petitioners withheld without payment; and (4) pay respondents attorneys fees and litigation
expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing
of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim, [14] attached to
which was petitioner Anthonys Affidavit.[15] Petitioners vehemently denied the allegation that petitioner
Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner
Anthonys name. For the incorporation of Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up
capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the said amount being paid
out of petitioner Anthonys personal savings and petitioners Anthony and Rositas conjugal funds. Winchester,
Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly evidencing

On 30 October 2002, the hearing on the application for the appointment of a Management Committee
was commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he
executed, which was attached to the respondents Complaint. On 4 November 2002, respondent Joseph was
cross-examined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29
November 2002, in order for petitioners to adduce evidence in support of their opposition to the application for
the appointment of a Management Committee.[17]
During the hearing on 29 November 2002, the parties manifested before the RTC that there was an
ongoing mediation between them, and so the hearing on the appointment of a Management Committee was
reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the
stocks in trade,[18] the real properties, and the other assets of Winchester, Inc. In partial implementation of the
afore-mentioned amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc.
were equally distributed among petitioners and respondents. As a result, the stockholders and members of the
Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution[19]dissolving the
corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.[20]

28

On 25 June 2004, petitioners filed a Manifestation[21] informing the RTC of the existence of their
amicable settlement with respondents. Respondents, however, made their own manifestation before the
RTC that they were repudiating said settlement, in view of the failure of the parties thereto to divide the
remaining assets of Winchester, Inc.Consequently, respondents moved to have SRC Case No. 022-CEB set for
pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.[22]
On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the
application for the appointment of a Management Committee, petitioners and respondents agreed that the RTC
may already render a judgment based on the pleadings. In accordance with the agreement of the parties, the
RTC issued, on even date, an Order[23] which stated:

Memorandum a Supplemental Affidavit[25] of respondent Joseph, containing assertions that refuted the
allegations in petitioner Anthonys Affidavit, which was earlier submitted with petitioners Answer with
Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary evidence,
[26]
consisting of original and duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc.,
to further substantiate their claim that petitioners were understating sales and charging their personal expenses
to the corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court
hereby renders judgment in this case DISMISSING the complaint filed by the [herein
respondents].
The Court also hereby dismisses the [herein petitioners] counterclaim because it has
not been indubitably shown that the filing by the [respondents] of the latters complaint was
done in bad faith and with malice.[27]

ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties manifested,
agreed and suggested that a judgment may be rendered by the Court in this case based on the
pleadings, affidavits, and other evidences on record, or to be submitted by them, pursuant to
the provision of Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The
suggestion of counsels was approved by the Court.

The RTC declared that respondents failed to show that they had complied with the essential requisites
for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies:

Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty (20) days from notice
hereof. Thereafter, the instant case will be deemed submitted for resolution.

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires;

xxxx

(3) No appraisal rights are available for the act or acts complained of; and

Cebu City, August 26, 2004.

(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge

(4) The suit is not a nuisance or harassment suit.

Petitioners and respondents duly filed their respective Memoranda, [24] discussing the arguments already
set forth in the pleadings they had previously submitted to the RTC.Respondents, though, attached to their

As to respondents prayer for the inspection of corporate books and records, the RTC adjudged that they
had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies requires that the complaint for inspection of
corporate books or records must state that:

29

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or
records and/or to be furnished with financial statements under Sections 74 and 75 of
the Corporation Code of thePhilippines;

Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for its failure to
comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate
Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2
thereof, which reads as follows:

(2) A demand for inspection and copying of books and records and/or to be furnished with
financial statements made by the plaintiff upon defendant;

RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for
such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof.

Sec. 4. Complaint. The complaint shall state or contain:

xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as
such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for
respondents inspection of the same was no longer necessary. The RTC similarly denied respondents demand for
accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm. Respondent
Joseph himself described the audit firm as competent and independent, and believed that the audited financial
statements the said audit firm prepared were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby
dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for
Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December
2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together with
the applicable laws and jurisprudence, WE see no reason or justification for granting the
present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into consideration all the
pleadings and evidence of the parties except the supplemental affidavit of [herein respondent]
Joseph and its corresponding annexes appended in [respondents] memorandum before the

RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires.
xxxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these Rules, the
complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of
corporate orders or records and/or to be furnished with financial statements under
Section 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to be furnished with
financial statements made by the plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff and the
reasons given for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof.

30
xxxx
A perusal of the extant record shows that [herein respondents] have not complied with the
above quoted provisions. [Respondents] should be mindful that in filing their complaint
which, as admitted by them, is a derivative suit, should have first exhausted all available
remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules
governing the corporation. The contention of [respondent Joseph] that he had indeed
made several talks to (sic) his brother [herein petitioner Anthony] to settle their
differences is not tantamount to exhaustion of remedies. What the law requires is to
bring the grievance to the Board of Directors or Stockholders for the latter to take the
opportunity to settle whatever problem in its regular meeting or special meeting called
for that purpose which [respondents] failed to do. x x x The requirements laid down by the
Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be
dispensed with by any stockholder of a corporation before filing a derivative suit.
[28]
(Emphasis ours.)

The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Josephs
Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their
Memorandum to the said trial court. The appellate court ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental affidavit of
[respondent] Joseph and its annexes appended to their memorandum should have been taken
into consideration by the Court a quo to support the reliefs prayed [for] in their
complaint. (sic) This Court rules that said supplemental affidavit and its annexes
is (sic) inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial conference
conducted on August 26, 2004, the parties through their respective counsels had come up with
an agreement that the lower court would render judgment based on the pleadings and
evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules
of Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial
briefs, the court determines that, upon consideration of the pleadings, the
affidavits and other evidence submitted by the parties, a judgment may
be rendered, the court may order the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty (20) days
from receipt of the order. Thereafter, the court shall render judgment, either
full or otherwise, not later than ninety (90) days from the expiration of the
period to file the memoranda.
xxxx

Clearly, the supplemental affidavit and its appended documents which were submitted only
upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial
briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted
pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be
based on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is
competent to testify on the matters stated therein. The affidavits shall be in
question and answer form, and shall comply with the rules on admissibility
of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the
pre-trial brief required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except in the
following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness
is presumed prima facie hostile if he fails or refuses to execute an affidavit
after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling
reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes falls
(sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, the party making an
allegation in a civil case has the burden of proving it by preponderance of
evidence. Differently stated, upon the plaintiff in [a] civil case, the burden of proof never
parts. That is, appellants must adduce evidence that has greater weight or is more convincing
that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the
dismissal of the complaint but the [respondents] themselves for their lackadaisical attitude in
setting forth and appending their defences belatedly. To admit them would be a denial of due
process for the opposite party which this Court cannot allow.[29]

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and
the assailed Decision of the Regional Trial Court (RTC), 7 th Judicial Region, Branch

31
II, Cebu City, datedNovember 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in
toto. Cost against the [herein respondents].[30]

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for
Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration, [31] invoking the
following grounds:
(1)

The [herein respondents] have sufficiently exhausted all remedies before filing the
present action; and

(2)

[The] Honorable Court erred in holding that the supplemental affidavit and its
annexes is (sic) inadmissible because the rules and the lower court expressly allowed
the submission of the same in its order dated August 26, 2004 x x x.[32]

In a Resolution[33] dated 8 March 2006, the Court of Appeals granted respondents Motion to Set for Oral
Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution [34] setting forth the events that transpired during the
oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate
court that they were submitting respondents Motion for Reconsideration for resolution. Justice Magpale,
however, still called on the parties to talk about the possible settlement of the case considering their familial
relationship. Independent of the resolution of respondents Motion for Reconsideration, the parties were
agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started.
In a Resolution[35] dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from
notice, their intended amicable settlement, since the same would undeniably affect the resolution of respondents
pending Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable
settlement, then they were directed by the appellate court to file within 10 days thereafter their position papers
instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,[36] stating that the parties
did not reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the
Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already
divided the stocks in trade and the real assets of the corporation among themselves. Respondents posited,
though, that the afore-mentioned distribution of the assets of Winchester, Inc. among the parties was null and

void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, [e]xcept by a
decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. At the
same time, however, respondents brought to the attention of the Court of Appeals that the parties did eventually
file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved. [37]
Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for
Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision
dated 10 November 2004. They instead argued that the RTC Decision in question was null and void as it did not
clearly state the facts and the law on which it was based. Respondents sought the remand of the case to the RTC
for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including
the legalization of the prior partial distribution among the parties of the assets of said corporation.
Petitioners filed their Position Paper [38] on 23 May 2006, wherein they accused respondents of attempting to
incorporate extraneous matters into the latters Motion for Reconsideration. Petitioners pointed out that the issue
before the Court of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of
the case to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents Motion for
Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis--vis the issues raised by the
[herein respondents] motion for reconsideration and in view of the formal dissolution of the
corporation which leaves unresolved up to the present the settlement of the properties and
assets which are now in danger of dissipation due to the unending litigation, this Court finds
the need to remand the instant case to the lower court (commercial court) as the proper forum
for the adjudication, disposition, conveyance and distribution of said properties and assets
between and amongst its stockholders as final settlement pursuant to Sec. 122 of the
Corporation Code after payment of all its debts and liabilities as provided for under the same
proviso. This is in accord with the pronouncement of the Supreme Court in the case
of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE
quote, viz:
the corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the
disposition and distribution of its remaining assets. It may, during the threeyear term, appoint a trustee or a receiver who may act beyond that period.
The termination of the life of a juridical entity does not by itself cause the

32
extinction or diminution of the rights and liabilities of such entity x x x nor
those of its owners and creditors. If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustees) xxx may
be permitted to so continue as "trustees" by legal implication to complete
the corporate liquidation. Still in the absence of a board of directors or
trustees, those having any pecuniary interest in the assets, including not
only the shareholders but likewise the creditors of the corporation, acting
for and in its behalf, might make proper representation with the
Securities and Exchange Commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out
a final settlement of the corporate concerns.

WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT

JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE
ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE
[RESPONDENTS] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE]
REASON CITED WAS A NON-ISSUE IN THE CASE.
IV.

In the absence of a trustee or board of director in the case at bar for purposes above
mentioned, the lower court under Republic Act No. [8799] (otherwise known as the Securities
and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases
from the Securities and Exchange Commission to the Regional Trial Courts) which took effect
on October 1, 2001, is the proper forum for working out the final settlement of the corporate
concern.[39]

Hence, the Court of Appeals ruled:

WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The
order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED to
the lower court to take the necessary proceedings in resolving with deliberate dispatch any
and all corporate concerns towards final settlement.[40]

Petitioners filed a Motion for Reconsideration [41] of the foregoing Resolution, but it was denied by the Court of
Appeals in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE
CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE
NULL AND VOID[.]
II.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT

VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.[42]

The crux of petitioners contention is that the Court of Appeals committed grievous error in reconsidering its
Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in
respondents Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before
the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets
of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact
that the parties were able to agree before the Court of Appeals to submit for resolution respondents Motion for
Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement
between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the
distinction and independence of these matters from one another. Petitioners also contend that the assailed
Resolution dated 18 July 2006 of the Court of Appeals, granting respondents Motion for Reconsideration, failed
to clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC,
petitioners maintain, will violate the very essence of the summary nature of the Interim Rules of
Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert
the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on
their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and
reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for

33
their personal benefit.During the pendency of the proceedings before the court a quo, the parties were able to
reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among
themselves. This amicable settlement was already partially implemented by the parties, when
respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10
November 2004, the RTC promulgated its Decision dismissing respondents Complaint for failure to comply
with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of
Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents
allegations in said Complaint after consideration of the pleadings and evidence on record.

such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a
necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder
may intervene and defend on behalf of the corporation.[43] By virtue of Republic Act No. 8799, otherwise known
as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now
vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated
on 21 November 2000.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the
RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their
case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the
appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending
resolution of respondents Motion for Reconsideration, the Court of Appeals urged the parties to again strive to
reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able
to submit to the appellate court, within the given period, any amicable settlement; and filed, instead,
their Position Papers. This effectively meant that the parties opted to submit respondents Motion for
Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners opposition to the
same, for resolution by the appellate court on the merits.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically

governed by Section 122 of the Corporation Code, which reads:

It was at this point that the case took an unexpected turn.

In accordance with respondents allegation in their Position Paper that the parties subsequently filed
with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of
Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding
Winchester, Inc. could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals
converted the derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged with its board
of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In

SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders, members,
creditors, and other persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors
or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful dissolution and
after payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of

settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all

34
that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.
[44]
More particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all assets, the
payment of all its creditors, and the distribution of the remaining assets, if any among the
stockholders thereof in accordance with their contracts, or if there be no special contract, on
the basis of their respective interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail unless it is inconsistent with
law.[45]
It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom
all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree
dissolving the corporation.[46]
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are
neither part of each other nor the necessary consequence of the other.There is totally no justification for the
Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own
behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester,
Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already
distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that
respondents themselves repudiated said amicable settlement before the RTC, even after the same had been
partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the
dispute between the parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the final settlement of corporate
concerns was solely grounded on respondents allegation in its Position Paper that the parties had already filed
before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that
there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of
such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule
in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the
voluntary dissolution of Winchester, Inc., respondents must, therefore, prove it. [47] This respondents failed to
do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc.
and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final
settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by
respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the
corporate funds and assets which they purportedly misappropriated for their personal use; surrender by the
petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents
of damages. There was nothing in respondents Complaint which sought the dissolution and liquidation of
Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion
of respondents derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of
the derivative suit based on either compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals
already went beyond the issues raised in respondents Motion for Reconsideration. Instead of focusing on
whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents
Complaint due to respondents failure to comply with the requirements for a derivative suit and submit evidence
to support their allegations, the Court of Appeals unduly concentrated on respondents unsubstantiated allegation
that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for
proceedings so vitally different from that originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits of
respondents Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake
of finally putting an end to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted
all remedies before filing the derivative suit; and (2) respondent Josephs Supplemental Affidavit and its annexes
should have been taken into consideration, since the submission thereof was allowed by the rules of procedure,
as well as by the RTC in its Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a
derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16
February 2006.
The Court has recognized that a stockholders right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized

35
when the said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or
dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In
effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders
to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors
or management to make suitable measures for its protection. The basis of a stockholders suit is always one in
equity. However, it cannot prosper without first complying with the legal requisites for its institution. [48]
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays
down the following requirements which a stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

A perusal of respondents Complaint before the RTC would reveal that the same did not allege with
particularity that respondents exerted all reasonable efforts to exhaust allremedies available under the articles of
incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in respondent Josephs
Affidavit, which was attached to respondents Complaint. RespondentJoseph averred in his Affidavit that he
tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not
listen. Respondents additionally claimed that taking further remedies within the corporation would have been
idle ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect
petitioners to take action against themselves who were the ones accused of wrongdoing.
The Court is not persuaded.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction.The second paragraph thereof
requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The
obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other
remedies to obtain the relief sought had failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner
Anthony regarding their dispute hardly constitutes all reasonable efforts to exhaust all remedies
available. Respondents did not refer to or mention at all any other remedy under the articles of incorporation or
by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents
unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of
incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves from
complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents
accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact
that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with
the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent
laws or rules supporting the distinction between, and the difference in the requirements for, family corporations
vis--vis other types of corporations, in the institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents Complaint failed to
allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners
complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit.
As to respondents second ground in their Motion for Reconsideration, the Court agrees with the ruling
of the Court of Appeals, in its 15 February 2006 Decision, that respondent Josephs Supplemental Affidavit and
additional evidence were inadmissible since they were only appended by respondents to their Memorandum

36
before the RTC.Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is
crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal
knowledge, shall set forth such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the matters stated therein. The
affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading, Provided, however, that affidavits, documentary
and other evidence not so submitted may be attached to the pre-trial brief required
under these Rules. Affidavits and other evidence not so submitted shall not be admitted
in evidence, except in the following cases:
(1)

(2)
(3)

Testimony of unwilling, hostile, or adverse party witnesses. A

witness is presumed prima facie hostile if he fails or refuses to
execute an affidavit after a written request therefor;
If the failure to submit the evidence is for meritorious and
compelling reasons; and
Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five
(5) days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other
documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff
and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be
attached to the respective pre-trial briefs of the parties. That the parties should have already identified and
submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is
strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies require that the following matters should already be set forth in the parties pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the period for
availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof,
whichever comes later, the court shall issue and serve an order immediately setting the case
for pre-trial conference, and directing the parties to submit their respective pre-trial briefs. The
parties shall file with the court and furnish each other copies of their respective pre-trial brief

in such manner as to ensure its receipt by the court and the other party at least five (5) days
before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
xxxx
(4) Documents not specifically denied under oath by either or both
parties;
xxxx
(7) Names of witnesses to be presented and the summary of their
testimony as contained in their affidavits supporting their positions on each
of the issues;
(8) All other pieces of evidence, whether documentary or otherwise
and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies,[49] it is the duty of the court to ensure during the pre-trial conference that the parties consider in
detail, among other things, objections to the admissibility of testimonial, documentary, and other evidence, as
well as objections to the form or substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a
partys pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to object to the
form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid
the granting of any undue advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC, even before
pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies:
Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the
court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may order the
parties to file simultaneously their respective memoranda within a non-extendible period
of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment,

37
either full or otherwise, not later than ninety (90) days from the expiration of the period to file
the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it can
render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into
consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the
court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that
affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties pre-trial
briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same would
mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence
attached by the other party to its memorandum. To violate the above-quoted provision would, thus, irrefragably
run afoul the former partys constitutional right to due process.
In the instant case, therefore, respondent Josephs Supplemental Affidavit and the additional
documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were
correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been
belatedly submitted. Respondents neither alleged nor proved that the documents in question fall under any of
the three exceptions to the requirement that affidavits and documentary evidence should be attached to the
appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is
hereby GRANTED. The assailed Resolutions dated 18 July 2006and 19 April 2007 of the Court of Appeals
in CA-G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February
2006 of the Court of Appeals is hereby AFFIRMED. No costs.
SO ORDERED.

PACIFIC BANKING CORPORATION EMPLOYEES ORGANIZATION, PAULA S. PAUG, and its

officers and members, petitioners, vs. THE HONORABLE COURT OF APPEALS and
VITALIANO N. NAAGAS II, as Liquidator of Pacific Banking Corporation, respondents.
[G.R. No. 112991. March 27, 1998]

THE PRESIDENT OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION, as Liquidator of

the Pacific Banking Corporation, petitioner, vs. COURT OF APPEALS, HON. JUDGE
REGINO T. VERIDIANO II, DEPUTY SHERIFF RAMON ENRIQUEZ and ANG ENG JOO,
ANG KEONG LAN and E.J ANG INTL. LTD., represented by their Attorney-in-fact,
GONZALO C. SY, respondents.
RESOLUTION
MENDOZA, J.:
For consideration are (1) petitioner's Omnibus Motion in G.R. No. 112991 seeking
reconsideration of the Court's resolution dated October 9, 1995, which denied the reconsideration of
the decision in this case promulgated on March 20, 1995, and the resolution of October 13, 1995
which absolved the branch clerk of court of the RTC of Manila, Branch 31, of charges of wrongdoing;
and (2) the manifestation and motions for clarification filed by the Land Bank of the Philippines (LBP)
concerning the request of petitioner in G.R. No. 112991 for the transfer of the funds of the Pacific
Banking Corporation (PaBC) to its other account in another branch of LBP and the alleged
garnishment of the funds of PaBC deposited in LBP in favor of the Bureau of Internal Revenue.
The antecedent facts are as follows:
On March 20, 1995, the Court rendered a decision holding that a petition for liquidation under Sec. 29
of the Central Bank Act, R.A.No. 265[1] is a special proceeding and , therefore, the rules prescribing a
period of 30 days for appealing and requiring a record on appeal apply. Accordingly, the appeal in
G.R. No. 109373 was held to have been duly perfected but the appeal in G.R. No. 112991 had not
been perfected because of petitioner's failure to file a record on appeal.
Petitioner in G.R. No. 112991 moved for a reconsideration of the aforesaid decision but the Court
denied his motion in its resolution of October 9, 1995 on the following grounds (1) the clerks of the
RTC and the Court of Appeals certified that no record on appeal had been filed; (2) the branch clerk
denied that the signature on the alleged copy of the record on appeal was his; (3) counsel for private
respondents and his clerk denied in their respective affidavits that they had been served a copy of the
record on appeal; (4) the identity of the person who allegedly received the record on appeal filed in
the trial court and whose initials appear on the first page of the alleged copy of the said record had
never been established; and (5) the copy of the record on appeal allegedly filed did not bear the
stamp of the RTC showing due receipt thereof.

38
In the resolution of October 13, 1995, the Court held Judge Regino Veridiano II, Deputy Sheriff
Carmelo Cachero and private respondent's counsel, Atty. Marino Eslao, guilty of indirect contempt for
executing the decision of the trial court despite the temporary restraining order issued by this
Court. The Court, however, found no basis of holding branch clerk Antonio Valencia Jr. guilty of any
wrongdoing in certifying that petitioner failed to file a record on appeal.
On November 6, 1995, petitioner then filed the Omnibus Motion in question seeking to (1) reopen the
case and/or consider the resolution of October 9, 1995 which denied his motion for reconsideration,
and (2) reconsider the October 13, 1995 resolution absolving the branch clerk of the trial court from
contempt charges.

Because of the serious ness of the petitioner's allegation that its record on appeal had been
suppressed, the Court on December 11, 1996, referred the question to the Office of the Court
Administrator (OCA) for investigation, report and recommendation.
On June 18, 1997, the OCA submitted its report and recommendation, the pertinent portions of
which state:[2]
In the formal investigation conducted (please see attached transcript) it was disclosed that
Atty. Antonio Valencia Jr. was appointed as the Clerk of Court V on June 18, 1992 and
officially assumed office on July 1, 1992.

In his omnibus motion, petitioner insists that he filed a record on appeal. As proof, he presents a
photocopy of the record on appeal allegedly received by the branch clerk of the trial court bearing the
handwritten notation "Received, 10-15-92, 3:45 PM" and the alleged initials of the said
clerk. Petitioner explains that the record on appeal does not have the RTC stamp "Received" because
the trial court does not use a stamp but receipt of pleadings is acknowledged simply by nothing this
fact by hand. Petitioner submitted certain pleadings filed in the trial court which were acknowledged
by the branch clerk in the same way he allegedly acknowledged by the branch clerk in the same way
he allegedly acknowledged receipt of petitioner's record on appeal. These are the notice of appeal
filed by petitioner on October 14, 1992 (Annex E, Omnibus Motion), Motion to Strike Out the Notice of
Appeal with Motion for Issuance of Writ of Execution filed by the private respondents (Annex G) and
Comment filed by another claimant (Solid Bank) dated May 26, 1995 (Annex H).

As the Clerk of Court of RTC, Branch 31, it is his duty to exercise control and supervision
over the personnel of the said court; examines records of all cases filed and calendared;
issues court processes, prepares drafts of orders and other matters which are assigned by
the Judge Regino Verediano.

In addition, petitioner claims that the certifications by the clerks of the RTC and the Court of Appeals
that no record on appeal was filed are unreliable, that his record on appeal was suppressed from the
records of the case, and that the certification of the Court of Appeals that no record on appeal was
filed therein was to be expected because the record on appeal was filed with the RTC and not with
the Court of Appeals.

For his part, Atty. Valencia claims that he rarely receives pleadings since before it reaches
his table, the same are already duly received. Besides, it is not one of his duties to receive
pleadings.

Commenting, private respondents contend that the Omnibus Motion is actually a second motion for
reconsideration which is not allowed by the rules since the issues raised therein had been fully
considered and passed upon by the Court and that there is no compelling reason to grant the
motion. They maintain that petitioner's appeal was not perfected because of the non-filing of a record
on appeal. Branch Clerk of court Antonio Valencia, on the other hand, maintains that "no record on
appeal was filed and therefore none could be found in the expediente (records of the case)." He
claims that the record on appeal allegedly filed in the trial court could not have been unlawfully
removed from the records because all pleadings received by the court are immediately attached to
the records. He denies that the signature appearing on the alleged record on appeal was his.

In their sala each personnel have their respective duties , from receipt of pleadings that are
being filed to their safekeeping. In no case is anyone allowed to interfere with the duties of
each personnel except under extreme urgency. Thus, receiving of pleadings is normally
entrusted to the receiving clerk and no one else. It is, as claimed by Atty. Valencia, only in
the absence of the said receiving clerk that other employees are authorized to receive
pleadings.

With respect to the alleged receipt of the record on appeal by their office, specifically to him,
Atty. Valencia vehemently denied having received the same. First, because the stroke of the
alphabet indicating his initials is very different and so with the dates, secondly, if it was
actually received it could have been brought to attention of the late Judge Verediano who
thereafter would have made a notation of the same, like all other pleadings received in their
office or simply instruct the preparation of an order if necessary and lastly, it would have
been included in their court calendar as there was a notice of hearing attached thereto.
In the court's calendar dated October 23, 1992, Sp. Proc. No. 35313 was never scheduled
for hearing. Under normal circumstances, if there was notice of hearing it would be outrightly
included in the court's calendar for October 23, 1992 as requested.

39
To substantiate the aforesaid allegations Atty. Valencia submitted copies of pleadings filed
relative to the subject case bearing the notation of then Judge Verediano and the Court's
calendar for October 22 and 23, 1992.
In addition, he pointed out that if the Notice of Appeal (Record on Appeal) was actually filed
in their sala, why was it raised for the first time only in PDIC's Motion for
Reconsideration. This according to him is suspicious. He even insinuated that nobody could
have done this (meaning inserted the notice of appeal [record on appeal] in their pleadings)
except the interested lawyer/s.
Moreover, Atty. Valencia vouches for the honesty and integrity of his staff, and if there be a
need for the examination of their signatures they would be very willing to go for a specimen
signature examination only to clear his/their names.
The office of the undersigned believes the claim of Atty. Valencia that no Notice of Appeal
[Record on Appeal] was filed at RTC Branch 31, Manila. As a CPA/lawyer, he was very well
aware of his duties and responsibilities as a Branch Clerk of Court. This is evidenced by the
fact that in his more than five (5) years stay as a Branch Clerk of Court, no single
administrative complaint has ever been lodged against him, be it a harassment suit or
otherwise.
Moreover, if it has been actually filed it would not have passed unnoticed by then Judge
Verediano who had to approve the same.
The undersigned is in accord with the claim of Atty. Valencia as presented by him to Atty.
Cunanan of this Office that indeed no record on appeal was filed by the counsels of PDIC in
the subject case, thus no administrative action should be taken against him. (Memorandum
dated June 5, 1997, pp. 1-2; Rollo, p. 538-539)
On July 23, 1997, after considering the report and it appearing that the investigation conducted
by the OCA was limited to hearing the evidence of the branch clerk of court and his witnesses, the
required the OCA to hear the evidence of petitioner that he had filed a record on appeal but it was
suppressed and, after considering that totality of the evidence presented, to determine liability for any
wrongful act committed, and to submit its findings and recommendations.
On January 27, 1998, the OCA submitted its report and recommendation on the additional
investigation it conducted from which it appears that hearings were held on three dates; the parties,
through their counsel, were duly notified of the same; and that at the first scheduled hearing on

October 7, 1997, only Atty. Marino E. Eslao, counsel for private respondent, appeared. In order to
expidite the proceedings, he was allowed to present documentary evidence without prejudice to the
right of the petitioner to comment thereon. During the hearing on November 5, 1997, the parties
agreed to file position papers after the testimony of branch clerk Atty. Valencia. On November 6,
1997, the respective testimonies of Atty. Valencia and Atty. Pablo Romero, the sole witness for
petitioner, were taken. In his report dated December 1, 1997,[3] Senior Deputy Court Administrator
Reynaldo L. Suarez summarized the evidence presented by the parties and his findings on the same,
to wit:
Atty. Pablo Romero, Manager of R&L Litigation Center, PDIC testifies that he was the one
who prepared the subject Record on Appeal. He likewise confirmed the fact that the
President of the PDIC, Mr. Ernest Leung, Atty. Rosalinda Casiguran and he then went to
see Judge Veridiano and was informed by Atty. Valencia that he cannot find a copy of the
Record on Appeal which was allegedly filed. He cannot recall if Atty. Valencia ever
demanded from him a copy of said record (pp. 28-29, TSN dated November 6, 1997). No
other relevant information were given by Atty. Romero.
Atty. Antonio Valencia, Branch Clerk of Court, RTC, Branch 31, Manila, was invited to testify
as to whether a Record on Appeal was actually filed before their court and the same was
duly received by him. He was examined by the parties, principally the counsel for PDIC.
In his testimony, Atty. Valencia, reiterated his previous stand that he never saw a copy of the
Record on Appeal and he was positive that indeed there was no Record on Appeal having
been filed in his court. Counsel of PDIC however insinuated that record on appeal might
have been filed but the same was misplaced. Atty. Valencia assured that "this is very
remote". (TSN, p. 8, November 6, 1997).
He even stressed that when he was made earlier to comment on whether or not a record on
appeal was actually filed, he checked and double checked the original records, inquired
from the employees of RTC, Manila including the Judge whether they have knowledge of
any record on appeal which was filed in their sala but all answered in the negative. (pp. 21 &
22, TSN, Nov. 6, 1997).
Moreover, he also firmly denied having received the alleged copy of the record on appeal
which was presented to him for identification during his direct testimony since the signatures
appearing therein are totally different from his actual signature (pp. 23, TSN, November 6,
1997).

40
It is to be noted that the alleged duplicate original copy of the Notice of Appeal [Record on
Appeal] which is supposed to be with the counsels of PDIC was not presented as
evidence. In fact when the counsel of PDIC Atty. Romero was asked if the PDIC employee
who allegedly filed the Record on Appeal could testify he answered in the negative and
claimed that the said employee is already in Riyadh, Saudi Arabia. No evidence was
likewise presented to prove the same. No effort was exerted by PDIC to prove the
authenticity of the signature of Clerk of Court Valencia appearing in PDIC's copy of the
Record on Appeal.
It is also worthy to note that other than the bare testimony of Atty. Romero, no other
evidence were presented by petitioner PDIC to substantiate their claim that a Record on
Appeal was filed at the RTC of Manila and the same was duly received by Atty.
Valencia. The testimony was not even corroborated.
Be that as it may this Office still has to determine as to whether a Record on Appeal was
actually filed at the court a quo.
A review of the record impels a rejection of the petitioner's claim that a Record on Appeal
was filed.
The private respondent was able to present proof which are affirmative, unequivocal
convincing, and consistent. In fact the testimony alone of Atty. Valencia which was a
reiteration of his previous testimonies were very clear, concise, and moreover
consistent. For the record Atty. Valencia is viewed by the undersigned who personally
conducted the investigation as a plain, sincere and honest man who, not having been
shown of any reason to be bias or to favor any party, had no reason to deliberately tell a
falsehood relative to his official functions. The fact therefore that he submitted himself to an
investigatin twice and in different occassions shows his determination to vindicate his honor
by proving the integrity of the records of his office.
From all indications and as the records of the case will show NO RECORD ON APPEAL
was actually filed in the court a quo.
Apparently, RTC, Branch 31, Manila has an effective records management (system) and it
is improbable to have missed one important document (RECORD ON APPEAL). In the
absence of any convincing proof to the contrary, the regularity of official function must be
upheld.

Far from the assertions of the petitioner we conclude that there was no Record on Appeal
actually filed. (Memorandum dated December 11, 1997, pp. 3-5; Rollo, pp. 557-559)
The findings of the OCA are well taken.
In civil cases, the burden of proof is on the party who would be defeated if no evidence is given
on the either side. Plaintiff must therefore establish his case by a preponderance of evidence, i.e.
evidence as a whole which is superior to that of the defendant. [4] In other words, the party who alleges
a fact has the burden of proving it. [5] In this case, petitioner, as the party claiming affirmative relief
from this Court by contending that he had filed a record on appeal in the trial court, must discharge
the burden of convincingly proving his claim. [6] As found by the OCA, however, the evidence of the
respondents even outweighs that of petitioner. Private respondents presented proof which are
affirmative, unequivocal, convincing, and consistent that no record on appel had been filed. As the
OCA noted, petitioner not only failed to present the PDIC employee who allegedly filed on the record
appeal in the trial court but more importantly, he failed to prove the authenticity of the alleged
signature of Branch Clerk Antonio Valencia appearing in his copy of the record on appeal.
The firm and consistent denial of the branch clerk that he was the one who received the record
on appeal and acknowledged its filing was disputed by petitioner. But petitioner's witness, Atty.
Romero, who allegedly prepared the said record did not file it in the trial court. Nor did he have any
personal knowledge of the actual filing of the record on appeal in the trial court. According to Atty.
Romero, the PDIC employee who allegedly filed the record on appeal in the trial court could not
testify because the said employee was already in Riyadh, Saudi Arabia. This allegation is not
persuasive since no evidence was presented to prove the same. [7]
Even the documentary evidence submitted by petitioner to prove the authenticity of the signature
of the branch clerk on the alleged duplicate original copy of the record on appeal [8] is not
convincing. The signature and notation on the alleged duplicate original copy of the record on appeal
do not match the actual signature and handwriting of the branch clerk as shown in the pleadings
submitted by petitioner himself, namely, the notice of appeal filed by petitioner (Annex E, Omnibus
Motion), motion to strike out notice of appeal filed by private respondents (Annex G) and comment
filed by another claimant (Annex H). The branch clerk's alleged signature and notation are markedly
different from his signature and handwriting appearing in the submitted documentary evidence. [9] For
one, the branch clerk's initial "AV" appear "HV" in the alleged duplicate original copy of the record. In
addition, numeral "5" was written with a rounded stroke instead of a sharp one. Clearly, petitioner
failed to discharge the required burden of proof. Hence, petitioner's assertion that he had filed a
record on appeal is not worthy of belief.

41
As regards petitioner's prayer that the Court reconsider its resolution of October 13, 1995
absolving the branch clerk of court of charges of wrongdoing, suffice it to state here that no ground
exists to impute bad faith on the part of the branch clerk. Good faith is presumed and the complainant
has the burden of proving any wrongdoing. [10] Petitioner simply failed to prove that the branch clerk
either suppressed the record on appeal allegedly filed by petitioner did not file the said record. The
Court cannot find the branch clerk guilty of any wrongdoing in certifying that petitioner failed to file a
record on appeal in the trial court in the face of petitioner's failure to adduce convincing proof that
such a record was in fact filed therein.
Also for consideration are two (2) manifestations and motions for clarification filed by the Land
Bank of the Philippines (LBP). In its Manifestation/Motion dated May 20, 1996, LBP alleges that on or
about March 24, 1995, petitioner's deposit accounts in LBP were garnished by Sheriff Carmelo
Cachero in favor of private respondents pursuant to the writ of execution issued by RTC Branch 31,
Manila acting as the liquidation court; that on April 10, 1995, it received from petitioner a copy of the
April 7, 1995 order of this Court directing the parties to maintain the status quo in the case; that on
November 20, 1995, the Court issued another resolution directing the parties to maintain the
status quo until further orders; and that on April 1, 1996, it received as request from the petitioner to
transfer the garnished funds to a different account maintained by petitioner in another branch of
LBP. LBP seeks clarification whether or not the garnishment of petitioner's deposit accounts on March
24, 1995 is null and void considering the status quo orders issued by the Court. It further inquires
whether or not it may acquiesce to petitioner's request to transfer the garnished funds to petitioner's
other account in another branch of LBP.[11] In its Manifestation dated October 7, 1996, on the other
hand, LBP alleges that on September 9, 1996, it received from Sheriff Adolfo Garcia a notice of
garnishment over the same deposit accounts of petitioner implementing the writ of execution issued
also by the RTC, Branch 31, Manila, but for another claimant, the Bureau of Internal Revenue (BIR);
that on September 25, 1996, it wrote Sheriff Garcia informing him that the accounts sought to be
garnished were already garnished pursuant to the processes of the same court for another claimant
(herein private respondents); that on September 27, 1996, it received a letter from petitioner urging it
to effect the immediate release of the garnished funds to the BIR and that on October 2, 1996, it
received from Sheriff Garcia the order to deliver to him the garnished amount
of P179,971,860.13. LBP manifests that it is holding in abeyance action on the order to Sheriff Garcia
and the letter of petitioner until the incidents in this case are finally resolved by this Court. [12]
These are matters largely relating to the execution of the decision of the trial court. As far as this
Court is concerned, its decision is now final and it no longer has any jurisdiction to pass upon these
incidents, not to mention the fact that the manifestation filed by LBP are in the nature of consultation
by one not a party to this case.

WHEREFORE, the Court RESOLVED to DENY petitioner's Omnibus Motion for lack of
merit. The manifestations and motions dated May 20, 1996 and October 7, 1996 by the Land Bank of
the Philippines are NOTED.
SO ORDERED.

JAIME G. ONG, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPOUSES MIGUEL K.
ROBLES and ALEJANDRO M. ROBLES, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari from the judgment rendered by the Court of Appeals which,
except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of Lucena City,
Branch 60, setting aside the Agreement of Purchase and Sale entered into by herein petitioner and private
respondent spouses in Civil Case No. 85-85.
On May 10, 1983, petitioner Jaime Ong, on the one hand, and respondent spouses Miguel K. Robles and
Alejandra Robles, on the other hand, executed an Agreement of Purchase and Sale respecting two parcels of
land situated at Barrio Puri, San Antonio, Quezon. The terms and conditions of the contract read:
1. That for and in consideration of the agreed purchase price of TWO MILLION PESOS (P2,000,000.00),
Philippine currency, the mode and manner of payment is as follows:
A. The initial payment of SIX HUNDRED THOUSAND PESOS (P600,000.00) as verbally agreed by the
parties, shall be broken down as follows:
1. P103,499.91 shall be paid, and as already paid by the BUYER to the SELLERS on March 22, 1983, as
stipulated under the Certification of undertaking dated March 22, 1983 and covered by a check voucher of even
date.
2. That the sum of P496,500.09 shall be paid directly by the BUYER to the Bank of Philippine Islands to
answer for the loan of the SELLERS which as of March 15, 1983 amounted to P537,310.10, and for the interest
that may accrued (sic) from March 15, 1983, up to the time said obligation of the SELLERS with the said bank

42
has been settled, provided however that the amount in excess of P496,500.09, shall be chargeable from the time
deposit of the SELLERS with the aforesaid bank.
B. That the balance of ONE MILLION FOUR HUNDRED THOUSAND (P1,400,000.00) PESOS shall be paid
by the BUYER to the SELLERS in four (4) equal quarterly installments of THREE HUNDRED FIFTY
THOUSAND PESOS (P350,000.00), the first to be due and payable on June 15, 1983, and every quarter
thereafter, until the whole amount is fully paid, by these presents promise to sell to said BUYER the two (2)
parcels of agricultural land including the rice mill and the piggery which are the most notable improvements
thereon, situated at Barangay Puri, San Antonio Quezon, x x x.
2. That upon the payment of the total purchase price by the BUYER the SELLERS bind themselves to deliver to
the former a good and sufficient deed of sale and conveyance for the described two (2) parcels of land, free and
clear from all liens and encumbrances.
3. That immediately upon the execution of this document, the SELLERS shall deliver, surrender and transfer
possession of the said parcels of land including all the improvements that may be found thereon, to the BUYER,
and the latter shall take over from the SELLER the possession, operation, control and management of the
RICEMILL and PIGGERY found on the aforesaid parcels of land.
4. That all payments due and payable under this contract shall be effected in the residence of
the SELLERS located at Barangay Puri, San Antonio, Quezon unless another place shall have been
subsequently designated by both parties in writing.

out of the P496,500.00 loan of respondent spouses with the Bank of the Philippine Islands, which petitioner, as
per agreement, should have paid, petitioner only managed to dole out no more than P393,679.60. When the
bank threatened to foreclose the respondent spouses mortgage, they sold three transformers of the rice mill
worth P51,411.00 to pay off their outstanding obligation with said bank, with the knowledge and conformity of
petitioner.[8] Petitioner, in return, voluntarily gave the spouses authority to operate the rice mill. [9] He, however,
continued to be in possession of the two parcels of land while private respondents were forced to use the rice
mill for residential purposes.
On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking for the
return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed with the
Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of contract and recovery of
properties with damages. Later, while the case was still pending with the trial court, petitioner introduced major
improvements on the subject properties by constructing a complete fence made of hollow blocks and expanding
the piggery. These prompted the respondent spouses to ask for a writ of preliminary injunction. [10] The trial court
granted the application and enjoined petitioner from introducing improvements on the properties except for
repairs.[11]
On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as follows:
IN VIEW OF THE FOREGOING, judgment is hereby rendered:
a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and Alejandra M. Robles and
the defendant, Jaime Ong captioned Agreement of Purchase and Sale, marked as Exhibit A set aside;

x x x x x x x x x.[1]
On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the piggery,
building, ricemill, residential house and other improvements thereon.
Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91 [2] by
depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money with
the Bank of Philippine Islands (BPI),[3] in accordance with their stipulation that petitioner pay the loan of
respondents with BPI.
To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks
payable to respondent spouses in the amount of P350,0000.00 each, namely: Check No. 157708 dated June 15,
1983,[4] Check No. 157709 dated September 15,1983,[5] Check No. 157710 dated December 15, 1983[6] and
Check No. 157711 dated March 15, 1984.[7] When presented for payment, however, the checks were dishonored
due to insufficient funds. Petitioner promised to replace the checks but failed to do so. To make matters worse,

b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are the subject matter of Exhibit
A together with the improvements thereon to the spouses Miguel K. Robles and Alejandro M. Robles;
c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to Jaime Ong the sum of
P497,179.51;
d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as exemplary damages; and
e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles and Alejandra Robles the sum
of P20,000.00 as attorneys fees and litigation expenses.
The motion of the plaintiff spouses Miguel K. Roles and Alejandra Robles for the appointment of receivership
is rendered moot and academic.

43
SO ORDERED.[12]
From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the
Regional Trial Court but deleted the award of exemplary damages. In affirming the decision of the trial court,
the Court of Appeals noted that the failure of petitioner to completely pay the purchase price is a substantial
breach of his obligation which entitles the private respondents to rescind their contract under Article 1191 of the
New Civil Code. Hence, the instant petition.
At the outset, it must be stated that the issues raised by the petitioner are generally factual in nature and
were already passed upon by the Court of Appeals and the trial court. Time and again, we have stated that it is
not the function of the Supreme Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties to an appeal, particularly where, such as in the case at bench, the findings
of both the trial court and the appellate court on the matter coincide. There is no cogent reason shown that
would justify the court to discard the factual findings of the two courts below and to superimpose its own. [13]
The only pertinent legal issues raised which are worthy of discussion are: (1) whether the contract entered
into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and (2) whether the
parties had novated their original contract as to the time and manner of payment.
Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid
respondent spouses a considerable sum and has therefore substantially complied with his obligation. He cites
Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission may not
be resorted to.

contracts validly entered into and subsisting and both require mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term rescission, the original term which was used in the old Civil Code, from
which the article was based, was resolution.[17] Resolution is a principal action which is based on breach of a
party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion
by more than one fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due
them;
4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission.
Obviously, the contract entered into by the parties in the case at bar does not fall under any of those
mentioned by Article 1381. Consequently, Article 1383 is inapplicable.

A discussion of the aforesaid articles is in order.

May the contract entered into between the parties, however, be rescinded based on Article 1191?
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their condition at the moment prior to the
celebration of the contract.[14] It implies a contract, which even if initially valid, produces a lesion or a pecuniary
damage to someone.[15]
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.
[16]
They are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose

A careful reading of the parties Agreement of Purchase and Sale shows that it is in the nature of a contract
to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved in
the vendor and is not to pass to the vendee until full payment of the purchase price. [18] In a contract to sell, the
payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory
force.[19]
Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering
the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise to
sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the

44
petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective and without force and effect. It must be
stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligors failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. [20] Failure to pay,
in this instance, is not even a breach but merely an event which prevents the vendors obligation to convey title
from acquiring binding force.[21] Hence, the agreement of the parties in the case at bench may be set aside, but
not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather,
his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey
title from acquiring an obligatory force.
Petitioner insists, however, that the contract was novated as to the manner and time of payment.
We are not persuaded. Article 1292 of the New Civil Code states that, In order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatible with each other.
Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility between the old and the new obligation. [22] Petitioner
cites the following instances as proof that the contract was novated: the retrieval of the transformers from
petitioners custody and their sale by the respondents to MERALCO on the condition that the proceeds thereof
be accounted for by the respondents and deducted from the price of the contract; the take-over by the
respondents of the custody and operation of the rice mill; and the continuous and regular withdrawals by
respondent Miguel Robles of installment sums per vouchers (Exhs. 8 to 47) on the condition that these
installments be credited to petitioners account and deducted from the balance of the purchase price.
Contrary to petitioners claim, records show that the parties never even intended to novate their previous
agreement. It is true that petitioner paid respondents small sums of money amounting to P48,680.00, in
contravention of the manner of payment stipulated in their contract. These installments were, however, objected
to by respondent spouses, and petitioner replied that these represented the interest of the principal amount which
he owed them.[23] Records further show that petitioner agreed to the sale of MERALCO transformers by private
respondents to pay for the balance of their subsisting loan with the Bank of Philippine Islands.Petitioners letter
of authorization reads:
xxxxxxxxx
Under this authority, it is mutually understood that whatever payment received from MERALCO as payment to
the transformers will be considered as partial payment of the undersigneds obligation to Mr. and Mrs. Miguel K.
Robles.

The same will be utilized as partial payment to existing loan with the Bank of Philippine Islands.
It is also mutually understood that this payment to the Bank of Philippine Islands will be reimbursed to Mr. and
Mrs. Miguel K. Robles by the undersigned. [Underscoring supplied][24]
It should be noted that while it was agreed that part of the purchase price in the sum of P496,500.00 would
be directly deposited by petitioner to the Bank of Philippine Islands to answer for the loan of respondent
spouses, petitioner only managed to deposit P393,679.60. When the bank threatened to foreclose the properties,
petitioner apparently could not even raise the sum needed to forestall any action on the part of the
bank.Consequently, he authorized respondent spouses to sell the three (3) transformers. However, although the
parties agreed to credit the proceeds from the sale of the transformers to petitioners obligation, he was supposed
to reimburse the same later to respondent spouses. This can only mean that there was never an intention on the
part of either of the parties to novate petitioners manner of payment.
Petitioner contends that the parties verbally agreed to novate the manner of payment when respondent
spouses proposed to operate the rice mill on the condition that they will account for its earnings. We find that
this is unsubstantiated by the evidence on record. The tenor of his letter dated August 12, 1984 to respondent
spouses, in fact, shows that petitioner had a little misunderstanding with respondent spouses whom he was
evidently trying to appease by authorizing them to continue temporarily with the operation of the rice
mill. Clearly, while petitioner might have wanted to novate the original agreement as to his manner of payment,
the records are bereft of evidence that respondent spouses willingly agreed to modify their previous
arrangement.
In order for novation to take place, the concurrence of the following requisites is indispensable: (1) there
must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new contract;
(3) there must be the extinguishment of the old contract; and (4) there must be the validity of the new contract.
[25]
The aforesaid requisites are not found in the case at bench. The subsequent acts of the parties hardly
demonstrate their intent to dissolve the old obligation as a consideration for the emergence of the new one. We
repeat to the point of triteness, novation is never presumed, there must be an express intention to novate.
As regards the improvements introduced by petitioner to the premises and for which he claims
reimbursement, we see no reason to depart from the ruling of the trial court and the appellate court that
petitioner is a builder in bad faith. He introduced the improvements on the premises knowing fully well that he
has not paid the consideration of the contract in full and over the vigorous objections of respondent
spouses. Moreover, petitioner introduced major improvements on the premises even while the case against him
was pending before the trial court.

45
The award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no moral,
temperate, liquidated or compensatory damages in addition to exemplary damages were awarded.
WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED with the
MODIFICATION that respondent spouses are ordered to return to petitioner the sum of P48,680.00 in addition
to the amounts already awarded. Costs against petitioner.

VELASCO, JR., J.:

The Case
This is a Petition for Review on Certiorari under Rule 45 with Prayer for Issuance of a Temporary Restraining
Order (TRO)/Writ of Preliminary Injunction, questioning the Decision dated September 30, 2008 [1] of the Court
of Appeals (CA) in CA-G.R. SP No. 103935. The CA Decision upheld the Order [2] dated June 4, 2008 of the

SO ORDERED.

Regional Trial Court (RTC), Branch 28 in Manila, issuing writs of preliminary injunction in Civil Case Nos. 08BANGKO SENTRAL NG PILIPINAS
MONETARY BOARD and CHUCHI
FONACIER,
Petitioners,

G.R. No. 184778

119243, 08-119244, 08-119245, 08-119246, 08-119247, 08-119248, 08-119249, 08-119250, 08-119251, and 08119273, and the Order dated May 21, 2008 that consolidated the civil cases.

Present:
- versus HON. NINA G. ANTONIO-VALENZUELA, in
her capacity as Regional Trial Court Judge of
Manila, Branch 28; RURAL BANK OF
PARAAQUE, INC.; RURAL BANK OF SAN
JOSE (BATANGAS), INC.; RURAL BANK OF
CARMEN (CEBU), INC.; PILIPINO RURAL
BANK, INC.; PHILIPPINE COUNTRYSIDE
RURAL BANK, INC.; RURAL BANK OF
CALATAGAN (BATANGAS), INC. (now
DYNAMIC RURAL BANK); RURAL BANK OF
DARBCI, INC.; RURAL BANK OF KANANGA
(LEYTE), INC. (now FIRST INTERSTATE
RURAL BANK); RURAL BANK OF BISAYAS
MINGLANILLA (now BANK OF EAST ASIA);
and SAN PABLO CITY DEVELOPMENT
BANK, INC.,
Respondents.

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.

The Facts
In September of 2007, the Supervision and Examination Department (SED) of the Bangko Sentral ng
Pilipinas (BSP) conducted examinations of the books of the following banks: Rural Bank of Paraaque, Inc.
(RBPI), Rural Bank of San Jose (Batangas), Inc., Rural Bank of Carmen (Cebu), Inc., Pilipino Rural Bank, Inc.,
Philippine Countryside Rural Bank, Inc., Rural Bank of Calatagan (Batangas), Inc. (now Dynamic Rural Bank),
Rural Bank of Darbci, Inc., Rural Bank of Kananga (Leyte), Inc. (now First Interstate Rural Bank), Rural Bank
de Bisayas Minglanilla (now Bank of East Asia), and San Pablo City Development Bank, Inc.
After the examinations, exit conferences were held with the officers or representatives of the banks wherein the
SED examiners provided them with copies of Lists of Findings/Exceptions containing the deficiencies
discovered during the examinations. These banks were then required to comment and to undertake the remedial
measures stated in these lists within 30 days from their receipt of the lists, which remedial measures included
the infusion of additional capital. Though the banks claimed that they made the additional capital infusions,
petitioner Chuchi Fonacier, officer-in-charge of the SED, sent separate letters to the Board of Directors of each

Promulgated:
October 2, 2009
x-----------------------------------------------------------------------------------------x
DECISION

bank, informing them that the SED found that the banks failed to carry out the required remedial measures. In
response, the banks requested that they be given time to obtain BSP approval to amend their Articles of
Incorporation, that they have an opportunity to seek investors. They requested as well that the basis for the

46
capital infusion figures be disclosed, and noted that none of them had received the Report of Examination

The other banks separately filed motions for consolidation of their cases in Branch 28, which motions were

(ROE) which finalizes the audit findings. They also requested meetings with the BSP audit teams to reconcile

granted. Judge Valenzuela set the complaint of Rural Bank of San Jose(Batangas), Inc. for hearing on May 15,

audit figures. In response, Fonacier reiterated the banks failure to comply with the directive for additional

2008. Petitioners assailed the validity of the consolidation of the nine cases before the RTC, alleging that the

capital infusions.

court had already prejudged the case by the earlier issuance of a TRO in Civil Case No. 08-119243, and moved
for the inhibition of respondent judge. Petitioners filed a motion for reconsideration regarding the consolidation

On May 12, 2008, the RBPI filed a complaint for nullification of the BSP ROE with application for a TRO and

of the subject cases.

writ of preliminary injunction before the RTC docketed as Civil Case No. 08-119243 against Fonacier, the BSP,
Amado M. Tetangco, Jr., Romulo L. Neri, Vicente B. Valdepenas, Jr., Raul A. Boncan, Juanita D. Amatong,

On May 16, 2008, San Pablo City Development Bank, Inc. filed a similar complaint against the same

Alfredo C. Antonio, and Nelly F. Villafuerte. RBPI prayed that Fonacier, her subordinates, agents, or any other

defendants with the RTC, and this was docketed as Civil Case No. 08-119273 that was later on consolidated

person acting in her behalf be enjoined from submitting the ROE or any similar report to the Monetary Board

with Civil Case No. 08-119243. Petitioners filed an Urgent Motion to Lift/Dissolve the TRO and an Opposition

(MB), or if the ROE had already been submitted, the MB be enjoined from acting on the basis of said ROE, on

to the earlier motion for reconsideration of Pilipino Rural Bank, Inc.

the allegation that the failure to furnish the bank with a copy of the ROE violated its right to due process.
On May 19, 2008, Judge Valenzuela issued an Order granting the prayer for the issuance of TROs for the other
The Rural Bank of San Jose (Batangas), Inc., Rural Bank of Carmen (Cebu), Inc., Pilipino Rural Bank, Inc.,

seven cases consolidated with Civil Case No. 08-119243. On May 21, 2008, Judge Valenzuela issued an Order

Philippine Countryside Rural Bank, Inc., Rural Bank of Calatagan (Batangas), Inc., Rural Bank of Darbci, Inc.,

denying petitioners motion for reconsideration regarding the consolidation of cases in Branch 28. On May 22,

Rural Bank of Kananga (Leyte), Inc., and Rural Bank de Bisayas Minglanilla followed suit, filing complaints

2008, Judge Valenzuela granted the urgent motion for reconsideration of Pilipino Rural Bank, Inc. and issued a

with the RTC substantially similar to that of RBPI, including the reliefs prayed for, which were raffled to

TRO similar to the ones earlier issued.

different branches and docketed as Civil Cases Nos. 08-119244, 08-119245, 08-119246, 08-119247, 08-119248,
08-119249, 08-119250, and 08-119251, respectively.

On May 26, 2008, petitioners filed a Motion to Dismiss against all the complaints (except that of the San Pablo
City Development Bank, Inc.), on the grounds that the complaints stated no cause of action and that a condition

On May 13, 2008, the RTC denied the prayer for a TRO of Pilipino Rural Bank, Inc. The bank filed a motion

precedent for filing the cases had not been complied with. On May 29, 2008, a hearing was conducted on the

for reconsideration the next day.

application for a TRO and for a writ of preliminary injunction of San Pablo City Development Bank, Inc.

On May 14, 2008, Fonacier and the BSP filed their opposition to the application for a TRO and writ of

The Ruling of the RTC

preliminary injunction in Civil Case No. 08-119243 with the RTC.Respondent Judge Nina Antonio-Valenzuela
of Branch 28 granted RBPIs prayer for the issuance of a TRO.

After the parties filed their respective memoranda, the RTC, on June 4, 2008, ruled that the banks were entitled
to the writs of preliminary injunction prayed for. It held that it had been the practice of the SED to provide the
ROEs to the banks before submission to the MB. It further held that as the banks are the subjects of

47
prepared in connection with the examination conducted on the plaintiff has been
submitted to the Monetary Board, the latter and its members (i.e. defendants Tetangco,
Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

examinations, they are entitled to copies of the ROEs. The denial by petitioners of the banks requests for copies
of the ROEs was held to be a denial of the banks right to due process.
The dispositive portion of the RTCs order reads:
WHEREFORE, the Court rules as follows:
1)

2)

3)

4)

Re: Civil Case No. 08-119243. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Rural Bank of Paranaque Inc. is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the plaintiff will pay to the
defendants all damages which they may sustain by reason of the injunction if the Court
should finally decide that the plaintiff was not entitled thereto. After posting of the bond
and approval thereof, let a writ of preliminary injunction be issued to enjoin and restrain
the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary
Board. In case such a Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has been submitted to the
Monetary Board, the latter and its members (i.e. defendants Tetangco, Neri, Valdepenas,
Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from acting on
the basis of said report.

Re: Civil Case No. 08-119246. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Pilipino Rural Bank Inc. is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the plaintiff will pay to the
defendants all damages which they may sustain by reason of the injunction if the Court
should finally decide that the plaintiff was not entitled thereto. After posting of the bond
and approval thereof, let a writ of preliminary injunction be issued to enjoin and restrain
the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary
Board. In case such a Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has been submitted to the
Monetary Board, the latter and its members (i.e. defendants Tetangco, Neri, Valdepenas,
Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from acting on
the basis of said report.

5)

Re: Civil Case No. 08-119244. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Rural Bank of San Jose (Batangas), Inc. is directed to post a bond
executed to the defendants, in the amount of P500,000.00 to the effect that the plaintiff
will pay to the defendants all damages which they may sustain by reason of the injunction
if the Court should finally decide that the plaintiff was not entitled thereto. After posting
of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin
and restrain the defendants from submitting the Report of Examination or any other
similar report prepared in connection with the examination conducted on the plaintiff, to
the Monetary Board. In case such a Report on Examination [sic] or any other similar
report prepared in connection with the examination conducted on the plaintiff has been
submitted to the Monetary Board, the latter and its members (i.e. defendants Tetangco,
Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

Re: Civil Case No. 08-119247. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Philippine Countryside Rural Bank Inc. is directed to post a bond
executed to the defendants, in the amount of P500,000.00 to the effect that the plaintiff
will pay to the defendants all damages which they may sustain by reason of the injunction
if the Court should finally decide that the plaintiff was not entitled thereto. After posting
of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin
and restrain the defendants from submitting the Report of Examination or any other
similar report prepared in connection with the examination conducted on the plaintiff, to
the Monetary Board. In case such a Report on Examination [sic] or any other similar
report prepared in connection with the examination conducted on the plaintiff has been
submitted to the Monetary Board, the latter and its members (i.e. defendants Tetangco,
Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

6)

Re: Civil Case No. 08-119248. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Dynamic Bank Inc. (Rural Bank of Calatagan) is directed to post a
bond executed to the defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may sustain by reason of the
injunction if the Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ of preliminary
injunction be issued to enjoin and restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a Report on Examination
[sic] or any other similar report prepared in connection with the examination conducted
on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.

Re: Civil Case No. 08-119245. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Rural Bank of Carmen (Cebu), Inc. is directed to post a bond executed
to the defendants, in the amount of P500,000.00 to the effect that the plaintiff will pay to
the defendants all damages which they may sustain by reason of the injunction if the
Court should finally decide that the plaintiff was not entitled thereto. After posting of the
bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar
report prepared in connection with the examination conducted on the plaintiff, to the
Monetary Board. In case such a Report on Examination [sic] or any other similar report

48
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report.
7)

8)

9)

Re: Civil Case No. 08-119249. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Rural Bank of DARBCI, Inc. is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the plaintiff will pay to the
defendants all damages which they may sustain by reason of the injunction if the Court
should finally decide that the plaintiff was not entitled thereto. After posting of the bond
and approval thereof, let a writ of preliminary injunction be issued to enjoin and restrain
the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary
Board. In case such a Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has been submitted to the
Monetary Board, the latter and its members (i.e. defendants Tetangco, Neri, Valdepenas,
Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from acting on
the basis of said report.
Re: Civil Case No. 08-119250. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Rural Bank of Kananga Inc. (First Intestate Bank), is directed to post a
bond executed to the defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may sustain by reason of the
injunction if the Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ of preliminary
injunction be issued to enjoin and restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a Report on Examination
[sic] or any other similar report prepared in connection with the examination conducted
on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report.
Re: Civil Case No. 08-119251. Pursuant to Rule 58, Section 4(b) of the Revised Rules
of Court, plaintiff Banco Rural De Bisayas Minglanilla (Cebu) Inc. (Bank of East Asia) is
directed to post a bond executed to the defendants, in the amount of P500,000.00 to the
effect that the plaintiff will pay to the defendants all damages which they may sustain by
reason of the injunction if the Court should finally decide that the plaintiff was not
entitled thereto. After posting of the bond and approval thereof, let a writ of preliminary
injunction be issued to enjoin and restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a Report on Examination
[sic] or any other similar report prepared in connection with the examination conducted
on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report.

10) Re: Civil Case No. 08-119273. Pursuant to Rule 58, Section 4(b) of the Revised Rules of
Court, plaintiff San Pablo City Development Bank, Inc. is directed to post a bond
executed to the defendants, in the amount of P500,000.00 to the effect that the plaintiff
will pay to the defendants all damages which they may sustain by reason of the injunction
if the Court should finally decide that the plaintiff was not entitled thereto. After posting
of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin
and restrain the defendants from submitting the Report of Examination or any other
similar report prepared in connection with the examination conducted on the plaintiff, to
the Monetary Board. In case such a Report on Examination [sic] or any other similar
report prepared in connection with the examination conducted on the plaintiff has been
submitted to the Monetary Board, the latter and its members (i.e. defendants Tetangco,
Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.[3]
The Ruling of the CA
Petitioners then brought the matter to the CA via a petition for certiorari under Rule 65 claiming grave abuse of
discretion on the part of Judge Valenzuela when she issued the orders dated May 21, 2008 and June 4, 2008.
The CA ruled that the RTC committed no grave abuse of discretion when it ordered the issuance of a writ of
preliminary injunction and when it ordered the consolidation of the 10 cases.
It held that petitioners should have first filed a motion for reconsideration of the assailed orders, and failed to
justify why they resorted to a special civil action of certiorari instead.
The CA also found that aside from the technical aspect, there was no grave abuse of discretion on the part of the
RTC, and if there was a mistake in the assessment of evidence by the trial court, that should be characterized as
an error of judgment, and should be correctable via appeal.
The CA held that the principles of fairness and transparency dictate that the respondent banks are entitled to
copies of the ROE.

49
Regarding the consolidation of the 10 cases, the CA found that there was a similarity of facts, reliefs sought,
issues raised, defendants, and that plaintiffs and defendants were represented by the same sets of counsels. It
found that the joint trial of these cases would prejudice any substantial right of petitioners.
Finding that no grave abuse of discretion attended the issuance of the orders by the RTC, the CA denied the
petition.

III.

TRANSPARENCY DESPITE LACK OF EXPRESS PROVISION IN THE NEW

CENTRAL BANK ACT REQUIRING BSP TO DO THE SAME
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
DEPARTING FROM WELL-ESTABLISHED PRECEPTS OF LAW AND
JURISPRUDENCE
A.
B.

On November 24, 2008, a TRO was issued by this Court, restraining the CA, RTC, and respondents from
implementing and enforcing the CA Decision dated September 30, 2008 in CA-G.R. SP No. 103935.[4]

C.

THE EXCEPTIONS CITED BY PETITIONER JUSTIFIED RESORT

TO PETITION FOR CERTIORARI UNDER RULE 65 INSTEAD OF
FIRST FILING A MOTION FOR RECONSIDERATION
RESPONDENT BANKS ACT OF RESORTING IMMEDIATELY TO
THE COURT WAS PREMATURE SINCE IT WAS MADE IN UTTER
DISREGARD OF THE PRINCIPLE OF PRIMARY JURISDICTION AND
EXHAUSTION OF ADMINISTRATIVE REMEDY
THE ISSUANCE OF A WRIT OF PRELIMINARY INJUNCTION BY
THE REGIONAL TRIAL COURT WAS NOT ONLY IMPROPER BUT
AMOUNTED TO GRAVE ABUSE OF DISCRETION[7]

By reason of the TRO issued by this Court, the SED was able to submit their ROEs to the MB. The
MB then prohibited the respondent banks from transacting business and placed them under receivership under
Section 53 of Republic Act No. (RA) 8791[5] and Sec. 30 of RA

Our Ruling

7653[6] through MB Resolution No. 1616 dated December 9, 2008; Resolution Nos. 1637 and 1638 dated
December 11, 2008; Resolution Nos. 1647, 1648, and 1649 dated December 12, 2008; Resolution Nos. 1652
and 1653 dated December 16, 2008; and Resolution Nos. 1692 and 1695 dated December 19, 2008, with the
Philippine Deposit Insurance Corporation as the appointed receiver.
Now we resolve the main petition.
Grounds in Support of Petition
I.

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT

FINDING THAT THE INJUNCTION ISSUED BY THE REGIONAL TRIAL
COURT VIOLATED SECTION 25 OF THE NEW CENTRAL BANK ACT AND
EFFECTIVELY HANDCUFFED THE
BANGKO SENTRAL FROM
DISCHARGING ITS FUNCTIONS TO THE GREAT AND IRREPARABLE
DAMAGE OF THE COUNTRYS BANKING SYSTEM;
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING
THAT RESPONDENTS ARE ENTITLED TO BE FURNISHED COPIES OF
THEIR RESPECTIVE ROEsBEFORE THE SAME IS SUBMITTED TO THE
MONETARY BOARD IN VIEW OF THE PRINCIPLES OF FAIRNESS AND

The petition is meritorious.

In Lim v. Court of Appeals it was stated:
The requisites for preliminary injunctive relief are: (a) the invasion of right sought to
be protected is material and substantial; (b) the right of the complainant is clear and
unmistakable; and (c) there is an urgent and paramount necessity for the writ to prevent
serious damage.
As such, a writ of preliminary injunction may be issued only upon clear showing of
an actual existing right to be protected during the pendency of the principal action. The twin
requirements of a valid injunction are the existence of a right and its actual or threatened
violations. Thus, to be entitled to an injunctive writ, the right to be protected and the violation
against that right must be shown.[8]

These requirements are absent in the present case.

50
In granting the writs of preliminary injunction, the trial court held that the submission of the ROEs to
the MB before the respondent banks would violate the right to due process of said banks.
This is erroneous.

that case was held to be entitled to annexes of the Supervision and Examination Sectors reports, as it already
had a copy of the reports themselves. It was not the subject of the case whether or not the petitioner was entitled
to a copy of the reports. And the ruling was made after the petitioner bank was ordered closed, and it was
allowed to be supplied with annexes of the reports in order to better prepare its defense. In this instance, at the

The respondent banks have failed to show that they are entitled to copies of the ROEs. They can point
to no provision of law, no section in the procedures of the BSP that shows that the BSP is required to give them

time the respondent banks requested copies of the ROEs, no action had yet been taken by the MB with regard to
imposing sanctions upon said banks.

copies of the ROEs. Sec. 28 of RA 7653, or the New Central Bank Act, which governs examinations of banking
institutions, provides that the ROE shall be submitted to the MB; the bank examined is not mentioned as a

The issuance by the RTC of writs of preliminary injunction is an unwarranted interference with the
powers of the MB. Secs. 29 and 30 of RA 7653[10] refer to the appointment of a conservator or a receiver for a

recipient of the ROE.

bank, which is a power of the MB for which they need the ROEs done by the supervising or examining
The respondent banks cannot claim a violation of their right to due process if they are not provided

department. The writs of preliminary injunction issued by the trial court hinder the MB from fulfilling its

with copies of the ROEs. The same ROEs are based on the lists of findings/exceptions containing the

function under the law. The actions of the MB under Secs. 29 and 30 of RA 7653 may not be restrained or set

deficiencies found by the SED examiners when they examined the books of the respondent banks. As found by

aside by the court except on petition for certiorari on the ground that the action taken was in excess of

the RTC, these lists of findings/exceptions were furnished to the officers or representatives of the respondent

jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The writs of

banks, and the respondent banks were required to comment and to undertake remedial measures stated in said

preliminary injunction order are precisely what cannot be done under the law by preventing the MB from taking

lists. Despite these instructions, respondent banks failed to comply with the SEDs directive.

action under either Sec. 29 or Sec. 30 of RA 7653.

Respondent banks are already aware of what is required of them by the BSP, and cannot claim

As to the third requirement, the respondent banks have shown no necessity for the writ of preliminary

violation of their right to due process simply because they are not furnished with copies of the ROEs.

injunction to prevent serious damage. The serious damage contemplated by the trial court was the possibility of

Respondent banks were held by the CA to be entitled to copies of the ROEs prior to or simultaneously with their

the imposition of sanctions upon respondent banks, even the sanction of closure. Under the law, the sanction of

submission to the MB, on the principles of fairness and transparency. Further, the CA held that if the contents of

closure could be imposed upon a bank by the BSP even without notice and hearing. The apparent lack of

the ROEs are essentially the same as those of the lists of findings/exceptions provided to said banks, there is no

procedural due process would not result in the invalidity of action by the MB. This was the ruling in Central

reason not to give copies of the ROEs to the banks. This is a flawed conclusion, since if the banks are already

Bank of the Philippines v. Court of Appeals.[11] This close now, hear later scheme is grounded on practical and

aware of the contents of the ROEs, they cannot say that fairness and transparency are not present. If sanctions

legal considerations to prevent unwarranted dissipation of the banks assets and as a valid exercise of police

are to be imposed upon the respondent banks, they are already well aware of the reasons for the sanctions,

power to protect the depositors, creditors, stockholders, and the general public. The writ of preliminary

having been informed via the lists of findings/exceptions, demolishing that particular argument. The ROEs

injunction cannot, thus, prevent the MB from taking action, by preventing the submission of the ROEs and

would then be superfluities to the respondent banks, and should not be the basis for a writ of preliminary

worse, by preventing the MB from acting on such ROEs.

[9]

injunction. Also, the reliance of the RTC on Banco Filipino v. Monetary Board is misplaced. The petitioner in

51
The trial court required the MB to respect the respondent banks right to due process by allowing the

requirements for the issuance of the writ have not been proved. No invasion of the rights of respondent banks

respondent banks to view the ROEs and act upon them to forestall any sanctions the MB might impose. Such

has been shown, nor is their right to copies of the ROEs clear and unmistakable. There is also no necessity for

procedure has no basis in law and does in fact violate the close now, hear later doctrine. We held in Rural Bank

the writ to prevent serious damage. Indeed the issuance of the writ of preliminary injunction tramples upon the

of San Miguel, Inc. v. Monetary Board, Bangko Sentral ng Pilipinas:

powers of the MB and prevents it from fulfilling its functions.There is no right that the writ of preliminary
injunction would protect in this particular case. In the absence of a clear legal right, the issuance of the

It is well-settled that the closure of a bank may be considered as an exercise of police

power. The action of the MB on this matter is final and executory. Such exercise may
nonetheless be subject to judicial inquiry and can be set aside if found to be in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction.[12]

injunctive writ constitutes grave abuse of discretion. [15] In the absence of proof of a legal right and the injury
sustained by the plaintiff, an order for the issuance of a writ of preliminary injunction will be nullified. [16]

The respondent banks cannotthrough seeking a writ of preliminary injunction by appealing to lack of
due process, in a roundabout manner prevent their closure by the MB.Their remedy, as stated, is a subsequent
one, which will determine whether the closure of the bank was attended by grave abuse of discretion. Judicial

Courts are hereby reminded to take greater care in issuing injunctive relief to litigants, that it would not

review enters the picture only after the MB has taken action; it cannot prevent such action by the MB. The

violate any law. The grant of a preliminary injunction in a case rests on the sound discretion of the court with

threat of the imposition of sanctions, even that of closure, does not violate their right to due process, and cannot

the caveat that it should be made with great caution. [17] Thus, the issuance of the writ of preliminary injunction

be the basis for a writ of preliminary injunction.

must have basis in and be in accordance with law. All told, while the grant or denial of an injunction generally
rests on the sound discretion of the lower court, this Court may and should intervene in a clear case of abuse. [18]
WHEREFORE, the petition is hereby GRANTED. The assailed CA Decision dated September 30, 2008 in CA-

The close now, hear later doctrine has already been justified as a measure for the protection of the

G.R. SP No. 103935 is hereby REVERSED. The assailed order and writ of preliminary injunction of respondent

public interest. Swift action is called for on the part of the BSP when it finds that a bank is in dire straits. Unless

Judge Valenzuela in Civil Case Nos. 08-119243, 08-119244, 08-119245, 08-119246, 08-119247, 08-119248, 08-

adequate and determined efforts are taken by the government against distressed and mismanaged banks, public

119249, 08-119250, 08-119251, and 08-119273 are hereby declared NULL and VOID.

faith in the banking system is certain to deteriorate to the prejudice of the national economy itself, not to
mention the losses suffered by the bank depositors, creditors, and stockholders, who all deserve the protection
of the government.[13]
The respondent banks have failed to show their entitlement to the writ of preliminary injunction. It
must be emphasized that an application for injunctive relief is construed strictly against the pleader. [14] The
respondent banks cannot rely on a simple appeal to procedural due process to prove entitlement. The

SO ORDERED.
KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father and Natural Guardian,
and Spouses FEDERICO N. SALVACION, JR., and EVELINA E. SALVACION, petitioners,
vs. CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and
GREG BARTELLI y NORTHCOTT, respondents.
DECISION

52
TORRES, JR., J.:
In our predisposition to discover the original intent of a statute, courts become the unfeeling
pillars of the status quo. Little do we realize that statutes or even constitutions are bundles of
compromises thrown our way by their framers. Unless we exercise vigilance, the statute may already
be out of tune and irrelevant to our day.

February 4, and three times each day on February 5, 6, and 7, 1989. On February 7, 1989, after
policemen and people living nearby, rescued Karen, Greg Bartelli was arrested and detained at the
Makati Municipal Jail. The policemen recovered from Bartelli the following items:1.) Dollar Check No.
368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK Bank Book No. 104-1087588 (Peso Acct.); 3.) Dollar Account China Banking Corp., US $/A#54105028-2; 4.) ID-122-308877; 5.) Philippine Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear)
used in seducing the complainant.

The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued restraining the respondents from
applying and enforcing Section 113 of Central Bank Circular No. 960;
b.) After hearing, judgment be rendered:
1.) Declaring the respective rights and duties of petitioners and respondents;
2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to the provision
of the Constitution, hence void; because its provision that Foreign currency deposits shall
be exempt from attachment, garnishment, or any other order to process of any court,
legislative body, government agency or any administrative body whatsoever
i.) has taken away the right of petitioners to have the bank deposit of defendant Greg
Bartelli y Northcott garnished to satisfy the judgment rendered in petitioners favor in
violation of substantive due process guaranteed by the Constitution;
ii.) has given foreign currency depositors an undue favor or a class privilege in
violation of the equal protection clause of the Constitution;
iii.) has provided a safe haven for criminals like the herein respondent Greg Bartelli
y Northcott since criminals could escape civil liability for their wrongful acts by
merely converting their money to a foreign currency and depositing it in a foreign
currency deposit account with an authorized bank.
The antecedents facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner
Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained
Karen Salvacion for four days, or up to February 7, 1989 and was able to rape the child once on

On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against Greg Bartelli,
Criminal Case No. 801 for Serious Illegal Detention and Criminal Cases Nos. 802, 803, 804, and 805
for four (4) counts of Rape. On the same day, petitioners filed with the Regional Trial Court of Makati
Civil Case No. 89-3214 for damages with preliminary attachment against Greg Bartelli. On February
24, 1989, the day there was a scheduled hearing for Bartellis petition for bail the latter escaped from
jail.
On February 28, 1989, the court granted the fiscals Urgent Ex-Parte Motion for the Issuance of
Warrant of Arrest and Hold Departure Order. Pending the arrest of the accused Greg Bartelli y
Northcott, the criminal cases were archived in an Order dated February 28, 1989.
Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22, 1989
granting the application of herein petitioners, for the issuance of the writ of preliminary
attachment.After petitioners gave Bond No. JCL (4) 1981 by FGU Insurance Corporation in the
amount P100,000.00, a Writ of Preliminary Attachment was issued by the trial court on February 28,
1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on China
Banking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff of Makati, China Banking
Corporation invoked Republic Act No. 1405 as its answer to the notice of garnishment served on
it. On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman sent his reply to China Banking
Corporation saying that the garnishment did not violate the secrecy of bank deposits since the
disclosure is merely incidental to a garnishment properly and legally made by virtue of a court order
which has placed the subject deposits in custodia legis. In answer to this letter of the Deputy Sheriff of
Makati, China Banking Corporation, in a letter dated March 20, 1989, invoked Section 113 of Central
Bank Circular No. 960 to the effect that the dollar deposits of defendant Greg Bartelli are exempt from
attachment, garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body, whatsoever.

53
This prompted the counsel for petitioners to make an inquiry with the Central Bank in a letter
dated April 25, 1989 on whether Section 113 of CB Circular No. 960 has any exception or whether
said section has been repealed or amended since said section has rendered nugatory the substantive
right of the plaintiff to have the claim sought to be enforced by the civil action secured by way of the
writ of preliminary attachment as granted to the plaintiff under Rule 57 of the Revised Rules of
Court. The Central Bank responded as follows:

Bartelli y Northcott. Summons with the complaint was published in the Manila Times once a week for
three consecutive weeks. Greg Bartelli failed to file his answer to the complaint and was declared in
default on August 7, 1989. After hearing the case ex-parte, the court rendered judgment in favor of
petitioners on March 29, 1990, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering the
latter:

May 26, 1989

1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral damages;
Ms. Erlinda S. Carolino
12 Pres. Osmea Avenue

2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and Evelina E. Salvacion the
amount of P150,000.00 each or a total of P300,000.00 for both of them;

South Admiral Village

3. To pay plaintiffs exemplary damages of P100,000.00; and

Paranaque, Metro Manila

4. To pay attorneys fees in an amount equivalent to 25% of the total amount of damages herein
awarded;

Dear Ms. Carolino:

5. To pay litigation expenses of P10,000.00; plus
This is in reply to your letter dated April 25, 1989 regarding your inquiry on Section 113, CB Circular
No. 960 (1983).
The cited provision is absolute in application. It does not admit of any exception, nor has the same
been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the countrys banking system which
would help in the development of the economy. There is no intention to render futile the basic rights
of a person as was suggested in your subject letter. The law may be harsh as some perceive it, but it is
still the law. Compliance is, therefore, enjoined.
Very truly yours,
(SGD) AGAPITO S. FAJARDO
Director[1]
Meanwhile, on April 10, 1989, the trial court granted petitioners motion for leave to serve
summons by publication in the Civil Case No. 89-3214 entitled Karen Salvacion. et al. vs. Greg

6. Costs of the suit.

SO ORDERED.
The heinous acts of respondents Greg Bartelli which gave rise to the award were related in
graphic detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the municipal jail of Makati but was able to
escape therefrom on February 24, 1989 as per report of the Jail Warden of Makati to the Presiding
Judge, Honorable Manuel M. Cosico of the Regional Trial Court of Makati, Branch 136, where he
was charged with four counts of Rape and Serious Illegal Detention (Crim. Cases Nos. 802 to
805). Accordingly, upon motion of plaintiffs, through counsel, summons was served upon defendant
by publication in the Manila Times, a newspaper of general circulation as attested by the Advertising
Manager of the Metro Media Times, Inc., the publisher of the said newspaper. Defendant, however,
failed to file his answer to the complaint despite the lapse of the period of sixty (60) days from the last
publication; hence, upon motion of the plaintiffs through counsel, defendant was declared in default
and plaintiffs were authorized to present their evidence ex parte.

54
In support of the complaint, plaintiffs presented as witness the minor Karen E. Salvacion, her father,
Federico N. Salacion, Jr., a certain Joseph Aguilar and a certain Liberato Mandulio, who gave the
following testimony:
Karen took her first year high school in St. Marys Academy in Pasay City but has recently transferred to
Arellano University for her second year.
In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati Cinema Square, with her friend Edna
Tangile whiling away her free time. At about 3:30 p.m. while she was finishing her snack on a concrete bench
in front of Plaza Fair, an American approached her. She was then alone because Edna Tangile had already left,
and she was about to go home. (TSN, Aug. 15, 1989, pp. 2 to 5)
The American asked her name and introduced himself as Greg Bartelli. He sat beside her when he talked to
her. He said he was a Math teacher and told her that he has a sister who is a nurse in New York. His sister
allegedly has a daughter who is about Karens age and who was with him in his house along Kalayaan
Avenue. (TSN, Aug. 15, 1989, pp. 4-5).
The American asked Karen what was her favorite subject and she told him its Pilipino. He then invited her to go
with him to his house where she could teach Pilipino to his niece. He even gave her a stuffed toy to persuade
her to teach his niece. (Id., pp.5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to reach the defendants house along Kalayaan
Avenue. (Id., p.6)
When they reached the apartment house, Karen notices that defendants alleged niece was not outside the house
but defendant told her maybe his niece was inside. When Karen did not see the alleged niece inside the house,
defendant told her maybe his niece was upstairs, and invited Karen to go upstairs. (Id., p. 7)
Upon entering the bedroom defendant suddenly locked the door. Karen became nervous because his niece was
not there. Defendant got a piece of cotton cord and tied Karens hands with it, and then he undressed her.Karen
cried for help but defendant strangled her. He took a packing tape and he covered her mouth with it and he
circled it around her head. (Id., p. 7)
Then, defendant suddenly pushed Karen towards the bed which was just near the door. He tied her feet and
hands spread apart to the bed posts. He knelt in front of her and inserted his finger in her sex organ. She felt
severe pain. She tried to shout but no sound could come out because there were tapes on her mouth. When
defendant withdrew his finger it was full of blood and Karen felt more pain after the withdrawal of the finger.
(Id., p.8)

He then got a Johnsons Baby Oil and he applied it to his sex organ as well as to her sex organ. After that he
forced his sex organ into her but he was not able to do so. While he was doing it, Karen found it difficult to
breathe and she perspired a lot while feeling severe pain. She merely presumed that he was able to insert his sex
organ a little, because she could not see. Karen could not recall how long the defendant was in that position.(Id.,
pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also told Karen to take a shower and he untied her
hands. Karen could only hear the sound of the water while the defendant, she presumed, was in the bathroom
washing his sex organ. When she took a shower more blood came out from her. In the meantime, defendant
changed the mattress because it was full of blood. After the shower, Karen was allowed by defendant to
sleep. She fell asleep because she got tired crying. The incident happened at about 4:00 p.m. Karen had no way
of determining the exact time because defendant removed her watch. Defendant did not care to give her food
before she went to sleep. Karen woke up at about 8:00 oclock the following morning. (Id., pp. 9-10)
The following day, February 5, 1989, a Sunday, after breakfast of biscuit and coke at about 8:30 to 9:00 a.m.
defendant raped Karen while she was still bleeding. For lunch, they also took biscuit and coke. She was raped
for the second time at about 12:00 to 2:00 p.m. In the evening, they had rice for dinner which defendant had
stored downstairs; it was he who cooked the rice that is why it looks like lugaw. For the third time, Karen was
raped again during the night. During those three times defendant succeeded in inserting his sex organ but she
could not say whether the organ was inserted wholly.
Karen did not see any firearm or any bladed weapon. The defendant did not tie her hands and feet nor put a tape
on her mouth anymore but she did not cry for help for fear that she might be killed; besides, all those windows
and doors were closed. And even if she shouted for help, nobody would hear her. She was so afraid that if
somebody would hear her and would be able to call a police, it was still possible that as she was still inside the
house, defendant might kill her. Besides, the defendant did not leave that Sunday, ruling out her chance to call
for help. At nighttime he slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times, once in the morning for thirty minutes after
breakfast of biscuits; again in the afternoon; and again in the evening. At first, Karen did not know that there
was a window because everything was covered by a carpet, until defendant opened the window for around
fifteen minutes or less to let some air in, and she found that the window was covered by styrofoam and
plywood. After that, he again closed the window with a hammer and he put the styrofoam, plywood, and carpet
back. (Id., pp. 14-15)
That Monday evening, Karen had a chance to call for help, although defendant left but kept the door closed. She
went to the bathroom and saw a small window covered by styrofoam and she also spotted a small hole. She
stepped on the bowl and she cried for help through the hole. She cried: Maawa na po kayo sa akin. Tulungan

55
nyo akong makalabas dito. Kinidnap ako! Somebody heard her. It was a woman, probably a neighbor, but she
got angry and said she was istorbo. Karen pleaded for help and the woman told her to sleep and she will call the
police. She finally fell asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)
She woke up at 6:00 oclock the following morning, and she saw defendant in bed, this time sleeping. She
waited for him to wake up. When he woke up, he again got some food but he always kept the door locked. As
usual, she was merely fed with biscuit and coke. On that day, February 7, 1989, she was again raped three
times. The first at about 6:30 to 7:00 a.m., the second at about 8:30 9:00, and the third was after lunch at 12:00
noon. After he had raped her for the second time he left but only for a short while. Upon his return, he caught
her shouting for help but he did not understand what she was shouting about. After she was raped the third time,
he left the house. (TSN, Aug. 15, 1989, pp. 16-17) She again went to the bathroom and shouted for help. After
shouting for about five minutes, she heard many voices. The voices were asking for her name and she gave her
name as Karen Salvacion. After a while, she heard a voice of a woman saying they will just call the
police. They were also telling her to change her clothes. She went from the bathroom to the room but she did
not change her clothes being afraid that should the neighbors call the police and the defendant see her in
different clothes, he might kill her. At that time she was wearing a T-shirt of the American bacause the latter
washed her dress. (Id., p. 16)
Afterwards, defendant arrived and opened the door. He asked her if she had asked for help because there were
many policemen outside and she denied it. He told her to change her clothes, and she did change to the one she
was wearing on Saturday. He instructed her to tell the police that she left home and willingly; then he went
downstairs but he locked the door. She could hear people conversing but she could not understand what they
were saying. (Id., p. 19)
When she heard the voices of many people who were conversing downstairs, she knocked repeatedly at the door
as hard as she could. She heard somebody going upstairs and when the door was opened, she saw a
policeman. The policeman asked her name and the reason why she was there. She told him she was
kidnapped. Downstairs, he saw about five policemen in uniform and the defendant was talking to
them. Nakikipag-areglo po sa mga pulis, Karen added. The policeman told him to just explain at the
precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in front of the house. They rode the car of a
certain person she called Kuya Boy together with defendant, the policeman, and two of her neighbors whom she
called Kuya Bong Lacson and one Ate Nita. They were brought to Sub-Station I and there she was investigated
by a policeman. At about 2:00 a.m., her father arrived, followed by her mother together with some of their
neighbors. Then they were brought to the second floor of the police headquarters. (Id., p. 21)

At the headquarters, she was asked several questions by the investigator. The written statement she gave to the
police was marked Exhibit A. Then they proceeded to the National Bureau of Investigation together with the
investigator and her parents. At the NBI, a doctor, a medico-legal officer, examined her private parts. It was
already 3:00 in early morning, of the following day when they reached the NBI, (TSN, Aug. 15, 1989, p.
22)The findings of the medico-legal officer has been marked as Exhibit B.
She was studying at the St. Marys Academy in Pasay City at the time of the Incident but she subsequently
transferred to Apolinario Mabini, Arellano University, situated along Taft Avenue, because she was ashamed to
be the subject of conversation in the school. She first applied for transfer to Jose Abad Santos, Arellano
University along Taft Avenue near the Light Rail Transit Station but she was denied admission after she told the
school the true reason for her transfer. The reason for their denial was that they might be implicated in the
case. (TSN, Aug. 15, 1989, p. 46)
xxx xxx xxx
After the incident, Karen has changed a lot. She does not play with her brother and sister anymore, and she is
always in a state of shock; she has been absent-minded and is ashamed even to go out of the house. (TSN, Sept.
12, 1989, p. 10) She appears to be restless or sad. (Id., p. 11) The father prays for P500,000.00 moral damages
for Karen for this shocking experience which probably, she would always recall until she reaches old age, and
he is not sure if she could ever recover from this experience. (TSN, Sept. 24, 1989, pp. 10-11)
Pursuant to an Order granting leave to publish notice of decision, said notice was published in
the Manila Bulletin once a week for three consecutive weeks. After the lapse of fifteen (15) days from
the date of the last publication of the notice of judgment and the decision of the trial court had
become final, petitioners tried to execute on Bartellis dollar deposit with China Banking
Corporation. Likewise, the bank invoked Section 113 of Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down to two:
May this Court entertain the instant petition despite the fact that original jurisdiction in petitions
for declaratory relief rests with the lower court? She Section 113 of Central Bank Circular No. 960 and
Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency Deposit
Act be made applicable to a foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing
that Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or

56
process of any court, legislative body, government agency or any administrative body whatsoever.
should be adjudged as unconstitutional on the grounds that: 1.) it has taken away the right of
petitioners to have the bank deposit of defendant Greg Bartelli y Northcott garnished to satisfy the
judgment rendered in petitioners favor in violation of substantive due process guaranteed by the
Constitution; 2.) it has given foreign currency depositors an undue favor or a class privilege n
violation of the equal protection clause of the Constitution; 3.) it has provided a safe haven for
criminals like the herein respondent Greg Bartelli y Northcott since criminal could escape civil liability
for their wrongful acts by merely converting their money to a foreign currency and depositing it in a
foreign currency deposit account with an authorized bank; and 4.) The Monetary Board, in issuing
Section 113 of Central Bank Circular No. 960 has exceeded its delegated quasi- legislative power
when it took away: a.) the plaintiffs substantive right to have the claim sought to be enforced by the
civil action secured by way of the writ of preliminary attachment as granted by Rule 57 of the Revised
Rules of Court; b.) the plaintiffs substantive right to have the judgment credit satisfied by way of the
writ of execution out of the bank deposit of the judgment debtor as granted to the judgment creditor
by Rule 39 of the Revised Rules of Court, which is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that the Monetary Board in
issuing Section 113 of CB Circular No. 960 did not exceed its power or authority because the subject
Section is copied verbatim from a portion of R.A. No. 6426 as amended by P.D. 1246. Hence, it was
not the Monetary Board that grants exemption from attachment or garnishment to foreign currency
deposits, but the law (R.A. 6426 as amended) itself; that it does not violate the substantive due
process guaranteed by the Constitution because a.) it was based on a law; b.) the law seems to be
reasonable; c.) it is enforced according to regular methods of procedure; and d.) it applies to all
members of a class.
Expanding, the Central Bank said; that one reason for exempting the foreign currency deposits
from attachment, garnishment or any other order process of any court, is to assure the development
and speedy growth of the Foreign Currency Deposit System and the Offshore Banking System in the
Philippines; that another reason is to encourage the inflow of foreign currency deposits into the
banking institutions thereby placing such institutions more in a position to properly channel the same
to loans and investments in the Philippines, thus directly contributing to the economic development of
the country; that the subject section is being enforced according to the regular methods of procedure;
and that it applies to all currency deposits made by any person and therefore does not violate the
equal protection clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is needed to promote the
public interest and the general welfare; that the State cannot just stand idly by while a considerable
segment of the society suffers from economic distress; that the State had to take some measures to

encourage economic development; and that in so doing persons and property may be subjected to
some kinds of restraints or burdens to secure the general welfare or public interest. Respondent
Central Bank also alleges that Rule 39 and Rule 57 of the Revised Rules of Court provide that some
properties are exempted from execution/attachment especially provided by law and R.A. No. 6426 as
amended is such a law, in that it specifically provides, among others, that foreign currency deposits
shall be exempted from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever.
For its part, respondent China Banking Corporation, aside from giving reasons similar to that of
respondent Central Bank, also stated that respondent China Bank is not unmindful of the inhuman
sufferings experienced by the minor Karen E. Salvacion from the beastly hands of Greg Bartelli; that it
is not only too willing to release the dollar deposit of Bartelli which may perhaps partly mitigate the
sufferings petitioner has undergone; but it is restrained from doing so in view of R.A. No. 6426 and
Section 113 of Central Bank Circular No. 960; and that despite the harsh effect to these laws on
petitioners, CBC has no other alternative but to follow the same.
This court finds the petition to be partly meritorious.
Petitioner deserves to receive the damages awarded to her by the court. But this petition for
declaratory relief can only be entertained and treated as a petition for mandamus to require
respondents to honor and comply with the writ of execution in Civil Case No. 89-3214.
The Court has no original and exclusive jurisdiction over a petition for declatory relief. [2] However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as one for mandamus. [3]
Here is a child, a 12-year old girl, who in her belief that all Americans are good and in her
gesture of kindness by teaching his alleged niece the Filipino language as requested by the
American, trustingly went with said stranger to his apartment, and there she was raped by said
American tourist Greg Bartelli. Not once, but ten times. She was detained therein for four (4)
days.This American tourist was able to escape from the jail and avoid punishment. On the other hand,
the child, having received a favorable judgment in the Civil Case for damages in the amount of more
than P1,000,000.00, which amount could alleviate the humiliation, anxiety, and besmirched reputation
she had suffered and may continue to suffer for a long, long time; and knowing that this person who
had wronged her has the money, could not, however get the award of damages because of this
unreasonable law. This questioned law, therefore makes futile the favorable judgment and award of
damages that she and her parents fully deserve. As stated by the trial court in its decision,

57
Indeed, after hearing the testimony of Karen, the Court believes that it was indoubtedly a shocking
and traumatic experience she had undergone which could haunt her mind for a long, long time, the
mere recall of which could make her feel so humiliated, as in fact she had been actually humiliated
once when she was refused admission at the Abad Santos High School, Arellano University, where
she sought to transfer from another school, simply because the school authorities of the said High
School learned about what happened to her and allegedly feared that they might be implicated in the
case.
xxx
The reason for imposing exemplary or corrective damages is due to the wanton and bestial manner
defendant had committed the acts of rape during a period of serious illegal detention of his hapless
victim, the minor Karen Salvacion whose only fault was in her being so naive and credulous to
believe easily that defendant, an American national, could not have such a bestial desire on her nor
capable of committing such heinous crime. Being only 12 years old when that unfortunate incident
happened, she has never heard of an old Filipino adage that in every forest there is a snake, xxx.[4]

which fitted him when a boy, as civilized society to remain ever under the regimen of their barbarous
ancestors.
In his comment, the Solicitor General correctly opined, thus:
"The present petition has far-reaching implications on the right of a national to obtain redress for a
wrong committed by an alien who takes refuge under a law and regulation promulgated for a purpose
which does not contemplate the application thereof envisaged by the allien. More specifically, the
petition raises the question whether the protection against attachment, garnishment or other court
process accorded to foreign currency deposits PD No. 1246 and CB Circular No. 960 applies when
the deposit does not come from a lender or investor but from a mere transient who is not expected to
maintain the deposit in the bank for long.
The resolution of this question is important for the protection of nationals who are victimized in the
forum by foreigners who are merely passing through.
xxx

If Karens sad fate had happened to anybodys own kin, it would be difficult for him to fathom how
the incentive for foreign currency deposit could be more important than his childs right to said award
of damages; in this case, the victims claim for damages from this alien who had the gall to wrong a
child of tender years of a country where he is mere visitor. This further illustrates the flaw in the
questioned provisions.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the countrys
economy was in a shambles; when foreign investments were minimal and presumably, this was the
reason why said statute was enacted. But the realities of the present times show that the country has
recovered economically; and even if not, the questioned law still denies those entitled to due process
of law for being unreasonable and oppressive. The intention of the questioned law may be good when
enacted. The law failed to anticipate the inquitous effects producing outright injustice and inequality
such as as the case before us.
It has thus been said thatBut I also know,[5] that laws and institutions must go hand in hand with the progress of the human
mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths
are disclosed and manners and opinions change with the change of circumstances, institutions must
advance also, and keep pace with the times We might as well require a man to wear still the coat

xxx Respondents China Banking Corporation and Central Bank of the Philippines refused to honor
the writ of execution issued in Civil Case No. 89-3214 on the strength of the following provision of
Central Bank Circular No. 960:
Sec. 113 Exemption from attachment. Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
Central Bank Circular No. 960 was issued pursuant to Section 7 of Republic Act No. 6426:
Sec. 7. Rules and Regulations. The Monetary Board of the Central Bank shall promulgate
such rules and regulations as may be necessary to carry out the provisions of this Act
which shall take effect after the publication of such rules and regulations in the Official
Gazette and in a newspaper of national circulation for at least once a week for three
consecutive weeks. In case the Central Bank promulgates new rules and regulations
decreasing the rights of depositors, the rules and regulations at the time the deposit was
made shall govern.
The aforecited Section 113 was copied from Section 8 of Republic Act No. 6426. As amended by P.D.
1246, thus:

58
Sec. 8. Secrecy of Foreign Currency Deposits. -- All foreign currency deposits authorized
under this Act, as amended by Presidential Decree No. 1035, as well as foreign currency
deposits authorized under Presidential Decree No. 1034, are hereby declared as and
considered of an absolutely confidential nature and, except upon the written permission
of the depositor, in no instance shall such foreign currency deposits be examined,
inquired or looked into by any person, government official, bureau or office whether
judicial or administrative or legislative or any other entity whether public or
private:Provided, however, that said foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
The purpose of PD 1246 in according protection against attachment, garnishment and other court
process to foreign currency deposits is stated in its whereases, viz.:
WHEREAS, under Republic Act No. 6426, as amended by Presidential Decree No. 1035,
certain Philippine banking institutions and branches of foreign banks are authorized to
accept deposits in foreign currency;
WHEREAS, under provisions of Presidential Decree No. 1034 authorizing the
establishment of an offshore banking system in the Philippines, offshore banking units
are also authorized to receive foreign currency deposits in certain cases;
WHEREAS, in order to assure the development and speedy growth of the Foreign
Currency Deposit System and the Offshore Banking System in the Philippines, certain
incentives were provided for under the two Systems such as confidentiality subject to
certain exceptions and tax exemptions on the interest income of depositors who are
nonresidents and are not engaged in trade or business in the Philippines;
WHEREAS, making absolute the protective cloak of confidentiality over such foreign
currency deposits, exempting such deposits from tax, and guaranteeing the vested right of
depositors would better encourage the inflow of foreign currency deposits into the
banking institutions authorized to accept such deposits in the Philippines thereby placing
such institutions more in a position to properly channel the same to loans and investments
in the Philippines, thus directly contributing to the economic development of the country;
Thus, one of the principal purposes of the protection accorded to foreign currency deposits is to
assure the development and speedy growth of the Foreign Currency Deposit system and the Offshore
Banking in the Philippines (3rd Whereas).

The Offshore Banking System was established by PD No. 1034. In turn, the purposes of PD No. 1034
are as follows:
WHEREAS, conditions conducive to the establishment of an offshore banking system,
such as political stability, a growing economy and adequate communication facilities,
among others, exist in the Philippines;
WHEREAS, it is in the interest of developing countries to have as wide access as
possible to the sources of capital funds for economic development;
WHEREAS, an offshore banking system based in the Philippines will be advantageous
and beneficial to the country by increasing our links with foreign lenders, facilitating the
flow of desired investments into the Philippines, creating employment opportunities and
expertise in international finance, and contributing to the national development effort.
WHEREAS, the geographical location, physical and human resources, and other positive
factors provide the Philippines with the clear potential to develop as another financial
center in Asia;
On the other hand, the Foreign Currency Deposit system was created by PD No. 1035. Its purpose are
as follows:
WHEREAS, the establishment of an offshore banking system in the Philippines has been
authorized under a separate decree;
WHEREAS, a number of local commercial banks, as depository bank under the Foreign
Currency Deposit Act (RA No. 6426), have the resources and managerial competence to
more actively engage in foreign exchange transactions and participate in the grant of
foreign currency loans to resident corporations and firms;
WHEREAS, it is timely to expand the foreign currency lending authority of the said
depository banks under RA 6426 and apply to their transactions the same taxes as would
be applicable to transaction of the proposed offshore banking units;
It is evident from the above [Whereas clauses] that the Offshore Banking System and the Foreign
Currency Deposit System were designed to draw deposits from foreign lenders and investors (Vide
second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these depositors that are
induced by the two laws and given protection and incentives by them.

59
Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit
encourage by PD Nos. 1034 and 1035 and given incentives and protection by said laws because such
depositor stays only for a few days in the country and, therefore, will maintain his deposit in the bank
only for a short time.
Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with
respondent China Banking Corporation only for safekeeping during his temporary stay in the
Philippines.
For the reasons stated above, the Solicitor General thus submits that the dollar deposit of respondent
Greg Bartelli is not entitled to the protection of Section 113 of Central Bank Circular No. 960 and PD
No. 1246 against attachment, garnishment or other court processes.[6]
In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that
the questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment,
garnishment, or any other order or process of any court. Legislative body, government agency or any
administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to
a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the
New Civil Code which provides that in case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail. Ninguno non deue
enriquecerse tortizerzmente con damo de otro. Simply stated, when the statute is silent or
ambiguous, this is one of those fundamental solutions that would respond to the vehement urge of
conscience. (Padilla vs. Padilla, 74 Phil. 377)
It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used
as a device by accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the
expense of the innocent.

because of its peculiar circumstances. Respondents are hereby REQUIRED to COMPLY with the writ
of execution issued in Civil Case No. 89-3214, Karen Salvacion, et al. vs. Greg Bartelli y Northcott, by
Branch CXLIV, RTC Makati and to RELEASE to petitioners the dollar deposit of respondent Greg
Bartelli y Northcott in such amount as would satisfy the judgment.
SO ORDERED.
ANA MARIA A. KORUGA,
Petitioner,

G.R. No. 168332

- versus TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE,

CESAR S. PAGUIO, FRANCISCO A. RIVERA, and THE
HONORABLE COURT OF APPEALS, THIRD
DIVISION,
Respondents.
x-----------------------------x
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE,
CESAR S. PAGUIO, and FRANCISCO A. RIVERA,
Petitioners,

G.R. No. 169053

Present:

- versus HON. SIXTO MARELLA, JR., Presiding Judge, Branch

138, Regional Trial Courtof Makati City, and ANA MARIA
A. KORUGA,
Respondents.

YNARES-SANTIAGO, J.,
Chairperson,
CARPIO,*
CORONA,**
NACHURA, and
PERALTA, JJ.
Promulgated:

Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding
the final and executory judgment of the lower court against the Central Bank Circular protecting the
foreign depositor? Shielding or protecting the dollar deposit of a transient alien depositor against
injustice to a national and victim of a crime? This situation calls for fairness legal tyranny.
We definitely cannot have both ways and rest in the belief that we have served the ends of
justice.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD No. 1246,
insofar as it amends Section 8 of R.A. 6426 are hereby held to be INAPPLICABLE to this case

June 19, 2009

x------------------------------------------------------------------------------------x

60
DECISION

(b)
For granting and approving loans and/or loaned sums of money
to six (6) dummy borrower corporations (Borrower Corporations) which, at the time
of loan approval, had no financial capacity to justify the loans. (sic)

NACHURA, J.:

(c)
For approving and accepting a dacion en pago, or payment of
loans with property instead of cash, resulting to a diminished future cumulative
interest income by the Bank and a decline in its liquidity position. (sic)

Before this Court are two petitions that originated from a Complaint filed by Ana Maria A. Koruga
(Koruga) before the Regional Trial Court (RTC) of Makati City against the Board of Directors of Banco
Filipino and the Members of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) for violation of the
Corporation Code, for inspection of records of a corporation by a stockholder, for receivership, and for the
creation of a management committee.
G.R. No. 168332
The first is a Petition for Certiorari under Rule 65 of the Rules of Court, docketed as G.R. No. 168332,
[1]

praying for the annulment of the Court of Appeals (CA) Resolution in CA-G.R. SP No. 88422 dated April 18,
2005 granting the prayer for a Writ of Preliminary Injunction of therein petitioners Teodoro O. Arcenas, Jr.,
Albert C. Aguirre, Cesar S. Paguio, and Francisco A. Rivera (Arcenas, et al.).
Koruga is a minority stockholder of Banco Filipino Savings and Mortgage Bank. On August 20, 2003,

(d)
For knowingly giving favorable treatment to the Borrower
Corporations in which some or most of them have interests, i.e. interlocking
directors/officers thereof, interlocking ownerships. (sic)
(e)
For employing their respective offices and functions as the
Banks officers and directors, or omitting to perform their functions and duties, with
negligence, unfaithfulness or abuse of confidence of fiduciary duty, misappropriated
or misapplied or ratified by inaction the misappropriation or misappropriations, of
(sic) almost P1.6 Billion Pesos (sic) constituting the Banks funds placed under their
trust and administration, by unlawfully releasing loans to the Borrower Corporations
or refusing or failing to impugn these, knowing before the loans were released or
thereafter that the Banks cash resources would be dissipated thereby, to the prejudice
of the Petitioner, other Banco Filipino depositors, and the public.
10.2 Right of a stockholder to inspect the records of a corporation (including
financial statements) under Sections 74 and 75 of the Code, as implemented by the Interim
Rules;
(a)
Unlawful refusal to allow the Petitioner from inspecting or
otherwise accessing the corporate records of the bank despite repeated demand in
writing, where she is a stockholder. (sic)
10.3 Receivership and Creation of a Management Committee pursuant to:

she filed a complaint before the Makati RTC which was raffled to Branch 138, presided over by Judge Sixto

(a)

Rule 59 of the 1997 Rules of Civil Procedure (Rules);

Marella, Jr.[2] Korugas complaint alleged:

(b)

Section 5.2 of R.A. No. 8799;

(c)

Rule 1, Section 1(a)(1) of the Interim Rules;

(d)

Rule 1, Section 1(a)(2) of the Interim Rules;

(e)

Rule 7 of the Interim Rules;

(f)

Rule 9 of the Interim Rules; and

10. 1 Violation of Sections 31 to 34 of the Corporation Code (Code) which prohibit

self-dealing and conflicts of interest of directors and officers, thus:
(a)
For engaging in unsafe, unsound, and fraudulent banking
practices that have jeopardized the welfare of the Bank, its shareholders, who
includes among others, the Petitioner, and depositors. (sic)

61
(g)

The General Banking Law of 2000 and the New Central Bank

Act.[3]
On February 22, 2005, the RTC issued a Notice of Pre-trial [9] setting the case for pre-trial on June 2 and
On September 12, 2003, Arcenas, et al. filed their Answer raising, among others, the trial courts lack of
jurisdiction to take cognizance of the case. They also filed a Manifestation and Motion seeking the dismissal of
the case on the following grounds: (a) lack of jurisdiction over the subject matter; (b) lack of jurisdiction over
the persons of the defendants; (c) forum-shopping; and (d) for being a nuisance/harassment suit. They then
moved that the trial court rule on their affirmative defenses, dismiss the intra-corporate case, and set the case for
preliminary hearing.

9, 2005. Arcenas, et al. filed a Manifestation and Motion[10] before the CA, reiterating their application for a writ
of preliminary injunction. Thus, on April 18, 2005, the CA issued the assailed Resolution, which reads in part:
(C)onsidering that the Temporary Restraining Order issued by this Court on February 9, 2005
expired on April 10, 2005, it is necessary that a writ of preliminary injunction be issued in
order not to render ineffectual whatever final resolution this Court may render in this case,
after the petitioners shall have posted a bond in the amount of FIVE HUNDRED
THOUSAND (P500,000.00) PESOS.
SO ORDERED.[11]

In an Order dated October 18, 2004, the trial court denied the Manifestation and Motion, ruling thus:
The result of the procedure sought by defendants Arcenas, et al. (sic) is for the Court to
conduct a preliminary hearing on the affirmative defenses raised by them in their Answer.
This [is] proscribed by the Interim Rules of Procedure on Intracorporate (sic) Controversies
because when a preliminary hearing is conducted it is as if a Motion to Dismiss was filed
(Rule 16, Section 6, 1997 Rules of Civil Procedure). A Motion to Dismiss is a prohibited
pleading under the Interim Rules, for which reason, no favorable consideration can be given
to the Manifestation and Motion of defendants, Arcenas, et al.
The Court finds no merit to (sic) the claim that the instant case is a nuisance or harassment
suit.
WHEREFORE, the Court defers resolution of the affirmative defenses raised by the
defendants Arcenas, et al.[4]

Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of the Rules of Court. Koruga
alleged that the CA effectively gave due course to Arcenas, et al.s petition when it issued a writ of preliminary
injunction without factual or legal basis, either in the April 18, 2005 Resolution itself or in the records of the
case. She prayed that this Court restrain the CA from implementing the writ of preliminary injunction and, after
due proceedings, make the injunction against the assailed CA Resolution permanent. [12]
In their Comment, Arcenas, et al. raised several procedural and substantive issues. They alleged that
the Verification and Certification against Forum-Shopping attached to the Petition was not executed in the
manner prescribed by Philippine law since, as admitted by Korugas counsel himself, the same was only a
facsimile.

Arcenas, et al. moved for reconsideration[5] but, on January 18, 2005, the RTC denied the motion.
[6]

This prompted Arcenas, et al. to file before the CA a Petition forCertiorari and Prohibition under Rule 65 of

the Rules of Court with a prayer for the issuance of a writ of preliminary injunction and a temporary retraining
order (TRO).[7]
On February 9, 2005, the CA issued a 60-day TRO enjoining Judge Marella from conducting further
proceedings in the case.[8]

They also averred that Koruga had admitted in the Petition that she never asked for reconsideration of
the CAs April 18, 2005 Resolution, contending that the Petition did not raise pure questions of law as to
constitute an exception to the requirement of filing a Motion for Reconsideration before a Petition
for Certiorari is filed.

62
They, likewise, alleged that the Petition may have already been rendered moot and academic by the
July 20, 2005 CA Decision,

[13]

which denied their Petition, and held that the RTC did not commit grave abuse of

parties for the same cause pending before the Monetary Board of the BSP, and this constituted forum-shopping;
and that jurisdiction over the subject matter of the case is vested by law in the BSP.[15]

discretion in issuing the assailed orders, and thus ordered the RTC to proceed with the trial of the case.
Arcenas, et al. assign the following errors:
Meanwhile, on March 13, 2006, this Court issued a Resolution granting the prayer for a TRO and
enjoining the Presiding Judge of Makati RTC, Branch 138, from proceeding with the hearing of the case upon

I.

THE COURT OF APPEALS, IN FINDING NO GRAVE ABUSE OF

DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL
COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS,
FAILED TO CONSIDER AND MERELY GLOSSED OVER THE MORE
TRANSCENDENT ISSUES OF THE LACK OF JURISDICTION ON THE PART
OF SAID PUBLIC RESPONDENT OVER THE SUBJECT MATTER OF THE
CASE BEFORE IT, LITIS PENDENTIA AND FORUM SHOPPING, AND THE
CASE BELOW BEING A NUISANCE OR HARASSMENT SUIT, EITHER ONE
AND ALL OF WHICH GOES/GO TO RENDER THE ISSUANCE BY PUBLIC
RESPONDENT OF THE ASSAILED ORDERS A GRAVE ABUSE OF
DISCRETION.

II.

THE FINDING OF THE COURT OF APPEALS OF NO GRAVE ABUSE OF

DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL
COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS, IS
NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF
THIS HONORABLE COURT.[16]

the filing by Arcenas, et al. of a P50,000.00 bond. Koruga filed a motion to lift the TRO, which this Court
denied on July 5, 2006.
On the other hand, respondents Dr. Conrado P. Banzon and Gen. Ramon Montao also filed their
Comment on Korugas Petition, raising substantially the same arguments as Arcenas, et al.
G.R. No. 169053
G.R. No. 169053 is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, with
prayer for the issuance of a TRO and a writ of preliminary injunction filed by Arcenas, et al.
In their Petition, Arcenas, et al. asked the Court to set aside the Decision [14] dated July 20, 2005 of the

Meanwhile, in a Manifestation and Motion filed on August 31, 2005, Koruga prayed for, among others,

CA in CA-G.R. SP No. 88422, which denied their petition, having found no grave abuse of discretion on the

the consolidation of her Petition with the Petition for Review onCertiorari under Rule 45 filed by Arcenas, et

part of the Makati RTC. The CA said that the RTC Orders were interlocutory in nature and, thus, may be

al., docketed as G.R. No. 169053. The motion was granted by this Court in a Resolution dated September 26,

assailed by certiorari or prohibition only when it is shown that the court acted without or in excess of

2005.

jurisdiction or with grave abuse of discretion. It added that the Supreme Court frowns upon resort to remedial
measures against interlocutory orders.
Arcenas, et al. anchored their prayer on the following grounds: that, in their Answer before the RTC,

Our Ruling
Initially, we will discuss the procedural issue.

they had raised the issue of failure of the court to acquire jurisdiction over them due to improper service of
summons; that the Koruga action is a nuisance or harassment suit; that there is another case involving the same

Arcenas, et al. argue that Korugas petition should be dismissed for its defective Verification and
Certification Against Forum-Shopping, since only a facsimile of the same was attached to the Petition. They

63
also claim that the Verification and Certification Against Forum-Shopping, allegedly executed

actually a valid service of summons. If, after hearing, such service is found to have been
improper, then new summons should be served forthwith.[20]

in Seattle, Washington, was not authenticated in the manner prescribed by Philippine law and not certified by
the Philippine Consulate in the United States.
This contention deserves scant consideration.
On the last page of the Petition in G.R. No. 168332, Korugas counsel executed an Undertaking, which
reads as follows:
In view of that fact that the Petitioner is currently in the United States, undersigned
counsel is attaching a facsimile copy of the Verification and Certification Against ForumShopping duly signed by the Petitioner and notarized by Stephanie N. Goggin, a Notary
Public for the Sate (sic) of Washington. Upon arrival of the original copy of the Verification
and Certification as certified by the Office of the Philippine Consul, the undersigned counsel
shall immediately provide duplicate copies thereof to the Honorable Court.[17]

Thus, in a Compliance[18] filed with the Court on September 5, 2005, petitioner submitted the original
copy of the duly notarized and authenticated Verification and Certification Against Forum-Shopping she had
executed.[19] This Court noted and considered the Compliance satisfactory in its Resolution dated November 16,
2005. There is, therefore, no need to further belabor this issue.
We now discuss the substantive issues in this case.
First, we resolve the prayer to nullify the CAs April 18, 2005 Resolution.
We hold that the Petition in G.R. No. 168332 has become moot and academic. The writ of preliminary
injunction being questioned had effectively been dissolved by the CAs July 20, 2005 Decision. The dispositive
portion of the Decision reads in part:
The case is REMANDED to the court a quo for further proceedings and to resolve
with deliberate dispatch the intra-corporate controversies and determine whether there was

Accordingly, there is no necessity to restrain the implementation of the writ of preliminary injunction issued by
the CA on April 18, 2005, since it no longer exists.
However, this Court finds that the CA erred in upholding the jurisdiction of, and remanding the case to,
the RTC.
The resolution of these petitions rests mainly on the determination of one fundamental issue: Which
body has jurisdiction over the Koruga Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with violation of Sections 31 to 34 of the Corporation Code,
prohibiting self-dealing and conflict of interest of directors and officers; invoked her right to inspect the
corporations records under Sections 74 and 75 of the Corporation Code; and prayed for Receivership and
Creation of a Management Committee, pursuant to Rule 59 of the Rules of Civil Procedure, the Securities
Regulation Code, the Interim Rules of Procedure Governing Intra-Corporate Controversies, the General
Banking Law of 2000, and the New Central Bank Act. She accused the directors and officers of Banco Filipino
of engaging in unsafe, unsound, and fraudulent banking practices, more particularly, acts that violate the
prohibition on self-dealing.
It is clear that the acts complained of pertain to the conduct of Banco Filipinos banking business. A
bank, as defined in the General Banking Law,[21] refers to an entity engaged in the lending of funds obtained in
the form of deposits.[22] The banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people and the revenues of the

64
state. Banks are affected with public interest because they receive funds from the general public in the form of
Koruga alleges that the dispute in the trial court involves the manner with which the Directors (sic)

deposits. It is the Governments responsibility to see to it that the financial interests of those who deal with banks
and banking institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the
BSP, which pursuant to its Charter, is authorized to administer the monetary, banking, and credit system of

have handled the Banks affairs, specifically the fraudulent loans anddacion en pago authorized by the Directors
in favor of several dummy corporations known to have close ties and are indirectly controlled by the Directors.
[26]

thePhilippines. It is further authorized to take the necessary steps against any banking institution if its continued
operation would cause prejudice to its depositors, creditors and the general public as well.[23]

Her allegations, then, call for the examination of the allegedly questionable loans. Whether these loans are

covered by the prohibition on self-dealing is a matter for the BSP to determine. These are not ordinary intracorporate matters; rather, they involve banking activities which are, by law, regulated and supervised by the

The law vests in the BSP the supervision over operations and activities of banks. The New Central
Bank Act provides:
Section 25. Supervision and Examination. - The Bangko Sentral shall have
supervision over, and conduct periodic or special examinations of, banking institutions and
quasi-banks, including their subsidiaries and affiliates engaged in allied activities. [24]

BSP. As the Court has previously held:

It is well-settled in both law and jurisprudence that the Central Monetary Authority,
through the Monetary Board, is vested with exclusive authority to assess, evaluate and
determine the condition of any bank, and finding such condition to be one of insolvency, or
that its continuance in business would involve a probable loss to its depositors or creditors,
forbid bank or non-bank financial institution to do business in the Philippines; and shall
designate an official of the BSP or other competent person as receiver to immediately take
charge of its assets and liabilities.[27]

Specifically, the BSPs supervisory and regulatory powers include:

4.1 The issuance of rules of conduct or the establishment of standards of operation for
uniform application to all institutions or functions covered, taking into consideration
the distinctive character of the operations of institutions and the substantive
similarities of specific functions to which such rules, modes or standards are to be
applied;
4.2 The conduct of examination to determine compliance with laws and regulations if
the circumstances so warrant as determined by the Monetary Board;
4.3 Overseeing to ascertain that laws and Regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the
last date of examination to determine whether an institution is conducting its
business on a safe or sound basis: Provided, That the deficiencies/irregularities
found by or discovered by an audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action.[25]

Correlatively, the General Banking Law of 2000 specifically deals with loans contracted by bank
directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to Directors, Officers,
Stockholders and Their Related Interests. No director or officer of any bank shall, directly
or indirectly, for himself or as the representative or agent of others, borrow from such bank
nor shall he become a guarantor, indorser or surety for loans from such bank to others, or in
any manner be an obligor or incur any contractual liability to the bank except with the written
approval of the majority of all the directors of the bank, excluding the director concerned:
Provided, That such written approval shall not be required for loans, other credit
accommodations and advances granted to officers under a fringe benefit plan approved by the
Bangko Sentral. The required approval shall be entered upon the records of the bank and a
copy of such entry shall be transmitted forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or stockholders and their related
interests shall be upon terms not less favorable to the bank than those offered to others.

65
After due notice to the board of directors of the bank, the office of any bank director
or officer who violates the provisions of this Section may be declared vacant and the director
or officer shall be subject to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations
and guarantees that may be extended, directly or indirectly, by a bank to its directors,
officers, stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their related
interests.However, the outstanding loans, credit accommodations and guarantees which a
bank may extend to each of its stockholders, directors, or officers and their related interests,
shall be limited to an amount equivalent to their respective unencumbered deposits and book
value of their paid-in capital contribution in the bank: Provided, however, That loans, credit
accommodations and guarantees secured by assets considered as non-risk by the Monetary
Board shall be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to officers in the form of fringe benefits granted in accordance
with rules as may be prescribed by the Monetary Board shall not be subject to the individual
limit.
The Monetary Board shall define the term related interests.
The limit on loans, credit accommodations and guarantees prescribed herein shall not
apply to loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.[28]

Furthermore, the authority to determine whether a bank is conducting business in an unsafe or unsound
manner is also vested in the Monetary Board. The General Banking Law of 2000 provides:
SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In
determining whether a particular act or omission, which is not otherwise prohibited by any
law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as
conducting business in an unsafe or unsound manner for purposes of this Section, the
Monetary Board shall consider any of the following circumstances:
56.1. The act or omission has resulted or may result in material loss or damage, or
abnormal risk or danger to the safety, stability, liquidity or solvency of the
institution;
56.2. The act or omission has resulted or may result in material loss or damage or
abnormal risk to the institution's depositors, creditors, investors,
stockholders or to the Bangko Sentral or to the public in general;

56.3. The act or omission has caused any undue injury, or has given any unwarranted
benefits, advantage or preference to the bank or any party in the discharge
by the director or officer of his duties and responsibilities through manifest
partiality, evident bad faith or gross inexcusable negligence; or
56.4. The act or omission involves entering into any contract or transaction
manifestly and grossly disadvantageous to the bank, quasi-bank or trust
entity, whether or not the director or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an
unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative
sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30
of the same Act and/or immediately exclude the erring bank from clearing, the provisions of
law to the contrary notwithstanding.

Finally, the New Central Bank Act grants the Monetary Board the power to impose administrative
sanctions on the erring bank:
Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice
to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of
this Act, the Monetary Board may, at its discretion, impose upon any bank or quasibank, their directors and/or officers, for any willful violation of its charter or by-laws,
willful delay in the submission of reports or publications thereof as required by law, rules and
regulations; any refusal to permit examination into the affairs of the institution; any willful
making of a false or misleading statement to the Board or the appropriate supervising and
examining department or its examiners; any willful failure or refusal to comply with, or
violation of, any banking law or any order, instruction or regulation issued by the Monetary
Board, or any order, instruction or ruling by the Governor; or any commission of
irregularities, and/or conducting business in an unsafe or unsound manner as may be
determined by the Monetary Board, the following administrative sanctions, whenever
applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate,
but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation,
taking into consideration the attendant circumstances, such as the nature and gravity
of the violation or irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko Sentral credit
facilities;
(c) suspension of lending or foreign exchange operations or authority to accept new
deposits or make new investments;

66
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively
suspend any director or officer of a bank or quasi-bank pending an investigation: Provided,
That should the case be not finally decided by the Bangko Sentral within a period of one
hundred twenty (120) days after the date of suspension, said director or officer shall be
reinstated in his position: Provided, further, That when the delay in the disposition of the case
is due to the fault, negligence or petition of the director or officer, the period of delay shall not
be counted in computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.
Whether or not there is an administrative proceeding, if the institution and/or the
directors and/or officers concerned continue with or otherwise persist in the commission of
the indicated practice or violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned to cease and desist from the indicated
practice or violation, and may further order that immediate action be taken to correct the
conditions resulting from such practice or violation. The cease and desist order shall be
immediately effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing
before the Monetary Board or any committee chaired by any Monetary Board member created
for the purpose, upon request made by the respondents within five (5) days from their receipt
of the order. If no such hearing is requested within said period, the order shall be final. If a
hearing is conducted, all issues shall be determined on the basis of records, after which the
Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking
institutions, for any failure to comply with the requirements of law, Monetary Board
regulations and policies, and/or instructions issued by the Monetary Board or by the
Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory until reversed, modified or lifted by the
Monetary Board on appeal.[29]

67
Koruga also accused Arcenas, et al. of violation of the Corporation Codes provisions on self-dealing
and conflict of interest. She invoked Section 31 of the Corporation Code, which defines the liability of directors,
trustees, or officers of a corporation for, among others, acquiring any personal or pecuniary interest in conflict
with their duty as directors or trustees, and Section 32, which prescribes the conditions under which a contract
of the corporation with one or more of its directors or trustees the so-called self-dealing directors [30] would be
valid. She also alleged that Banco Filipinos directors violated Sections 33 and 34 in approving the loans of
corporations with interlocking ownerships, i.e., owned, directed, or managed by close associates of Albert C.
Aguirre.
Sections 31 to 34 of the Corporation Code provide:
Section 31. Liability of directors, trustees or officers. - Directors or trustees who
wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Section 32. Dealings of directors, trustees or officers with the corporation. - A
contract of the corporation with one or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the

Where any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances.
Section 33. Contracts between corporations with interlocking directors. - Except in
cases of fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking director in
one corporation is substantial and his interest in the other corporation or corporations is
merely nominal, he shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.
Section 34. Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the director risked his own funds in
the venture.

Korugas invocation of the provisions of the Corporation Code is misplaced. In an earlier case with
similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying to all types of corporations, while
the New Central Bank Act regulates specifically banks and other financial institutions,
including the dissolution and liquidation thereof. As between a general and special law, the
latter shall prevail generalia specialibus non derogant.[31]

contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board
of directors.

Consequently, it is not the Interim Rules of Procedure on Intra-Corporate Controversies, [32] or Rule 59
of the Rules of Civil Procedure on Receivership, that would apply to this case. Instead, Sections 29 and 30 of
the New Central Bank Act should be followed, viz.:

68
Section 29. Appointment of Conservator. - Whenever, on the basis of a report
submitted by the appropriate supervising or examining department, the Monetary Board finds
that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of depositors and creditors, the
Monetary Board may appoint a conservator with such powers as the Monetary Board shall
deem necessary to take charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due said institution, and exercise all
powers necessary to restore its viability. The conservator shall report and be responsible to the
Monetary Board and shall have the power to overrule or revoke the actions of the previous
management and board of directors of the bank or quasi-bank.
xxxx
The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can continue to operate on its own and the conservatorship is no longer necessary.
The conservatorship shall likewise be terminated should the Monetary Board, on the basis of
the report of the conservator or of its own findings, determine that the continuance in business
of the institution would involve probable loss to its depositors or creditors, in which case the
provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report
of the head of the supervising or examining department, the Monetary Board finds that a bank
or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course
of business: Provided, That this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking
community;
(b) has insufficient realizable assets, as determined by the Bangko Sentral,
to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its
depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37 that has
become final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior hearing forbid the
institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking
institution.
xxxx

The actions of the Monetary Board taken under this section or under Section 29
of this Act shall be final and executory, and may not be restrained or set aside by the
court except on petition for certiorari on the ground that the action taken was in excess
of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition forcertiorari may only be filed by the stockholders of record
representing the majority of the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of
a receiver under this section shall be vested exclusively with the Monetary Board .
Furthermore, the designation of a conservator is not a precondition to the designation of a
receiver.[33]

On the strength of these provisions, it is the Monetary Board that exercises exclusive jurisdiction over
proceedings for receivership of banks.
Crystal clear in Section 30 is the provision that says the appointment of a receiver under this section
shall be vested exclusively with the Monetary Board. The term exclusively connotes that only the Monetary
Board can resolve the issue of whether a bank is to be placed under receivership and, upon an affirmative
finding, it also has authority to appoint a receiver. This is further affirmed by the fact that the law allows the
Monetary Board to take action summarily and without need for prior hearing.
And, as a clincher, the law explicitly provides that actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the
court except on a petition for certiorari on the ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of jurisdiction.
From the foregoing disquisition, there is no doubt that the RTC has no jurisdiction to hear and decide a
suit that seeks to place Banco Filipino under receivership.
Koruga herself recognizes the BSPs power over the allegedly unlawful acts of Banco Filipinos
directors. The records of this case bear out that Koruga, through her legal counsel, wrote the Monetary

69
Board[34] on April 21, 2003 to bring to its attention the acts she had enumerated in her complaint before the
RTC. The letter reads in part:
Banco Filipino and the current members of its Board of Directors should be placed
under investigation for violations of banking laws, the commission of irregularities, and for
conducting business in an unsafe or unsound manner. They should likewise be placed under
preventive suspension by virtue of the powers granted to the Monetary Board under Section
37 of the Central Bank Act. These blatant violations of banking laws should not go by without
penalty. They have put Banco Filipino, its depositors and stockholders, and the entire banking
system (sic) in jeopardy.
xxxx
We urge you to look into the matter in your capacity as regulators. Our clients, a
minority stockholders, (sic) and many depositors of Banco Filipino are prejudiced by a failure
to regulate, and taxpayers are prejudiced by accommodations granted by the BSP to Banco
Filipino[35]
In a letter dated May 6, 2003, BSP Supervision and Examination Department III Director Candon B.
Guerrero referred Korugas letter to Arcenas for comment. [36] On June 6, 2003, Banco Filipinos then Executive
Vice President and Corporate Secretary Francisco A. Rivera submitted the banks comments essentially arguing
that Korugas accusations lacked legal and factual bases. [37]
On the other hand, the BSP, in its Answer before the RTC, said that it had been looking into Banco
Filipinos activities. An October 2002 Report of Examination (ROE) prepared by the Supervision and
Examination Department (SED) noted certain dacion payments, out-of-the-ordinary expenses, among other
dealings. On July 24, 2003, the Monetary Board passed Resolution No. 1034 furnishing Banco Filipino a copy
of the ROE with instructions for the bank to file its comment or explanation within 30 to 90 days under threat of
being fined or of being subjected to other remedial actions. The ROE, the BSP said, covers substantially the
same matters raised in Korugas complaint. At the time of the filing of Korugas complaint on August 20, 2003,

Thus, the courts jurisdiction could only have been invoked after the Monetary Board had taken action
on the matter and only on the ground that the action taken was in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction.
Finally, there is one other reason why Korugas complaint before the RTC cannot prosper. Given her
own admission and the same is likewise supported by evidence that she is merely a minority stockholder of
Banco Filipino, she would not have the standing to question the Monetary Boards action. Section 30 of the New
Central Bank Act provides:
The petition for certiorari may only be filed by the stockholders of record representing the
majority of the capital stock within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or conservatorship.

All the foregoing discussion yields the inevitable conclusion that the CA erred in upholding the
jurisdiction of, and remanding the case to, the RTC. Given that the RTC does not have jurisdiction over the
subject matter of the case, its refusal to dismiss the case on that ground amounted to grave abuse of discretion.
WHEREFORE, the foregoing premises considered, the Petition in G.R. No. 168332 is DISMISSED,
while the Petition in G.R. No. 169053 is GRANTED. The Decision of the Court of Appeals dated July 20, 2005
in CA-G.R. SP No. 88422 is hereby SET ASIDE. The Temporary Restraining Order issued by this Court on
March 13, 2006 is madePERMANENT. Consequently, Civil Case No. 03-985, pending before
the Regional Trial Court of Makati City, is DISMISSED.
SO ORDERED.
G.R. No. 88013 March 19, 1990

the period for Banco Filipino to submit its explanation had not yet expired. [38]
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

70
Don P. Porcuincula for petitioner.

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P12,953.00:

San Juan, Gonzalez, San Agustin & Sinense for private respondent.
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the
amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club
Corporation in the amount of P4,385.02: and

CRUZ, J.:
We are concerned in this case with the question of damages, specifically moral and exemplary
damages. The negligence of the private respondent has already been established. All we have to
ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the
exportation of food products. It buys these products from various local suppliers and then sells them
abroad, particularly in the United States, Canada and the Middle East. Most of its exports are
purchased by the petitioner on credit.
The petitioner was a depositor of the respondent bank and maintained a checking account in its
branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its
account in the said bank the amount of P100,000.00, thus increasing its balance as of that date to
P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but was
suprised to learn later that they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing
Company, Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue
in the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount
of P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P42,906.00:

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount
of P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of
demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made
good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the
petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on
June 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future payments
be made by it in cash or certified check. Meantime, action on the pending orders of the petitioner with
the other suppliers whose checks were dishonored was also deferred.
The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the
sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The
error was rectified on June 17, 1981, and the dishonored checks were paid after they were redeposited. 4
In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its
"gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the
then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum
of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and
costs.
After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages
were not called for under the circumstances. However, observing that the plaintiff's right had been
violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus
P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6
The respondent court found with the trial court that the private respondent was guilty of negligence
but agreed that the petitioner was nevertheless not entitled to moral damages. It said:

71
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs.
Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendantappellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the
bank rectified its records. It credited the said amount in favor of plaintiff-appellant in
less than a month. The dishonored checks were eventually paid. These
circumstances negate any imputation or insinuation of malicious, fraudulent, wanton
and gross bad faith and negligence on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the negligence of the private respondent had been
brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We
feel it is not enough to say that the private respondent rectified its records and credited the deposit in
less than a month as if this were sufficient repentance. The error should not have been committed in
the first place. The respondent bank has not even explained why it was committed at all. It is true that
the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took
almost a month when, properly, the checks should have been paid immediately upon presentment.
As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical
attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith,
that the respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent bank, the decision
practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not,
indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not
acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation
was tarnished. Its standing was reduced in the business community. All this was due to the fault of the
respondent bank which was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for
injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner
did sustain actual injury as a result of the dishonored checks and that the existence of the loss having
been established "absolute certainty as to its amount is not required." 7 Such injury should bolster all
the more the demand of the petitioner for moral damages and justifies the examination by this Court
of the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the
plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such
damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent
court said that the claimed losses are purely speculative and are not supported by substantial
evidence, but if failed to consider that the amount of such losses need not be established with
exactitude precisely because of their nature. Moral damages are not susceptible of pecuniary
estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is
necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be
adjudicated." That is why the determination of the amount to be awarded (except liquidated damages)
is left to the sound discretion of the court, according to "the circumstances of each case."
From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of
P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that
prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled
to moral damages because, not being a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only
exception to this rule is where the corporation has a good reputation that is debased, resulting in its
social humiliation. 9
We shall recognize that the petitioner did suffer injury because of the private respondent's negligence
that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige
was impaired because of the bouncing checks and confidence in it as a reliable debtor was
diminished. The private respondent makes much of the one instance when the petitioner was sued in
a collection case, but that did not prove that it did not have a good reputation that could not be
marred, more so since that case was ultimately settled. 10 It does not appear that, as the private
respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good
name to protect.
Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the
proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal
damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by
the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff
for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through
the fault of the private respondent, the proper remedy is the award to it of moral damages, which we
impose, in our discretion, in the same amount of P20,000.00.
Now for the exemplary damages.

72
The pertinent provisions of the Civil Code are the following:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.
The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will
even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the payment of
ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active
associate that can help in the running of their affairs, not only in the form of loans when needed but
more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of
the bank, such as the dishonor of a check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the
respondent bank was remiss in that duty and violated that relationship. What is especially deplorable
is that, having been informed of its error in not crediting the deposit in question to the petitioner, the
respondent bank did not immediately correct it but did so only one week later or twenty-three days
after the deposit was made. It bears repeating that the record does not contain any satisfactory
explanation of why the error was made in the first place and why it was not corrected immediately

after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in
the Civil Code that calls for the imposition of exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes
upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or
correction for the public good," in the words of the law. It is expected that this ruling will serve as a
warning and deterrent against the repetition of the ineptness and indefference that has been
displayed here, lest the confidence of the public in the banking system be further impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered
to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and
exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the
amount of P5,000.00, and costs.
SO ORDERED.
.R. No. 97626 March 14, 1997
PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et
al., petitioners,
vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA,
its President & General Manager, respondents.

HERMOSISIMA, JR., J.:

Challenged in this petition for review is the Decision dated February 28, 1991 1 rendered by public
respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional
Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288
entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce, now absorbed by
Philippine Commercial and Industrial Bank."
The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation
(RMC for brevity), represented by its President and General Manager Romeo Lipana, to recover from
the former Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine

73
Commercial International Bank, the sum of P304,979.74 representing various deposits it had made in
its current account with said bank but which were not credited to its account, and were instead
deposited to the account of one Bienvenido Cotas, allegedly due to the gross and inexcusable
negligence of the petitioner bank.

her company believe that all the while the amounts she deposited were being credited to its account
when, in truth and in fact, they were being deposited by her and credited by the petitioner bank in the
account of Cotas. This went on in a span of more than one (1) year without private respondent's
knowledge.

RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-017487, with the Pasig Branch of PBC in connection with its business of selling appliances.

Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money,
but as its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig,
Branch 160. The trial court found petitioner bank negligent and ruled as follows:

In the ordinary and usual course of banking operations, current account deposits are accepted by the
bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of the deposit, and the amount
of the deposit either in cash or checks. The deposit slip has an upper portion or stub, which is
detached and given to the depositor or his agent; the lower portion is retained by the bank. In some
instances, however, the deposit slips are prepared in duplicate by the depositor. The original of the
deposit slip is retained by the bank, while the duplicate copy is returned or given to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in
the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said
funds in the current accounts of RMC with PBC. It turned out, however, that these deposits, on all
occasions, were not credited to RMC's account but were instead deposited to Account No. 53-017347 of Yabut's husband, Bienvenido Cotas who likewise maintains an account with the same bank.
During this period, petitioner bank had, however, been regularly furnishing private respondent with
monthly statements showing its current accounts balances. Unfortunately, it had never been the
practice of Romeo Lipana to check these monthly statements of account reposing complete trust and
confidence on petitioner bank.
Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the
deposit slip, an original and a duplicate. The original showed the name of her husband as depositor
and his current account number. On the duplicate copy was written the account number of her
husband but the name of the account holder was left blank. PBC's teller, Azucena Mabayad, would,
however, validate and stamp both the original and the duplicate of these deposit slips retaining only
the original copy despite the lack of information on the duplicate slip. The second copy was kept by
Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of RMC
in the space left blank in the duplicate copy and change the account number written thereon, which is
that of her husband's, and make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3.
With the daily remittance records also prepared by Ms. Yabut and submitted to private respondent
RMC together with the validated duplicate slips with the latter's name and account number, she made

WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank

of Commerce, now absorbed by defendant Philippine Commercial & Industrial Bank,
and defendant Azucena Mabayad to pay the plaintiff, jointly and severally, and
without prejudice to any criminal action which may be instituted if found warranted:
1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon
at the legal rate from the filing of the complaint;
2. A sum equivalent to 14% thereof, as exemplary damages;
3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and
4. Costs.
Defendants' counterclaim is hereby dismissed for lack of merit. 2
On appeal, the appellate court affirmed the foregoing decision with modifications, viz:
WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the
awards of exemplary damages and attorney's fees specified therein are eliminated
and instead, appellants are ordered to pay plaintiff, in addition to the principal sum of
P304,979.74 representing plaintiff's lost deposit plus legal interest thereon from the
filing of the complaint, P25,000.00 attorney's fees and costs in the lower court as well
as in this Court. 3
Hence, this petition anchored on the following grounds:

74
1) The proximate cause of the loss is the negligence of respondent Rommel
Marketing Corporation and Romeo Lipana in entrusting cash to a dishonest
employee.
2) The failure of respondent Rommel Marketing Corporation to cross-check the
bank's statements of account with its own records during the entire period of more
than one (1) year is the proximate cause of the commission of subsequent frauds and
misappropriation committed by Ms. Irene Yabut.

We sustain the private respondent.

Our law on quasi-delicts states:
Art. 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasidelict and is governed by the provisions of this Chapter.

3) The duplicate copies of the deposit slips presented by respondent Rommel

Marketing Corporation are falsified and are not proof that the amounts appearing
thereon were deposited to respondent Rommel Marketing Corporation's account with
the bank,

There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must respond; and (c) the
connection of cause and effect between the fault or negligence of the defendant and the damages
incurred by the plaintiff. 7

4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up
her fraudulent acts against respondent Rommel Marketing Corporation, and not as
records of deposits she made with the bank. 4

In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff
in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which
caused the damage where the parties point to each other as the culprit.

The petition has no merit.

Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune
of P304,979.74, suffered by the private respondent RMC petitioner bank's negligence or that of
private respondent's?
Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and
Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene
Yabut. 5 According to them, it was impossible for the bank to know that the money deposited by Ms.
Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will be depositing
cash to its account. Thus, it was impossible for the bank to know the fraudulent design of Yabut
considering that her husband, Bienvenido Cotas, also maintained an account with the bank. For the
bank to inquire into the ownership of the cash deposited by Ms. Irene Yabut would be irregular.
Otherwise stated, it was RMC's negligence in entrusting cash to a dishonest employee which
provided Ms. Irene Yabut the opportunity to defraud RMC. 6
Private respondent, on the other hand, maintains that the proximate cause of the loss was the
negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both
original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of
the deposit slips was not completely accomplished.

Negligence is the omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case
of Picart v. Smith, 8 provides the test by which to determine the existence of negligence in a particular
case which may be stated as follows: Did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed
to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence
of negligence in a given case is not determined by reference to the personal judgment of the actor in
the situation before him. The law considers what would be reckless, blameworthy, or negligent in the
man of ordinary intelligence and prudence and determines liability by that.
Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in
validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut,
despite the glaring fact that the duplicate copy was not completely accomplished contrary to the selfimposed procedure of the bank with respect to the proper validation of deposit slips, original or
duplicate, as testified to by Ms. Mabayad herself, thus:
Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs.
Mabayad your important duties and functions?

75
A: I accept current and savings deposits from depositors and
encashments.

A: We see to it that the deposit slip 9 is properly accomplished and

then we count the money and then we tally it with the deposit slip sir.

Q: Now in the handling of current account deposits of bank clients,

could you tell us the procedure you follow?

Q: Now is the depositor's stub which you issued to your clients

validated?

A: The client or depositor or the authorized representative prepares

a deposit slip by filling up the deposit slip with the name, the account
number, the date, the cash breakdown, if it is deposited for cash,
and the check number, the amount and then he signs the deposit
slip.

A: Yes, sir. 10 [Emphasis ours]

Q: Now, how many deposit slips do you normally require in

accomplishing current account deposit, Mrs. Mabayad?
A: The bank requires only one copy of the deposit although some of
our clients prepare the deposit slip in duplicate.
Q: Now in accomplishing current account deposits from your clients,
what do you issue to the depositor to evidence the deposit made?
A: We issue or we give to the clients the depositor's stub as a receipt
of the deposit.
Q: And who prepares the deposit slip?
A: The depositor or the authorized representative sir?
Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad,
is it with the deposit slip?
A: The depositor's stub is connected with the deposit slip or the
bank's copy. In a deposit slip, the upper portion is the depositor's
stub and the lower portion is the bank's copy, and you can detach the
bank's copy from the depositor's stub by tearing it sir.
Q: Now what do you do upon presentment of the deposit slip by the
depositor or the depositor's authorized representative?

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the
duplicate slip was not compulsorily required by the bank in accepting deposits should not
relieve the petitioner bank of responsibility. The odd circumstance alone that such duplicate
copy lacked one vital information that of the name of the account holder should have
already put Ms. Mabayad on guard. Rather than readily validating the incomplete duplicate
copy, she should have proceeded more cautiously by being more probing as to the true
reason why the name of the account holder in the duplicate slip was left blank while that in
the original was filled up. She should not have been so naive in accepting hook, line and
sinker the too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy
was only for her personal record, she would simply fill up the blank space later on. 11 A
"reasonable man of ordinary prudence" 12 would not have given credence to such explanation
and would have insisted that the space left blank be filled up as a condition for validation.
Unfortunately, this was not how bank teller Mabayad proceeded thus resulting in huge losses
to the private respondent.
Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr.
Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its VicePresident, to the effect that, while he ordered the investigation of the incident, he never came to know
that blank deposit slips were validated in total disregard of the bank's validation procedures, viz:
Q: Did he ever tell you that one of your cashiers affixed the stamp
mark of the bank on the deposit slips and they validated the same
with the machine, the fact that those deposit slips were unfilled up, is
there any report similar to that?
A: No, it was not the cashier but the teller.
Q: The teller validated the blank deposit slip?

76
A: No it was not reported.
Q: You did not know that any one in the bank tellers or cashiers
validated the blank deposit slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, sir. 13
Prescinding from the above, public respondent Court of Appeals aptly observed:
xxx xxx xxx
It was in fact only when he testified in this case in February, 1983, or after the lapse
of more than seven (7) years counted from the period when the funds in question
were deposited in plaintiff's accounts (May, 1975 to July, 1976) that bank manager
Bonifacio admittedly became aware of the practice of his teller Mabayad of validating
blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence
in the appellant bank's supervision of its employees. 14
It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in
the selection and supervision of its bank teller, which was the proximate cause of the loss suffered by
the private respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted
by the petitioners.
Proximate cause is determined on the facts of each case upon mixed considerations of logic,
common sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank
of the Phil. Islands v. Court of Appeals, 17 defines proximate cause as "that cause, which, in natural
and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. . . ." In this case, absent the act of Ms. Mabayad in
negligently validating the incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not
have the facility with which to perpetrate her fraudulent scheme with impunity. Apropos, once again, is
the pronouncement made by the respondent appellate court, to wit:
. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted
to her by plaintiff, she would not have been able to deposit those funds in her

husband's current account, and then make plaintiff believe that it was in the latter's
accounts wherein she had deposited them, had it not been for bank teller Mabayad's
aforesaid gross and reckless negligence. The latter's negligence was thus the
proximate, immediate and efficient cause that brought about the loss claimed by
plaintiff in this case, and the failure of plaintiff to discover the same soon enough by
failing to scrutinize the monthly statements of account being sent to it by appellant
bank could not have prevented the fraud and misappropriation which Irene Yabut had
already completed when she deposited plaintiff's money to the account of her
husband instead of to the latter's accounts. 18
Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening
negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in
essence, states that where both parties are negligent, but the negligent act of one is appreciably later
in time than that of the other, or when it is impossible to determine whose fault or negligence should
be attributed to the incident, the one who had the last clear opportunity to avoid the impending harm
and failed to do so is chargeable with the consequences thereof. 19Stated differently, the rule would
also mean that an antecedent negligence of a person does not preclude the recovery of damages for
the supervening negligence of, or bar a defense against liability sought by another, if the latter, who
had the last fair chance, could have avoided the impending harm by the exercise of due
diligence. 20 Here, assuming that private respondent RMC was negligent in entrusting cash to a
dishonest employee, thus providing the latter with the opportunity to defraud the company, as
advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the last
clear opportunity to avert the injury incurred by its client, simply by faithfully observing their selfimposed validation procedure.
At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in
dealing with their clients.
The New Civil Code provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
(1104a)

77
In the case of banks, however, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks are duty
bound to treat the accounts of their clients with the highest degree of care. 21
As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor
expects the bank to treat his account with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose as he sees fit, confident that the bank will
deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly
credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment
if not financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. In the case before us, it is apparent that the
petitioner bank was remiss in that duty and violated that relationship.
Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's
statements of account with its own records during the entire period of more than one (1) year is the
proximate cause of the commission of subsequent frauds and misappropriation committed by Ms.
Irene Yabut.
We do not agree.
While it is true that had private respondent checked the monthly statements of account sent by the
petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by
the petitioners to escape liability. This omission on the part of the private respondent does not change
the fact that were it not for the wanton and reckless negligence of the petitioners' employee in
validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not
have occurred. Considering, however, that the fraud was committed in a span of more than one (1)
year covering various deposits, common human experience dictates that the same would not have
been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. Ms.
Mabayad was negligent in the performance of her duties as bank teller nonetheless. Thus, the
petitioners are entitled to claim reimbursement from her for whatever they shall be ordered to pay in
this case.

The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise
negligent in not checking its monthly statements of account. Had it done so, the company would have
been alerted to the series of frauds being committed against RMC by its secretary. The damage
would definitely not have ballooned to such an amount if only RMC, particularly Romeo Lipana, had
exercised even a little vigilance in their financial affairs. This omission by RMC amounts to
contributory negligence which shall mitigate the damages that may be awarded to the private
respondent 23 under Article 2179 of the New Civil Code, to wit:
. . . When the plaintiff's own negligence was the immediate and proximate cause of
his injury, he cannot recover damages. But if his negligence was only contributory,
the immediate and proximate cause of the injury being the defendant's lack of due
care, the plaintiff may recover damages, but the courts shall mitigate the damages to
be awarded.
In view of this, we believe that the demands of substantial justice are satisfied by allocating
the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate
court, except the award of P25,000.00 attorney's fees, shall be borne by private respondent
RMC; only the balance of 60% needs to be paid by the petitioners. The award of attorney's
fees shall be borne exclusively by the petitioners.
WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount
of actual damages private respondent is entitled to by 40%. Petitioners may recover from Ms.
Azucena Mabayad the amount they would pay the private respondent. Private respondent shall have
recourse against Ms. Irene Yabut. In all other respects, the appellate court's decision is AFFIRMED.
Proportionate costs.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.

Separate Opinions

78
account holder, the date of the deposit, and the amount of the deposit either in cash or in checks.
(Rollo, p. 137)
PADILLA, J., dissenting:
I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by
Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the
petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene
Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are entitled
to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this
case."
It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene
Yabut, RMC's own employee, who should have been charged with estafa or estafa through
falsification of private document. Interestingly, the records are silent on whether RMC had ever filed
any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have been
impleaded even as a party defendant in any civil case for damages. Why is RMC insulating Ms. Irene
Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer?
To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976,
Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of
Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial
Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to
defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47).
Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed
Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence
cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that
there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad was
just unfortunate that private respondent's documentary evidence showed that she was the attending
teller in the bulk of Yabut's transactions with the bank.
Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact
business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip.
PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub
and the lower part was called the bank copy. Both parts were detachable from each other. The
deposit slip was prepared and signed by the depositor or his representative, who indicated therein the
current account number to which the deposit was to be credited, the name of the depositor or current

Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count
whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it
did, then the teller proceeded to verify whether the current account number matched with the current
account name as written in the deposit slip.
In the earlier days before the age of full computerization, a bank normally maintained a ledger which
served as a repository of accounts to which debits and credits resulting from transactions with the
bank were posted from books of original entry. Thus, it was only after the transaction was posted in
the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or
initial to serve as proof of the completed transaction.
It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy
on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut.
The teller, however, detached the validated depositor's stub on the original deposit slip and allowed
Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the
original deposit slip, but with the account name purposely left blank by Yabut, on the assumption that
it would serve no other purpose but for a personal record to complement the original validated
depositor's stub.
Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate
copy of the deposit slip, tampered with its account number, and superimposed RMC's account
number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit
slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear
evidence of tampering with any of the material entries in a deposit slip, the genuineness and due
execution of the document become an issue in resolving whether or not the transaction had been fair
and regular and whether the ordinary course of business had been followed by the bank.
It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut,
its employee, deposited the money of RMC in her husband's name and account number instead of
that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut that
directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller as
the deposit slip was made out by Yabut in her husband's name and to his account.
Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original
deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the

79
damage had already been done to RMC when Yabut deposited its funds in the name and account
number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would
have done afterwards like tampering both the account number and the account name on the stub
of the original deposit slip and on the duplicate copy in order to cover up her crime.

I vote to grant the petition.

Separate Opinions
Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee
that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the
bank tellers were absolutely unaware that a crime had already been consummated by Yabut when
her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her
husband's account even if the funds deposited belonged to RMC.
The teller(s) in this case were not in any way proven to be parties to the crime either as accessories
or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act
because the teller(s) simply had no choice but to accept and validate the deposit as written in the
original deposit slip under the account number and name of Yabut's husband. Hence, the act of
validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause
which an independent cause or agency merely took advantage of to accomplish something which
was not the probable or natural effect thereof. That explains why Yabut still had to tamper with the
account number of the duplicate deposit slip after filling in the name of RMC in the blank space.
Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes
that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same
must be the proximate cause of the injury. In short, there must be a last and a clear chance, not a
last possible chance, to avoid the accident or injury. It must have been a chance as would have
enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the
resulting damage to himself.
In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private
respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's
attention at the earliest opportunity. Private respondent failed to examine these bank statements not
because it was prevented by some cause in not doing so, but because it was purposely negligent as
it admitted that it does not normally check bank statements given by banks.
It was private respondent who had the last and clear chance to prevent any further misappropriation
by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it
monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent
should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence,
therefore, is not contributory but the immediate and proximate cause of its injury.

PADILLA, J., dissenting:

I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by
Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the
petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene
Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are entitled
to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this
case."
It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene
Yabut, RMC's own employee, who should have been charged with estafa or estafa through
falsification of private document. Interestingly, the records are silent on whether RMC had ever filed
any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have been
impleaded even as a party defendant in any civil case for damages. Why is RMC insulating Ms. Irene
Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer?
To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976,
Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of
Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial
Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to
defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47).
Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed
Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence
cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that
there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad was
just unfortunate that private respondent's documentary evidence showed that she was the attending
teller in the bulk of Yabut's transactions with the bank.
Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact
business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip.
PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub

80
and the lower part was called the bank copy. Both parts were detachable from each other. The
deposit slip was prepared and signed by the depositor or his representative, who indicated therein the
current account number to which the deposit was to be credited, the name of the depositor or current
account holder, the date of the deposit, and the amount of the deposit either in cash or in checks.
(Rollo, p. 137)
Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count
whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it
did, then the teller proceeded to verify whether the current account number matched with the current
account name as written in the deposit slip.
In the earlier days before the age of full computerization, a bank normally maintained a ledger which
served as a repository of accounts to which debits and credits resulting from transactions with the
bank were posted from books of original entry. Thus, it was only after the transaction was posted in
the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or
initial to serve as proof of the completed transaction.
It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy
on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut.
The teller, however, detached the validated depositor's stub on the original deposit slip and allowed
Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the
original deposit slip, but with the account name purposely left blank by Yabut, on the assumption that
it would serve no other purpose but for a personal record to complement the original validated
depositor's stub.
Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate
copy of the deposit slip, tampered with its account number, and superimposed RMC's account
number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit
slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear
evidence of tampering with any of the material entries in a deposit slip, the genuineness and due
execution of the document become an issue in resolving whether or not the transaction had been fair
and regular and whether the ordinary course of business had been followed by the bank.
It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut,
its employee, deposited the money of RMC in her husband's name and account number instead of
that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut that
directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller as
the deposit slip was made out by Yabut in her husband's name and to his account.

Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original
deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the
damage had already been done to RMC when Yabut deposited its funds in the name and account
number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would
have done afterwards like tampering both the account number and the account name on the stub
of the original deposit slip and on the duplicate copy in order to cover up her crime.
Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee
that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the
bank tellers were absolutely unaware that a crime had already been consummated by Yabut when
her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her
husband's account even if the funds deposited belonged to RMC.
The teller(s) in this case were not in any way proven to be parties to the crime either as accessories
or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act
because the teller(s) simply had no choice but to accept and validate the deposit as written in the
original deposit slip under the account number and name of Yabut's husband. Hence, the act of
validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause
which an independent cause or agency merely took advantage of to accomplish something which
was not the probable or natural effect thereof. That explains why Yabut still had to tamper with the
account number of the duplicate deposit slip after filling in the name of RMC in the blank space.
Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes
that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same
must be the proximate cause of the injury. In short, there must be a last and a clear chance, not a
last possible chance, to avoid the accident or injury. It must have been a chance as would have
enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the
resulting damage to himself.
In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private
respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's
attention at the earliest opportunity. Private respondent failed to examine these bank statements not
because it was prevented by some cause in not doing so, but because it was purposely negligent as
it admitted that it does not normally check bank statements given by banks.
It was private respondent who had the last and clear chance to prevent any further misappropriation
by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it
monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent

81
should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence,
therefore, is not contributory but the immediate and proximate cause of its injury.

Monetary Board. On 21 January 1991, this Court ordered the consolidation of G.R. No. 92943 with
G.R. No. 88353. 1

I vote to grant the petition.

The first case, G.R. No. 88353, is a petition for review on certiorari of the decision of 6 October
1988 2 and the resolution of 17 May 1989 3 of the respondent Court of Appeals in C.A.-G.R. No. SP13624. The impugned decision upheld the 21 September 1987 Order of respondent Judge Teofilo
Guadiz, Jr. in Civil Case No. 17692 granting the motion for issuance of a writ of preliminary injunction
enjoining petitioners Central Bank of the Philippines (CB), Mr. Jose B. Fernandez, Jr. and the
Monetary Board, or any of their agencies from implementing Monetary Board (MB) Resolutions No.
649 and No. 751, or from taking the threatened appropriate alternative action and the 27 October
1987 Order in the same case denying petitioners' motion to dismiss and vacate said injunction. The
challenged resolution, on the other hand, denied petitioners' motion for reconsideration of the 6
October 1988 decision.

G.R. No. 88353 May 8, 1992

CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ, petitioners,
vs.
HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE
PHILIPPINES and PRODUCERS PROPERTIES, INC., respondents.
G.R. No. 92943 May 8, 1992
ATTY. LEONIDA G. TANSINSIN-ENCARNACION, as the Acting Conservator of Producers Bank
of the Philippines, and PRODUCERS BANK OF THE PHILIPPINES, petitioners,
vs.
PRODUCERS BANK OF THE PHILIPPINES, allegedly represented by HENRY L. CO, HON.
COURT OF APPEALS, HON. TEOFILO GUADIZ, JR., and the "LAW FIRM OF QUISUMBING,
TORRES AND EVANGELISTA" (RAMON J. QUISUMBING, VICENTE TORRES,RAFAEL E.
EVANGELISTA, JR. and CHRISTOFER L. LIM), respondents.
Agapito S. Fajardo, Jerry P. Rebutoc & Antonio M. Tan for petitioners in G.R. No. 88353.
Leonida G.T. Encarnacion for petitioners in G.R. No. 92943.
Quiason, Makalintal, Barot, Torres, Ibarra Law Office for the respondents in G.R. Nos. 88353 &
92943.

DAVIDE, JR., J.:

The common origin of these cases is Civil Case No. 17692 filed before Branch 147 (Makati) of the
Regional trail Court, National Capital Judicial Region and entitled Producers Bank of the Philippines
and Producers Properties, Inc. versus Central Bank of the Philippines, Jose B. Fernandez. Jr. and the

The second case, G.R. No. 92943, is a petition for review directed principally against the 17 January
1990 decision of the respondent Court of Appeals in C.A.-G.R. SP No. 16972. The said decision
dismissed the petition therein filed and sustained the various Orders of the respondent Judge in Civil
Case No. 17692, but directed the plaintiffs therein to amend the amended complaint by stating in its
prayer the specific amount of damages which Producers Bank of the Philippines (PBP) claims to have
sustained as a result of losses of operation and the conservator's bank frauds and abuses; the Clerk
of Court was also ordered to determine the amount of filing fees which should be paid by the plaintiffs
within the applicable prescriptive or reglementary period. 4
The records of both cases reveal the following factual and procedural antecedents:
Petitioners claim that on 29 April 1983, during the regular examination of the PBP, CB examiners
stumbled upon some highly questionable loans which had been extended by the PBP management to
several entities. Upon further examination, it was discovered that these loans, totalling approximately
P300 million, were "fictitious" as they were extended, without collateral, to certain interests related to
PBP owners themselves. Said loans were deemed to be anomalous particularly because the total
paid-in capital of PBP at that time was only P 140.544 million. This means that the entire paid-in
capital of the bank, together with some P160 million of depositors' money, was utilized by PBP
management to fund these unsecured loans.
Sometime in August of the same year, at the height of the controversy surrounding the discovery of
the anomalous loans, several blind items about a family-owned bank in Binondo which granted
fictitious loans to its stockholders appeared in major newspapers. These news items triggered a bankrun in PBP which resulted in continuous over-drawings on the bank's demand deposit account with

82
the Central Bank; the over-drawings reached P74.109 million by 29 August 1983. By 17 January
1984, PBP's overdraft with the CB increased to P143.955 million, an indication of PBP's continuing
inability to maintain that condition of solvency and liquidity necessary to protect the interests of its
depositors and creditors. Hence, on 20 January 1984, on the basis of the report submitted by the
Supervision and Examination Sector, Department I of the CB, the Monetary Board (MB), pursuant to
its authority under Section 28-A of R.A. No. 265 and by virtue of MB Board Resolution No. 164,
placed PBP under conservatorship. 5

On 27 April 1984, the MB adopted Resolution No. 584 approving the consolidation of PBP's other
unsecured obligations to the CB with its overdraft and authorizing the conversion thereof into an
emergency loan. The same resolution authorized the CB Governor to lift the conservatorship and
return PBP's management to its principal stockholders upon completion of the documentation and full
collateralization of the emergency loan, but directed PBP to pay the emergency loan in five (5) equal
annual installments, with interest and penalty rates at MRR 180 days plus 48% per annum, and
liquidated damages of 5% for delayed payments.

While PBP admits that it had no choice but to submit to the conservatorship, 6 it nonetheless
requested that the same be lifted by the CB. Consequently, the MB issued on 3 February 1984
Resolution No. 169 directing the principal stockholders of PBP to increase its capital accounts by
such an amount that would be necessary for the elimination of PBP's negative net worth of P424
million. On 10 April 1984, CB senior deputy Governor Gabriel Singson informed PBP that pursuant to
MB Resolution No. 490 of 30 March 1984, the CB would be willing to lift the conservatorship under
the following conditions:

On 4 June 1984, PBP submitted a rehabilitation plan to the CB which proposed the transfer to PBP of
three (3) buildings owned by Producers Properties, Inc. (PPI), its principal stockholder and the
subsequent mortgage of said properties to the CB as collateral for the bank's overdraft
obligation. 7 Although said proposal was explored and discussed, no program acceptable to both the
CB and PPI was arrived at because of disagreements on certain matters such as interest rates,
penalties and liquidated damages.

(a) PBP's unsecured overdraft with the Central Bank will be converted into an
emergency loan, to be secured by sufficient collateral, including but not limited to the
Following properties offered by PBP's principal stockholders:
i. 6 floors and other areas of the Producers Bank Bldg., at Paseo de
Roxas, owned by PBP;
ii. 15 floors of the Producers Bank Bldg., at Paseo de Roxas, Makati,
owned by the Producers Properties, Inc.;
iii. Manhattan Bldg. on Nueva Street, Binondo, Manila; and
iv. Producers Bank, Makati Branch Bldg. at Buendia Avenue, Makati;

No other rehabilitation program was submitted by PBP for almost three (3) years; as a result thereof,
its overdrafts with the CB continued to accumulate. By the end of June 1987, the figure swelled to a
staggering P1.023 billion.Consequently, per Resolution No. 649 dated 3 July 1987, the CB Monetary
Board decided to approve in principle what it considered a viable rehabilitation program for PBP. The
program had these principal features:
Al. The Central Bank will assign in favor of the Philippine Deposit Insurance
Corporation (PDIC) its claim over the overdraft of PBP net of net peso differential
arising from swap transactions and interest thereon, up to the amount of the par
value of the Producers Properties, Inc. (PPI) shares of stock in PBP presently
pledged to the Central Bank, and PDIC will enter into a contract of dacion en
pago with PBP and PPI whereby PDIC will acquire 4,116,100 preferred shares of
stock of PBP with a par value of P100 per share in consideration for which PDIC will
convey its rights over the overdraft assigned to it by the Central Bank, in favor of PPI;

(b) A comptroller for PBP and any number of bank examiners deemed necessary to
oversee PBP's operations shall be designated by the Central Bank, under terms of
reference to be determined by the Governor;

2. The balance of the overdraft of PBP, after the assignment to PDIC of a portion of
such overdraft referred to in Item I above, will also be assigned to PDIC and
converted into preferred shares of stock of PBP;

(c) A letter from the Management of PBP authorizing the Central Bank to
automatically return clearing items that would result in an overdraft in its Central Bank
account shall be submitted to the Central Bank.

3. The interest on the overdraft of PBP will be reduced to 11.75% p.a. retroactively to
the date when the overdraft of PBP was incurred;

83
4. The accrued interest on the overdraft of PBP, at the reduced rate approved in Item
3 above, as well as the unbooked penalties on legal reserve deficiencies of PBP will
be assigned in favor of PDIC and such amounts will be allowed to be converted into
preferred shares of stock of PBP; and
5. The booking of valuation reserves will be allowed as follows:
3rd year P31 million
4th year 48 million
5th year 67 million
6th year 85 million
7th year 105 million
8th year 124.61 million
subject to the following conditions:
a. Fresh capital of P200.0 million shall be put up, provided that a new
group of stockholders shall hold at least 40% of the total outstanding
voting shares of stock of PBP;
b. PBP shall submit additional collaterals to fully collateralize its
overdraft with the Central Bank;
c. PPI shall convey to PBP the remaining floors of the Producers
Bank Centre for a value of P143.54 million partly in payment of
DOSRI loans of P27.6 million, principal plus interest, and the balance
of P115.94 million for shares of stock of PBP, P15.12 million common
and P100.89 million preferred, with features as presently provided
under PBP's Articles of Incorporation and By-Laws;
d. PBP's Articles of Incorporation and By-Laws shall be amended so
as to create a special class of preferred, non-voting, cumulative,
non-participating shares of stock with a dividend rate of 12% which
shall be issued (i) in exchange for the PPI shares that will be
conveyed to PDIC under the dacion en pago mentioned in Item 1
above, (ii) in consideration of the balance of PBP's overdraft
assigned to PDIC under Item 2 above, (iii) in consideration of the
accrued interest on PBP's overdraft assigned to PDIC and the

unbooked penalties on legal reserve deficiencies of PBP also

assigned to PDIC. The said preferred shares of stock shall be
convertible into common voting shares of stock upon the sale of
such preferred shares to private parties at the option of such
parties.Proceeds from the sale of these shares of stock shall be used
to liquidate the advances made by the Central Bank to PDIC by
virtue of the various assignments under Items 1, 2, and 4 above. The
said shares of stock shall not share in losses and other capital
adjustments representing reduction of capital accounts as
recommended by SES Department I incurred up to the date of the
issuance of such shares of stock;
e. PBP shall execute in favor of a trustee to be approved by the
Central Bank of mortgage trust indenture covering the assets
presently mortgaged/pledged to Central Bank as collateral for the
overdraft of PBP as well as additional collaterals to be submitted to
fully collateralize the overdraft of PBP, under which indenture PDIC
as holder of preferred shares of stocks, shall have the first lien and
preference over the assets subject of the indenture in case of
insolvency, to the extent of the overdraft converted into preferred
shares of stock, provided that PBP shall submit an opinion from the
Securities and Exchange Commission that such indenture is legal
and valid; and
f. The principal stockholders of both PBP and PPI shall submit in
writing their conformity to the above conditions, with the effect that
any previous agreements to the contrary shall be set aside; and
B. To require PBP to submit to the Monetary Board for approval the identities of the
new stockholdersand the new management which shall not be changed without the
prior approval of the Central Bank, it being understood that final approval of the
above rehabilitation plan shall depend entirely upon the acceptance by the Board of
the new stockholders and the new management; and to give PBP a period of two
weeks after such final approval within which to implement the above rehabilitation
plan 8(Emphasis supplied).

84
There being no response from both PBP and PPI on the proposed rehabilitation plan, the MB issued
Resolution No. 751 on 7 August 1987 instructing Central Bank management to advise the bank,
through Mr. Henry Co, as follows:
a. The Central Bank conservatorship over PBP may be lifted only after PBP shall
have identified the new group of stockholders who will put in new capital in PBP and
after the Monetary Board shall have considered such new stockholders as
acceptable; and

that the appointment of the conservator was arbitrary; that herein petitioners acted in bad faith; that
the CB-designated conservators committed bank frauds and abuses; that the CB is guilty of
promissory estoppel; and that by reason of the conservatorship, it suffered losses enumerated in
paragraph 27 thereof, the total quantifiable extent of which is P108,479,771.00, exclusive of loss of
profits and loss of
goodwill. 11 It concluded with a prayer for:
. . . judicial review of Monetary Board Resolutions No. 649 dated July 3, 1987 and
No. 751 dated 14 August, 1987 and that judgment be rendered nullifying the same
and ordering defendant Central Bank's conservator to restore the viability of PBP as
mandated by section 28-A of R.A. 265 and to fully repair the damages inflicted on
PBP consisting of losses of operation and the conservators' bank frauds and
abuses, with costs against defendants. (emphasis supplied).

b. The stockholders of PBP have to decide whether or not to accept the terms of the
rehabilitation plan as provided under Resolution
No. 649 dated July 3, 1987 within one week from receipt of notice hereof and if such
terms are not acceptable to them, the Central Bank will take appropriate alternative
action on the matter; . . . 9
and for:
Additionally, in a letter dated 14 August 1987, the CB called the attention of the PBP directors and
officers to Section 107 of R.A. No. 265, as amended by Executive Order No. 289 dated 23 July 1987,
which provides, inter alia, that:
. . . any bank which incurs an overdrawing in its deposit account with the Central
Bank shall fully cover said overdraft not later than the next clearing day: Provided,
further, That settlement of clearing balances shall not be effected for any account
which continue (sic) to be overdrawn for five consecutive banking days until such
time as the overdrawing is fully covered or otherwise converted into an emergency
loan or advance pursuant to the provisions of Sec. 90 of this Act. Provided, Finally,
That the appropriate clearing office shall be officially notified of banks with overdrawn
balances.Banks with existing overdrafts with the Central Bank as of the effectivity of
this amended section shall within such period as may be prescribed by the Monetary
Board, either convert the overdraft into an emergency loan or advance with a plan of
payment, or settle such overdrafts, and that upon failure to so comply herewith, the
Central Bank shall take such action against the bank as may be warranted under this
Act. (Emphasis provided).
A. few days later, or on 27 August 1987, the PBP, without responding to the communications of the
CB, filed a complaint verified by its former board chairman, Henry Co, with the Regional Trial Court of
Makati against the CB, the MB and CB Governor Jose B. Fernandez, Jr. The complaint, docketed as
Civil Case No. 17692, 10 devoted several pages to specific allegations in support of PBP's assertions
that the conservatorship was unwarranted, ill-motivated, illegal, utterly unnecessary and unjustified;

. . . the issue of a temporary restraining order/preliminary injunction enjoining

defendants' coercion on PBP to accept the rehabilitation plan within one week or their
taking "appropriate alternative action" including exclusion of PBP from settlement of
clearing balances at the Central
Bank clearing house, pending judicial review of Monetary Board Resolutions No. 649
dated July 3, 1987 and No. 751 dated August 14,
1987 defendants not being above the law. 12
Only P102.00 was paid as docket fee.
The case was raffled to Branch 147 of said court which was then presided over by respondent Judge.
On 31 August 1987, respondent Judge issued a temporary restraining order and set the hearing of
the application for preliminary injunction on 9 September 1987. 13 On 11 September 1987, petitioner
filed an Opposition to the application for preliminary injunction. 14
Subsequently, on 21 September 1987, respondent Judge issued an Order granting the writ
enjoining defendant-petitioners or any of their agents from:

15

and

. . . implementing Monetary Board Resolutions Nos. 649 and 751 or from taking the
threatened "appropriate alternative action" including exclusion of plaintiff bank from
settlement of clearing balances at the Central Bank clearing house or any other

85
action that will disturb the status quo or the viability of plaintiff bank during the
pendency of this case conditioned upon the posting of a bond in the amount of
P2,000,000.00.
On 25 October 1987, PBP filed the Amended Complaint 16 impleading PPI as an additional plaintiff.
No new allegations or causes of action for said plaintiff were made.
On 5 November 1987, petitioners filed a Motion to Dismiss the Amended Complaint. The motion
contained a prayer to vacate the injunction and raised the following grounds:
1) the amended complaint states no cause of action; MB Resolution Nos. 649 and
751 are merely advisory, thus, neither effect impairment of plaintiffs' rights nor cause
it prejudice, loss or damage; furthermore, there is no basis for the averments on the
legality or illegality of the conservatorship since the amended complaint does not
seek its annulment;
2) the amended complaint is not authorized by the management of PBP; and
3) the lower court did not acquire jurisdiction over the case except to order the
amended complaint expunged from the records because the proper filing fee was not
paid. 17
On 27 November 1987, the trial court, through the respondent Judge, handed down an Order denying
the motion to dismiss on the following grounds: (a) the amended complaint alleges ultimate facts
showing that plaintiff has a right and that such a right has been violated by defendant; the questioned
MB Resolutions were issued arbitrarily and with bad faith, "being a part of a scheme to divest
plaintiff's present stockholders of their control of PBP and to award the same to the PDIC or its
unknown transferees"; and the averments of legality or illegality of the conservatorship are relevant to
the cause of action since the complaint seeks the lifting of the conservatorship; (b) While it is true that
under Section 28-A of the Central Bank Act the conservator takes over the management of a bank,
the Board of Directors of such bank is not prohibited from filing a suit to lift the conservatorship and
from questioning the validity of both the conservator's fraudulent acts and abuses and its principal's
(MB) arbitrary action; besides, PPI is now a party-plaintiff in the action; and (c) plaintiffs have paid the
correct filing fees since "the value of the case cannot be estimated." 18
G.R. No. 88353

Unable to accept the above Order, herein petitioners CB and Jose B. Fernandez, Jr. filed with
respondent Court of Appeals on 11 January 1988 a petition for certiorari with preliminary
injunction 19 to annul the 21 September and 27 November 1987 Orders of the respondent Judge,
restrain the implementation of the same and nullify the writ of preliminary injunction. They contend
therein that:
1. The trial court's injunctive order and writ are anomalous and illegal because they
are directed against CB acts and measures which constitute no invasion of plaintiff's
rights; and
2. The complaint filed was, on its face, dismissible: (a) for failure to state a cause of
action, (b) for being unauthorized by the party in whose name it purports to have
been filed, and (c) for failure of the purported plaintiff to pay the required filing fees.
Confronted with the "threshold and decisive issue of whether the respondent Judge gravely abused
his discretion when he issued the Writ of Preliminary Injunction to enjoin petitioner from implementing
Monetary Board Resolutions Nos. 649 and 751 for having been issued arbitrarily and with bad faith,"
the respondent Court promulgated the challenged decision dismissing the petition for lack of
merit. 20 Respondent Court ruled that the CB's sudden and untimely announcement of the
conservatorship over PBP eroded the confidence which the banking public had hitherto reposed on
the bank and resulted in the bank-run; it then concluded that when the CB "peremptorily and illtimely
(sic) announced" the conservatorship, PBP was not given an opportunity to be heard since the CB
arbitrarily brushed aside administrative due process notwithstanding PBP's having sufficiently
established its inherent corporate right to autonomously perform its banking activities without undue
governmental interference that would in effect divest its stockholders of their control over the
operations of the bank." It further held that the challenged resolutions of the MB are not just advisory
in character "because the same sought to impose upon the respondent bank petitioners'
governmental acts that were specifically designed and executed to devise a scheme that would
irreparably divest from the stockholders of the respondent bank control of the same."
The motion filed by petitioners for the reconsideration of the above decision was denied by the
respondent Court in its Resolution of 17 May
1989. 21 On the issue of the non-payment of the correct docket fees, the said court, in ruling that the
correct amount was paid, said that "the instant case is incapable of pecuniary estimation because the
value of the losses incurred by the respondent bank cannot be calibrated nor pinned down to a
specific amount in view of the damage that may be caused by the appointment of a conservator to its
goodwill and standing in the community."

86
Undaunted by the adverse decision of the Court of Appeals, petitioners filed with this Court on 30 July
1989 the instant petition for review under Rule 45 of the Rules of Court. 22 It is alleged therein that the
respondent Court committed grave abuse of discretion in:
(1) Ignoring petitioners' contention that since PBP did not pay the correct filing fees,
the trial court did not acquire jurisdiction over the case; hence, pursuant
to Manchester Development Corp., et al. vs.Court of Appeals, et al., G.R. No. 75919,
7 May 1987, 23 the complaint should have been dismissed for lack of jurisdiction on
the part of the court;
(2) . . . ruling on the propriety or impropriety of the conservatorship as a basis for
determining the existence of a cause of action since the amended complaint does not
seek the annulment or lifting of the conservatorship;
(3) . . . not holding that the amended complaint should have been dismissed because
it was filed in the name of PBP without the authority of its conservator; and
(4) . . . not setting aside the Order of the trial court granting the issuance of a writ of
preliminary injunction which unlawfully restrained the CB from exercising its
mandated responsibilities and effectively compelled it to allow the PBP to continue
incurring overdrafts with it.
This petition was docketed as G.R. No. 88353.
On 19 July 1989, this Court required the respondents to comment on the petition.

24

In the Comment 25 filed on 9 October 1989, private respondents maintain that: (a) the issue of
whether or not they paid the correct filing fees involves a question of correctness of judgment, not
grave abuse of discretion; errors of judgment cannot be the subject of the present petition
for certiorari; (b) the complaint and the amended complaint state sufficient causes of action because
they both contain specific allegations of an illegal, unnecessary, disastrous and repressive
conservatorship conducted contrary to its mandated purpose, and breach of promissory estoppel;
furthermore, the trial court committed no grave abuse of discretion when it found that the questioned
MB Resolutions were arbitrarily issued in contravention of the due process clause of the Constitution;
(c) the "Filing of the complaint without authority from the conservator is an issue involving an error of
judgment; besides, it would be ridiculous and absurd to require such prior authorization from the
conservator for no one expects him to sanction the filing of a suit against his principal the CB;
moreover, Rule 3 of the Rules of Court requires that every action must be prosecuted and defended

in the name of the real party in interest; besides, no administrative authority, even the CB, can nullify
judicial review of administrative action by requiring that only said administrative authority or its
designated conservator can file suit for judicial review of its actuation; and (d) the writ of preliminary
injunction was properly issued.
Petitioners filed a Reply 26 to the Comment on 3 November 1989.
In their Supplemental Comment, private respondents argue that the Manchester rule is not applicable
in the case at bar because what is primarily sought for herein is a writ of injunction and not an award
for damages; it is further alleged that an order denying a motion to dismiss is neither appealable nor
be made the proper subject of a petition for certiorari absent a clear showing of lack of jurisdiction or
grave abuse of discretion.
On 15 February 1990, this Court resolved to give due course to the instant petition and require the
parties to simultaneously file their respective Memoranda, 27 which they complied with.
On 1 March 1990, petitioners filed an Urgent Motion 28 informing this Court of the fact that on 6 June
1989, PBP, through Henry Co, proposed another rehabilitation plan which involved the infusion of
fresh capital into PBP by Banque Indosuez (Bangue) and the AFP-Retirement and Separation
Benefits Systems (ARSBS). Under said proposal, all existing law suits of PBP against the Central
Bank and the PBP Conservator, and vice-versa, shall be withdrawn upon approval and
implementation of the plan. The plan was approved by the Monetary Board in its Resolution No. 497
dated 23 June 1989. However, before the mechanics of the rehabilitation plan could be threshed out
among the parties, a "quarrel" developed between Henry and Luis Co, who both have controlling
interests in PBP. Luis accused Henry of "serious manipulations" in PBP and both steadfastly refused
to settle their differences notwithstanding efforts of mediators, including prospective investors.
Eventually, the prospective investors, in a letter dated 20 November 1989, advised the Central Bank
that they are withdrawing their offer to infuse capital in PBP and that they have terminated all
discussions with the Co family.
Petitioner further allege that with the withdrawal of Banque Indosuez and RSBS, the rehabilitation
plan for PBP is no longer feasible. Meanwhile, the bank's overdraft with the Central Bank continues to
rise. As of 13 February 1990, PBP's overdraft with the CB increased to P1.233 billion. If the injunction
is not lifted, PBP will continually bleed the CB because of the former's liability to discharge its
responsibilities under the law.
G.R. No. 92943

87
Pursuant to the powers and authority conferred upon her by the Central Bank, Atty. Leonida
Tansinsin-Encarnacion, in her capacity as conservator, instituted reforms aimed at making PBP more
viable. With this purpose in mind, she started reorganizing the bank's personnel and committees.
In order to prevent her from continuing with the reorganization, PBP filed on 24 October 1987, or after
it obtained a writ of preliminary injunction in Civil Case No. 17692, an Omnibus Motion asking the trial
court for an order:
(a) reinstating PBP officers to their original positions and restoring the bank's standing committees to
their respective compositions prior to said reorganization; (b) enjoining the lease of any portion of the
bank's space in Producers Bank Centre building to third parties and the relocation of
departments/offices of PBP as was contemplated; and (c) to hold, after an opportunity to be heard is
given her, said conservator in contempt of court for disobedience of and resistance to the writ of
injunction. An opposition to the contempt charge was later filed by said petitioner.
Subsequently, upon its inclusion as party-plaintiff via the amended complaint, PPI filed on 4
November 1987 a motion asking the lower court to order the Central Bank and its agents to restore to
PPI the administration of the three (3) buildings earlier assigned to PBP pending the lifting of the
conservatorship. PPI claimed that such transfer was necessary to prevent the rental income of said
buildings being dissipated by the conservator.
On 17 November 1987, both PBP and PPI filed a motion praying:
(1) that the CB Conservator be ordered to publish PBP's financial statement for the
last quarter of 1987 and every quarterly statement thereafter during the pendency of
this case, with the following claims of plaintiff PBP against the Central Bank, to wit:
(a) Interest in unconscionable rates of CB overdrawing illegally paid
by the CB conservators to CB now totaling P56,002,000.00,
(b) Penalties on reserve deficiencies illegally paid by the CB
conservators to CB now totaling P20,657,000.00,
(c) Penalties on reserve deficiencies not yet paid but which the
conservator has booked as liabilities now totaling
P31,717,000.00,
(d) Losses of operation by the CB conservators from January 31,
1984 to October 31, 1987 now totaling P461,092,000.00

as "suspense" accounts; and (2) that the CB conservator be ordered to carry those
"suspense" accounts in the books of PBP.
The following day, respondent Judge issued an Order (a) requiring conservator TansinsinEncarnacion to reinstate PBP officers to their original positions prior to the reorganization of the
bank's personnel and restore PBP's standing committees to their original compositions, and (b)
restraining her from leasing out to third parties any portion of PBP's space in the Producers Bank
Centre building. However, respondent Judge held in abeyance the contempt proceedings against the
conservator pending her immediate compliance with the Order.
On 22 December 1987, respondent Judge granted PPI's motion for an order transferring to it the
administration of the three (3) buildings assigned to PBP. A motion for reconsideration of this order
was filed by petitioners but was subsequently denied by respondent Judge in the Order of 4 October
1988.
A second Order, issued by respondent Judge on the same day, 22 December 1987, directed
conservator Tansinsin-Encarnacion to publish the financial statement of PBP in the manner prayed for
in the aforesaid 17 November 1987 motion. The motion to reconsider this Order was denied by
respondent Judge on 3 October 1988.
On several occasions thereafter, conservator Tansinsin-Encarnacion caused the publication of PBP's
financial statement as required by regulations, without, however, carrying the items enumerated by
the trial court as "suspense accounts." Consequently, two (2) contempt charges were filed against
her, one for the 3 February 1988 publication in the Manila Standard of PBP's statement of condition
as of 29 December 1987 and the other for the 29 July 1988 publication in the Daily Globe of the
bank's statement as of 30 June 1988. Oppositions to both charges of contempt were filed.
On 9 November 1988, respondent Judge declared said conservator guilty of contempt of court on
three (3) counts and imposed upon her a fine of P1,000.00 for each count of contempt. The latter
asked for reconsideration of the order but the respondent Judge denied the same.
Another contempt charge against her was filed for publishing the statement of condition of PBP (as of
13 September 1988) in the 9 November 1988 issue of the Daily Globe without carrying the alleged
"suspense accounts." She was again found guilty as charged and her motion for reconsideration was
denied. Finding no other adequate relief, Tansinsin-Encarnacion filed with this Court on 11 January
1989 a petition for certiorariagainst respondent Judge, Henry L. Co and the law firm of Quisumbing,
Torres and Evangelista. This case was docketed as G.R. No. 86526. She prays therein for judgment
declaring respondent judge to be without jurisdiction to entertain both the complaint and amended

88
complaint in Civil Case No. 17692; declaring null and void all his orders, specially the contempt
orders; and finding respondent Judge and respondent lawyers guilty of violating their respective oaths
of office. 29
On 8 February 1989, this Court resolved to refer said petition to the Court of Appeals which docketed
it as C.A.-G.R.-SP No. 16972.
In her Memorandum submitted to the Court of Appeals, Tansinsin-Encarnacion alleged that: (1)
respondent Judge has no jurisdiction over Civil Case No. 17692 because its filing was not authorized
by the petitioner or the conservator in violation of Section 28-A of R.A. No. 265, as amended, it was
filed after the ten (10) day period prescribed by Section 29 of R.A. No. 265, as amended, and the
correct docket fees were not paid; (2) respondent Judge illegally ordered her to return to PPI the
administration of the bank's three (3) properties, contrary to his own writ of preliminary injunction and
earlier order to make the bank viable, and to publish the alleged "suspense accounts" contrary to
Section 28-A of R.A. No. 265, as amended, the writ of preliminary injunction and her constitutional
right to silence; (3) respondent Judge erred in declaring her in contempt of court notwithstanding his
lack of jurisdiction over the case and failure to set any date for the hearing and reception of evidence,
in violation of her right to due process of law; and (4) respondents Judge and lawyers are
administratively liable for their grossly illegal actuations and for depriving the Government of at least
P13.2 million in filing fees. 30
In its decision dated 17 January 1990, the Court of Appeals (Twelfth Division) 31 dismissed the
petition; while finding the claim of lack of jurisdiction to be without merit, the said court nonetheless
gave the following exception:
. . . except that plaintiffs in Civil Case No. 17692, within 15 days from receipt of a
copy of this Decision, shall file the corresponding amendment to their amended
complaint in said case, stating a specific amount "to fully repair the damages inflicted
on PBP consisting of losses of operation and the conservator's bank frauds and
abuses", in the prayer of their amended complaint. Thereafter, the Clerk of Court of
the lower court and/or his duly authorized Docket Clerk of Court in charge, should
determine the amount found due, which should be paid by complainants within the
applicable prescriptive or reglementary period, failure of which said claims for
damages shall be dismissed.
In disposing of the issues raised, respondent Court merely adopted with approval the ruling of the
respondent Judge on the question of jurisdiction and cited the decision of the Court of Appeals in
C.A.-G.R. SP No. 13624 (subject of G.R. No. 88353), sustaining the respondent Judge's ruling. As to

the filing of the complaint after the lapse of the 10-day period provided for in Section 29 of R.A. No.
265, it ruled that the Section does not apply because the complaint essentially seeks to compel the
conservator to perform his duties and refers to circumstances and incidents which transpired after
said 10-day period.
On the issue of lack of jurisdiction for non-payment of correct filing fees, to which an
exception was made in the dispositive portion, the respondent Court found the same to be
"partly" meritorious. It agreed with petitioner that while the other losses and damages sought
to be recovered are incapable of pecuniary estimation, the damages inflicted on PBP due to
losses of operation and the conservator's bank frauds and abuses were in fact pegged at
P108,479,771.00 in paragraph 26 of the amended complaint. This specific amount, however,
should have been stated in the prayer of the complaint. It also held that the Manchestercase
"has been legally construed in the subsequent case of Sun Insurance Office Ltd. 32 and the
case ofFilipinas Shell Petroleum Corp. 33 to the effect that applying the doctrine initiated in the
case of Manchester, together with said subsequent thereto (sic), plaintiffs in Civil Case No.
17692 should be given a reasonable time to amend their complaint, more particularly, to state
in their prayer in the amended complaint the specific amount of damages . . ."
On the orders of contempt and the reasons therefor, respondent Court merely stated:
. . . Generally, when the court has jurisdiction over the subject matter and of the
person, decisions upon or questions pertinent to the cause are decisions within its
jurisdiction, and however, irregular or erroneous they may be, they cannot be
corrected by certiorari Whether the court's conclusions was based merely on
speculations and conjecture, or on a misapprehension of facts contrary to the
documents and exhibits of the case, is not for us to determine in a petition for
certiorari wherein only issues of jurisdiction may be raised. . . . Thus, the instant
petition cannot prosper.
and opined that under the Rules of Court, a judgment of contempt may be questioned on
appeal and not oncertiorari.
Finally, on the administrative liability of the respondent Judge and the lawyers, the respondent Court
declared the claim to be without merit.
Petitioner's motion to reconsider the decision having been denied in the 2 April 1990 Resolution of the
respondent Court, 34 she filed with this Court a petition under Rule 45 of the Rules of Court, which
was docketed as G.R. No. 92943. Petitioner Claims that respondent Court grossly erred in

89
confirming/affirming the allegedly void Orders of respondent Judge which denied the motion to
dismiss the complaint and granted the writ of preliminary injunction, restating in this regard the issues
raised by the CB in G.R.
No. 88353, and in holding her in contempt of court on four occasions. As to the last ground, she
asserts that the Orders were issued in violation of the Rules of Court and infringed her right to due
process since there was no hearing on the motions for contempt, except for the third motion wherein
respondent Judge immediately ordered the movant to present evidence.
In their Comment, 35 filed in compliance with Our Resolution 21 May 1990, private respondents
practically reiterated the arguments in their Comment to the petition in G.R. No. 88353; in addition,
more specifically on the issue of contempt, they assert that while the motions for contempt were set
for hearing, there is no showing that the scheduled hearings actually took place. Besides, the remedy
to question a contempt order is an appeal; 36 since petitioner did not appeal the questioned orders,
the same became final and executory. 37
After petitioner filed a Reply and private respondents submitted their Rejoinder thereto, this Court
gave due course to the petition.
THE ISSUES
The basic issue in these cases is whether or not the respondent Court committed reversible error in
affirming the challenged Orders of the respondent Judge. This necessarily calls for a determination of
whether or not the respondent Judge committed grave abuse of discretion amounting to lack of
jurisdiction:
(1) In not dismissing Civil Case No. 17692 on the following grounds: (a) lack of legal.
personality to bring the action as the same was filed in the name of the PBP without
the authority of the conservator;
(b) failure of the complaint and amended complaint to state a cause of action; and (c)
non-payment of the correct amount of docket fee in violation of the rule enunciated
in Manchester Development Corp.vs. Court of Appeals, et al.;
(2) In granting the writ of preliminary injunction; and
(3) In issuing the assailed Orders in G.R. No. 92943.
DISCUSSION

We shall take up the issues sequentially.

1. PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A of the
Central Bank Act,38 a conservator, once appointed, takes over the management of the bank and
assumes exclusive powers to oversee every aspect of the bank's operations and affairs. Petitioners
now maintain that this power includes the authority to determine "whether or not to maintain suit in the
bank's name." 39 The trial court overruled this contention stating that the section alluded to "does not
prohibit the Board of Directors of a bank to file suit to lift the conservatorship over it, to question the
validity of the conservator's fraudulent acts and abuses and the arbitrary action of the conservator's
principal the Monetary Board of the Central Bank. The conservator cannot be expected to question
his own continued existence and acts. He cannot be expected to file suit to annul the action of his
principal . . . or a suit that would point out the ill-motivation, the disastrous effects of the
conservatorship and the conservator's bank frauds and abuses as alleged in the complaint." 40
Obviously, the trial court was of the impression that what was sought for in Civil Case No. 17692 is
the lifting of the conservatorship because it was arbitrarily and illegally imposed. While it may be true
that the PBP devoted the first 38 pages of its 47-page complaint and amended complaint to what it
considers an unwarranted, ill-motivated, illegal, unnecessary, and unjustified conservatorship, it,
nevertheless, submitted to the same. There is nothing in the amended complaint to reflect an
unequivocal intention to ask for its lifting. Of course, as subsequent maneuvers would show, PBP
sought to accomplish the lifting thereof through surreptitious means. That such action was not, on its
face, filed to have the conservatorship lifted, is best evidenced by PBP's prayer for a judgment
"ordering defendant Central Bank's conservator to restore the viability of PBP as mandated by
Section 28-A of R.A. No. 265 . . ." 41 Unfortunately too, respondent Court was easily misled into
believing that the amended complaint sought the lifting of the conservatorship. Thus, although the
matter was not specifically raised in issue and clearly unnecessary for the determination of the issues
squarely raised, the respondent Court opined:
It is Our sober assessment that the respondent bank was not given an opportunity to
be heard when the Central Bank peremptorily and illtimely (sic) announced the
appointment of a conservatorship over the latter (bank) for which reason We believe
that administrative due process was arbitrarily brushed aside to the prejudice of the
said bank. . . .
If it were to lift the conservatorship because it was arbitrarily imposed, then the case should have
been dismissed on the grounds of prescription and lack of personality to bring the action. Per the fifth
paragraph of Section 29 of the Central Bank Act, as amended by Executive Order No. 289, the
actions of the MB may be assailed in an appropriate pleading filed by the stockholders of record

90
representing the majority of the capital stock within ten (10) days from receipt of notice by the said
majority stockholders of the order placing the bank under conservatorship. The pertinent portion of
said paragraph reads as follows:
The provisions of any law to the contrary notwithstanding, the actions of the Monetary
Board under this Section, Section 28-A, and the second paragraph of section 34 of
this Act shall be final and executory, and can be set aside by a court only if there is
convincing proof, after hearing, that the action is plainly arbitrary and made in bad
faith: Provided, That the same is raised in an appropriate pleading filed by the
stockholders of record representing the majority of the capital stock within ten (10)
days from the date the receiver takes charge of the assets and liabilities of the bank
or non-bank financial intermediary performing quasi-banking functions or, in case of
conservatorship or liquidation, within ten (10) days from receipt of notice by the said
majority stockholders of said bank or non-bank financial intermediary of the order of
its placement under conservatorship or liquidation. . . .
The following requisites, therefore, must be present before the order of conservatorship may be set
aside by a court:
1. The appropriate pleading must be filed by the stockholders of record representing
the majority of the capital stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said
majority stockholders of the order placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary
and made in bad faith. 42
In the instant case, PBP was placed under conservatorship on 20 January 1984. The original
complaint in Civil Case No. 17692 was filed only on 27 August 1987, or three (3) years, seven (7)
months and seven (7) days later, long after the expiration of the 10-day period deferred to above. It is
also beyond question that the complaint and the amended complaint were not initiated by the
stockholders of record representing the majority of the capital stock. Accordingly, the order placing
PBP under conservatorship had long become final and its validity could no longer be litigated upon
before the trial court. Applying the original provision of the aforesaid Section 29 of the Central Bank
Act, this Court, in Rural Bank of Lucena, Inc. vs. Arca, et al., 43 ruled that:

Nor can the proceedings before Judge Arca be deemed a judicial review of the 1962
resolution No. 122 of the Monetary Board, if only because by law (Section 29, R.A.
265) such review must be asked within 10 days from notice of the resolution of the
Board. Between the adoption of Resolution No. 122 and the challenged order of
Judge Arca, more than one year had elapsed. Hence, the validity of the Monetary
Board's resolution can no longer be litigated before Judge Arca, whose role under the
fourth paragraph of section 29 is confined to assisting and supervising the liquidation
of the Lucena bank.
This rule is still good law notwithstanding the amendment to Section 29 which expands its scope by
including the action of the MB under Section 28-A of the Act on the appointment of a conservator.
It was precisely an awareness of the futility of any action to set aside the conservatorship which
prompted PBP to limit its action to a claim for damages and a prayer for an injunction against the
implementation of MB Resolution Nos. 649 and 751. However, to make it appear that it had a
meritorious case and a valid grievance against the Central Bank, it wandered long into the past and
narrated a sad story of persecution, oppression and injustice since the inception of the
conservatorship obviously to gain the sympathy of the court, which it eventually obtained.
The next crucial question that suggests itself for resolution is whether an action for damages arising
from the MB's act of placing the PBP under conservatorship and the acts of the conservator, and to
enjoin the MB from implementing resolutions related or incident to, or in connection with the
conservatorship, may be brought only for and in behalf of the PBP by the stockholders on record
representing the majority of the capital stock thereof or simply upon authority of its Board of Directors,
or by its Chairman. We hereby rule that as to the first kind of damages, the same may be claimed
only if the MB's action is plainly arbitrary and made in bad faith, and that the action therefor is
inseparable from an action to set aside the conservatorship. In other words, the same must be filed
within ten (10) days from receipt of notice of the order placing the bank under conservatorship.
Otherwise, the provision of the fifth paragraph of Section 29 of the Central. Bank Act could be
rendered meaningless and illusory by the bank's filing, beyond the prescribed ten-day period, of an
action ostensibly claiming damages but in reality questioning the conservatorship. As to actions for
the second kind of damages and for injunction to restrain the enforcement of the CB's implementing
resolutions, said fifth paragraph of Section 29 of the Central Bank Act, as amended, equally applies
because the questioned acts are but incidental to the conservatorship. The purpose of the law in
requiring that only the stockholders of record representing the majority of the capital stock may bring
the action to set aside a resolution to place a bank under conservatorship is to ensure that it be not
frustrated or defeated by the incumbent Board of Directors or officers who may immediately resort to
court action to prevent its implementation or enforcement. It is presumed that such a resolution is

91
directed principally against acts of said Directors and officers which place the bank in a state of
continuing inability to maintain a condition of liquidity adequate to protect the interest of depositors
and creditors. Indirectly, it is likewise intended to protect and safeguard the rights and interests of the
stockholders. Common sense and public policy dictate then that the authority to decide on whether to
contest the resolution should be lodged with the stockholders owning a majority of the shares for they
are expected to be more objective in determining whether the resolution is plainly arbitrary and issued
in bad faith.
The original complaint in Civil Case No. 17692 was not initiated by the majority of the stockholders,
hence it should have been dismissed. However, confronted with this fatal flaw, counsel for PBP,
through shrewd maneuvering, attempted to save the day by impleading as co-plaintiff a corporation,
the PPI, which was not under conservatorship. Unfortunately, the maneuver was crudely and
imperfectly executed. Except for the inclusion of its name, nothing new was actually added to the
original complaint in terms of causes of action and reliefs for PPI. The amendment then was an
exercise in futility. We cannot, however, subscribe to the petitioner's view that: (a) once a bank is
placed under conservatorship, no action may be filed on behalf of the bank without prior approval of
the conservator, and (b) since in this case such approval was not secured prior to the filing of Civil
Case No. 17692, the latter must also be dismissed on that ground. No such approval is necessary
where the action was instituted by the majority of the bank's stockholders. To contend otherwise
would be to defeat the rights of such stockholders under the fifth paragraph of Section 29 of the
Central Bank Act. It must be stressed here that a bank retains its juridical personality even if placed
under conservatorship; 44 it is neither replaced nor substituted by the conservator who, per Section
28-A of the Central Bank Act, as amended by P.D. No. 1932, shall only:
. . . take charge of the assets, liabilities, and the management of that institution,
collect all monies and debts due said institution and exercise all powers necessary to
preserve the assets of the institution, reorganize the management thereof, and
restore its viability. He shall have the power to overrule, or revoke the actions of the
previous management and board of directors . . ., any provision of law to the contrary
notwithstanding, and such other powers as the Monetary Board shall deem
necessary.

The Court acquires jurisdiction over any case only upon the payment of the
prescribed docket fee. An amendment of the complaint or similar pleading will not
thereby vest jurisdiction in the Court, much less the payment of the docket fee based
on the amounts sought in the amended pleading. The ruling in the Magaspi case [115
SCRA 193], in so far as it is inconsistent with this pronouncement is overturned and
reversed.
The respondent Judge, in ruling that PBP and PPI had paid the correct docket fee of P102.00, said
that "the value of the case cannot be estimated" since what is sought is an injunction against the
enforcement of the challenged resolutions of the MB; in short, the claim for damages is merely
incidental. Upon the other hand, respondent Court, in its Resolution of 17 May 1989 in C.A.-G.R. SP
No. 13624, ruled that the case is "incapable of pecuniary estimation" because the value of the losses
incurred by the PBP "cannot be calibrated nor pinned down to a specific amount in view of the
damage that may be caused by the appointment of a conservator to its goodwill and standing in the
community." 46
Both conclusions are unfounded and are the result of a misapprehension of the allegations and
causes of action in both the complaint and amended complaint.
While PBP cleverly worded its complaint in Civil Case No. 17692 to make it appear as one principally
for injunction, deliberately omitting the claim for damages as a specific cause of action, a careful
examination thereof bears that the same is in reality an action for damages arising out of the alleged
"unwarranted, ill-motivated and illegal conservatorship," or a conservatorship which "was utterly
unnecessary and unjustified," and the "arbitrary" appointment of a conservator. 47 Thus, as stated
earlier, it devoted the bulk of its petition to detailed events, occurrences and transactions in support
thereof and patiently enumerated the losses it sustained and suffered. The pertinent portions of
paragraph 27 of both the original and amended complaints read as follows:
27. The record of the Central Bank conservatorship of PBP clearly shows that it
was responsible for the losses.
xxx xxx xxx

Even assuming for the sake of argument that the action was properly brought by an authorized party,
the same must nevertheless be dismissed for failure of the plaintiffs therein to pay the correct docket
fees, pursuant toManchester Development Corp. vs. Court of Appeals, et al.; 45 the said case was
decided by this Court on 7 May 1987, exactly three (3) months and twenty (20) days before the filing
of the original complaint and five (5) months and eighteen (18) days before the filing of the Amended
Complaint in Civil Case No. 17692. We ruled therein that:

[Then follows an enumeration, from (a) to (u), of particular acts causing or resulting in
losses, most of which are specifically stated]
xxx xxx xxx

92
(v) Total of only the foregoing mentioned and only of those that can be quantified is
P108,479,771.00.
And that excludes loss of profits that PBP could have realized if that
disastrous conservatorship had not been imposed on it and loss of
goodwill.
The causes for these abuses of the conservators are course graft
and corruption of the conservators aside from fault in the system
which denies private enterprise. (emphasis supplied)
xxx xxx xxx
These are the very damages referred to in the prayer:

the Clerk of Court of the lower court or his duly authorized docket clerk should determine the amount
found due, which said plaintiffs shall pay "within the applicable prescriptive or reglementary period,
. . ." 50 The 17 January 1990 ruling, clearly reversing the earlier one, is of doubtful propriety in view of
the petition for review of the decision in C.A.-G.R. SP No. 13624 filed by the petitioner.
In granting PBP and PPI an opportunity to amend their amended complaint to reflect the specific
amount of damages in the prayer of their Amended Complaint, respondent Court took refuge under
the rule laid down in Sun Insurance Office, Ltd., et al. vs. Asuncion, et al. 51 and Filipinas Shell
Petroleum Corp. vs. Court of Appeals, et al. 52 Of course, it was erroneous for respondent Court to
apply these last two (2) cases which were decided by this Court three (3) months short of two (2)
years after the promulgation of the Manchester decision on 7 May 1987. Accordingly, since the
original complaint in Civil Case No. 17692 was filed on 27 August 1987, the Manchester doctrine was
the controlling and applicable law. The lower court had no choice but to apply it when its attention was
called by the petitioner.

. . . to fully repair the damages inflicted on PBP consisting of losses of operation and
the conservators' bank frauds and abuses, . . .

Moreover, even granting for the sake of argument that Sun Insurance and Pilipinas Shell 53 may apply
in this case, We should not lose sight of the fact that in the former, this Court categorically stated:

but not specified therein. To this Court's mind, this was done to evade the payment of the
corresponding filing fees which, as computed by petitioner on the basis alone of the specified
losses of P108,479,771.00, would amount to about P 437,000.00. 48 The PBP then clearly
acted with manifest bad faith in resorting to the foregoing clever strategy to avoid paying the
correct filing fees. We are thus constrained to reiterate Our pronouncements in
the Manchester case:

1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the
payment of the prescribed docket fee, that vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where the filling of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow the payment of the
fee within a reasonable time but in no case beyond the applicable prescriptive or
reglementary period.

The Court cannot close this case without making the observation that it frowns at the
practice of counsel who filed the original complaint in this case of omitting any
specification of the amount of damages in the prayer although the amount of over
P78 million is alleged in the body of the complaint. This is clearly intended for no
other purpose than to evade the payment of the correct filing fees if not to mislead
the docket clerk in the assessment of the filing fee. . . .
The respondent Court itself, in its decision of 17 January 1990 in C.A-G.R. SP No.
16972, 49 confronted by the same issue, but perhaps unaware of its Resolution of 17 May 1989 in
C.A.-G.R. SP No. 13624 aforementioned, ruled that PBP and PPI are liable for the filing fees on the
claim for damages. It even directed PBP and PPI to file "the corresponding amendment to their
amended complaint in said case stating a specific amount 'to fully repair the damages inflicted on
PBP consisting of losses of operation and the conservator's bank frauds and abuses' . . .," after which

The prescriptive period therein mentioned refers to the period within which a specific action must be
filed. It means that in every case, the docket fee must be paid before the lapse of the prescriptive
period. Chapter 3, Title V, Book III of the Civil Code is the principal law governing prescription of
actions.
There can be no question that in the instant case, PBP's claims for damages arise out of an injury to
its rights. Pursuant to Article 1146 of the Civil Code, the action therefor must be initiated within four (4)
years from the time the cause of action accrued. Since the damages arose out of the alleged
unwarranted, ill-motivated, illegal, unnecessary and unjustified conservatorship, the cause of action, if
any, first accrued in 1984 and continued until 27 August 1987, when the original complaint was filed.
Even if We are to assume that the four-year period should start running on 27 August 1987, that
period lapsed on 27 August 1991. There is no showing that PBP paid the correct filing fee for the

93
claim within the prescribed period. Hence, nothing can save Civil Case No. 17692 from being
dismissed.

cause prejudice to its depositors, creditors and the general public as well. This power has been
expressly recognized by this Court. In Philippine Veterans Bank Employees Union-NUBE
vs. Philippine Veterans Bank, 59 this Court held that:

2. And now on the issue of the writ of preliminary injunction.

The challenged Orders of the trial court granting the application for a writ of preliminary injunction and
the assailed decision of the respondent Court in C.A. G.R. No. 13624 clearly betray a prejudgment of
the case. In both instances, not only did said courts declare MB Resolutions Nos. 649 and 751 to be
arbitrary, both also declared the conservatorship to have been issued in violation of PBP's right to
administrative due process, which the CB "arbitrarily brushed aside to the prejudice" of the latter. The
said courts further concluded that "the sudden and untimely announcement by the Central Bank that
respondent Producers Bank will be under a conservatorship that will oversee its operations worked
havoc over the confidence that the public had hitherto reposed on respondent bank so that the
majority of its depositors over-reacted and rashly withdrew their accounts from said bank, thus it
incurred a loss of P593.707 million or 59.5% of its deposits."
Thus, save only for the determination of the full extent of PBP's claim for damages, said courts have,
at the most, decided or, at the very least, prejudged the case. Courts, notwithstanding the discretion
given to them, should avoid issuing writs of preliminary injunction which in effect dispose of the main
case without a trial. 54 We do not then hesitate to rule that there was grave abuse of discretion in the
issuance of the writ of preliminary injunction.
Besides, there was neither arbitrariness nor bad faith in the issuance of MB Resolutions Nos. 649 and
751. It must be stressed in this connection that the banking business is properly subject to reasonable
regulation under the police power of the state because of its nature and relation to the fiscal affairs of
the people and the revenues of the state. 55 Banks are affected with public interest because they
receive funds from the general public in the form of deposits. Due to the nature of their transactions
and functions, a fiduciary relationship is created between the banking institutions and their depositors.
Therefore, banks are under the obligation to treat with meticulous care and utmost fidelity the
accounts of those who have reposed their trust and confidence in them. 56
It is then Government's responsibility to see to it that the financial interests of those who deal with
banks and banking institutions, as depositors or otherwise, are protected. In this country, that task is
delegated to the Central Bank which, pursuant to its Charter, 57 is authorized to administer the
monetary, banking and credit system of the Philippines. Under both the 1973 and 1987 Constitutions,
the Central Bank is tasked with providing policy direction in the areas of money, banking and credit;
corollarily, it shall have supervision over the operations of banks. 58 Under its charter, the CB is further
authorized to take the necessary steps against any banking institution if its continued operation would

. . . Unless adequate and determined efforts are taken by the government against
distressed and mismanaged banks, public faith in the banking system is certain to
deteriorate to the prejudice of the national economy itself, not to mention the losses
suffered by the bank depositors, creditors, and stockholders, who all deserve the
protection of the government. The government cannot simply cross its arms while the
assets of a bank are being depleted through mismanagement or irregularities. It is
the duty of the Central Bank in such an event to step in and salvage the remaining
resources of the bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.
One important measure adopted by the government to protect the public against unscrupulous
practices of some bankers is to require banking institutions to set up reserves against their deposit
liabilities. These reserves, pegged at a certain percentage of the volume of deposit liability, is that
portion of the deposit received by a banking institution which it cannot use for loans and investments.
The reserve requirement, which ordinarily takes the form of a deposit with the Central Bank, is one
means by which the government ensures the liquidity of banking institutions. 60
These reserve accounts maintained by banking institutions with the Central Bank also serve as a
basis for the clearing of checks and the settlement of interbank balances. 61
The need to maintain these required reserves cannot be over-emphasized. Thus, where overdrawings on deposit accounts (regardless of amount) are incurred, R.A. No. 265 requires the
delinquent bank to:
. . . fully cover said overdraft not later than the next clearing day: Provided,
Further, That settlement of clearing balances shall not be effected for any account
which continue to, be overdrawn for five consecutive banking days until such time as
the overdrawing is fully covered or otherwise converted into an emergency loan or
advance pursuant to the provisions of Sec. 90 of this Act. Provided, Finally, That the
appropriate clearing office shall be officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Central Bank as of the effectivity of
this amended section shall, within such period as may be prescribed by the Monetary
Board, either convert the overdraft into an emergency loan or advance with a plan of
payment, or settle such overdrafts, and that, upon failure to comply herewith, the

94
Central Bank shall take such action against the bank as may be warranted under this
Act. 62 [Emphasis supplied.]
The fact that PBP is grossly overdrawn on its reserve account with the CB (up to P1.233 billion as of
13 February 1990) is not disputed by PBP. This enormous overdraft evidences the patent inability of
the bank's management to keep PBP liquid. This fact alone sufficiently justifies the remedial
measures taken by the Monetary Board.
MB Resolutions Nos. 649 and 751 were not promulgated to arbitrarily divest the present stockholders
of control over PBP, as is claimed by the latter. The same contemplates an effective and viable plan to
revive and restore PBP. It is to be noted that before issuing these resolutions, the MB gave the
management of PBP ample opportunity (from 30 March 1984 to June of 1987) to submit
a viable rehabilitation plan for the bank.
MB Resolution Nos. 751 merely reiterated the requirement set forth in Resolution No. 649 for PBP to
identify and submit the list of new stockholders who will infuse new capital into the bank for CB
approval. In this Resolution, the MB gave PBP's stockholders one (1) week from notice within which
to signify their acceptance or rejection of the proposed rehabilitation plan.
The foregoing resolutions refer to a recommended rehabilitation plan. What was conveyed to PBP
was a mere proposal. There was nothing in the resolutions to indicate that the plan was mandatory.
On the contrary, PBP was given a specific period within which to accept or reject the plan. And, as
petitioners correctly pointed out, the plan was not self-implementing. The warning given by the MB
that should said proposal be rejected, the CB "will take appropriate alternative actions on the matter,"
does not make the proposed rehabilitation plan compulsory. Whether or not there is a rehabilitation
plan agreed upon between PBP and the MB, the CB is authorized under R.A. No. 265 to take
appropriate measures to protect the interest of the bank's depositors as well as of the general public.
Furthermore, the assignment of claims to PDIC and the subsequent dacion en pago (payment of
credit through shares) do not divest the present stockholders of control over PBP. As may be readily
observed from the terms of Resolution No. 645, the shares which shall be issued to PDIC under
the dacion are preferred, non-voting and non-participating shares. Hence, except for the instances
enumerated in the Corporation Code where holders of non-voting shares are given the right to vote,
PDIC shall have no hand in the bank's operation or business. In any event, these preferred shares
will eventually be sold to private parties or new stockholders as soon as they are identified by PBP
and approved by the CB. Prior approval by the CB of the stockholders is necessary screening
purposes.

There is nothing objectionable to the actions of the MB. We, therefore, find to be completely without
legal or evidentiary basis the contention that the impugned resolutions are arbitrary, illegal and made
in bad faith.
Moreover, respondent Judge acted in complete disregard of Section 107 of R.A. No. 265 when he
enjoined the CB from taking appropriate actions against the bank, "including exclusion of (PBP) from
settlement of clearing balances at the Central Bank clearing house" as warranted by law. By using his
own standards, and without scrutinizing the law, respondent Judge arbitrarily determined when CB
may or may not initiate measures against a bank that cannot maintain its liquidity. He also arbitrarily
and capriciously decided who can continually overdraw from the deposit account with the CB, to the
prejudice of other banking institutions, the banking public and the government.
3. As could be gleamed from the pleadings in G.R. No. 92943, the respondent Judge, per his order of
18 November 1987, (a) directed the conservator to restore both the PBP officers to their original
positions prior to the reorganization of the bank's personnel, and the PBP's standing committees to
their original compositions, and (b) restrained her from leasing out to a third party any portion of
PBP's space in the Producers Bank Centre; per his Order of 22 December 1987, respondent Judge
granted PPI's motion for an order transferring to the latter the administration of the three (3) buildings;
and per the Order of 22 December 1987, he granted the motion directing the conservator to publish
the financial statement of the PBP in the manner prayed for by the latter.
The foregoing Orders were issued without due hearing. Moreover, these reliefs were not prayed for in
the Amended Complaint. They were not even covered by any specific allegations therein. Except for
the prohibition to lease, the rest partook of the nature of a preliminary mandatory injunction which
deprived the conservator of her rights and powers under Section 28-A of R.A. No. 265 and, in effect,
set aside the conservatorship with PBP itself had earlier accepted. It must be remembered that PBP
did not ask, in its Amended Complaint, for the setting aside of the conservatorship. On the contrary, it
even prayed that the conservator be ordered to restore the viability of PBP as mandated by said
Section 28-A.
The respondent Judge should not have forgotten the settled doctrine that it is improper to issue a writ
of preliminary mandatory injunction prior to the final hearing, except in cases of extreme urgency,
where the right is very clear, where considerations of relative inconvenience bear strongly in
complainant's favor, where there is a willful and unlawful invasion of plaintiff's right against his protest
and remonstrance, the injury being a continuing one, and where the effect of the mandatory injunction
is rather to re-establish and maintain a pre-existing continuing relation between the parties, recently
and arbitrarily interrupted by the defendant, than to establish a new relation. 63

95
It is plain to this Court that respondent Judge ceased to be an impartial arbitrator; he became the
godfather of PBP and PPI, granting to them practically all that they had asked for in the motions they
filed. Upon the issuance of these Orders, nothing appeared clearer in the judicial horizon than this
PBP and PPI had everything in the bag, so to speak, including the reliefs not even contemplated in
their Amended Complaint. The challenged Orders then were whimsically and arbitrarily issued.

17692. All proceedings undertaken and all orders issued by respondent Judge are hereby SET ASIDE
for being null and void. The writ of preliminary injunction issued by the trial court in its Order dated 21
September 1987 is hereby LIFTED.

Compounding such detestable conduct is the respondent Judge's issuance, with undue haste and
unusual speed, of the orders of contempt without the proper hearing. If the conservator could, at all,
be liable for contempt, it would be for indirect contempt punished under Section 3, Rule 71 of the
Rules of Court, more specifically item (b) of the first paragraph which reads:

Narvasa, C.J., Melencio-Herrera, Cruz, Paras, Feliciano, Bidin, Grio-Aquino, Regalado, Romero and
Nocon, JJ., concur.

IT IS SO ORDERED.

Padilla and Bellosillo, JJ., took no part.

Sec. 3 Indirect contempts to be punished after charge and hearing. After charge in
writing has been filed, and an opportunity given to the accused to be heard by himself
or counsel, a person guilty of any of the following acts may be punished for contempt:
xxx xxx xxx
(b) Disobedience of or resistance to a lawful writ, process, order,
judgment, or command of a court, or injunction granted by a court or
judge, . . .;
It is clear from the said section that it is necessary that there be a charge and that the party cited for
contempt be given an opportunity to be heard. The reason for this is that contempt partakes of the
nature of a criminal offense. In the instant case, each motion for contempt served as the charge. It is
settled that a charge may be filed by a fiscal, a judge, or even a private person. 64 Petitioner
Tansinsin-Encarnacion filed oppositions thereto. Thereafter, it was the duty of the respondent Judge
to hold a hearing on the motions. Respondent Judge deliberately did away with the hearing and this
Court finds no justifiable reason therefor.
There is, moreover, another reason why the contempt orders must be struck down. The orders which
were supposedly disobeyed and from which the motions for contempt arose were, as earlier
indicated, null and void for having been issued with grave abuse of discretion amounting to lack of
jurisdiction. Such Orders, therefore, cannot then be characterized as lawful. Consequently, resistance
thereto cannot be punished as contempt 65
PREMISES CONSIDERED, the petitions in G.R. Nos. 88353 and 92943 are GRANTED. The 6
October 1988 decision and 17 May 1989 resolution of the Court of Appeals in C.A.-G.R. SP No.
13624 are REVERSED and SET ASIDE. Respondent Judge is ordered to dismiss Civil Case No.

Separate Opinions
GUTIERREZ, JR., J., concurring:
While I concur in the Court's decision, I would like to express certain reservations about the arbitrary
grant of power under the law to Central Bank (CB) authorities.
Any displeasure of CB officials against a private bank expressed through official pronouncements or
through rumors, real or imagined, in media, as in this case, will lead to a bank run by depositors. And
if the CB, which alone can stem the disaster, does not sincerely do all it can to help the bank, the
inevitable result is the bank's collapse and closure. Subsequent judicial action is illusory. I realize that
the possibility of abuse is no reason to invalidate a law but here it is not a mere "possibility." It is
a certainty whenever CB officials decide or will to do so. The absolute power and discretion over a
bank's life or death and the total reliance on the officials' good faith is contrary to principles of fairness
and substantive due process embodied in our Constitution.
The principal function of a CB conservator is to preserve the assets of the private bank and restore its
viability. I, however, note from this petition and earlier cases of the same nature that a conservator
usually forgets that he is supposed to be a friend of the bank under conservatorship and not its
adversary. The distinction between a conservator and a liquidator is overlooked. The conservator

96
starts with a prejudiced attitude. There should be a more objective and evenhanded way of restoring
distressed banks to viability.

Separate Opinions
GUTIERREZ, JR., J., concurring:
While I concur in the Court's decision, I would like to express certain reservations about the arbitrary
grant of power under the law to Central Bank (CB) authorities.
Any displeasure of CB officials against a private bank expressed through official pronouncements or
through rumors, real or imagined, in media, as in this case, will lead to a bank run by depositors. And
if the CB, which alone can stem the disaster, does not sincerely do all it can to help the bank, the
inevitable result is the bank's collapse and closure. Subsequent judicial action is illusory. I realize that
the possibility of abuse is no reason to invalidate a law but here it is not a mere "possibility." It is
a certainty whenever CB officials decide or will to do so. The absolute power and discretion over a
bank's life or death and the total reliance on the officials' good faith is contrary to principles of fairness
and substantive due process embodied in our Constitution.
The principal function of a CB conservator is to preserve the assets of the private bank and restore its
viability. I, however, note from this petition and earlier cases of the same nature that a conservator
usually forgets that he is supposed to be a friend of the bank under conservatorship and not its
adversary. The distinction between a conservator and a liquidator is overlooked. The conservator
starts with a prejudiced attitude. There should be a more objective and evenhanded way of restoring
distressed banks to viability.
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS and BENJAMIN C.
NAPIZA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CA-G.R. CV No.
37392 affirming in toto that of the Regional Trial Court of Makati, Branch 139, [2] which dismissed the

complaint filed by petitioner Bank of the Philippine Islands against private respondent Benjamin C.
Napiza for sum of money. Sdaad
On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU)
Savings Account No. 028-187[3] which he maintained in petitioner banks Buendia Avenue Extension
Branch, Continental Bank Managers Check No. 00014757 [4] dated August 17, 1984, payable to "cash"
in the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private
respondent on its dorsal side.[5] It appears that the check belonged to a certain Henry Chan who went
to the office of private respondent and requested him to deposit the check in his dollar account by
way of accommodation and for the purpose of clearing the same. Private respondent acceded, and
agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the
check is cleared, both of them would go to the bank to withdraw the amount of the check upon private
respondents presentation to the bank of his passbook.
Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one
Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No.
028-187. Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman
and Agnes C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo. [6]
On November 20, 1984, petitioner received communication from the Wells Fargo Bank International
of New York that the said check deposited by private respondent was a counterfeit check [7]because it
was "not of the type or style of checks issued by Continental Bank International." [8] Consequently, Mr.
Ariel Reyes, the manager of petitioners Buendia Avenue Extension Branch, instructed one of its
employees, Benjamin D. Napiza IV, who is private respondents son, to inform his father that the
check bounced.[9] Reyes himself sent a telegram to private respondent regarding the dishonor of the
check. In turn, private respondents son wrote to Reyes stating that the check had been assigned "for
encashment" to Ramon A. de Guzman and/or Agnes C. de Guzman after it shall have been cleared
upon instruction of Chan. He also said that upon learning of the dishonor of the check, his father
immediately tried to contact Chan but the latter was out of town. [10]
Private respondents son undertook to return the amount of $2,500.00 to petitioner bank. On
December 18, 1984, Reyes reminded private respondent of his sons promise and warned that should
he fail to return that amount within seven (7) days, the matter would be referred to the banks lawyers
for appropriate action to protect the banks interest. [11] This was followed by a letter of the banks lawyer
dated April 8, 1985 demanding the return of the $2,500.00. [12]
In reply, private respondent wrote petitioners counsel on April 20, 1985 [13] stating that he deposited the
check "for clearing purposes" only to accommodate Chan. He added:

97
"Further, please take notice that said check was deposited on September 3, 1984
and withdrawn on October 23, 1984, or a total period of fifty (50) days had elapsed at
the time of withdrawal. Also, it may not be amiss to mention here that I merely signed
an authority to withdraw said deposit subject to its clearing, the reason why the
transaction is not reflected in the passbook of the account. Besides, I did not receive
its proceeds as may be gleaned from the withdrawal slip under the captioned
signature of recipient.
If at all, my obligation on the transaction is moral in nature, which (sic) I have been
and is (sic) still exerting utmost and maximum efforts to collect from Mr. Henry Chan
who is directly liable under the circumstances. Scsdaad
xxx......xxx......xxx."
On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of
the amount of $2,500.00 or the prevailing peso equivalent plus legal interest from date of demand to
date of full payment, a sum equivalent to 20% of the total amount due as attorney's fees, and litigation
and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the
understanding that the amount deposited would be withdrawn only after the check in question has
been cleared. He likewise alleged that he instructed the party to whom he issued the signed blank
withdrawal slip to return it to him after the bank drafts clearance so that he could lend that party his
passbook for the purpose of withdrawing the amount of $2,500.00. However, without his knowledge,
said party was able to withdraw the amount of $2,541.67 from his dollar savings account through
collusion with one of petitioners employees. Private respondent added that he had "given the Plaintiff
fifty one (51) days with which to clear the bank draft in question." Petitioner should have disallowed
the withdrawal because his passbook was not presented. He claimed that petitioner had no one to
blame except itself "for being grossly negligent;" in fact, it had allegedly admitted having paid the
amount in the check "by mistake" x x x "if not altogether due to collusion and/or bad faith on the part
of (its) employees." Charging petitioner with "apparent ignorance of routine bank procedures," by way
of counterclaim, private respondent prayed for moral damages of P100,000.00, exemplary damages
of P50,000.00 and attorneys fees of 30% of whatever amount that would be awarded to him plus an
honorarium of P500.00 per appearance in court.
Private respondent also filed a motion for admission of a third party complaint against Chan. He
alleged that "thru strategem and/or manipulation," Chan was able to withdraw the amount of
$2,500.00 even without private respondents passbook. Thus, private respondent prayed that third

party defendant Chan be made to refund to him the amount withdrawn and to pay attorneys fees of
P5,000.00 plus P300.00 honorarium per appearance.
Petitioner filed a comment on the motion for leave of court to admit the third party complaint, wherein
it asserted that per paragraph 2 of the Rules and Regulations governing BPI savings accounts,
private respondent alone was liable "for the value of the credit given on account of the draft or check
deposited." It contended that private respondent was estopped from disclaiming liability because he
himself authorized the withdrawal of the amount by signing the withdrawal slip. Petitioner prayed for
the denial of the said motion so as not to unduly delay the disposition of the main case asserting that
private respondents claim could be ventilated in another case.
Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of
suits, the motion to admit third party complaint should be granted. Meanwhile, the trial court issued
orders on August 25, 1987 and October 28, 1987 directing private respondent to actively participate in
locating Chan. After private respondent failed to comply, the trial court, on May 18, 1988, dismissed
the third party complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that
petitioner could not hold private respondent liable based on the checks face value alone. To so hold
him liable "would render inutile the requirement of clearance from the drawee bank before the value
of a particular foreign check or draft can be credited to the account of a depositor making such
deposit." The lower court further held that "it was incumbent upon the petitioner to credit the value of
the check in question to the account of the private respondent only upon receipt of the notice of final
payment and should not have authorized the withdrawal from the latters account of the value or
proceeds of the check." Having admitted that it committed a "mistake" in not waiting for the clearance
of the check before authorizing the withdrawal of its value or proceeds, petitioner should suffer the
resultant loss. Supremax
On appeal, the Court of Appeals affirmed the lower courts decision. The appellate court held that
petitioner committed "clear gross negligence" in allowing Ruben Gayon, Jr. to withdraw the money
without presenting private respondents passbook and, before the check was cleared and in crediting
the amount indicated therein in private respondents account. It stressed that the mere deposit of a
check in private respondents account did not mean that the check was already private respondents
property. The check still had to be cleared and its proceeds can only be withdrawn upon presentation
of a passbook in accordance with the banks rules and regulations. Furthermore, petitioners
contention that private respondent warranted the checks genuineness by endorsing it is untenable for
it would render useless the clearance requirement. Likewise, the requirement of presentation of a

98
passbook to ascertain the propriety of the accounting reflected would be a meaningless exercise.
After all, these requirements are designed to protect the bank from deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,[14] where this
Court stated that a personal check is not legal tender or money, and held that the check deposited in
this case must be cleared before its value could be properly transferred to private respondent's
account.
Without filing a motion for the reconsideration of the Court of Appeals Decision, petitioner filed this
petition for review on certiorari, raising the following issues:
1.......WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS
WARRANTIES AS A GENERAL INDORSER.
2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN
RESPONDENT NAPIZA AND RUBEN GAYON.
3.......WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN
ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check,
should be liable for the amount stated therein in accordance with the following provision of the
Negotiable Instruments Law (Act No. 2031):
"SEC. 66. Liability of general indorser. Every indorser who indorses without
qualification, warrants to all subsequent holders in due course
(a)......The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
(b)......That the instrument is at the time of his indorsement, valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay it."

Section 65, on the other hand, provides for the following warranties of a person negotiating an
instrument by delivery or by qualified indorsement: (a) that the instrument is genuine and in all
respects what it purports to be; (b) that he has a good title to it, and (c) that all prior parties had
capacity to contract.[15] In People v. Maniego,[16] this Court described the liabilities of an indorser as
follows: Juris
"Appellants contention that as mere indorser, she may not be liable on account of the
dishonor of the checks indorsed by her, is likewise untenable. Under the law, the
holder or last indorsee of a negotiable instrument has the right to enforce payment of
the instrument for the full amount thereof against all parties liable thereon. Among the
parties liable thereon is an indorser of the instrument, i.e., a person placing his
signature upon an instrument otherwise than as a maker, drawer or acceptor * *
unless he clearly indicated by appropriate words his intention to be bound in some
other capacity. Such an indorser who indorses without qualification, inter
alia engages that on due presentment, * * (the instrument) shall be accepted or paid,
or both, as the case may be, according to its tenor, and that if it be dishonored, and
the necessary proceedings on dishonor be duly taken, he will pay the amount thereof
to the holder, or any subsequent indorser who may be compelled to pay it. Maniego
may also be deemed an accommodation party in the light of the facts, i.e., a person
who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. As such, she is under the law liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew * * (her) to be
only an accommodation party, although she has the right, after paying the holder, to
obtain reimbursement from the party accommodated, since the relation between
them is in effect that of principal and surety, the accommodation party being the
surety."
It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or
even as an accommodation party.[17] However, to hold private respondent liable for the amount of the
check he deposited by the strict application of the law and without considering the attending
circumstances in the case would result in an injustice and in the erosion of the public trust in the
banking system. The interest of justice thus demands looking into the events that led to the
encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity
for the withdrawal of the amount in question." Petitioner relied "on the genuine signature on the
withdrawal slip, the personality of private respondents son and the lapse of more than fifty (50) days

99
from date of deposit of the Continental Bank draft, without the same being returned yet." [18] We hold,
however, that the propriety of the withdrawal should be gauged by compliance with the rules thereon
that both petitioner bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private respondent, the following rules on withdrawal of
deposits appear:
"4.......Withdrawals must be made by the depositor personally but in some
exceptional circumstances, the Bank may allow withdrawal by another upon the
depositors written authority duly authenticated; and neither a deposit nor a withdrawal
will be permitted except upon the presentation of the depositors savings passbook, in
which the amount deposited withdrawn shall be entered only by the Bank.
5.......Withdrawals may be made by draft, mail or telegraphic transfer in currency of
the account at the request of the depositor in writing on the withdrawal slip or by
authenticated cable. Such request must indicate the name of the payee/s, amount
and the place where the funds are to be paid. Any stamp, transmission and other
charges related to such withdrawals shall be for the account of the depositor and
shall be paid by him/her upon demand. Withdrawals may also be made in the form of
travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed
subject however, to their (availability).
6.......Deposits shall not be subject to withdrawal by check, and may be withdrawn
only in the manner above provided, upon presentation of the depositors savings
passbook and with the withdrawal form supplied by the Bank at the
counter."[19] Scjuris
Under these rules, to be able to withdraw from the savings account deposit under the Philippine
foreign currency deposit system, two requisites must be presented to petitioner bank by the person
withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositors passbook. Private
respondent admits that he signed a blank withdrawal slip ostensibly in violation of Rule No. 6
requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the
place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with
only private respondents two signatures affixed on the proper spaces is buttressed by petitioners
allegation in the instant petition that had private respondent indicated therein the person authorized to
receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends
that "(i)n failing to do so (i.e., naming his authorized agent), he practically authorized any possessor
thereof to write any amount and to collect the same." [20]

Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a
special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman."
Such being the case, petitioners personnel should have been duly warned that Gayon, who was also
employed in petitioners Buendia Ave. Extension branch, [21] was not the proper payee of the proceeds
of the check. Otherwise, either Ramon or Agnes de Guzman should have issued another authority to
Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to
withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Private
respondent does not deny having signed such authority. However, considering petitioners clear
admission that the withdrawal slip was a blank one except for private respondents signature, the
unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and
thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount.
Under these facts, there could not have been a principal-agent relationship between private
respondent and Gayon so as to render the former liable for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and
presented with the corresponding foreign currency savings passbook by the depositor in person. For
withdrawals thru a representative, depositor should accomplish the authority at the back." The
requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip
service even though the person making the withdrawal is authorized by the depositor to do so. This is
clear from Rule No. 6 set out by petitioner so that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be entered in the depositors passbook. The fact that
private respondents passbook was not presented during the withdrawal is evidenced by the entries
therein showing that the last transaction that he made with the bank was on September 3, 1984, the
date he deposited the controversial check in the amount of $2,500.00. [22]
In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook.
Thus:
"2.......All deposits will be received as current funds and will be repaid in the same
manner; provided, however, that deposits of drafts, checks, money orders, etc. will
be accepted as subject to collection only and credited to the account only upon
receipt of the notice of final payment. Collection charges by the Banks foreign
correspondent in effecting such collection shall be for the account of the depositor. If
the account has sufficient balance, the collection shall be debited by the Bank against
the account. If, for any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return such proceeds,
the provisional entry therefor made by the Bank in the savings passbook and its
records shall be deemed automatically cancelled regardless of the time that has

100
elapsed, and whether or not the defective items can be returned to the depositor; and
the Bank is hereby authorized to execute immediately the necessary corrections,
amendments or changes in its record, as well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and underlining supplied.) Jurissc
As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did
not become the outright owner of the amount stated therein. Under the above rule, by depositing the
check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a
managers check or ordinary check, is not legal tender.[23] As such, after receiving the deposit, under
its own rules, petitioner shall credit the amount in private respondents account or infuse value thereon
only after the drawee bank shall have paid the amount of the check or the check has been cleared for
deposit. Again, this is in accordance with ordinary banking practices and with this Courts
pronouncement that "the collecting bank or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the presentment has done its
duty to ascertain the genuineness of the endorsements." [24] The rule finds more meaning in this case
where the check involved is drawn on a foreign bank and therefore collection is more difficult than
when the drawee bank is a local one even though the check in question is a managers check.
[25]
Misjuris
In Banco Atlantico v. Auditor General,[26] Banco Atlantico, a commercial bank in Madrid, Spain, paid
the amounts represented in three (3) checks to Virginia Boncan, the finance officer of the Philippine
Embassy in Madrid. The bank did so without previously clearing the checks with the drawee bank, the
Philippine National Bank in New York, on account of the "special treatment" that Boncan received
from the personnel of Banco Atlanticos foreign department. The Court held that the encashment of
the checks without prior clearance is "contrary to normal or ordinary banking practice specially so
where the drawee bank is a foreign bank and the amounts involved were large." Accordingly, the
Court approved the Auditor Generals denial of Banco Atlanticos claim for payment of the value of the
checks that was withdrawn by Boncan.
Said ruling brings to light the fact that the banking business is affected with public interest. By the
nature of its functions, a bank is under obligation to treat the accounts of its depositors "with
meticulous care, always having in mind the fiduciary nature of their relationship." [27] As such, in
dealing with its depositors, a bank should exercise its functions not only with the diligence of a good
father of a family but it should do so with the highest degree of care.[28]

In the case at bar, petitioner, in allowing the withdrawal of private respondents deposit, failed to
exercise the diligence of a good father of a family. In total disregard of its own rules, petitioners
personnel negligently handled private respondents account to petitioners detriment. As this Court
once said on this matter:
"Negligence is the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs, would
do, or the doing of something which a prudent and reasonable man would do. The
seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides the test
by which to determine the existence of negligence in a particular case which may be
stated as follows: Did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in
the same situation? If not, then he is guilty of negligence. The law here in effect
adopts the standard supposed to be supplied by the imaginary conduct of the
discreet pater-familias of the Roman law. The existence of negligence in a given case
is not determined by reference to the personal judgment of the actor in the situation
before him. The law considers what would be reckless, blameworthy, or negligent in
the man of ordinary intelligence and prudence and determines liability by that." [29]
Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and
above the aggregate amount of private respondents dollar deposits that had yet to be cleared. The
banks ledger on private respondents account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00.[30] Upon private respondents deposit of $2,500.00 on
September 3, 1984, that amount was credited in his ledger as a deposit resulting in the corresponding
total balance of $3,250.00.[31] On September 10, 1984, the amount of $600.00 and the additional
charges of $10.00 were indicated therein as withdrawn thereby leaving a balance of $2,640.00. On
September 30, 1984, an interest of $11.59 was reflected in the ledger and on October 23, 1984, the
amount of $2,541.67 was entered as withdrawn with a balance of $109.92. [32] On November 19, 1984
the word "hold" was written beside the balance of $109.92. [33] That must have been the time when
Reyes, petitioners branch manager, was informed unofficially of the fact that the check deposited was
a counterfeit, but petitioners Buendia Ave. Extension Branch received a copy of the communication
thereon from Wells Fargo Bank International in New York the following day, November 20, 1984.
[34]
According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against
U.S. banks that were deposited with petitioner.[35] Jjlex
From these facts on record, it is at once apparent that petitioners personnel allowed the withdrawal of
an amount bigger than the original deposit of $750.00 and the value of the check deposited in the
amount of $2,500.00 although they had not yet received notice from the clearing bank in the United

101
States on whether or not the check was funded. Reyes contention that after the lapse of the 35-day
period the amount of a deposited check could be withdrawn even in the absence of a clearance
thereon, otherwise it could take a long time before a depositor could make a withdrawal, [36] is
untenable. Said practice amounts to a disregard of the clearance requirement of the banking system.

spouses are hereby ordered to pay the defendant Asian Savings Bank the amount of
P50,000.00 as moral and exemplary damages, plus P15,000.00 as and for attorney's fees.

While it is true that private respondents having signed a blank withdrawal slip set in motion the events
that resulted in the withdrawal and encashment of the counterfeit check, the negligence of petitioners
personnel was the proximate cause of the loss that petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause,
which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred." [37] The proximate cause of the
withdrawal and eventual loss of the amount of $2,500.00 on petitioners part was its personnels
negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in
the banking system. In so doing, petitioner assumed the risk of incurring a loss on account of a forged
or counterfeit foreign check and hence, it should suffer the resulting damage.

SO ORDERED.3

WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals
in CA-G.R. CV No. 37392 is AFFIRMED.
SO ORDERED. Newmiso
G.R. No. 112160

February 28, 2000

OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner,

vs.
COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES and VICENTE
MAOSCA,respondents.

With costs against appellees.

The facts that matter:

Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private respondent, Vicente
Maosca, decided to venture in business and to raise the capital needed therefor. The former then
executed a Special Power of Attorney authorizing the latter to mortgage two parcels of land situated
in San Dionisio, (BF Homes) Paranaque, Metro Manila, each lot with semi-concrete residential house
existing thereon, and respectively covered by Transfer Certificate of Title No. 54366 in his
(Osmundo's) name and Transfer Certificate of Title No. S-78498 in the name of his wife Angelina
Canlas.
Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente Maosca, for and in
consideration of P850,000.00, P500,000.00 of which payable within one week, and the balance of
P350,000.00 to serve as his (Osmundo's) investment in the business. Thus, Osmundo Canlas
delivered to Vicente Maosca the transfer certificates of title of the parcels of land involved. Vicente
Maosca, as his part of the transaction, issued two postdated checks in favor of Osmundo Canlas in
the amounts of P40,000.00 and P460,000.00, respectively, but it turned out that the check covering
the bigger amount was not sufficiently funded.4
On September 3, 1982, Vicente Maosca was able to mortgage the same parcels of land for
P100,000.00 to a certain Attorney Manuel Magno, with the help of impostors who misrepresented
themselves as the spouses, Osmundo Canlas and Angelina Canlas. 5

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to review
and set aside the Decision1 of the Court of Appeals in CA-G.R. CV No. 25242, which reversed the
Decision2 of Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-028; the
dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and a
new one is hereby entered DISMISSING the complaint of the spouses Osmundo and
Angelina Canlas. On the counterclaim of defendant Asian Savings Bank, the plaintiffs Canlas

On September 29, 1982, private respondent Vicente Maosca was granted a loan by the respondent
Asian Savings Bank (ASB) in the amount of P500,000.00, with the use of subject parcels of land as
security, and with the involvement of the same impostors who again introduced themselves as the
Canlas spouses.6 When the loan it extended was not paid, respondent bank extrajudicially foreclosed
the mortgage.
On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank that the
execution of subject mortgage over the two parcels of land in question was without their (Canlas
spouses) authority, and request that steps be taken to annul and/or revoke the questioned mortgage.

102
On January 18, 1983, petitioner Osmundo Canlas also wrote the office of Sheriff Maximo O.
Contreras, asking that the auction sale scheduled on February 3, 1983 be cancelled or held in
abeyance. But respondents Maximo C. Contreras and Asian Savings Bank refused to heed petitioner
Canlas' stance and proceeded with the scheduled auction sale. 7
Consequently, on February 3, 1983 the herein petitioners instituted the present case for annulment of
deed of real estate mortgage with prayer for the issuance of a writ of preliminary injunction; and on
May 23, 1983, the trial court issued an Order restraining the respondent sheriff from issuing the
corresponding Certificate of Sheriff's Sale.8

From such Decision below, Asian Savings Bank appealed to the Court of Appeals, which handed
down the assailed judgment of reversal, dated September 30, 1983, in CA-G.R. CV No. 25242.
Dissatisfied therewith, the petitioners found their way to this Court via the present Petition; theorizing
that:
I
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE MORTGAGE OF THE
PROPERTIES SUBJECT OF THIS CASE WAS VALID.

For failure to file his answer, despite several motions for extension of time for the filing thereof,
Vicente Maosca was declared in default.9
On June 1, 1989, the lower court a quo came out with a decision annulling subject deed of mortgage
and disposing, thus:

II
RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT PETITIONERS ARE NOT
ENTITLED TO RELIEF BECAUSE THEY WERE NEGLIGENT AND THEREFORE MUST BEAR THE
LOSS.

Premises considered, judgment is hereby rendered as follows.1wphi1.nt

1. Declaring the deed of real estate mortgage (Exhibit "L") involving the properties of
the plaintiffs as null and void;

III
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB
EXERCISED DUE DILIGENCE IN GRANTING THE LOAN APPLICATION OF RESPONDENT.

2. Declaring the public auction sale conducted by the defendant Sheriff, involving the
same properties as illegal and without binding effect;
3. Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of
P20,000.00 representing attorney's fees;
4. On defendant ASB's crossclaim: ordering the cross-defendant Vicente Maosca to
pay the defendant ASB the sum of P350,000.00, representing the amount which he
received as proceeds of the loan secured by the void mortgage, plus interest at the
legal rate, starting February 3, 1983, the date when the original complaint was filed,
until the amount is fully paid;

IV
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB DID NOT
ACT WITH BAD FAITH IN PROCEEDING WITH THE FORECLOSURE SALE OF THE
PROPERTIES.
V
RESPONDENT COURT OF APPEALS ERRED IN AWARDING RESPONDENT ASB MORAL
DAMAGES.11
The Petition is impressed with merit.

5. With costs against the defendants.

Art. 1173 of the Civil Code, provides:
SO ORDERED.10
Art. 1173. The fault or negligence of the obligor consist in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstances of the

103
persons, of the time and of the place. When negligence shows bad faith, the provisions of
articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required. (1104)
The degree of diligence required of banks is more than that of a good father of a family; 12 in keeping
with their responsibility to exercise the necessary care and prudence in dealing even on a registered
or titled property. The business of a bank is affected with public interest, holding in trust the money of
the depositors, which bank deposits the bank should guard against loss due to negligence or bad
faith, by reason of which the bank would be denied the protective mantle of the land registration law,
accorded only to purchasers or mortgagees for value and in good faith. 13
In the case under consideration, from the evidence on hand it can be gleaned unerringly that
respondent bank did not observe the requisite diligence in ascertaining or verifying the real identity of
the couple who introduced themselves as the spouses Osmundo Canlas and Angelina Canlas. It is
worthy to note that not even a single identification card was exhibited by the said impostors to show
their true identity; and yet, the bank acted on their representations simply on the basis of the
residence certificates bearing signatures which tended to match the signatures affixed on a previous
deed of mortgage to a certain Atty. Magno, covering the same parcels of land in question. Felizado
Mangubat, Assistant Vice President of Asian Savings Bank, thus testified inter alia:
xxx

xxx

A:
That is just the basis of accepting the signature, because at that time the loan have
been approved already on the basis of the financial statement of the client the Bank
Statement. Wneh (sic) it was approved we have to base it on the Financial statement of the
client, the signatures were accepted only for the purpose of signing the mortgage not for the
approval, we don't (sic) approve loans on the signature.
ATTY. CLAROS:
Would you agree that as part of ascertaining the identify of the parties particularly the
mortgage, you don't consider also the signature, the Residence Certificate, the
particular address of the parties involved.
A:

I think the question defers (sic) from what you asked a while ago.

Q:

Among others?

A:
We have to accept the signature on the basis of the other signatures given to us it
being a public instrument.
ATTY. CARLOS:
You mean to say the criteria of ascertaining the identity of the mortgagor does not
depend so much on the signature on the residence certificate they have presented.

xxx

Q:
According to you, the basis for your having recommended for the approval of
MANASCO's (sic) loan particularly that one involving the property of plaintiff in this case, the
spouses OSMUNDO CANLAS and ANGELINA CANLAS, the basis for such approval was
that according to you all the signatures and other things taken into account matches with that
of the document previously executed by the spouses CANLAS?
Q:
That is the only basis for accepting the signature on the mortgage, the basis for the
recommendation of the approval of the loan are the financial statement of MAOSCA?
A:
Yes; among others the signature and TAX Account Number, Residence Certificate
appearing on the previous loan executed by the spouses CANLAS, I am referring to EXHIBIT
5, mortgage to ATTY. MAGNO, those were made the basis.

A:

We have to accept that.

xxx

xxx

xxx

A:
We accepted the signature on the basis of the mortgage in favor of ATTY. MAGNO
duly notarized which I have been reiterrting (sic) entitled to full faith considering that it is a
public instrument.
ATTY. CARLOS:
What other requirement did you take into account in ascertaining the identification of
the parties particularly the mortgagor in this case.
A:

Residence Certificate.

104
Q:

Is that all, is that the only requirement?

A:
We requested for others but they could not produce, and because they presented to
us the Residence Certificate which matches on the signature on the Residence Certificate in
favor of Atty. Magno.14

Thus, armed with the titles and the special power of attorney, Maosca went to the defendant
bank and applied for a loan. And when Maosca came over to the bank to submit additional
documents pertinent to his loan application, Osmundo Canlas was with him, together with a
certain Rogelio Viray. At that time, Osmundo Canlas was introduced to the bank personnel as
"Leonardo Rey".

Evidently, the efforts exerted by the bank to verify the identity of the couple posing as Osmundo
Canlas and Angelina Canlas fell short of the responsibility of the bank to observe more than the
diligence of a good father of a family. The negligence of respondent bank was magnified by the fact
that the previous deed of mortgage (which was used as the basis for checking the genuineness of the
signatures of the supposed Canlas spouses) did not bear the tax account number of the
spouses,15 as well as the Community Tax Certificate of Angelina Canlas.16 But such fact
notwithstanding, the bank did not require the impostors to submit additional proof of their true identity.

When he was introduced as "Leonardo Rey" for the first time Osmundo should have
corrected Maosca right away. But he did not. Instead, he even allowed Maosca to avail of
his (Osmundo's) membership privileges at the Metropolitan Club when Maosca invited two
officers of the defendant bank to a luncheon meeting which Osmundo also attended. And
during that meeting, Osmundo did not say who he really is, but even let Maosca introduced
him again as "Leonardo Rey", which all the more indicates that he connived with Maosca in
deceiving the defendant bank.

Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the
resulting loss. In essence, the doctrine of last clear chance is to the effect that where both parties are
negligent but the negligent act of one is appreciably later in point of time than that of the other, or
where it is impossible to determine whose fault or negligence brought about the occurrence of the
incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so, is
chargeable with the consequences arising therefrom. Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the impending harm by the exercise
of due diligence.17

Finally after the loan was finally approved, Osmundo accompanied Maosca to the bank
when the loan was released. At that time, a manger's check for P200,000.00 was issued in
the name of Oscar Motorworks, which Osmundo admits he owns and operates.

Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the opportunity to
perpetrate the fraud, by entrusting to latter the owner's copy of the transfer certificates of title of
subject parcels of land, it cannot be denied that the bank had the last clear chance to prevent the
fraud, by the simple expedient of faithfully complying with the requirements for banks to ascertain the
identity of the persons transacting with them.
For not observing the degree of diligence required of banking institutions, whose business is
impressed with public interest, respondent Asian Savings Bank has to bear the loss sued upon.
In ruling for respondent bank, the Court of Appeals concluded that the petitioner Osmundo Canlas
was a party to the fraudulent scheme of Maosca and therefore, estopped from impugning the validity
of subject deed of mortgage; ratiocinating thus:
xxx

xxx

xxx

Collectively, the foregoing circumstances cannot but conjure to a single conclusion that
Osmundo active participated in the loan application of defendant Asian Savings Bank, which
culminated in his receiving a portion of the process thereof: 18
A meticulous and painstaking scrutiny of the Records on hand, reveals, however, that the findings
arrived at by the Court of Appeals are barren of any sustainable basis. For instance, the execution of
the deeds of mortgages constituted by Maosca on subject pieces of property of petitioners were
made possible not by the Special Power of Attorney executed by Osmundo Canlas in favor of
Maosca but through the use of impostors who misrepresented themselves as the spouses Angelina
Canlas and Osmundo Canlas. It cannot be said therefore, that the petitioners authorized Vicente
Maosca to constitute the mortgage on their parcels of land.
What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente Maosca, only on the
occasion of the luncheon meeting at the Metropolitan Club. 19 Thereat, the failure of Osmundo Canlas
to rectify Maosca's misrepresentations could not be taken as a fraudulent act. As well explained by
the former, he just did not want to embarrass Maosca, so that he waited for the end of the meeting
to correct Maosca.20
Then, too, Osmundo Canlas recounted that during the said luncheon meeting, they did not talk about
the security or collateral for the loan of Maosca with ASB. 21 So also, Mrs. Josefina Rojo, who was

105
the Account Officer of Asian Savings Bank when Maosca applied for subject loan, corroborated the
testimony of Osmundo Canlas, she testified:
xxx
QUESTION:
Club in Makati?

xxx

xxx

Now could you please describe out the lunch conference at the Metro

ANSWER:
Mr. Mangubat, Mr. Maosca and I did not discuss with respect to the loan
application and discuss primarily his business.
xxx
QUESTION:

xxx

xxx

So, what is the main topic of your discussion during the meeting?

ANSWER:
The main topic war then, about his business although, Mr. Leonardo Rey,
who actually turned out as Mr. Canlas, supplier of Mr. Maosca.
QUESTION:
topic discussed?
ANSWER:
QUESTION:
ANSWER:

I see . . . other than the business of Mr. Maosca, were there any other

YES.

The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop him from
assailing the validity of the mortgage because the said amount was in payment of the parcels of land
he sold to Maosca.24
What is decisively clear on record is that Maosca managed to keep Osmundo Canlas uninformed of
his (Maosca's) intention to use the parcels of land of the Canlas spouses as security for the loan
obtained from Asian Savings Bank. Since Vicente Maosca showed Osmundo Canlas several
certificates of title of lots which, according to Maosca were the collaterals, Osmundo Canlas was
confident that their (Canlases') parcels of land were not involved in the loan transactions with the
Asian Savings Bank.25 Under the attendant facts and circumstances, Osmundo Canlas was
undoubtedly negligent, which negligence made them (petitioners) undeserving of an award of
attorney's fees.
Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the
property mortgaged;26 a mortgage, constituted by an impostor is void. 27 Considering that it was
established indubitably that the contract of mortgage sued upon was entered into and signed by
impostors who misrepresented themselves as the spouses Osmundo Canlas and Angelina Canlas,
the Court is of the ineluctible conclusion and finding that subject contract of mortgage is a complete
nullity.
WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals, dated September
30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The Decision of Branch 59 of the Regional Trial
Court of Makati City in Civil Case No. M-028 is hereby REINSTATED. No pronouncement as to costs.

And what was the topic:

General Economy then.
xxx

wanted to make sure that Maosca would make good his promise to pay the balance of the purchase
price of the said lots out of the proceeds of the loan. 23

xxx

x x x22

Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca, explaining thus why he
(Osmundo) did not bother to correct what Maosca misrepresented and to assert ownership over the
two parcels of land in question.
Not only that; while it is true that Osmundo Canlas was with Vicente Maosca when the latter
submitted the documents needed for his loan application, and when the check of P200,000.00 was
released, the former did not know that the collateral used by Maosca for the said loan were their
(Canlas spouses') properties. Osmundo happened to be with Maosca at the time because he

SO ORDERED.1wphi1.nt
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and
CARLOS CAJES, respondents.
DECISION
MENDOZA, J.: Misact
This is a petition for certiorari seeking to reverse the decision[1] and resolution[2] of the Court of
Appeals dated August 30, 1996 and April 23, 1997, respectively, declaring private respondent Carlos

106
Cajes the owner of 19.4 hectares of land embraced in TCT No. 10101 and ordering the segregation
and reconveyance of said portion to him.

respondent paid the loan to petitioner for which the former was issued a Cancellation of Mortgage,
dated March 18, 1981, releasing the property in question from encumbrance. [21]

The antecedent facts are as follows:

Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property
covered by TCT No. 10101 was conducted by petitioners representatives. It was then discovered that
private respondent was occupying a portion of said land. Private respondent was informed that
petitioner had become the owner of the land he was occupying, and he was asked to vacate the
property. As private respondent refused to do so, [22] petitioner filed a complaint for recovery of
possession with damages against him. The case was assigned to Branch 1 of the Regional Trial
Court, Tagbilaran City,[23] which after trial, rendered a decision, dated August 22, 1989, declaring
petitioner the lawful owner of the entire land covered by TCT No. 10101 on the ground that the decree
of registration was binding upon the land.[24] The dispositive portion of the decision reads:

The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was
originally owned by Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax Declaration
No. 3840.[3] In 1950,[4] Mumar sold the land to private respondent who was issued Tax Declaration No.
R-1475 that same year.[5] The tax declaration was later superseded by Tax Declaration Nos. R-799
issued in 1961[6] and D-2247 issued in 1974.[7] Private respondent occupied and cultivated the said
land,[8] planting cassava and camote in certain portions of the land. [9]
In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration of a
parcel of land with an area of 1,512,468.00 square meters, [10] in his name for which he was issued
OCT No. 546 on June 16, 1969.[11] The parcel of land included the 19.4 hectares occupied by private
respondent. Alvarez never occupied nor introduced improvements on said land. [12]
In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No.
10101 was issued.[13] That same year, the spouses Beduya obtained a loan from petitioner
Development Bank of the Philippines for P526,000.00 and, as security, mortgaged the land covered
by TCT No. 10101 to the bank.[14] In 1978, the SAAD Investment Corp., and the SAAD AgroIndustries, Inc., represented by Gaudencio Beduya, and the spouses Beduya personally executed
another mortgage over the land in favor of petitioner to secure a loan of P1,430,000.00. [15] Sdjad
The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the property
was foreclosed.[16] In the resulting foreclosure sale held on January 31, 1985, petitioner was the
highest bidder.[17] As the spouses Beduya failed to redeem the property, petitioner consolidated its
ownership.[18]
It appears that private respondent had also applied for a loan from petitioner in 1978, offering his 19.4
hectare property under Tax Declaration No. D-2247 as security for the loan. As part of the processing
of the application, a representative of petitioner, Patton R. Olano, inspected the land and appraised its
value.
Private respondents loan application was later approved by petitioner.[19] However after releasing the
amount of the loan to private respondent, petitioner found that the land mortgaged by private
respondent was included in the land covered by TCT No. 10101 in the name of the spouses Beduya.
Petitioner, therefore, cancelled the loan and demanded immediate payment of the amount. [20]Private

WHEREFORE, foregoing considered, the court renders judgment:

1.......Declaring plaintiff bank Development Bank of the Philippines the true and legal
owner of the land in question covered by TCT No. 10101 farm of Gaudencio Beduya;
2.......Dismissing defendants counterclaim; Sppedsc
3.......Ordering defendant to vacate from the land in question; the portion of which he
claims to belong to him for without basis in fact and law;
4.......Ordering defendant, his agents or any person representing him or those who
may claim substantial rights on the land to vacate therefrom, cease and desist from
disturbing, molesting and interfering plaintiffs possession of the land in question, and
from committing any such act as would tend to mitigate, deny or deprive plaintiff of its
ownership and possession over said land.
SO ORDERED.
On appeal, the Court of Appeals reversed and gave judgment for private respondent, declaring him
the owner of the 19.4 hectares of land erroneously included in TCT No. 10101. The dispositive portion
of the appellate courts decision reads:
WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A
new decision is hereby rendered:

107
1. Dismissing the complaint.
2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as
exclusively belonging to defendant-appellant, ordering its segregation from plaintiffappellees title and its reconveyance to appellant.
No pronouncement as to costs.
SO ORDERED.[25]
Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, 1997.
[26]
Hence this petition.
Petitioner contends that:
I.......THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH
THE APPLICABLE PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND
THE APPLICABLE DECISIONS OF THE SUPREME COURT, PARTICULARLY IN
THE CASE OF BENIN VS. TUASON, 57 SCRA 531.
II.......THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP
BEING AN INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN QUESTION
AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION
SALE. Calrsc
III.THE RESPONDENT COURTS RULING DECLARING DBP IN ESTOPPEL IS
ILLOGICAL.[27]
First. Petitioner invokes the ruling of this Court in Benin v. Tuason[28] in support of its claim that its
predecessor-in-interest, Jose Alvarez, became the owner of the land by virtue of the decree of
registration issued in his name. In Benin, three sets of plaintiffs filed separate complaints against
Mariano Severo Tuason and J.M. Tuason & Co., Inc., praying for the cancellation of OCT No. 735
covering two parcels of land called the Sta. Mesa Estate, or Parcel 1, with an area of 8,798,617.00
square meters, and the Diliman Estate, or Parcel 2, with an area of 15,961,246.00 square meters.
They asked that they be declared the owners and lawful possessors of said lands.
Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands which had
already been subdivided and bought by innocent purchasers for value and in good faith at the time

the claimants obtained registration. Secondly, when the claimants ancestors occupied the lands in
question and declared them for tax purposes in 1944, the lands were already covered by the tax
declarations in the name of J. M. Tuason & Co., Inc. In 1914, OCT No. 735 was issued in the name of
Tuason so that, from that time on, no possession could defeat the title of the registered owners of the
land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in several
cases[29] and, as a result thereof, the transfer certificates of title acquired by the innocent purchasers
for value were also declared valid. It was held that neither could the claimants file an action to annul
these titles for not only had these actions prescribed, but the fact was that the claimants were also
barred from doing so by laches, having filed the complaint only in 1955, or 41 years after the issuance
of OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registration which
was considered in resolving the Benin case. What was considered decisive was the valid title or right
of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for value and in
good faith compared to the failure of the claimants to show their right to own or possess the
questioned properties. Sccalr
Petitioner maintains that the possession by private respondent and his predecessor-in-interest of the
19.4 hectares of land for more than 30 years cannot overcome the decree of registration issued in
favor of its predecessor-in-interest Jose Alvarez. Petitioner quotes the following statement in
the Benin case:
It follows also that the allegation of prescriptive title in favor of plaintiffs does not
suffice to establish a cause of action. If such prescription was completed before the
registration of the land in favor of the Tuasons, the resulting prescriptive title was cut
off and extinguished by the decree of registration. If, on the contrary, the prescription
was either begun or completed after the decree of registration, it conferred no title
because, by express provision of law, prescription can not operate against the
registered owner (Act 496).[30]
Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those
claiming title from him (i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of land,
despite the fact that they neither possessed nor occupied these lands.
This view is mistaken. A consideration of the cases shows that a decree of registration cut off or
extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land
not to the right of ownership thereof which was not annotated on the certificate of title issued thereon.
Thus, Act No. 496 provides:

108
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:Calrspped
First. Liens, claims, or rights arising or existing under the laws of Constitution of the
United States or of the Philippine Islands which the statutes of the Philippine Islands
cannot require to appear of record in the Registry.
Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government
irrigation canal or lateral thereof, where the certificate of title does not state that the
boundaries of such highway, way, or irrigation canal or lateral thereof, have been
determined.
But if there are easements or other rights appurtenant to a parcel of registered land
which for any reason have failed to be registered, such easements or rights shall
remain so appurtenant notwithstanding such failure, and shall be held to pass with
the land until cut off or extinguished by the registration of the servient estate, or in
any other manner.
Hence, in Cid v. Javier,[31] it was helds:
. . . Consequently, even conceding arguendo that such an easement has been
acquired, it had been cut off and extinguished by the registration of the servient
estate under the Torrens system without the easement being annotated on the
corresponding certificate of title, pursuant to Section 39 of the Land Registration Act.
This principle was reiterated in Purugganan v. Paredes[32] which also involved an easement of light
and view that was not annotated on the certificate of title of the servient estate. Scedp
But to make this principle applicable to a situation wherein title acquired by a person through
acquisitive prescription would be considered cut off and extinguished by a decree of registration
would run counter to established jurisprudence before and after the ruling in Benin. Indeed,
registration has never been a mode of acquiring ownership over immovable property. As early as

1911, in the case of City of Manila v. Lack,[33] the Court already ruled on the purpose of registration of
lands, viz.:
The Court of Land Registration was created for a single purpose. The Act is entitled
"An Act to provide for the adjudication and registration of titles to lands in the
Philippine Islands." The sole purpose of the Legislature in its creation was to bring
the land titles of the Philippine Islands under one comprehensive and harmonious
system, the cardinal features of which are indefeasibility of title and the intervention
of the State as a prerequisite to the creation and transfer of titles and interest, with
the resultant increase in the use of land as a business asset by reason of the greater
certainty and security of title. It does not create a title nor vest one. It
simply confirms a title already created and already vested, rendering it forever
indefeasible. . .
Again, in the case of Angeles v. Samia[34] where land was erroneously registered in favor of persons
who neither possessed nor occupied the same, to the prejudice of the actual occupant, the Court
held:
. . . The purpose of the Land Registration Act, as this court has had occasion to so
state more than once, is not to create or vest title, but to confirm and register title
already created and already vested, and of course, said original certificate of title No.
8995 could not have vested in the defendant more title than what was rightfully due
her and her coowners. It appearing that said certificate granted her much more than
she expected, naturally to the prejudice of another, it is but just that the error, which
gave rise to said anomaly, be corrected (City of Manila vs. Lack, 19 Phil., 324). The
defendant and her coowners knew or, at least, came to know that it was through error
that the original certificate of title in question was issued by the court which heard
cadastral case No. 11 of Bacolor, not only in or prior to March, 1933, but from the
time said certificate was issued in their favor, that is, from December 15, 1921. This is
evidenced by the fact that, ever since, they remained passive without even
attempting to make the least showing of ownership over the land in question until
after the lapse of more than eleven years. The Land Registration Act as well as the
Cadastral Act protects only the holders of a title in good faith and does not permit its
provisions to be used as a shield for the commission of fraud, or that one should
enrich himself at the expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo
vs. Director of Lands, 49 Phil., 838). The above-stated Acts do not give anybody, who
resorts to the provisions thereof, a better title than he really and lawfully has. If he
happened to obtain it by mistake or to secure, to the prejudice of his neighbor, more

109
land than he really owns, with or without bad faith on his part, the certificate of title,
which may have been issued to him under the circumstances, may and should be
cancelled or corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is
permitted by section 112 of Act No. 496, which is applicable to the Cadastral Act
because it is so provided expressly by the provisions of section 11 of the latter Act. It
cannot be otherwise because, as stated in the case of Domingo vs. Santos,
Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be
registered in the registry and reproduced in the certificate of title issued later, do not
annul the decree of registration on the ground that it is not the plan but the land itself
which is registered in the registry. In other words, if the plan of an applicant for
registration or claimant in a cadastral case alleges that the land referred to in said
plan is 100 or 1,000 hectares, and the land which he really owns and desires to
register in the registry is only 80 ares, he cannot claim to be the owner of the existing
difference if afterwards he is issued a certificate of title granting him said area of 100
or 1,000 hectares.[35] Edpsc
The principle laid down in this 1938 case remains the prevailing doctrine, its latest application being in
the case of Reyes v. Court of Appeals[36] wherein we ruled that the fact that a party was able to secure
a title in his favor did not operate to vest ownership upon her of the property.
In the present case, private respondent has been in actual, open, peaceful and continuous
possession of the property since 1950. This fact was corroborated by the testimony of Eleuterio
Cambangay who personally knew that Ulpiano Mumar transferred the land covered by Tax
Declaration No. 3840[37] in favor of private respondent in 1950.[38] Private respondents claim based on
actual occupation of the land is bolstered by Tax Declaration Nos. R-1475, R-799 and D2247[39] which were issued in his name in 1950, 1961 and 1974, respectively. Together with his actual
possession of the land, these tax declarations constitute strong evidence of ownership of the land
occupied by him. As we said in the case of Republic vs. Court of Appeals:[40]
Although tax declarations or realty tax payments of property are not conclusive
evidence of ownership, nevertheless, they are good indicia of possession in the
concept of owner for no one in his right mind would be paying taxes for a property
that is not in his actual or at least constructive possession. They constitute at least
proof that the holder has a claim of title over the property. The voluntary declaration
of a piece of property for taxation purposes manifests not only ones sincere and
honest desire to obtain title to the property and announces his adverse claim against
the State and all other interested parties, but also the intention to contribute needed

revenues to the Government. Such an act strengthens onesbona fide claim of

acquisition of ownership.
More importantly, it was established that private respondent, having been in possession of the land
since 1950, was the owner of the property when it was registered by Jose Alvarez in 1969, his
possession tacked to that of his predecessor-in-interest, Ulpiano Mumar, which dates back to 1917.
[41]
Clearly, more than 30 years had elapsed before a decree of registration was issued in favor of
Jose Alvarez. This uninterrupted adverse possession of the land for more than 30 years could only
ripen into ownership of the land through acquisitive prescription which is a mode of acquiring
ownership and other real rights over immovable property. Prescription requires public, peaceful,
uninterrupted and adverse possession of the property in the concept of an owner for ten (10) years, in
case the possession is in good faith and with a just title. Such prescription is called ordinary
prescription, as distinguished from extraordinary prescription which requires possession for 30 years
in case possession is without just title or is not in good faith. [42] Edp
In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses
Beduya were at any time in possession of the property in question. In fact, despite knowledge by
Gaudencio Beduya that private respondent occupied this 19.4 hectares included in the area covered
by TCT No. 10101,[43] he never instituted any action to eject or recover possession from the latter.
Hence, it can be concluded that neither Jose Alvarez nor the spouses Beduya ever exercised any
right of ownership over the land. The fact of registration in their favor never vested in them the
ownership of the land in dispute. "If a person obtains a title under the Torrens system, which includes
by mistake or oversight land which can no longer be registered under the system, he does not, by
virtue of the said certificate alone, become the owner of the lands illegally included." [44]
Considering the circumstances pertaining in this case, therefore, we hold that ownership of the 19.4
hectares of land presently occupied by private respondent was already vested in him and that its
inclusion in OCT No. 546 and, subsequently, in TCT No. 10101, was erroneous. Accordingly, the land
in question must be reconveyed in favor of private respondent, the true and actual owner thereof,
reconveyance being clearly the proper remedy in this case.
"The true owner may bring an action to have the ownership or title to the land
judicially settled and the Court in the exercise of its equity jurisdiction, without
ordering the cancellation of the Torrens title issued upon the patent, may direct the
defendants, the registered owner to reconvey the parcel of land to the plaintiff who
has been found to be the true owner thereof." (Vital vs. Amore, 90 Phil. 955) "The
reconveyance is just and proper in order to terminate the intolerable anomaly that the
patentees should have a torrens title for the land which they and their predecessors

110
never possessed which has been possessed by Novo in the concept of owner."
(Bustarga v. Novo, 129 SCRA 125)[45]
Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the
instant case, prescribes in 10 years from the date of issuance of decree of registration. [46]However,
this rule does not apply when the plaintiff is in actual possession of the land. Thus, it has been
held: Misedp

possession. The Court reasoned that since all the facts of the case are before it, to direct the party to
institute cancellation proceedings would be needlessly circuitous and would unnecessarily delay the
termination of the controversy which has already dragged on for 20 years.
Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it,
because it is an innocent purchaser for value in the foreclosure sale held in 1985.
This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides: Misoedp

. . . [A]n action for reconveyance of a parcel of land based on implied or constructive

trust prescribes in ten years, the point of reference being the date of registration of
the deed or the date of the issuance of the certificate of title over the property, but this
rule applies only when the plaintiff or the person enforcing the trust is not in
possession of the property,since if a person claiming to be the owner thereof is in
actual possession of the property, as the defendants are in the instant case, the right
to seek reconveyance, which in effect seeks to quiet title to the property, does not
prescribe. The reason for this is that one who is in actual possession of a piece of
land claiming to be the owner thereof may wait until his possession is disturbed or his
title is attacked before taking steps to vindicate his right, the reason for the rule being,
that his undisturbed possession gives him a continuing right to seek the aid of a court
of equity to ascertain and determine the nature of the adverse claim of a third party
and its effect on his own title, which right can be claimed only by one who is in
possession.[47]
Having been the sole occupant of the land in question, private respondent may seek reconveyance of
his property despite the lapse of more than 10 years.
Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that the
indefeasibility of torrens titles cannot be collaterally attacked. In the instant case, the original
complaint is for recovery of possession filed by petitioner against private respondent, not an original
action filed by the latter to question the validity of TCT No. 10101 on which petitioner bases its right.
To rule on the issue of validity in a case for recovery of possession is tantamount to a collateral
attack. However, it should not be overlooked that private respondent filed a counterclaim against
petitioner, claiming ownership over the land and seeking damages. Hence, we could rule on the
question of the validity of TCT No. 10101 for the counterclaim can be considered a direct attack on
the same. "A counterclaim is considered a complaint, only this time, it is the original defendant who
becomes the plaintiff. . . . It stands on the same footing and is to be tested by the same rules as if it
were an independent action."[48] In an analogous case,[49] we ruled on the validity of a certificate of title
despite the fact that the original action instituted before the lower court was a case for recovery of

If the court after hearing finds that the applicant or adverse claimant has title as
stated in his application or adverse claim and proper for registration, a decree of
confirmation and registration shall be entered. Every decree of registration shall bind
the land, and quiet title thereto, subject only to the exceptions stated in the following
section. It shall be conclusive upon and against all persons, including the Insular
Government and all the branches thereof, whether mentioned by name in the
application, notice, or citation, or included in the general description "To all whom it
may concern." Such decree shall not be opened by reason of the absence, infancy,
or other disability of any person affected thereby, nor by any proceeding in any court
for reversing judgments or decrees; subject, however, to the right of any person
deprived of land or of any estate or interest therein by decree of registration obtained
by fraud to file in the competent Court of First Instance a petition for review within one
year after entry of the decree, provided no innocent purchaser for value has acquired
an interest. Upon the expiration of said term of one year, every decree or certificate of
title issued in accordance with this section shall be incontrovertible. If there is any
such purchaser, the decree of registration shall not be opened, but shall remain in full
force and effect forever, subject only to the right of appeal hereinbefore
provided: Provided, however,That no decree or certificate of title issued to persons
not parties to the appeal shall be cancelled or annulled. But any person aggrieved by
such decree in any case may pursue his remedy by action for damages against the
applicant or any other person for fraud in procuring the decree. Whenever the phrase
"innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be
deemed to include an innocent lessee, mortgagee, or other encumbrancer for value.
(As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.) Edpmis
Succinctly put, 38 provides that a certificate of title is conclusive and binding upon the whole world.
Consequently, a buyer need not look behind the certificate of title in order to determine who is the
actual owner of the land. However, this is subject to the right of a person deprived of land through
fraud to bring an action for reconveyance, provided that it does not prejudice the rights of an innocent

111
purchaser for value and in good faith. "It is a condition sine qua non for an action for reconveyance to
prosper that the property should not have passed to the hands of an innocent purchaser for
value."[50] The same rule applies to mortgagees, like petitioner. Thus, we held:
Where the certificate of title is in the name of the mortgagor when the land is
mortgaged, the innocent mortgagee for value has the right to rely on what appears on
the certificate of title. In the absence of anything to excite suspicion, said mortgagee
is under no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate. Although Article 2085 of the Civil
Code provides that absolute ownership of the mortgaged property by the mortgagor
is essential, the subsequent declaration of a title as null and void is not a ground for
nullifying the mortgage right of a mortgagee in good faith. [51]
The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be
sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of
the mortgagors title. Nonetheless, especially in the case of a banking institution, a mortgagee must
exercise due diligence before entering into said contract. Judicial notice is taken of the standard
practice for banks, before approving a loan, to send representatives to the premises of the land
offered as collateral and to investigate who are the real owners thereof. Banks, their business being
impressed with public interest, are expected to exercise more care and prudence than private
individuals in their dealings, even those involving registered lands. [52] Jjsc
In this case, petitioners representative, Patton R. Olano, admitted that he came to know of the
property for the first time in 1979 when he inspected it to determine whether the portion occupied by
private respondent and mortgaged by the latter to petitioner was included in TCT No. 10101. This
means that when the land was mortgaged by the spouses Beduya in 1972, no investigation had been
made by petitioner. It is clear, therefore, that petitioner failed to exercise due care and diligence in
establishing the condition of the land as regards its actual owners and possessors before it entered
into the mortgage contract in 1972 with the Beduyas. Had it done so, it would not have failed to
discover that private respondent was occupying the disputed portion of 19.4 hectares. For this
reason, petitioner cannot be considered an innocent purchaser for value when it bought the land
covered by TCT No. 10101 in 1985 at the foreclosure sale.
Indeed, two circumstances negate petitioners claim that it was an innocent purchaser for value when
it bought the land in question, including the portion occupied by private respondent: (1) petitioner was
already informed by Gaudencio Beduya that private respondent occupied a portion of the property
covered by TCT No. 10101; and (2) petitioners representative conducted an investigation of the
property in 1979 to ascertain whether the land mortgaged by private respondent was included in TCT

No. 10101. In other words, petitioner was already aware that a person other than the registered
owner was in actual possession of the land when it bought the same at the foreclosure sale. A person
who deliberately ignores a significant fact which would create suspicion in an otherwise reasonable
man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot close his
eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in
good faith under the belief that there was no defect in the title of the vendor." [53]
Petitioner deliberately disregarded both the fact that private respondent already occupied the property
and that he was claiming ownership over the same. It cannot feign ignorance of private respondents
claim to the land since the latter mortgaged the same land to petitioner as security for the loan he
contracted in 1978 on the strength of the tax declarations issued under his name. Instead of inquiring
into private respondents occupation over the land, petitioner simply proceeded with the foreclosure
sale, pretending that no doubts surround the ownership of the land covered by TCT No. 10101.
Considering these circumstances, petitioner cannot be deemed an innocent mortgagee/purchaser for
value. As we ruled: Scjj
"The failure of appellees to take the ordinary precautions which a prudent man would
have taken under the circumstances, specially in buying a piece of land in the actual,
visible and public possession of another person, other than the vendor, constitutes
gross negligence amounting to bad faith.
In this connection, it has been held that where, as in this case, the land sold is in the
possession of a person other than the vendor, the purchaser is required to go beyond
the certificates of title and ma[k]e inquiries concerning the rights of the actual
possessor. (Citations omitted.)
....
One who purchases real property which is in the actual possession of another
should, at least, make some inquiry concerning the right of those in possession. The
actual possession by other than the vendor should, at least put the purchaser upon
inquiry. He can scarcely, in the absence of such inquiry, be regarded as a bona fide
purchaser as against such possessors."[54]
Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the
outcome of this case. Petitioner claims that the fact that it approved a loan in favor of private
respondent and executed a mortgage contract covering the 19.4 hectares covered by tax declarations
issued under private respondents name does not mean that it is estopped from questioning the latters

112
title. Petitioner accuses private respondent of having made misrepresentations which led it to believe
in his valid title and ownership.
The claim has no basis. Private respondent made no misrepresentation with regard to the land
occupied by him as he is actually the real owner thereof. Moreover, when private respondent entered
into a mortgage contract with petitioner, his claim of ownership was supported not only by the tax
declarations but also by a certification of the Clerk of Court of the Court of First Instance of Bohol that
no civil, land registration or cadastral case has been filed or instituted before the court affecting the
validity of Tax Declaration No. D-2247 covering the land located in Bugang, San Miguel, Bohol and
declared in the name of Carlos Cajes.[55] These documents were relied upon by private respondent in
support of his claim of ownership. We cannot consider the submission of these documents as
misrepresentations by private respondent as to the actual ownership of the land. Rather, private
respondent believed in good faith and with good reason that he was the owner of the 19.4 hectares
occupied by him. Sjcj
As to the question of estoppel, we do not find petitioner to be estopped from questioning private
respondents title. "Estoppel in pais arises when one, by his acts, representations or admission, or by
his own silence when he ought to speak out, intentionally or through culpable negligence, induces
another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that
he will be prejudiced if the former is permitted to deny the existence of such facts." [56] In the case at
bar, upon learning that the land occupied by private respondent was also covered by TCT No. 10101,
petitioner immediately demanded full payment of the loan and thereafter cancelled the mortgage
contract, a fact that is admitted by private respondent himself. [57] Indeed, nothing in record indicates
that petitioner impliedly acquiesced to the validity of private respondents title when it found out that
the latter was occupying a portion of the land covered by TCT No. 10101.
However, for reasons aforestated, we uphold private respondents ownership of 19.4 hectares
occupied by him. As a necessary consequence thereof, such portion of land included in TCT No.
10101 must be segregated and reconveyed in his favor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED. Supreme
PRUDENTIAL BANK, petitioner, vs. COURT OF APPEALS and LETICIA TUPASI-VALENZUELA
joined by husband Francisco Valenzuela, respondents. Ed-pm-is
DECISION

QUISUMBING, J.:
This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside the
Decision dated January 31, 1996, and the Resolution dated July 2, 1997, of the Court of Appeals in
CA G.R. CV No. 35532, which reversed the judgment of the Regional Trial Court of Valenzuela, Metro
Manila, Branch 171, in Civil Case No. 2913-V-88, dismissing the private respondent's complaint for
damages.[1]
In setting aside the trial court's decision, the Court of Appeals disposed as follows:
"WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and,
another rendered ordering the appellee bank to pay appellant the sum of
P100,000.00 by way of moral damages; P50,000.00 by way of exemplary damages,
P50,000.00 for and as attorney's fees; and to pay the costs. Jjs-c
SO ORDERED."[2]
The facts of the case on record are as follows:
Private respondent Leticia Tupasi-Valenzuela opened Savings Account No. 5744 and Current Account
No. 01016-3 in the Valenzuela Branch of petitioner Prudential Bank, with automatic transfer of funds
from the savings account to the current account.
On June 1, 1988, herein private respondent deposited in her savings account Check No. 666B
(104561 of even date) the amount of P35,271.60, drawn against the Philippine Commercial
International Bank (PCIB). Taking into account that deposit and a series of withdrawals, private
respondent as of June 21, 1988 had a balance of P35,993.48 in her savings account and P776.93 in
her current account, or total deposits of P36,770.41, with petitioner. Sc-jj
Thereafter, private respondent issued Prudential Bank Check No. 983395 in the amount of
P11,500.00 post-dated June 20, 1988, in favor of one Belen Legaspi. It was issued to Legaspi as
payment for jewelry which private respondent had purchased. Legaspi, who was in jewelry trade,
endorsed the check to one Philip Lhuillier, a businessman also in the jewelry business. When Lhuillier
deposited the check in his account with the PCIB, Pasay Branch, it was dishonored for being drawn
against insufficient funds. Lhuillier's secretary informed the secretary of Legaspi of the dishonor. The
latter told the former to redeposit the check. Legaspi's secretary tried to contact private respondent
but to no avail.

113
Upon her return from the province, private respondent was surprised to learn of the dishonor of the
check. She went to the Valenzuela Branch of Prudential Bank on July 4, 1988, to inquire why her
check was dishonored. She approached one Albert Angeles Reyes, the officer in charge of current
account, and requested him for the ledger of her current account. Private respondent discovered a
debit of P300.00 penalty for the dishonor of her Prudential Check No. 983395. She asked why her
check was dishonored when there were sufficient funds in her account as reflected in her passbook.
Reyes told her that there was no need to review the passbook because the bank ledger was the best
proof that she did not have sufficient funds. Then, he abruptly faced his typewriter and started
typing. S-jcj

II. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION
WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL
COURT, AWARDED MORAL DAMAGES IN THE AMOUNT OF P100,000.00.

Later, it was found out that the check in the amount of P35,271.60 deposited by private respondent
on June 1, 1988, was credited in her savings account only on June 24, 1988, or after a period of 23
days. Thus the P11,500.00 check was redeposited by Lhuillier on June 24, 1988, and properly
cleared on June 27, 1988.

IV. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH

GRAVE ABUSE OF DISCRETION WHERE EVEN IN THE ABSENCE OF
EVIDENCE, AWARDED ATTORNEY'S FEES.

Because of this incident, the bank tried to mollify private respondent by explaining to Legaspi and
Lhuillier that the bank was at fault. Since this was not the first incident private respondent had
experienced with the bank, private respondent was unmoved by the bank's apologies and she
commenced the present suit for damages before the RTC of Valenzuela.
After trial, the court rendered a decision on August 30, 1991, dismissing the complaint of private
respondent, as well as the counterclaim filed by the defendant, now petitioner.
Undeterred, private respondent appealed to the Court of Appeals. On January 31, 1996, respondent
appellate court rendered a decision in her favor, setting aside the trial court's decision and ordering
herein petitioner to pay private respondent the sum of P100,000.00 by way of moral damages;
P50,000.00 exemplary damages; P50,000.00 for and as attorney's fees; and to pay the costs. [3]
Petitioner filed a timely motion for reconsideration but it was denied. Hence, this petition, raising the
following issues:
I. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN
DEVIATING FROM ESTABLISHED JURISPRUDENCE IN REVERSING THE
DISMISSAL JUDGMENT OF THE TRIAL COURT AND INSTEAD AWARDED
MORAL DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY'S FEES. Supr-eme

III. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION,
WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL
COURT, AWARDED P50,000.00 BY WAY OF EXEMPLARY DAMAGES. Co-urt

Simply stated, the issue is whether the respondent court erred and gravely abused its discretion in
awarding moral and exemplary damages and attorney's fees to be paid by petitioner to private
respondent.
Petitioner claims that generally the factual findings of the lower courts are final and binding upon this
Court. However, there are exceptions to this rule. One is where the trial court and the Court of
Appeals had arrived at diverse factual findings.[4] Petitioner faults the respondent court from deviating
from the basic rule that finding of facts by the trial court is entitled to great weight, because the trial
court had the opportunity to observe the deportment of witness and the evaluation of evidence
presented during the trial. Petitioner contends that the appellate court gravely abused its discretion
when it awarded damages to the plaintiff, even in the face of lack of evidence to prove such damages,
as found by the trial court.
Firstly, petitioner questions the award of moral damages. It claims that private respondent did not
suffer any damage upon the dishonor of the check. Petitioner avers it acted in good faith. It was an
honest mistake on its part, according to petitioner, when misposting of private respondent's deposit on
June 1, 1988, happened. Further, petitioner contends that private respondent may not "claim"
damages because the petitioner's manager and other employee had profusely apologized to private
respondent for the error. They offered to make restitution and apology to the payee of the check,
Legaspi, as well as the alleged endorsee, Lhuillier. Regrettably, it was private respondent who
declined the offer and allegedly said, that there was nothing more to it, and that the matter had been
put to rest.[5]Jle-xj

114
Admittedly, as found by both the respondent appellate court and the trial court, petitioner bank had
committed a mistake. It misposted private respondent's check deposit to another account and
delayed the posting of the same to the proper account of the private respondent. The mistake
resulted to the dishonor of the private respondent's check. The trial court found "that the misposting of
plaintiffs check deposit to another account and the delayed posting of the same to the account of the
plaintiff is a clear proof of lack of supervision on the part of the defendant bank." [6] Similarly, the
appellate court also found that "while it may be true that the bank's negligence in dishonoring the
properly funded check of appellant might not have been attended with malice and bad faith, as
appellee [bank] submits, nevertheless, it is the result of lack of due care and caution expected of an
employee of a firm engaged in so sensitive and accurately demanding task as banking." [7]
In Simex International (Manila), Inc, vs. Court of Appeals, 183 SCRA 360, 367 (1990), and Bank of
Philippine Islands vs. IAC, et al., 206 SCRA 408, 412-413 (1992), this Court had occasion to stress
the fiduciary nature of the relationship between a bank and its depositors and the extent of diligence
expected of the former in handling the accounts entrusted to its care, thus: Lex-juris
"In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo,
and as promptly as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as he sees fit, confident
that the bank will deliver it as and to whomever he directs. A blunder on the part of
bank, such as the dishonor of a check without good reason, can cause the depositor
not a little embarrassment if not also financial loss and perhaps even civil and
criminal litigation.
The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the account of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. x x x"
In the recent case of Philippine National Bank vs. Court of Appeals,[8] we held that "a bank is under
obligation to treat the accounts of its depositors with meticulous care whether such account consists
only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the
performance of every kind of obligation is demandable. While petitioner's negligence in this case may
not have been attended with malice and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation". Hence we ruled that the offended party in said case was entitled to
recover reasonable moral damages.

Even if malice or bad faith was not sufficiently proved in the instant case, the fact remains that
petitioner has committed a serious mistake. It dishonored the check issued by the private respondent
who turned out to have sufficient funds with petitioner. The bank's negligence was the result of lack of
due care and caution required of managers and employees of a firm engaged in so sensitive and
demanding business as banking. Accordingly, the award of moral damages by the respondent Court
of Appeals could not be said to be in error nor in grave abuse of its discretion. Juri-smis
There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages
since each case must be governed by its own peculiar facts. The yardstick should be that it is not
palpably and scandalously excessive. In our view, the award of P100,000.00 is reasonable,
considering the reputation and social standing of private respondent Leticia T. Valenzuela. [9]
The law allows the grant of exemplary damages by way of example for the public good. [10] The public
relies on the banks' sworn profession of diligence and meticulousness in giving irreproachable
service. The level of meticulousness must be maintained at all times by the banking sector. Hence,
the Court of Appeals did not err in awarding exemplary damages. In our view, however, the reduced
amount of P20,000.00 is more appropriate. Jj-juris
The award of attorney's fees is also proper when exemplary damages are awarded and since private
respondent was compelled to engage the services of a lawyer and incurred expenses to protect her
interest.[11] The standards in fixing attorney's fees are: (1) the amount and the character of the
services rendered; (2) labor, time and trouble involved; (3) the nature and importance of the litigation
and business in which the services were rendered; (4) the responsibility imposed; (5) the amount of
money and the value of the property affected by the controversy or involved in the employment; (6)
the skill and the experience called for in the performance of the services; (7) the professional
character and the social standing of the attorney; (8) the results secured, it being a recognized rule
that an attorney may properly charge a much larger fee when it is contingent than when it is not. [12] In
this case, all the aforementioned weighed, and considering that the amount involved in the
controversy is only P36,770.41, the total deposit of private respondent which was misposted by the
bank, we find the award of respondent court of P50,000.00 for attorney's fees, excessive and reduce
the same to P30,000.00.
WHEREFORE, the assailed DECISION of the Court of Appeals is hereby AFFIRMED, with
MODIFICATION. The petitioner is ordered to pay P100,000.00 by way of moral damages in favor of
private respondent Leticia T. Valenzuela. It is further ordered to pay her exemplary damages in the
amount of P20,000.00 and P30,000.00, attorney's fees. Jksm
Costs against petitioner.

115
SO ORDERED.

respondents demands, the latter filed a complaint, joining in the actionEdgardo F. Blanco, Branch
Manager of FEBTC Harrison Plaza Branch, and Octavio Espiritu, FEBTC President.[11]

FAR EAST BANK AND TRUST COMPANY, petitioner, vs. ESTRELLA O. QUERIMIT, respondent.
DECISION

Petitioner FEBTC alleged that it had given respondents late husband Dominador an
accommodation to allow him to withdraw Estrellas deposit.[12] Petitioner presented certified true copies
of documents showing that payment had been made, to wit:

MENDOZA, J.:
This is a petition for review on certiorari seeking review of the decision, dated March 6, 2001,
and resolution, dated June 19, 2001, of the Court of Appeals [1] in CA-G.R. CV No. 67147,
entitled Estrella O. Querimit v. Far East Bank and Trust Company, which affirmed with modification
the decision of the Regional Trial Court, Branch 38, Manila, [2] ordering petitioner Far East Bank and
Trust Co. (FEBTC) to allow respondent Estrella O. Querimit to withdraw her time deposit with the
FEBTC.

1. Four FEBTC Harrison Plaza Branch Dollar Demand Drafts Nos. 886694903, 886694904,
886694905 and 886694906 for US$15,110.96 each, allegedly issued by petitioner to respondents
husband Dominador after payment on the certificates of deposit;[13]
2. A letter of Alicia de Bustos, branch cashier of FEBTC at Harrison Plaza, dated January 23,
1987, which was sent to Citibank, N.A., Citibank Center, Paseo de Roxas, Makati, Metro Manila,
informing the latter that FEBTC had issued the four drafts and requesting Citibank New York to debit
from petitioners account $60,443.84, the aggregate value of the four drafts; [14]

The facts are as follows:

3. Citicorp Remittance Service: Daily Summary and Payment Report dated January 23, 1987;[15]
Respondent Estrella O. Querimit worked as internal auditor of the Philippine Savings Bank
(PSB) for 19 years, from 1963 to 1992. [3] On November 24, 1986, she opened a dollar savings
account in petitioners Harrison Plaza branch,[4] for which she was issued four (4) Certificates of
Deposit (Nos. 79028, 79029, 79030, and 79031), each certificate representing the amount of
$15,000.00, or a total amount of $60,000.00. The certificates were to mature in 60 days, on January
23, 1987, and were payable to bearer at 4.5% interest per annum. The certificates bore the word
accrued, which meant that if they were not presented for encashment or pre-terminated prior to
maturity, the money deposited with accrued interest would be rolled over by the bank and annual
interest would accumulate automatically.[5] The petitioner banks manager assured respondent that her
deposit would be renewed and earn interest upon maturity even without the surrender of the
certificates if these were not indorsed and withdrawn. [6] Respondent kept her dollars in the bank so
that they would earn interest and so that she could use the fund after she retired. [7]
In 1989, respondent accompanied her husband Dominador Querimit to the United States for
medical treatment. She used her savings in the Bank of the Philippine Islands (BPI) to pay for the trip
and for her husbands medical expenses. [8] In January 1993, her husband died and Estrella returned
to the Philippines. She went to petitioner FEBTC to withdraw her deposit but, to her dismay, she was
told that her husband had withdrawn the money in deposit. [9] Through counsel, respondent sent a
demand letter to petitioner FEBTC. In another letter, respondent reiterated her request for updating
and payment of the certificates of deposit, including interest earned. [10] As petitioner FEBTC refused

4. Debit Ticket dated January 23, 1987, showing the debit of US$60,443.84 or its equivalent at
the time of P1,240,912.04 from the FEBTC Harrison Plaza Branch; [16] and
5. An Interbranch Transaction Ticket Register or Credit Ticket dated January 23, 1987 showing
that US$60,443.84 or P1,240,912.04 was credited to petitioners International Operation Division
(IOD).[17]
On May 6, 2000, the trial court rendered judgment for respondent. The dispositive portion of the
decision stated:
WHEREFORE, judgment is hereby rendered in favor of plaintiff [Estrella O. Querimit] and against defendants
[FEBTC et al.]:
1. ORDERING defendants to allow plaintiff to withdraw her U.S.$ Time Deposit of $60,000.00
plus accrued interests;
2. ORDERING defendants to pay moral damages in the amount of P50,000.00;
3. ORDERING defendants to pay exemplary damages in the amount of P50,000.00;

116
4. ORDERING defendants to pay attorneys fees in the amount of P100,000.00 plus P10,000.00
per appearance of counsel; and
5. ORDERING defendants to pay the costs of the suit.
SO ORDERED.[18]
On May 15, 2000, petitioner appealed to the Court of Appeals which, on March 6, 2001, affirmed
through its Fourteenth Division the decision of the trial court, with the modification that FEBTC was
declared solely liable for the amounts adjudged in the decision of the trial court. The appeals court
stated that petitioner FEBTC failed to prove that the certificates of deposit had been paid out of its
funds, since the evidence by the [respondent] stands unrebutted that the subject certificates of
deposit until now remain unindorsed, undelivered and unwithdrawn by [her].[19]But the Court of
Appeals held that the individual defendants, Edgardo F. Blanco, FEBTC-Harrison Plaza Branch
Manager, and Octavio Espiritu, FEBTC President, could not be held solidarilyliable with the FEBTC
because the latter has a personality separate from its officers and stockholders. [20]
Hence this appeal.
As stated by the Court of Appeals, the main issue in this case is whether the subject certificates
of deposit have already been paid by petitioner.[21] Petitioner contends thatI. Petitioner is not liable to respondent for the value of the four (4) Certificates of Deposit,
including the interest thereon as well as moral and exemplary damages, attorneys and
appearance fees.
II. The aggregate value - both principal and interest earned at maturity - of the four (4)
certificates of deposit was already paid to or withdrawn at maturity by the
late Dominador Querimit who was the respondents deceased husband.
III. Respondent is guilty of laches since the four (4) certificates of deposit were all issued
on 24 November 1986 but she attempted to withdraw their aggregate value on 29 July
1996 only on or after the lapse of more than nine (9) years and eight (8) months.
IV. Respondent is not liable to petitioner for attorneys fees. [22]
After reviewing the records, we find the petition to be without merit.

First. Petitioner bank failed to prove that it had already paid Estrella Querimit, the bearer and
lawful holder of the subject certificates of deposit. The finding of the trial court on this point, as
affirmed by the Court of Appeals, is that petitioner did not pay either respondent Estrella or her
husband the amounts evidenced by the subject certificates of deposit. This Court is not a trier of facts
and generally does not weigh anew the evidence already passed upon by the Court of Appeals.
[23]
The finding of respondent court which shows that the subject certificates of deposit are still in the
possession of Estrella Querimit and have not been indorsed or delivered to petitioner FEBTC is
substantiated by the record and should therefore stand. [24]
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt
of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order
of the depositor, or to some other person or his order, whereby the relation of debtor and creditor
between the bank and the depositor is created. The principles governing other types of bank deposits
are applicable to certificates of deposit, [25] as are the rules governing promissory notes when they
contain an unconditional promise to pay a sum certain of money absolutely. [26]The principle that
payment, in order to discharge a debt, must be made to someone authorized to receive it is
applicable to the payment of certificates of deposit. Thus, a bank will be protected in making payment
to the holder of a certificate indorsed by the payee, unless it has notice of the invalidity of
the indorsement or the holders want of title. [27] A bank acts at its peril when it pays deposits evidenced
by a certificate of deposit, without its production and surrender after proper indorsement.[28] As a rule,
one who pleads payment has the burden of proving it. Even where the plaintiff must allege nonpayment, the general rule is that the burden rests on the defendant to prove payment, rather than on
the plaintiff to prove payment. The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.[29]
In this case, the certificates of deposit were clearly marked payable to bearer, which means, to
[t]he person in possession of an instrument, document of title or security payable to bearer or
indorsed in blank.[30] Petitioner should not have paid respondents husband or any third party without
requiring the surrender of the certificates of deposit.
Petitioner claims that it did not demand the surrender of the subject certificates of deposit since
respondents husband, Dominador Querimit, was one of the banks senior managers. But even long
after respondents husband had allegedly been paid respondents deposit and before his retirement
from service, the FEBTC never required him to deliver the certificates of deposit in question.
[31]
Moreover, the accommodation given to respondents husband was made in violation of the banks
policies and procedures.[32]

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Petitioner FEBTC thus failed to exercise that degree of diligence required by the nature of its
business.[33] Because the business of banks is impressed with public interest, the degree of diligence
required of banks is more than that of a good father of the family or of an ordinary business firm. The
fiduciary nature of their relationship with their depositors requires them to treat the accounts of their
clients with the highest degree of care.[34] A bank is under obligation to treat the accounts of its
depositors with meticulous care whether such accounts consist only of a few hundred pesos or of
millions of pesos. Responsibility arising from negligence in the performance of every kind of obligation
is demandable.[35] Petitioner failed to prove payment of the subject certificates of deposit issued to the
respondent and, therefore, remains liable for the value of the dollar deposits indicated thereon with
accrued interest.

expenses to protect her interest, making such award just and equitable. [41]However, we find the award
of attorneys fees to be excessive and accordingly reduce it to P20,000.00.[42]

Second. The equitable principle of laches is not sufficient to defeat the rights of respondent over
the subject certificates of deposit.

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND

AMERICA), petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and
CITIBANK, N.A., respondents.

Laches is the failure or neglect, for an unreasonable length of time, to do that which, by
exercising due diligence, could or should have been done earlier. It is negligence or omission to
assert a right within a reasonable time, warranting a presumption that the party entitled to assert it
either has abandoned it or declined to assert it.[36]
There is no absolute rule as to what constitutes laches or staleness of demand; each case is to
be determined according to its particular circumstances. The question of laches is addressed to the
sound discretion of the court and, being an equitable doctrine, its application is controlled by equitable
considerations. It cannot be used to defeat justice or perpetrate fraud and injustice. Courts will not be
guided or bound strictly by the statute of limitations or the doctrine of laches when to do so, manifest
wrong or injustice would result.[37]
In this case, it would be unjust to allow the doctrine of laches to defeat the right of respondent to
recover her savings which she deposited with the petitioner. She did not withdraw her deposit even
after the maturity date of the certificates of deposit precisely because she wanted to set it aside for
her retirement. She relied on the banks assurance, as reflected on the face of the instruments
themselves, that interest would accrue or accumulate annually even after their maturity.[38]
Third. Respondent is entitled to moral damages because of the mental anguish and humiliation
she suffered as a result of the wrongful refusal of the FEBTC to pay her even after she had delivered
the certificates of deposit.[39] In addition, petitioner FEBTC should pay respondent exemplary
damages, which the trial court imposed by way of example or correction for the public good. [40] Finally,
respondent is entitled to attorneys fees since petitioners act or omission compelled her to incur

WHEREFORE, premises considered, the present petition is hereby DENIED and the Decision in
CA-G.R. CV No. 67147 AFFIRMED, with the modification that the award of attorneys fees is reduced
to P20,000.00.
SO ORDERED.
[G.R. No. 121413. January 29, 2001]

[G.R. No. 121479. January 29, 2001]

FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.
[G.R. No. 128604. January 29, 2001]
FORD

PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE

INTERNATIONAL BANK and THE COURT OF APPEALS,respondents.

COMMERCIAL

DECISION
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank,
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision [1] of the Court
of Appeals in CA-G.R. CV No. 25017, entitled Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of

118
Asia and America (now Philippine Commercial International Bank), and the August 8, 1995 Resolution,
[2]
ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check
No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision [3] of the Court of
Appeals and its March 5, 1997 Resolution[4] in CA-G.R. No. 28430 entitled Ford Philippines, Inc. vs. Citibank,
N.A. and Philippine Commercial International Bank, affirming in toto the judgment of the trial court holding
the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for
the misapplied proceeds of the plaintiffs Citibank Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479

It has been duly established that for the payment of plaintiffs percentage tax for the last quarter of 1977, the
Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating
therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank, Alabang Branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiffs Citibank Check No. SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and
sent it to the Central Clearing House for clearing on the same day, with the indorsement at the back all prior
indorsements and/or lack of indorsements guaranteed. Thereafter, defendant IBAA presented the check for
payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check
in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiffs account
with the defendant Citibank and the check was returned to the plaintiff.

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiffs percentage or
manufacturers sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and was subsequently cleared at
the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA
as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers sales
taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had
been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that,
on its face were two parallel lines and written in between said lines was the phrase Payees Account Only; and
that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant
IBAA.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41
was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff supposed to be Exhibit D, the latter was officially informed, among others, that its check in the amount of
P4,746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized
persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of
the plaintiffs lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiffs percentage tax for the third quarter of 1977.
As a consequence of defendants refusal to reimburse plaintiff of the payment it had made for the second time to
the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI
Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs Citibank Check No. SN-04867 in the
amount of P4,746,114.41 was in due course; it merely relied on the clearing stamp of the depository/collecting
bank, the defendant IBAA that all prior indorsements and/or lack of indorsements guaranteed; and the
proximate cause of plaintiffs injury is the gross negligence of defendant IBAA in indorsing the plaintiffs
Citibank check in question.

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It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank Check No. SN-04867 was
paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant
Citibank.[5]

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective
petitions for review on certiorari to the Court of Appeals. On March 27, 1995, the appellate court issued its
judgment as follows:

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant
of Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax
due to the Bureau of Internal Revenue (BIR). With Riveras instruction, PCIBank replaced the check with two of
its own Managers Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific
Banking Corporation.

WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The court likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as the NBI declared him as a fugitive from
justice.
On June 15, 1989, the trial court rendered its decision, as follows:
Premises considered, judgment is hereby rendered as follows:
1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the
plaintiff the amount of P4,746,114.41 representing the face value of plaintiffs Citibank Check No.
SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the
original complaint was filed until the amount is fully paid, plus costs;
2. On defendant Citibanks cross-claim: ordering the cross-defendant IBAA (now PCI BANK) to
reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff
in accordance with the next preceding paragraph;
3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are dismissed, for lack of merits; and
4. With costs against the defendants.
SO ORDERED.[6]

The court hereby renders judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is
concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiffs Citibank Check No. SN-04867, with interest thereon at
the legal rate starting January 20, 1983. the date when the original complaint was filed until the
amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.[7]
PCIBank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a
Motion for Partial Reconsideration. Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of
the Court of Appeals contending that it merely acted on the instruction of Ford and such cause of action had
already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by
respondent Ford on the said respondents instructions, it nevertheless found the petitioner liable to
the said respondent for the full amount of the said check.

120
II. Did the respondent court err when it did not find prescription in favor of the petitioner.[8]
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court
which found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle Fords
percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing
the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR
Revenue Tax Receipt No. 28645385 was issued for the said purpose.

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which
was crossed and payable to Payees Account Only.
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of
petitioner Ford.[9]

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73,
representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of
Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were crossed checks and contain two diagonal lines on its upper left corner between which
were written the words payable to the payees account only.
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were considered fake and
spurious. This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to
pay the BIR anew, while an action was filed against Citibank and PCIBank for the recovery of the amount of
Citibank Check Numbers SN-10597 and 16508.

II. PCIBank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a
person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue;
thus, PCIBanks only obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.[10]
2. PCIBank which affixed its indorsement on the subject check (All prior indorsement and/or lack of
indorsement guaranteed), is liable as collecting bank.[11]

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows:
A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As
such, he prepared the plaintiffs check marked Ex. A [Citibank Check No. SN-10597] for payment to the
BIR.Instead, however, of delivering the same to the payee, he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston
Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person denominated
as Reynaldo Reyes in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.

3. PCIBank is barred from raising issues of fact in the instant proceedings. [12]
4. Petitioner Fords cause of action had not prescribed.

[13]

II. G.R. No. 128604

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check
in exactly the same amount as the first FORD check (Exh. A, P5,851,706.37) while this worthless check was
coursed through PCIBs main office enroute to the Central Bank for clearing, replaced this worthless check with
FORDs Exhibit A and accordingly tampered the accompanying documents to cover the replacement. As a

121
result, Exhibit A was cleared by defendant CITIBANK, and the fictitious deposit account of Reynaldo Reyes
was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit A. The same
method was again utilized by the syndicate in profiting from Exh. B [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Riveras Assistant at FORD.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank
and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for
P5,851,706.73 and P6,311,591.73 respectively.

From this Reynaldo Reyes account, Castro drew various checks distributing the shares of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between
Bernabe, FORDs Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN CASTILLO who assisted de Leon
in the initial arrangements; (4) GODOFREDO RIVERA, FORDs accountant who passed on the first check
(Exhibit A) to Castro; (5) REMBERTO CASTRO, PCIBs pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIBs Assistant Manager at its Meralco Branch, who assisted Castro
in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes bank
account; (7) ALEXIS MARINDO, Riveras Assistant at FORD, who gave the second check (Exh. B) to Castro;
(8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to
make it appear that the BIR had received FORDs tax payments.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:

Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded
in the present case. The manner by which the said funds were distributed among them are traceable from the
record of checks drawn against the original Reynaldo Reyes account and indubitably identify the parties who
illegally benefited therefrom and readily indicate in what amounts they did so.[14]

IV. Assuming arguendo that defendant PCIBank did not accept, endorse or negotiate in due course
the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it in its Central Bank account.[16]

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for
the value of the two checks while absolving PCIBank from any liability, disposing as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the
total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written
demand until full payment, plus P300,000.00 attorneys fees and expenses of litigation, and to pay the defendant,
PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorneys fees and costs of litigation, and
pay the costs.

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be
exercised by it as a banking institution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to
the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of
Central Bank Circular No. 580 series of 1977.

The main issue presented for our consideration by these petitions could be simplified as follows: Has
petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the
value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Fords cause of
action already prescribed?

SO ORDERED.[15]

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful means,
and the proceeds of the checks were not remitted to the payee. It was established that instead of paying the
checks to the CIR, for the settlement of the appropriate quarterly percentage taxes of Ford, the checks were
diverted and encashed for the eventual distribution among the members of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which
provides:

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial
court. Hence, this petition.

When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other

122
unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or under such
circumstances as amount to a fraud.
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of
faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his
principal. If the principal could prove that there was no negligence in the performance of his duties, he may set
up the personal defense to escape liability and recover from other parties who, through their own negligence,
allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the present parties
before us must bear the burden of loss of these millions. It all boils down to the question of liability based on
the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the imputed contributory
negligence that would defeat its claim for reimbursement, bearing in mind that its employees, Godofredo Rivera
and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the designated authorized collecting bank (MetrobankAlabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its
own employees, inasmuch as it only discovered the syndicates activities through the information given by the
payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around
of funds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damage
to Ford lies in its own officers and employees who carried out the fraudulent schemes and the
transactions.These circumstances were not checked by other officers of the company, including its comptroller
or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was
a sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences
of a breach of trust, the one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the case
ofGempesaw vs. Court of Appeals,[17] Ford argues that even if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends that Godofredo Rivera was not authorized to make any representation in its
behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed
negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his servants wrongful act, the law imputes to the master the act of
the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.
[18]
The general rule is that if the master is injured by the negligence of a third person and by the concurring
contributory negligence of his own servant or agent, the latters negligence is imputed to his superior and will
defeat the superiors action against the third person, assuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is made.[19]
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Fords General Ledger
Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. As defined,
proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening
cause produces the injury, and without which the result would not have occurred.[20]
It appears that although the employees of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the
CIR. The degree of Fords negligence, if any, could not be characterized as the proximate cause of the injury to
the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Riveras instruction to replace the said check with PCIBanks Managers Check
was not in the ordinary course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks
were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by
Fords employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing
the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.[21] This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold them in their possession.

123
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the
trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of
total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBanks share of
negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these checks.

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such diversion must be properly authorized by the
payor.Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that the
drawer has clothed his agent with apparent authority to receive the proceeds of such check.

G.R. Nos. 121413 and 121479

Citibank further argues that PCI Banks clearing stamp appearing at the back of the questioned checks
stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GUARANTEED should
render PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other
option but to pay it. Thus, Citibank asserts that the proximate cause of Fords injury is the gross negligence of
PCIBank. Since the questioned crossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in question is
deposited in Payees account only.

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back all prior
indorsements and/or lack of indorsements guaranteed, and was presented to Citibank for payment. Thereafter
PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Managers checks and enabled the
syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of
PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN04867 was duly authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of
the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted
instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
x x x. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of the BIR, it has the responsibility to make sure that the check in question is
deposited in Payees account only.
xxxxxxxxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its
principal BIR and not from any other person especially so when that person is not known to the defendant. It is
very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of one Godofredo
Rivera and in his signature to the authenticity of such signature considering that the plaintiff is not a client of
the defendant IBAA.
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank
to which it is sent for collection is, in the absence of an agreement to the contrary, that of principal and agent.
[22]
A bank which receives such paper for collection is the agent of the payee or holder.[23]

Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should
be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that
the check be deposited in payees account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing indorsement all prior
indorsements and/or lack of indorsement guaranteed.
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,[24] we ruled:
Anent petitioners liability on said instruments, this court is in full accord with the ruling of the PCHCs Board of
Directors that:
In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity
of all prior endorsements. Thus, stamped at the back of the checks are the defendants clear warranty: ALL
PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendants warranty. As the warranty has proven to
be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation. [25]
Lastly, banking business requires that the one who first cashes and negotiates the check must take some
precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or other
circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn
upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with

124
regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank
(or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.
[26]

Having established that the collecting banks negligence is the proximate cause of the loss, we conclude
that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the
frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will it
be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or
agent acting within the course and apparent scope of his employment or authority. [29] And if an officer or
employee of a bank, in his official capacity, receives money to satisfy an evidence of indebtedness lodged with
his bank for collection, the bank is liable for his misappropriation of such sum.[30]
Moreover, as correctly pointed out by Ford, Section 5 [31] of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in
this case is PCIBank.

G.R. No. 128604

But in this case, responsibility for negligence does not lie on PCIBanks shoulders alone.
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and
16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:
Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced that the switching operation (involving the checks while
in transit for clearing) were the clandestine or hidden actuations performed by the members of the syndicate in
their own personal, covert and private capacity and done without the knowledge of the defendant PCIBank. [27]
In this case, there was no evidence presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment. [28] A bank will be held
liable for the negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which
malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim
of the scheme hatched by a syndicate in which its own management employees had participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers
SN 10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBanks Meralco
Branch, who helped Castro open a Checking account of a fictitious person named Reynaldo Reyes. Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment of
Citibank Check Nos. SN 10597 and 16508. The PCIBank Pro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their official capacity or authority but for their
personal and private gain or benefit.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of
its duties. Citibank failed to establish that its payment of Fords checks were made in due course and legally in
order. In its defense, Citibank claims the genuineness and due execution of said checks, considering that
Citibank (1) has no knowledge of any infirmity in the issuance of the checks in question (2) coupled by the fact
that said checks were sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed
by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty
to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62[32] of the
Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptor which is Citibank
engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR),
considering the fact that here the check was crossed with annotation Payees Account Only.
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the
two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we agree with the respondent courts ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount
of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps
at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and
verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to
Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had
indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should

125
be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably,
in our view, constitutes negligence in carrying out the banks duty to its depositors. The point is that as a
business affected with public interest and because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their
relationship.[33]
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection and supervision of their
employees resulting in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we are constrained
to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such that the appropriate standard of
diligence must be very high, if not the highest, degree of diligence. [34] A banks liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.[35]
Banks handle daily transactions involving millions of pesos. [36] By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of
ordinary clerks and employees. [37] Banks are expected to exercise the highest degree of diligence in the selection
and supervision of their employees.[38]

Finally, we also find that Ford is not completely blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care
and diligence find therein, serves to mitigate the banks liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines,
responsibility arising from negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that he may recover.[42]
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017,
are AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and America, is declared solely responsible
for the loss of the proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41, which shall be paid
together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as
follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of
Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is
ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date
the complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank, N.A.

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability
to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account, [39] and
an action upon a check is ordinarily governed by the statutory period applicable to instruments in writing. [40]
Our laws on the matter provide that the action upon a written contract must be brought within ten years
from the time the right of action accrues.[41] Hence, the reckoning time for the prescriptive period begins when
the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank
Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on
January 20, 1983, barely six years had lapsed. Thus, we conclude that Fords cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.

SO ORDERED.
PHILIPPINE BANKING
CORPORATION (NOW: GLOBAL
BUSINESS BANK, INC.),
Petitioner,

- versus -

COMMISSIONER OF

G.R. No. 170574

Present:
CARPIO, J.,
Acting Chairperson,*
AUSTRIA-MARTINEZ,**
CORONA,
CARPIO MORALES,*** and
LEONARDO-DE CASTRO, JJ.

Promulgated:

126
INTERNAL REVENUE,
Respondent.

January 30, 2009

x--------------------------------------------------x
DECISION

CARPIO, J.:

outstanding balances of the SSDA appearing in the schedule attached to petitioners audited financial statements
for the taxable years 1996 and 1997.[5]
Petitioner claims that the SSDA is in the nature of a regular savings account since both types of accounts have
the following common features:
a. They are both evidenced by a passbook;

The Case

b. The depositors can make deposits or withdrawals anytime which are not subject to penalty; and
c. Both can have an Automatic Transfer Agreement (ATA) with the depositors current or checking

The Philippine Banking Corporation, now, Global Business Bank, Inc., (petitioner) filed this Petition for
Review[1] to reverse the Court of Tax Appeals Decision [2] dated 23 November 2005 in CTA EB No. 63 (C.T.A.
Case No. 6395). In the assailed decision, the Court of Tax Appeals En Banc ordered petitioner to
pay P17,595,488.75 andP47,767,756.24 as deficiency documentary stamp taxes for the taxable years 1996 and
1997, respectively, on its bank product called Special/Super Savings Deposit Account (SSDA).

account.[6]
Petitioner alleges that the only difference between the regular savings account and the SSDA is that the SSDA is
for depositors who maintain savings deposits with a substantial average daily balance, and as an incentive, they
are given higher interest rates than regular savings accounts. These deposits are classified separately in
petitioners financial statements in order to maintain a separate record for savings deposits with substantial
balances entitled to higher interest rates.[7]

The Facts
Petitioner maintains that the tax assessments are erroneous because Section 180 of the 1977 NIRC does not
include deposits evidenced by a passbook among the enumeration of instruments subject to DST. Petitioner
Petitioner is a domestic corporation duly licensed as a banking institution. [3] For the taxable years 1996 and

asserts that the language of the law is clear and requires no interpretation. [8] Section 180 of the 1977 NIRC, as

1997, petitioner offered its SSDA to its depositors. The SSDA is a form of a savings deposit evidenced by a

amended,[9] provides:

passbook and earning a higher interest rate than a regular savings account. Petitioner believes that the SSDA is
not subject to Documentary Stamp Tax (DST) under Section 180 of the 1977 National Internal Revenue Code
(NIRC), as amended.[4]
On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent petitioner a Final Assessment
Notice assessing deficiency DST based on the outstanding balances of its SSDA, including increments, in the
total sum of P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were based on the

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of the contract is located or used in the
Philippines; bills of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than at the sight
or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank
notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional

127
part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of
deposit, or note: provided, that only one documentary stamp tax shall be imposed on either
loan agreement, or promissory note issued to secure such loan, whichever will yield a higher
tax: provided, however, that loan agreements or promissory notes the aggregate of which does
not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his
purchase on installment for his personal use or that of his family and not for business, resale,
barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the
payment of the documentary stamp tax provided under this section. (Boldfacing supplied)

1. The holding period is fixed beforehand.

1. The holding period floats at the option of the

depositor. It can be 30, 60, 90 or 120 days or more
and as an incentive for maintaining a longer holding
period, the depositor earns higher interest.

2. There is pre-termination because there is no

partial withdrawal of a certificate. Pre-termination
results in the surrender and cancellation of the
certificate of deposit.

2. No pre-termination and the passbook account is

simply reverted to an ordinary savings status in case
of early or partial withdrawal or if the required
holding period is not met.

Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be construed as a certificate of
deposit subject to DST under Section 180 of the 1977 NIRC. Petitioner explains that the SSDA is a necessary
offshoot of the deregulated interest rate regime in bank deposits.[10] Petitioner elucidates:
With the removal of the respective interest rate ceilings on savings and time deposit, banks are
enabled to legitimately offer higher rates on savings account which may even be at par with
rates on time deposit. Practically, the distinction between a savings and a time deposit was
removed insofar as interest rates are concerned. This being so, and for the legitimate purpose
of further enticing deposits for savings account, banks have evolved a product the
Super/Special Savings Account which offers the flexibility of a savings deposit but does away
with the rigidity of a time deposit account and with interest rate at par with the latter. This is
offered as an incentive for depositors who maintain or who wish to maintain deposits with
substantial average daily balance. Such depositors will be entitled to an attractive interest rate,
a rate higher than that to which the regular savings account is entitled. Just like an ordinary
savings, Super/Special Savings Deposits can be withdrawn anytime. Of course, to be entitled
to preferential interest rate, such account must conform to a stated minimum deposit balance
within a specified holding period. Otherwise, the depositor will lose the incentive of a higher
interest rate and the account will revert to an ordinary savings account and be entitled only to
prevailing rates of interest applicable to regular savings account. And unlike a time deposit
account, the Super/Special Savings Account comes in the form of a passbook, hence need not
be formally renewed in the manner that a time deposit certificate has to be formally
surrendered and renewed upon maturity.[11]

Petitioner also argues that even on the assumption that a passbook evidencing the SSDA is a certificate of
deposit, no DST will be imposed because only negotiable certificates of deposits are subject to tax under
Section 180 of the 1977 NIRC.[13] Petitioner reasons that a savings passbook is not a negotiable instrument and
it cannot be denied that savings passbooks have never been taxed as certificates of deposits. [14]
Petitioner alleges that prior to the passage of Republic Act No. 9243 [15] (RA 9243), there was no law subjecting
SSDA to DST during the taxable years 1996 and 1997. The amendatory provision in RA 9243 now specifically
includes certificates or other evidences of deposits that are either drawing interest significantly higher than the
regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing
interest and having a specific maturity date.[16] Petitioner admits that with this new taxing clause, its SSDA is
now subject to DST. However, the fact remains that this provision was non-existent during the taxable years
1996 and 1997 subject of the assessments in the present case.[17]
Respondent, through the Office of the Solicitor General, contends that the SSDA is substantially the same and
identical to that of a time deposit account because in order to avail of the SSDA, one has to deposit a minimum

Petitioner argues that the DST is imposed on the basis of a mere inference or perceived implication of what the
SSDA is supposed to be and not on the basis of what the law specifically states. Petitioner points out the

of P50,000 and this amount must be maintained for a required period of time to earn higher interest rates. [18] In a
time deposit account, the minimum deposit requirement is P20,000 and this amount must be maintained for the
agreed period to earn the agreed interest rate. If a time deposit is pre-terminated, a penalty will be imposed

differences between the SSDA and time deposits:[12]

resulting in a lower interest income. In a regular savings account, the interest rate is fixed and there is no
TIME DEPOSITS

SSDA

128
penalty imposed for as long as the required minimum balance is maintained. Thus, respondent asserts that the
SSDA is a time deposit account, albeit in the guise of a regular savings account evidenced by a passbook.

[19]

The CTA pointed out that this Court neither referred to a particular form of deposit nor limited the coverage to
time deposits only. This Court used the term written acknowledgment which means that for as long as there is

Respondent explains that under Section 180 of the 1977 NIRC, certificates of deposits deriving interest are

some written memorandum of the fact that the bank accepted a deposit of a sum of money from a depositor, the

subject to the payment of DST. Petitioners passbook evidencing its SSDA is considered a certificate of deposit,

writing constitutes a certificate of deposit. The CTA held that a passbook representing an interest-earning

and being very similar to a time deposit account, it should be subject to the payment of DST.[20]

deposit account issued by a bank qualifies as a certificate of deposit drawing interest. [27]

Respondent also argues that Section 180 of the 1977 NIRC categorically states that certificates of deposit

The CTA emphasized that Section 180 of the 1977 NIRC imposes DST on documents, whether the documents

deriving interest are subject to DST without limiting the enumeration to negotiable certificates of deposit. Based

are negotiable or non-negotiable.[28] The CTA held that petitioners argument that Section 180 of the 1977 NIRC

on the definition of a certificate of deposit in Far East Bank and Trust Company v. Querimit,[21] a certificate of

imposes the DST only on negotiable certificates of deposit as implied from the old tax provision is erroneous.

[22]

deposit may or may not be negotiable, since it may be payable only to the depositor.

[29]

Section 217 of Commonwealth Act No. 466, as amended (old NIRC) reads:

The Ruling of the Court of Tax Appeals

On 23 November 2005, the Court of Tax Appeals En Banc (CTA) affirmed the Decision and Resolution of the
CTAs Second Division. The dispositive portion reads:
WHEREFORE, the instant petition is DENIED for lack of merit. Accordingly, the petitioner
is hereby ORDERED to PAY the amounts of P17,595,488.75 and P47,767,756.24 as
deficiency documentary stamp taxes for the taxable years 1996 and 1997, plus 25% surcharge
for late payment and 20% annual delinquency interest for late payment from January 20, 2002
until fully paid pursuant to Sections 248 and 249 of the Tax Code.[23]

Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts, certificate
of deposit bearing interest and others not payable on sight or demand. - On all bills of
exchange (between points within the Philippines), drafts or certificates of deposit drawing
interest, or orders for the payment of any sum of money otherwise than at sight or on
demand, or all negotiable promissory notes, except bank notes issued for circulation, and on
each renewal of any such note, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange, draft, certificate of deposit, or note. (As amended by Sec. 6, Republic Act
No. 40)[30] (Emphasis in the original)

The CTA observed that the requirement of negotiability pertains to promissory notes only. Such intention is
disclosed by the fact that the word negotiable was written beforepromissory notes followed by a comma, hence,
The CTA ruled that a deposit account with the same features as a time deposit, i.e., a fixed term in order to earn

the word negotiable modifies promissory notes only. Therefore, with respect to all other documents mentioned

a higher interest rate, is subject to DST imposed in Section 180 of the 1977 NIRC. [24] It is clear that certificates

in Section 217 of the old NIRC, the attribute of negotiability is not required. [31] The CTA added that the

of deposit drawing interest are subject to DST. The CTA, citing Far East Bank and Trust Company v. Querimit,

applicable provision is Section 180 of the 1977 NIRC and not Section 217 of the old NIRC. [32] Section 180 of

[25]

defined a certificate of deposit as a written acknowledgment by a bank or banker of the receipt of a sum of

the 1977 NIRC provides that the following are subject to DST, to wit: (1) Loan Agreements; (2) Bills of

money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or

Exchange; (3) Drafts; (4) Instruments and Securities issued by the Government or any of its instrumentalities;

some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor

(5) Certificates of Deposits drawing interest; (6) Orders for the payment of any sum of money otherwise than at

is created.[26]

sight or on demand; and (7) Promissory Notes, whether negotiable or non-negotiable. Therefore, the DST is
imposed on all certificates of deposit drawing interest without any qualification.[33]

129
Section 180 of the 1977 NIRC, as amended, provides:
The CTA held that a certificate of time deposit, a type of a certificate of deposit drawing interest, is subject to
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of the contract is located or used in the
Philippines; bills of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than at the sight
or on demand, or on all promissory notes, whether negotiable or non- negotiable, except bank
notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional
part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of
deposit, or note: provided, that only one documentary stamp tax shall be imposed on either
loan agreement, or promissory note issued to secure such loan, whichever will yield a higher
tax: provided, however, that loan agreements or promissory notes the aggregate of which does
not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his
purchase on installment for his personal use or that of his family and not for business, resale,
barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the
payment of the documentary stamp tax provided under this section. (Boldfacing and
underscoring supplied)

DST. The CTA observed that the SSDA has the same nature and characteristics as a time deposit. [34] The CTA
discussed the similarities of a time deposit account with an SSDA:
In order for the depositor to earn the agreed higher interest rate in a Special/Super Savings
Account, the required minimum amount of deposit must not only be met but should also be
maintained for a definite period. Thus, the Special/Super Savings Account is a deposit with a
fixed term. Withdrawal before the expiration of said fixed term results to the reduction of the
interest rate. The fixed term and reduction of interest rate in case of pre-termination
are essentially the features of a time deposit. Hence, this Court concurs with the conclusion
reached in the assailed Decision that petitioners Special/Super Savings Deposits and
certificates of time deposit are substantially the same, if not one and the same product, and
therefore both are subject to the DST on certificates of deposit.[35]
The CTA stated that the fact that the SSDA is evidenced by a passbook is immaterial because in determining
whether certain instruments are subject to DST, substance would control over form and labels.[36]
On 14 December 2005, petitioner appealed to this Court the CTA decision.[37]
The Issue

In Far East Bank and Trust Company v. Querimit,[39] the Court defined a certificate of deposit as a written
acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker

Petitioner submits this sole issue for our consideration: whether petitioners product called Special/Super
Savings Account is subject to DST under Section 180 of the 1977 NIRCprior to the passage of RA 9243
in 2004.[38]

promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of debtor and creditor between the bank and the depositor is created. A certificate of deposit is also
defined as a receipt issued by a bank for an interest-bearing time deposit coming due at a specified future date.
[40]

The Ruling of the Court

The issue in the present case is whether petitioners SSDAs are certificates of deposits drawing interest as used

The deposit operations of a bank as listed in the Bangko Sentral ng Pilipinas Manual of Regulations for
Banks[41] consist of the following:

in Section 180 of the 1977 NIRC. If they are, then the SSDAs are subject to DST. If not, then they are merely
regular savings account which concededly are not subject to DST. So what are certificates of deposits drawing

1.

Demand Deposits are deposits, subject to withdrawal either by check or thru the automated

interest, and how do they differ from a regular savings account?

tellering machines which are otherwise known as current or checking accounts. The Bank may or may not pay
interest on these accounts.[42]

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2.

Savings Deposits are interest-bearing deposits which are withdrawable either upon presentation of

Based on the definition and comparison, it is clear that a certificate of deposit drawing interest as used in

a properly accomplished withdrawal slip together with the corresponding passbook or thru the automated

Section 180 of the 1977 NIRC refers to a time deposit account. As the Bureau of Internal Revenue (BIR)

tellering machines.[43]

explained in Revenue Memorandum Circular No. 16-2003, [46] the distinct features of a certificate of deposit

3.

from a technical point of view are as follows:

Negotiable Order of Withdrawal Accounts are interest-bearing savings deposit which are

withdrawable by means of Negotiable Orders of Withdrawal.[44]

4.

Time Deposits are interest-bearing deposits with specific maturity dates and evidenced by

certificates issued by the bank.[45]

a. Minimum deposit requirement;

b. Stated maturity period;
c. Interest rate is higher than the ordinary savings account;

Petitioner treats the SSDA as a regular savings deposit account since it is evidenced by a passbook and allows

d. Not payable on sight or demand, but upon maturity or in case of pre-termination, prior notice is

withdrawal. Respondent treats the SSDA as a time deposit account because of the higher interest rates and

required; and

holding period. It is then significant to differentiate a regular savings deposit and a time deposit vis--vis the

e. Early withdrawal penalty in the form of partial loss or total loss of interest in case of pre-

SSDA to determine if the SSDA is a certificate of deposit drawing interest referred to in Section 180 of the 1977

termination.

NIRC. A comparison of a savings account, time deposit account, and SSDA is shown in the table below:
The SSDA is for depositors who maintain savings deposits with substantial average daily balance and which
Savings Account

Time Deposit

SSDA

earn higher interest rates. The holding period of an SSDA floats at the option of the depositor at 30, 60, 90, 120

Interest rate

Regular savings
interest

Higher interest
rate

Higher interest
rate

days or more and for maintaining a longer holding period, the depositor earns higher interest rates. There is no

Period

None

Fixed Term

Fixed Term

Evidenced by:

Passbook

Certificate of
Time Deposit

Passbook

Pre-termination

None

With penalty

With penalty

Holding Period

None

Yes

Yes

Withdrawal

Allowed

Withdrawal amounts to Allowed provided the

preminimum
termination
amount to earn
the higher interest rate is
maintained,
otherwise,
the
regular savings
interest rate will
apply.

pre-termination of accounts in an SSDA because the account is simply reverted to an ordinary savings status in
case of early or partial withdrawal or if the required holding period is not met. Based on the foregoing, the
SSDA has all of the distinct features of a certificate of deposit.
Petitioner argues that a deposit account evidenced by a passbook cannot be construed as a certificate of deposit
subject to DST under Section 180 of the 1977 NIRC. InInternational Exchange Bank v. Commissioner of
Internal Revenue,[47] this Court categorically ruled that a passbook representing an interest earning deposit
account issued by a bank qualifies as a certificate of deposit drawing interest and should be subject to DST. The
Court added that a document to be deemed a certificate of deposit requires no specific form as long as there is
some written memorandum that the bank accepted a deposit of a sum of money from a depositor.[48]

131
Petitioner also argues that prior to the passage of RA 9243, there was no law subjecting SSDA to DST.
In International Exchange Bank v. Commissioner of Internal Revenue,[49] the Court held that the amendment to

MR. ANDAYA. ...which is time, in effect, regardless of what form it takes should be
subject to DST.

include other evidences of deposits that are drawing interest significantly higher than the regular savings deposit

THE CHAIRMAN. Would you include savings deposit now?

was intended to eliminate the ambiguity. The Court explained:

If at all, the further amendment was intended to eliminate precisely the scheme used by banks
of issuing passbooks to cloak its time deposits as regular savings deposits. This is reflected
from the following exchanges between Mr. Miguel Andaya of the Bankers Association of the
Philippines and Senator Ralph Recto, Senate Chairman of the Committee on Ways and
Means, during the deliberations on Senate Bill No. 2518 which eventually became RA 9243:
MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to
clarify. Savings deposit at the present is not subject to DST.

MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed
maturity...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ..that would fall under the purview. (Italics in the original)
DST is imposed on Certificates of Deposits Bearing Interest
including a special savings account evidenced by a passbook.

THE CHAIRMAN. Thats right.

MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going
to encourage deposits, whether savings or time...
THE CHAIRMAN. Uh-huh.

Documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. A DST is actually an
excise tax because it is imposed on the transaction rather than on the document. [50] A DST is also levied on the
exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific

MR. ANDAYA. ...its questionable whether we should tax it with DST at all, even the
question of imposing final withholding tax has been raised as an issue.
THE CHAIRMAN. If I had it my way, I'll cut it by half.

legal relationships through the execution of specific instruments. [51] Hence, in imposing the DST, the Court
considers not only the document but also the nature and character of the transaction.
Section 180 of the 1977 NIRC imposes a DST of P0.30 on each P200 of the face value of any certificate of

MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue,
even the industry itself right now is not pushing in that direction, but in the long
term, when most of us in this room are gone, we hope that DST will disappear
from the face of this earth, no.

deposit drawing interest. As correctly observed by the CTA, a certificate of deposit is a written acknowledgment

Now, I think the move of the DOF to expand the coverage of or to add that phrase, Other
evidence of indebtedness, it just removed ambiguity. When we testified earlier in
the House on this very same bill, we did not interpose any objections if only for
the sake of avoiding further ambiguity in the implementation of DST on
deposits. Because of what has happened so far is, we don't know whether the
examiner is gonna come in and say, This savings deposit is not savings but its
time deposit. So, I think what DOF has done is to eliminate any confusion. They
said that a deposit that has a maturity...

the bank and the depositor is created.[52]

THE CHAIRMAN. Uh-huh.

by a bank of the receipt of a sum of money on deposit which the bank promises to pay to the depositor, to the
order of the depositor, or to some other person or his order, whereby the relation of debtor or creditor between

Petitioners SSDA has the following features:

1. Although the money placed in the SSDA can be withdrawn anytime, the money is subject to
a holding period in order to earn a higher interest rate. Otherwise, in case of premature

132
withdrawal, the depositor will not earn the preferred interest ranging from 8% or higher but
only the normal interest rate on regular savings deposit.
2. In order to qualify for an SSDA, the depositor must place a substantial amount of money of
not less than P50,000. This amount is even larger than what is needed to open a time deposit
which is P20,000. Aside from the substantial amount of money required, this amount must be

explained that like time deposit, ISA transactions bear a fixed term or maturity because the
bank acknowledges receipt of a sum of money on deposit which the bank promises to pay the
depositor, bearer or to the order of a bearer on a specified period of time. Section 180 of the
1997 NIRC does not prescribed the form of a certificate of deposit. It may be any 'written
acknowledgment by a bank of the receipt of money on deposit.' The definition of a
certificate of deposit is all encompassing to include a savings account deposit such as
ISA. (Emphasis supplied)

maintained within a certain period just like a time deposit.

3. On the issue of penalty, in an SSDA, if the depositor withdraws the money and the balance

Availment of the Tax Amnesty Program

falls below the minimum balance of P50,000, the interest is reduced. This condition is
identical to that imposed on a time deposit that is withdrawn before maturity. [53]
Based on these features, it is clear that the SSDA is a certificate of deposit drawing interest subject to DST even
if it is evidenced by a passbook and non-negotiable in character. In International Exchange Bank v.
Commissioner of Internal Revenue,[54] we held that:
A document to be deemed a certificate of deposit requires no specific form as long as there is
some written memorandum that the bank accepted a deposit of a sum of money from a
depositor. What is important and controlling is the nature or meaning conveyed by the
passbook and not the particular label or nomenclature attached to it, inasmuch as substance,
not form, is paramount.

Moreover, a certificate of deposit may be payable to the depositor, to the order of the depositor, or to some other
person or his order. From the use of the conjunction or, instead of and, the negotiable character of a certificate
of deposit is immaterial in determining the imposition of DST.[55]
In Banco de Oro Universal Bank v. Commissioner of Internal Revenue,[56] this Court upheld the CTAs decision
and ruled:
The CTA en banc likewise declared that in practice, a time deposit transaction is covered by a
certificate of deposit while petitioner's Investment Savings Account (ISA) transaction is
through a passbook. Despite the differences in the form of any documents, the CTA en
banc ruled that a time deposit and ISA have essentially the same attributes and features. It

On 24 May 2007, during the pendency of this case before this Court, Republic Act No. 9480 or An Act
Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue
Taxes Imposed by the National Government for Taxable Year 2005 and Prior Years (RA 9480), lapsed into law.
The pertinent provisions of RA 9480 are:
Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover
all national internal revenue taxes for the taxable year 2005 and prior years, with or
without assessments duly issued therefor, that have remained unpaid as of December 31,
2005: Provided, however, That the amnesty hereby authorized and granted shall not cover
persons or cases enumerated under Section 8 hereof.
xxx
Sec. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under
Section 5 hereof, and have fully complied with all its conditions shall be entitled to the
following immunities and privileges:
1.
The taxpayer shall be immune from the payment of taxes, as well as
addition thereto, and the appurtenant civil, criminal or administrative penalties
under the National Internal Revenue Code of 1997, as amended, arising from
the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.
xxx
Sec. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the
following persons or cases existing as of the effectivity of this Act:
1.
Withholding agents with respect to their withholding tax liabilities;

133
2.
Those with pending cases falling under the jurisdiction of the
Presidential Commission on Good Government;
3.
Those with pending cases involving unexplained or unlawfully acquired
wealth or under the Anti-Graft and Corrupt Practices Act;
4.
Those with pending cases filed in court involving violation of the AntiMoney Laundering Law;
5.
Those with pending criminal cases for tax evasion and other criminal
offenses under Chapter II of Title X of the National Internal Revenue Code of 1997,
as amended, and the felonies of frauds, illegal exactions and transactions, and
malversation of public funds and property under Chapters III and IV of Title VII of
the Revised Penal Code; and
6.
Tax cases subject of final and executory judgment by the
courts. (Emphasis supplied)

Cooperatives and tax-exempt entities that have become taxable as of December

31, 2005
Other juridical entities including partnerships.
Fiscal year taxpayers may likewise avail of the tax amnesty using their Financial Statement
ending in any month of 2005.
EXCEPT:
Withholding agents with respect to their withholding tax liabilities
Those with pending cases:
Under the jurisdiction of the PCGG
Involving violations of the Anti-Graft and Corrupt Practices Act
Involving violations of the Anti-Money Laundering Law
For tax evasion and other criminal offenses under the NIRC and/or the RPC
Issues and cases which were ruled by any court (even without finality) in favor
of the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers who
have failed to observe or follow BOI and/or PEZA rules on entitlement to
Income Tax Holiday Incentives and other incentives)
Cases involving issues ruled with finality by the Supreme Court prior to the
effectivity of RA 9480 (e.g. DST on Special Savings Account)
Taxes passed on and collected from customers for remittance to the BIR
Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax. (Emphasis supplied)

The Department of Finance (DOF) issued DOF Department Order No. 29-07 (DO 29-07). [57] Section 6 of DO
29-07 provides:
SEC. 6. Method of Availment of Tax Amnesty. 1.
Forms/Documents to be filed. - To avail of the general tax amnesty, concerned
taxpayers shall file the following documents/requirements:
a. Notice of Availment in such form as may be prescribed by the BIR;
b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in
such form, as may be prescribed by the BIR;
c. Tax Amnesty Return in such form as may be prescribed by the BIR.
xxx
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty
Return shall be submitted to the RDO, which shall be received only after complete
payment. The completion of these requirements shall be deemed full compliance with the
provisions of RA 9480. (Emphasis supplied)

The BIR issued Revenue Memorandum Circular No. 19-2008 (RMC 19-2008).[58] The pertinent provisions are:
Who may avail of the amnesty?
The following taxpayers may avail of the Tax Amnesty Program:
Individuals
Estates and Trusts
Corporations

The BIR also issued Revenue Memorandum Circular No. 69-2007 (RMC 69-2007). [59] The pertinent portion
provides:
Q-32 May surviving or new corporations avail of the tax amnesty in behalf of the
corporations absorbed or dissolved pursuant to a merger or consolidation that took effect
prior to Taxable Year 2005? Can they avail of the Tax Amnesty?
A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining tax
clearances for the dissolved or absorbed corporations. (Emphasis supplied)

On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the surviving entity that absorbed
petitioners banking business, filed a Tax Amnesty Return, [60] paid the amnesty tax and fully complied with all
the requirements[61] of the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this
availment, petitioner is now deemed immune from the payment of taxes as well as additions thereto, and is

134
statutorily discharged from paying all internal revenue tax liabilities for the taxable year 2005 and prior years.
Petitioner contends that the availment includes all deficiency tax assessments of the BIR subject of this petition.
A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its
right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A
tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty,

SO ORDERED.
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS,
SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA
RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA
RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.

similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing
Rene Diokno for petitioner.

authority.[62]

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
The DST is one of the taxes covered by the Tax Amnesty Program under RA 9480.

[63]

As discussed above,

petitioner is clearly liable to pay the DST on its SSDA for the years 1996 and 1997. However, petitioner, as the
absorbed corporation, can avail of the tax amnesty benefits granted to Metrobank.

Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of
Manila.
Josefina G. Salonga for all other respondents.

Records show that Metrobank, a qualified tax amnesty applicant, [64] has duly complied with the requirements
enumerated in RA 9480, as implemented by DO 29-07 and RMC 19-2008. [65] Considering that the completion
of these requirements shall be deemed full compliance with the tax amnesty program, [66] the law mandates that
the taxpayer shall thereafter be immune from the payment of taxes, and additions thereto, as well as the
appurtenant civil, criminal or administrative penalties under the NIRC of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. [67]
The BIRs inclusion of issues and cases which were ruled by any court (even without finality) in favor of the
BIR prior to amnesty availment of the taxpayer as one of the exceptions in RMC 19-2008 is misplaced. RA
9480 is specifically clear that the exceptions to the tax amnesty program include tax cases subject of final and
executory judgment by the courts. The present case has not become final and executory when Metrobank
availed of the tax amnesty program.
WHEREFORE, we GRANT the petition, and SET ASIDE the Court of Tax Appeals Decision dated 23
November 2005 in CTA EB No. 63 solely in view of petitioners availment of the Tax Amnesty Program.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of
joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against
respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders, on the
alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner and
assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors and the general
public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and
necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent
Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central
Bank of the Philippines," into a trust fund in favor of petitioner and all other depositors of respondent
Overseas Bank of Manila. It is also prayed that the respondents be prohibited permanently from
honoring, implementing, or doing any act predicated upon the validity or efficacy of the deeds of
mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in
Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352. 2

135
A sought for ex-parte preliminary injunction against both respondent banks was not given by this
Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6%
interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-% interest, on March 6,
1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed
to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of
Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a
single one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking system
of the Republic and it exercises supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent
supervision of banks, implying that respondent Central Bank has to watch every move or activity of all
banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of
March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited degree of
banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12,
1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its
chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent
Overseas Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner. It claims that neither the law nor sound banking supervision
requires respondent Central Bank to advertise or represent to the public any remedial measures it
may impose upon chronic delinquent banks as such action may inevitably result to panic or bank
"runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of
Manila as insolvent. 8

Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner
and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and
1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent
bank and its operation as a banking institution was being salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case
was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent
respondent Central Bank from closing, declaring the former insolvent, and liquidating its assets.
Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No.
L-29352, on the ground that Serrano had a real and legal interest as depositor of the Overseas Bank
of Manila in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352
opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground that his claim as
depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First Instance,
and if this Court were to allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of
other depositors would follow and thus cause an avalanche of cases in this Court. In the resolution
dated October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said motion
to intervene are substantially the same as those of the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and
executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the
dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent
Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank
of Manila to participate in clearing, direct the suspension of its operation, and
ordering the liquidation of said bank) are hereby annulled and set aside; and said
respondent Central Bank of the Philippines is directed to comply with its obligations
under the Voting Trust Agreement, and to desist from taking action in violation
therefor. Costs against respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying
for a decision on the merits, adjudging respondent Central Bank jointly and severally liable with
respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the

136
latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by the
respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust
funds for the benefit of petitioner and other depositors. 13

SO ORDERED.

By the very nature of the claims and causes of action against respondents, they in reality are
recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery of
damages against respondent Central Bank for its alleged failure to strictly supervise the acts of the
other respondent Bank and protect the interests of its depositors by virtue of the constructive trust
created when respondent Central Bank required the other respondent to increase its collaterals for its
overdrafts said emergency loans, said collaterals allegedly acquired through the use of depositors
money. These claims shoud be ventilated in the Court of First Instance of proper jurisdiction as We
already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L-29352.
Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown
clear abuse of discretion by the Central Bank in its exercise of supervision over the other respondent
Overseas Bank of Manila, and if there was, petitioner here is not the proper party to raise that
question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there
anything to prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of
dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends to use as his
basis for claims of damages against respondent Central Bank, had been accomplished a long time
ago.

AQUINO, J., concurring:

Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when
the petitioner claimed that there should be created a constructive trust in his favor when the
respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank for
the former's overdrafts and emergency loans, since these collaterals were acquired by the use of
depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and
are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn interests with respondent
Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank to honor the time
deposit is failure to pay s obligation as a debtor and not a breach of trust arising from depositary's
failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.

Separate Opinions

The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus
interests, which he could not recover from the distressed Overseas Bank of Manila, and to declare all
the assets assigned or mortgaged by that bank and the Ramos group to the Central Bank as trust
properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot
be granted in petitioner's instant original actions in this Court for mandamus and prohibition. It is not
the Central Bank's ministerial duty to pay petitioner's time deposits or to hold the mortgaged
properties in trust for the depositors of the Overseas Bank of Manila. The petitioner has no cause of
action for prohibition, a remedy usually available against any tribunal, board, corporation or person
exercising judicial or ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was
ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act No. 265
(p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his claim in the
liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA 114; Hernandez
vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).
Separate Opinions
AQUINO, J., concurring:
The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus
interests, which he could not recover from the distressed Overseas Bank of Manila, and to declare all
the assets assigned or mortgaged by that bank and the Ramos group to the Central Bank as trust
properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot
be granted in petitioner's instant original actions in this Court for mandamus and prohibition. It is not
the Central Bank's ministerial duty to pay petitioner's time deposits or to hold the mortgaged
properties in trust for the depositors of the Overseas Bank of Manila. The petitioner has no cause of

137
action for prohibition, a remedy usually available against any tribunal, board, corporation or person
exercising judicial or ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was
ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act No. 265
(p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his claim in the
liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA 114; Hernandez
vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).
G.R. No. 105836 March 7, 1994
SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,
vs.
THE HON. COURT OF APPEALS and CITYTRUST BANKING CORPORATION, respondents.

1. The transfer may be effected on the day following the overdrawing of the current
account, but the check/s would be honored if the savings account has sufficient
balance to cover the overdraft.
2. The regular charges on overdraft, and activity fees will be imposed by the Bank.
3. This is merely an accommodation on our part and we have the right, at all times
and for any reasonwhatsoever, to refuse to effect transfer of funds at our sole and
absolute option and discretion, reserving our right to terminate this arrangement at
any time without written notice to you.
4. You hold CITYTRUST free and harmless for any and all omissions or oversight in
executing this automatic transfer of funds; . . . 3
xxx xxx xxx

Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline
station located at Shaw Boulevard, corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They
regularly purchased bulk fuel and other related products from Petrophil Corporation on cash on
delivery (COD) basis. Orders for bulk fuel and other related products were made by telephone and
payments were effected by personal checks upon delivery. 1
Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two
savings accounts, (Nos. 1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust
Banking Corporation. As a special privilege to the Morans, whom it considered as valued clients, the
bank allowed them to maintain a zero balance in their current account. Transfers from Saving Account
No. 1037002387 to their current account could be made only with their prior authorization, but they
gave written authority to Citytrust to automatically transfer funds from their Savings Account No.
1037001372 to their Current Account No. 37-00066-7 at any time whenever the funds in their current
account were insufficient to meet withdrawals from said current account. Such arrangement for
automatic transfer of funds was called a pre-authorized transfer (PAT) agreement. 2
The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following
provisions:
xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for
P50,576.00 payable to Petrophil
Corporation. 4 The next day, December 13, 1983, petitioners, again through Librada Moran, issued
another check (Citytrust No. 041962) in the amount of P56,090.00 in favor of the same
corporation. 5 The total sum of the two checks was P106,666.00.
On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its
account with the Pandacan branch of the Philippine National Bank (PNB), the collecting bank. In turn,
PNB, Pandacan branch presented them for clearing with the Philippine Clearing House Corporation in
the afternoon of the same day. The records show that on December 14, 1983, Current Account No.
37-00066-7 had a zero balance, while Savings Account No. 1037001372 (covered by the PAT) had an
available balance of
P26,104.30 6 and Savings Account No. 1037002387 had an available balance of P43,268.39. 7
At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George Moran
went to the bank, as was his regular practice, to personally oversee their daily transactions with the
bank. He deposited in their Savings Account No. 1037002387 the amounts of P10,874.58 and
P6,754.25, 8 and he likewise deposited in their Savings Account No. 1037001372 the amounts of
P5,900.00, P35,100.00 and 30.00. 9 The amount of P40,000.00 was then transferred by him from
Saving Account No. 1037002387 to their current account by means of a pro forma withdrawal form (a
debit memorandum), which was provided by the bank, authorizing the latter to make the necessary

138
transfer. At the same time, the amount of P66,666.00 was transferred from Savings Account No.
1037001372 to the same current account through the pre-authorized transfer (PAT) agreement. 10
Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that
Petrophil refused to deliver their orders on a credit basis because the two checks they had previously
issued were dishonored upon presentment for payment. Apparently, the bank dishonored the checks
due to "insufficiency of funds." 11 The non-delivery of gasoline forced petitioners to temporarily stop
business operations, allegedly causing them to suffer loss of earnings. In addition, Petrophil cancelled
their credit accommodation, forcing them to pay for their purchases in cash. 12George Moran, furious
and upset, demanded an explanation from Raul Diaz, the branch manager. Failing to get a sufficient
explanation, he talked to a certain Villareal, a bank officer, who allegedly told him that Amy Belen
Ragodo, the customer service officer, had committed a "grave error". 13
On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the
petitioners on an application for a manager's check so that the dishonored checks could be
redeemed. Diaz then went to Petrophil to personally present the checks in payment for the two
dishonored checks. 14
In a chance meeting around May or June, 1984, George Moran learned from one Constancio Magno,
credit manager of Petrophil, that the latter received from Citytrust, through Diaz, a letter dated
December 16, 1983, notifying them that the two aforementioned checks were "inadvertently
dishonored . . . due to operational error." Said letter was received by Petrophil on January 4, 1984. 15
On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote
Citytrust claiming that the bank's dishonor of the checks caused them besmirched business and
personal reputation, shame and anxiety, hence they were contemplating the filing of the necessary
legal actions unless the bank issued a certification clearing their name and paid them P1,000,000.00
as moral damages. 16
The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on
September 8, 1984, with the Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was
docketed therein as Civil Case No. 51549. In turn, Citytrust filed a counterclaim for damages, alleging
that the case filed against it was unfounded and unjust.
After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the
complaint and the counterclaim. 17 On appeal, the Court of Appeals rendered judgment in CA-G.R. CV
No. 25009 on October 9, 1989 affirming the decision of the trial court. 18

We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn
on a bank payable on demand. 19 Thus, a check is a written order addressed to a bank or persons
carrying on the business of banking, by a party having money in their hands, requesting them to pay
on presentment, to a person named therein or to bearer or order, a named sum of money. 20
Fixed savings and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan. 21 In other words, the relationship between the bank and the
depositor is that of a debtor and creditor. 22 By virtue of the contract of deposit between the banker
and its depositor, the banker agrees to pay checks drawn by the depositor provided that said
depositor has money in the hands of the bank. 23
Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent
of the amount of his deposits. The failure of a bank to pay the check of a merchant or a trader, when
the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual
damages. 24
Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds,
notwithstanding the fact that a deposit may be made later in the day. 25 Before a bank depositor may
maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit
sufficient funds to meet his demand. 26
The present action for damages accordingly hinges on the resolution of the inquiry as to whether or
not petitioners had sufficient funds in their accounts when the bank dishonored the checks in
question. In view of the factual findings of the two lower courts the correctness of which are
challenged by what appear to be plausible, arguments, we feel that the same should properly be
resolved by us. This would necessarily require us to inquire into both the savings and current
accounts of petitioners in relation to the PAT arrangement.
On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the
available balance for Savings Account No. 1037001372 was P26,104.30 while Current Account No.
37-00066-7 expectedly had a zero balance. On December 15, 1983, at approximately ten o'clock in
the morning, petitioners, through George Moran, learned that P66,666.00 from Saving Account No.
1037001372 was transferred to their current account. Another P40,000.00 was transferred from
Saving Accounts No. 1037002387 to the current account. Considering that the transfers were by then
sufficient to cover the two checks, it is asserted by petitioners that such fact should have prevented
the dishonor of the checks. It appears, however, that it was not so.

139
As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing
unit of Citytrust, detailed on the witness stand the standard clearing procedure adopted by
respondent bank and the Philippine Clearing House Corporation, to wit:.
Q: Let me again re-phase the question. Most of (sic) these two
checks issued by Mrs. Librada Moran under the accounts of the
plaintiffs with Citytrust Banking Corporation were drawn dated
December 12, 1983 and December 13, 1983(and) these two (2)
checks were made payable to Petrophil Corporation. On record,
Petrophil Corporation presented these two (2) checks for clearing
with PNB Pandacan Branch on December 14, 1983. Now in
accordance with the bank, what would happen with these checks
drawn with (sic) PNB on December 14, 1983?.
A: So these checks will now be presented by PNB with the Philippine
Clearing House on December 14, and then the Philippine Clearing
House will process it until midnight of December 14. Citytrust will
send a clearing representative to the Philippine Clearing House at
around 2:00 o'clock in the morning of December 15 and then get the
checks. The checks will now be processed at the Citytrust Computer
at around 3:00 o'clock in the morning of December 14 (sic)but it will
be processed for balance of Citytrust as of December 14 because for
one, we have not opened on December 15 at 3:00 o'clock. Under the
clearing house rules, we are supposed to process it on the date it
was presented for clearing. (tsn, September 9, 1988, pp. 9-10). 27
Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that
the available balance on December 14, 1983 was used by the bank in determining whether or not
there was sufficient cash deposited to fund the two checks, although what was stamped on the dorsal
side of the two checks in question was "DAIF/12-15-83," since December 15, 1983 was the actual
date when the checks were processed. As earlier stated, when petitioners' checks were dishonored
due to insufficiency of funds, the available balance of Savings Account No. 1037001372, which was
the subject of the PAT agreement, was not enough to cover either of the two checks. On December
14, 1983, when PNB, Pandacan branch presented the checks for collection, the available balance for
Savings Account No. 1037001372, to repeat, was only P26,104.30 while Current Account No. 370006-7 had no available balance. It was only on December 15, 1983 at around ten o'clock in the
morning that the necessary funds were deposited, which unfortunately was too late to prevent the
dishonor of the checks.

Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider
the fact that the witness himself admitted that he had no personal knowledge surrounding the
dishonor of the two checks in question. Thus, although he knew the standard clearing procedure, it
does not necessarily mean that the same procedure was adopted with regard to the two checks.
We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in
law that the ordinary course of business has been followed. In the absence of a contrary showing, it is
presumed that the acts in question were in conformity with the usual conduct of business. In the case
at bar, petitioners failed to present countervailing evidence to rebut the presumption that the checks
involved underwent the same regular process for clearing of checks followed by the bank since 1983.
Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his
responsibilities every time he issues a check. He must personally keep track of his available balance
in the bank and not rely on the bank to notify him of the necessity to fund certain check she previously
issued. A check, as distinguished from an ordinary bill of exchange, is supposed to be drawn against
a previous deposit of funds for it is ordinarily intended for immediately payment. 28
Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of
their presentment on December 14, petitioners had, at the very least, twenty-four hours to replenish
their balance in the bank.
As previously noted, it was only during business hours in the morning of December 15, 1983, that
P66,666.00 was automatically transferred from Savings Account No. 1037001372 to Current Account
No. 37-00066-7, and another P40,000.00 was transferred from Savings Account No. 1037002387 to
the same current by a debit memorandum. Petitioners argue that if indeed the checks were
dishonored in the early morning of December 15, 1983, the bank would not have automatically
transferred P66,666.00 to said current account. They theorize that the checks having already been
dishonored, there was no necessity to put into effect the pre-authorized transfer agreement.
That theory is incorrect. When the transfer from both savings accounts to the current account were
made, they were done in the hope that the checks may be retrieved, thus preventing their dishonor.
Unfortunately, respondent bank did not succeed in effectuating its good intentions. The transfers were
made to preserve its relations with petitioners whom it knew were valued clients, hence it wanted to
prevent the dishonor of their checks, if the same was at all possible. Although not admitting fault, it
tried its best to make sure that the checks would not bounce.
Under similar circumstances, it was held in Whitman vs. First National Bank 29 that a bank performs
its full duty where, upon the receipt of a check drawn against an account in which there are

140
insufficient funds to pay it in full, it endeavors to induce the drawer to make good his account so that
the check can be paid, and failing in this, it protests the check on the following morning and notifies its
correspondent bank by the telegraph of the protest. It cannot, therefore, be held liable to the payee
and holder of the check for not protesting it upon the day when it was received. In fact, the court
added that the bank did more that it was required to do by making an effort to induce the drawer to
deposit sufficient money to make the check good, and by notifying its correspondent of the dishonor
of the check by telegram.
Petitioners maintain that at the time the checks were dishonored, they had already deposited
sufficient funds to cover said checks. To prove their point, petitioners quoted in their petition the
following testimony of said witness Rionisto, to wit:
Q: Now according to you, you would receive the checks from (being
deposited to) the collecting bank which in this particular example was
the Pandacan Branch of PNB which in turn will deliver it to the
Philippine Clearing House and the Philippine Clearing House will
deliver it to your office around 12:00 o'clock of December . . . ?
A: Around 2:00 o'clock of December 15. We sent a clearing
representative.
Q: And the checks will be processed in accordance with the balance
available as of December 14?
A: Yes, sir.
Q: And naturally you will place there "drawn against insufficient
funds, December 14, 1983"?
A: Yes, sir.
Q: Are you sure about that?
A: Yes, sir . . . (tsn, September 9, 1988, p. 14)

30

Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it
did not jibe with his previous testimony, wherein he categorically stated that "the checks will now be
processed as the Citytrust Computer at around 3:00 in the morning of December 14 (sic) but it will be

processed for balance of Citytrust as of December 14 because for one, we have not opened on
December 15 at 3:00 o'clock. Under the clearing house rules, we are supposed to process it on the
date it was presented for
clearing." 31 Analyzing the procedure he had previously explained, and analyzing his testimony in its
entirety and not in truncated portions, it would logically and ineluctably appear that he actually meant
December 15, and not December 14.
In the early morning of every business day, prior to banking hours, the various branches of Citytrust
would receive a computer printout called the "rejected transactions" report from the head office. The
report contains, among others, a listing of "checks to be funded." When Citytrust, Shaw Boulevard
branch, received said report in the early morning of December 15, 1983, the two checks involved
were included in the "checks to be funded." That report was used by the bank as its basis in
dishonoring the two checks in question. Petitioner contends that the bank erred when it did so
because on previous occasions, the report was merely used by the bank as a basis for determining
whether or not it was necessary to notify them of the need to deposit certain amounts in their
accounts.
Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the
report and transfer in on a "pink slip." These pink slips were then given to George Moran. In turn,
George Moran testified that he would deposit the necessary funds stated in the pink slips. As a matter
of fact, so petitioner asseverated, not a single check written on the notices was ever dishonored after
he had funded said checks with the bank. Thus, petitioner argues, the checks were not yet
dishonored after the bank received the report in the early morning of December 15, 1983.
Said argument does not persuade. If ever petitioners on previous occasions were given notices every
time a check was presented for clearing and payment and there were no adequate funds in their
accounts, these were, at most, mere accommodations on the part of respondent bank. It was not a
requirement or a general banking practice, hence non-compliance therewith could not lay the bank
open to blame or rebuke. Legally, the bank had all the right to dishonor the checks because there
were no sufficient funds to speak of in the first place. If the demand is by check, a drawer must have
to his credit enough to cover the demand. If his credit with the bank is less than the amount on the
face of the check, the bank may lawfully refuse payment. 32
Pursuing this matter further, the bank could also not be faulted for not accepting either of the two
checks. The first check issued was in the amount of P50,576.00, while the second one was for
P56,090.00. Savings Account No. 1307001372 then had a balance of only P26,104.30. This being the
case, Citytrust could not be expected to accept for payment either one of the two checks nor partially
honor one check.

141
A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's
funds, where the check is drawn for an amount larger than what the drawer has on deposit. Such a
practice of paying checks in part has never existed. Upon partial payment, the check holder could not
be called upon to surrender the check, and the bank would be without a voucher affording a certain
means of showing the payment. The rule is based on commercial convenience, and any rule that
would work such manifest inconvenience should not be recognized. A check is intended not only to
transfer a right to the amount named in it, but to serve the further purpose of affording evidence for
the bank of the payment of such amount when the check is taken up. 33
On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered
by a pre-arranged automatic transfer agreement, had enough amount deposited to cover both checks
(which is not so in this case), the bank still had no obligation to honor said checks as there was then
no authority given to it to make the transfer of funds. Where a depositor has two accounts with a
bank, an open account and a savings account, and draws a check upon the open account for more
money than the account contains, the bank may rightfully refuse to pay the check, and is under no
duty to make up the deficiency from the savings account. 34
We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of
the letter of Citytrust to Petrophil, dated December 16, 1983. As aptly and correctly stated by said
court, ". . . the letter is not an admission of liability as it was written merely to maintain the goodwill
and continued patronage of plaintiff-appellants. (This) cannot be characterized as baseless,
considering the totality of the circumstances surrounding its writing." 35
In the present case, the actions taken by the bank after the incident clearly show that there was
neither malice nor bad faith, but rather a clear intent to mollify an obviously agitated client. Raul Diaz,
the branch manager, even went for this purpose to the Moran residence to facilitate their application
for a manager's check. Later, he went to the Petrophil Corporation to personally redeem the checks.
Still later, the letter was sent by respondent bank to Petrophil explaining that the dishonor of the
checks was due to "operational error." However, we reiterate, it would be a mistake to construe that
letter as an admission of guilt on the part of the bank. It knew that it was confronted with a client who
obviously was not willing to admit any fault on his part, although the facts show otherwise. Thus,
respondent bank ran the risk of losing the business of an important and influential member of the
financial community if it did not do anything to assuage the feelings of petitioners.
It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved,
which fact, more than anything, displeased them, to say the least. On demand of petitioners that their
names be cleared, the bank considered it more prudent to send the letter. It never realized that it
would thereafter be used by petitioners as one of the bases of their legal action. It will be noted that

there was no reason for the bank to send the letter to Petrophil Corporation since the latter was not a
client nor was it demanding any explanation. Clearly, therefore, the letter was merely intended to
accommodate the request of the Morans and was part of the series of damage-control measures
taken by the bank to placate petitioners.
Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffsappellants (herein petitioners) for they did not thereafter take immediate punitive action against the
defendant-appellee (herein private respondent). As pointed out by the court a quo, it took plaintiffsappellants about six (6) months after the dishonor of the checks to demand that defendant-appellee
pay them P1,000,000.00 as damages. At that time, plaintiffs-appellants had discovered the letter of
Mr. Diaz attributing the dishonor of their checks to 'operational error'. The attempt to unduly ride on
the letter of Mr. Diaz speaks for itself." 36
On the above premises which irresistibly commend themselves to our acceptance, we find no cogent
and sufficient to award actual, moral, or exemplary damages to petitioners. Although we take judicial
notice of the fact that there is a fiduciary relationship between a bank and its depositors, as well as
the extent of diligence expected of it in handling the accounts entrusted to its care, 37 the bank may
not be held responsible for such damages in the absence of fraud, bad faith, malice, or wanton
attitude. 38
WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby
AFFIRMED, with costs against petitioners.
SO ORDERED.
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Is the contractual relation between a commercial bank and another party in a contract of rent of a
safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of
lessor and lessee?
This is the crux of the present controversy.

142
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula
Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of
land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while
the balance was covered by three (3) postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the
titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that
the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655
and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn
only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment
of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit
Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking
corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract
of lease (Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action
because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the
items or articles contained in the box could not give rise to an action against it. It then interposed a
counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00.
Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of
Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing
plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay
defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6

14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre
(for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the
respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other
for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the
certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a
price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of
P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded
the execution of a deed of sale which necessarily entailed the production of the certificates of title. In
view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4
October 1979 to open the safety deposit box and get the certificates of title. However, when opened
in the presence of the Bank's representative, the box yielded no such certificates. Because of the
delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00.
Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank
with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the
same as Civil Case No. 38382.

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of
the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared
that the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to
the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner
urged the respondent Court to reverse the challenged decision because the trial court erred in (a)
absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being
contrary to law, public order and public policy, the provisions in the contract for lease of the safety
deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as
well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's
fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and
attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision
principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank
is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given
control over the safety deposit box and its contents while the Bank retained no right to open the said
box because it had neither the possession nor control over it and its contents. As such, the contract is
governed by Article 1643 of the Civil Code 10 which provides:

143
Art. 1643. In the lease of things, one of the parties binds himself to give to another
the enjoyment or use of a thing for a price certain, and for a period which may be
definite or indefinite. However, no lease for more than ninety-nine years shall be
valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his
control over the property leased during the period of the contract and Article 1975 of the
Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which
earn interest shall be bound to collect the latter when it becomes due, and to take
such steps as may be necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain
the contents of the box. The stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot be regarded as contrary to
law, public order and public policy." 12 The appellate court was quick to add, however, that
under the contract of lease of the safety deposit box, respondent Bank is not completely free
from liability as it may still be made answerable in case unauthorized persons enter into the
vault area or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28
August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to
review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court
and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with
grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent
that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this
Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments
it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent
Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that

regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually
a contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who may
have been designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the provisions of Title I of
this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence
expound on the prevailing rule in the United States, to wit:

17

which is supposed to

The prevailing rule appears to be that where a safe-deposit company leases a safedeposit box or safe and the lessee takes possession of the box or safe and places
therein his securities or other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or other valuables; the
fact that the
safe-deposit company does not know, and that it is not expected that it shall know,
the character or description of the property which is deposited in such safe-deposit
box or safe does not change that relation. That access to the contents of the safedeposit box can be had only by the use of a key retained by the lessee ( whether it is
the sole key or one to be used in connection with one retained by the lessor) does
not operate to alter the foregoing rule. The argument that there is not, in such a case,
a delivery of exclusive possession and control to the deposit company, and that
therefore the situation is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as possession must be
either in the depositor or in the company, it should reasonably be considered as in
the latter rather than in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of the company. . . .
(citations omitted).

144
and a segment from Words and Phrases 18 which states that a contract for the rental of a
bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for
hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and
public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil
Code which provides that parties to a contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required
the parties to simultaneously submit their respective Memoranda.

There is, however, some support for the view that the relationship in question might
be more properly characterized as that of landlord and tenant, or lessor and lessee. It
has also been suggested that it should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or storage company,
and the renter of a safe-deposit box therein, is often described as contractual,
express or implied, oral or written, in whole or in part. But there is apparently no
jurisdiction in which any rule other than that applicable to bailments governs
questions of the liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act 23pertinently provides:

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not
an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully
subscribe to its view that the same is a contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit; 19the contract in the case at bar is a special kind of deposit. It
cannot be characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint renters the
petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this
key, neither of the renters could open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article
1975, also relied upon by the respondent Court, be invoked as an argument against the deposit
theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates,
bonds, securities or instruments which earn interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even
in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that
the relation between a bank renting out safe-deposit boxes and its customer with respect to the
contents of the box is that of a bail or and bailee, the bailment being for hire and mutual
benefit. 21 This is just the prevailing view because:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the
following services:
(a) Receive in custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of
this section asdepositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out
of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306
of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in
the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of
the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence
required, that of a good father of a family is to be observed. 27Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of fraud,

145
negligence or delay would be void for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit
box, which read:

own fraud or negligence or that of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-deposit box cannot limit
its liability for loss of the contents thereof through its own negligence, the view has
been taken that such a lessor may limits its liability to some extent by agreement or
stipulation. 30 (citations omitted)

13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with
this proposition for indeed, said provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt
the latter from any liability except as contemplated in condition 8 thereof which limits its duty
to exercise reasonable diligence only with respect to who shall be admitted to any rented
safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of
the Bank. It is not correct to assert that the Bank has neither the possession nor control of the
contents of the box since in fact, the safety deposit box itself is located in its premises and is
under its absolute control; moreover, the respondent Bank keeps the guard key to the said
box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates
by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safedeposit company, the parties, since the relation is a contractual one, may by special
contract define their respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship
of the parties; liability of the deposit company will not be enlarged or restricted by
words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition
should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In
the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of
Appeals, be based on or proceed from a characterization of the impugned contract as a contract of
lease, but rather on the fact that no competent proof was presented to show that respondent Bank
was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates
of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that
no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's determination that the contract
involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have
one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety
deposit box and, with the use of such key and the Bank's own guard key, could open the said box,
without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its
part had been established, the trial court erred in condemning the petitioner to pay the respondent
Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of
Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees
from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As
modified, and subject to the pronouncement We made above on the nature of the relationship
between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said
Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of
merit.
No pronouncement as to costs.
SO ORDERED.

146
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ,
[1]
doing business under the name and style SAPPHIRE SHIPPING, respondents.

"'(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the
plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defenses of
compensation for what is owing to it on the principle of solution (sic) indebiti;

DECISION
"'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be credited to his
account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the
plaintiff's account with the defendant, No. 830-2410;

PANGANIBAN, J.:
Does a local bank, while acting as local correspondent bank, have the right to intercept funds
being coursed through it by its foreign counterpart for transmittal and deposit to the account of an
individual with another local bank, and apply the said funds to certain obligations owed to it by the
said individual?
Assailed in this petition is the Decision of respondent Court of Appeals [2] in CA-G.R. CV No.
27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of
Quezon City, the dispositive portion of which read:[3]
"WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private respondent
herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal rate from
January 13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dfismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the
same being undisputed by the parties:[4]
"The body of the decision reads:
"'After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes the
following conclusions:

(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of P2,627.11 by
means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986
(Exh. 13), inviting the plaintiff to come for a conference;
"'(d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when
the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38,
respectively, which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point
(Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor impugned
by the plaintiff. He claims, however, that plaintiffs claim has prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits
erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11
months from November 1980, and 5 years and 9 months from January 1981. Such letter was answered by the
plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the
defendant through Exh. 13;
"'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and consent of the
plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant.
"'There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981
created an extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle
ofsolutio indebiti, as follows:
"'If something is received when there is no right to demand it, and it was unduly delivered throughg (sic)
mistake, the obligation to return it arises."' (Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner was
legally justified in making the compensation or set-off against the two remittances coursed through it
in favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981,

147
based on the principle of solutio indebiti, and second, whether or not petitioner's claim is barred by
the statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows: [5]

"'Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and
the plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as
follows:

"'Article 1279 of the Civil Code provides:

"'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by third
persons and communicated in due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum
of money, are both due, liquidated and demandable, and over neither of them is there a retention or controversy
commenced by third persons and communicated in due time to the debtor. The question, however, is, where
both of the obligors bound principally, and was each one of them a debtor and creditor of the other at the same
time?
"'Analyzing now the relationship between the parties, it appears that:
"'(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor
respectively (Guingona, et al. vs. City Fiscal, et al., 128 SCRA 577);
"'(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank
and local bank asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of America
NT & SA vs. IAC, 145 SCRA 419).
"'A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193;
Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).

"'When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to
another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic).
"'c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly received something
(sic) by mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the
defendant to return what he unduly received. Thus, there was created between them a relationship of obligor
and obligee, or of debtor and creditor under a quasi-contract.
"In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect
to the $2,627.11 from Jeddah neither are they at the same time principal creditor of the other. Therefore, as
matters stand, the parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil
Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as
the amount of $2,627.11 is concerned. They are debtor and creditor only with respect to the double payments;
but are trustee-beneficiary as to the fund transfer of $2,627.11.
"'Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the
other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of
the plaintiff the sum of $2,627.11.
"'Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23
and $5,885.38 erroneously doubly credited to his account, the defendant's actuation in intercepting the amount
of $2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust and
confidence of the international banking community in the banking system of the country, something we can ill
afford at this time when we need to attract and invite deposits of foreign currencies."'
"It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to
plaintiffs account No. 830-2410 with the defendant bank. However, the defendant alleged this for the first time
in its Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was neither any allegation
thereof in its pleadings, nor was there any evidence to prove such fact. On the contrary, the defendant admitted
that the telex advice was for credit of the amount of $2,627.11 to plaintiffs account with Citibank, Greenhills,
San Juan, MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in relation to
plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against the double
payments to plaintiff's account is not in accordance with law.

148
"'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no
express contract of agency. On the other hand, were we to infer that there was an implied agency, the same
would not be between the plaintiff and defendant, but rather, between the National Commercial Bank of Jeddah
as principal on the one hand, and the defendant as agent on the other. Thus, in case of violation of the agency,
the cause of action would accrue to the NCB and not to the plaintiff.
"'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is
a receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts
receivables with RICB Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated
February 28, 1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by
the plaintiff to the defendant as alleged in the last paragraph of defendant's memorandum. The same is
in accordance with the defendant's answer, as follows:
"The retention and application of the amount of P34,340.38 was done in a manner consonant with basic due
process considering that
plaintiff was not only furnished documented proof of the cause but was also given theopportunity to con(tro)ver
t such Proof.
"Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to the retention
and application of the amount in question." (Pls. see paragraphs 8-9, defendant's Answer with Compulsory
Counterclaim to Plaintiff's Supplemental Complaint)."
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt
was handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from
Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum
Marketing Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in
plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the
plaintiff). Such being the case, the Court believes that insofar as the amount of P34,340.38 is concerned, all the
requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the subject of
compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as the
amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit
only partial with respect to plaintiff's indebtedness of P7,380.44.
"Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable
in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a quasicontract (such as solutio indebiti) at six years.

In the dispositive portion of its decision, the trial court ruled that the herein petitioner was
obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with interest at
the legal rate. The court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the
US$2,627.11 in payment of the private respondent's indebtedness by way of compensation or set-off,
as provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
"The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the
National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of Plaintiff with the
Citibank, Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's
corresponden(t) bank in the Philippines.
"The credit account, or simply account means
that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citi
bank, and, in that sense, presupposes a creditor-debtorrelationship between the plaintiff, as creditor and the Citib
ank, as debtor. Withal the telegraphic money transfer, no such creditor-debtor relationship could have been creat
ed between the plaintiff and defendant.
"The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in
Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between
the two banks a sort of communication exchange for the corresponden(t) bank to transmit and/or remit and/or
pay the value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Some
such responsibility of the corresponden(t) bank is akin to Section 7 of the Rules and Regulations Implementing
E.O. 857, as amended by E.O. 925, "x x x to take charge of the prompt payment" of the telegraphic transfer, that
is,
by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to th
e account of the plaintiff with the said bank. That is all that the PNB can do underthe remittance arrangement th
at it has with the NCB. With its responsibility as defined as well as by the nature of its banking business and the
responsibility attached to it, and through which the industry, trade and commerce of all countries and
communities are carried on, the PNB's liability as corresponden(t) bank continues until it has completgely (sic)
performed and discharged it(s) obligation thereunder." (underscoring ours)
Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision.

149
The Issue
Petitioner's arguments revolve around one single issue:[6]
"WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY
BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF
US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN
PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME
AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL
JUSTICE, AND WOULD PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB
FOR THE COLLECTION OF THE SAME AMOUNT FROM PRIVATE RESPONDENT."

bank ends up in exactly the same position as when it first took the improper and unwarranted shortcut
by intercepting the said money transfer, notwithstanding the assailed Decision saying that this could
not be done!
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of
the petitioner bank, with the not impossible intention of using this case as a precedent for similar acts
of interception in the future. This piratical attitude of the nation's premier bank deserves a warning
that it should not abuse the justice system in its collection efforts, particularly since we are aware that
if the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten
minutes flat by means of an exchange of checks with private respondent for the same amount. The
litigation could have ended there, but it did not. Instead, this plainly unmeritorious case had to clog
our docket and take up the valuable time of this Court.

The Court's Ruling

We note that in framing the issue in the manner aforecited, the petitioner implicitly admits the
correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner
liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have
done otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate
court, we find no reversible error whatsoever in either ruling, and see no need to add to the extensive
discussions already made regarding the non-existence of all the requisites for legal compensation to
take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that
private respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private
respondent (resulting in legal compensation), the (h)onorable respondent court should have ordered
private respondent to pay PNB what the latter is bound by the trial court's decision to return the
former.[7]
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial
court and the appellate Court, and have this Court validate its original misdeed, thereby making a
mockery of the entire judicial process of this country. What the petitioner bank is effectively saying is
that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and
simply intercept funds being coursed through it, for transmittal to another bank, and eventually to be
deposited to the account of an individual who happens to owe some amount of money to the
petitioner, and because respondent Court ordered petitioner bank to return the intercepted amount to
said individual, who in turn was found by the appellate Court to be indebted to petitioner bank,
THEREFORE, there must now be legal compensation of the amounts each owes the other, and
hence, there is no need for petitioner bank to actually return the amount, and finally, that petitioner

WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the
assailed Decision is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.

G.R. No. 104612 May 10, 1994

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST
CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents.
The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of
respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November
1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967,
entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust
Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had
affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44
which represents the outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly established:

150
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account
("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of
petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account
("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds
withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or
withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money
market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at
P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and
as President and General Manager of Eastern, 2 one-half of this amount was provisionally released
and transferred to one of the bank accounts of Eastern with CBTC. 3

enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan
in respect of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare the
loan payable on demand at any time, nor shall the existence hereof and the nonresolution of the dispute between the contending parties in respect of entitlement to
the Account Balance, preclude Comtrust from instituting an action for recovery
against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and
Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities
thereunder.

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional
Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure
Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through
Lim, as its President and General Manager. 4 The loan was payable on demand with interest at
14% per annum.

In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC
of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In
the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim
was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the
urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and
Velasco and authorized the heirs to divide among themselves the amount withdrawn. 8

For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable
on demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both
in his own capacity and as President and General Manager of Eastern. No reference to any security
for the loan appears on the note. In the Disclosure Statement, the box with the printed word
"UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan
is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44.

Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of
Manila a complaint against Lim and Eastern demanding payment of the promissory note for
P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19
of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in
turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of
the Holdout Agreement and the interests thereon after deducting the amount due on the promissory
note.

In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also
dated 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have
offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint
names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as
a result of final and definitive judicial action or a settlement between and among the contesting parties
thereto." 7 Paragraph 02 of the Agreement provides as follows:

After due proceedings, the trial court rendered its decision on

15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it
ruled that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based
on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under
the promissory note to set off the loan even though the same has no fixed maturity." 11 As to the
defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had
been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959,
denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate
court. 12

Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall have been established with finality,
ample and sufficient power as shall be necessary to retain said Account Balance and

151
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as
CA-G.R. CV No. 25739.

We gave due course to the petition and required the parties to submit simultaneously their
memoranda.

On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court.
It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's
denial of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated
on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had
nothing to do with the claim of the defendants for the return of the balance of their account with
CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI,
are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp.
Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay
defendants the amount of P331,261.44 representing the outstanding balance in the bank account of
defendants." 14

The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite
the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on
the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco.

On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question
was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a
security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood
Corporation's interests to that amount are established as a result of a final and definitive judicial
action or a settlement between and among the contesting parties thereto." 15 Hence, BPI asserts, the
Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground
that it was the duty of CBTC to debit the account of the defendants to set off the amount of
P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner.
They interpret the findings of both the trial and appellate courts that the money deposited in the joint
account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money
deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood
Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in
question, the suspensive condition does not find any application in this case and the bank had the
duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the
disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence,
the petitioner can only hold the amount of P73,000.00 representing the security required for the note
and must return the rest. 16

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an
unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals,
"[t]here is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled
that BPI was not a holder in due course because the note was not indorsed to BPI by the payee,
CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a
holder in due course. It acquired the note from CBTC by the contract of merger or sale between the
two banks. BPI, therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is
clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to
demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to
retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the
agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or
obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a
right of set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC
was not in any way precluded from demanding payment from Eastern and from instituting an action to
recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing
its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had
opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the
payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in
order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent
portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in
affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable.

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder
thereto.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for
the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their
deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and

152
current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits
are in the nature of irregular deposits; they are really loans because they earn interest. The
relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the
questioned account was an ordinary bank deposit; hence, it was payable on demand of the
depositor. 22

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R.
CV No. 25735 is hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the promissory note for
P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;

The account was proved and established to belong to Eastern even if it was deposited in the names
of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand
payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed
the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have
allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership
of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate
Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by
them and that one-half was being claimed by the heirs of Velasco. 23
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to
withdraw the account. BPI was not specifically ordered to release the account to the said heirs;
hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco
cannot be construed as a final determination or adjudication that the account belonged to Velasco.
We have ruled that when the ownership of a particular property is disputed, the determination by a
probate court of whether that property is included in the estate of a deceased is merely provisional in
character and cannot be the subject of execution. 24
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect
thereto, had no right to pay to persons other than those in whose favor the obligation was constituted
or whose right or authority to receive payment is indisputable. The payment of the money deposited
with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the
creditor or to one authorized by him or by the law to receive it. 25 Payment made by the debtor to the
wrong party does not extinguish the obligation as to the creditor who is without fault or negligence,
even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco,
even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside.
The award on the counterclaim is sustained subject to a modification of the interest.

(b) 12% per annum on the interest which had accrued up to the date
of the filing of the complaint, computed from that date until payment
pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents shall bear interest
at the rate of 12% per annum computed from the filing of the counterclaim.
No pronouncement as to costs.
SO ORDERED.

153
JOSE C. GO,

G.R. No. 178429

Petitioner,

79149, as well as its June 4, 2007 resolution.[3] The CA decision and resolution annulled
and set aside the May 20, 2003[4] and June 30, 2003[5] orders of the Regional Trial Court

Present:

(RTC), Branch 26, Manila which granted Gos motion to quash the Information filed
against him.

QUISUMBING, J., Chairperson,

-

versus -

CARPIO,

CARPIO MORALES,
BRION, and

THE FACTS
On August 20, 1999, an Information[6] for violation of Section 83 of Republic Act No. 337
(RA 337) or the General Banking Act, as amended by Presidential Decree No. 1795, was
filed against Go before the RTC. The charge reads:

ABAD, JJ.

BANGKO SENTRAL NG PILIPINAS,

Respondent.

Promulgated:

October 23, 2009

x ------------------------------------------------------------------------------------------x

DECISION

BRION, J.:

Through the present petition for review on certiorari,[1] petitioner Jose C. Go (Go)
assails the October 26, 2006 decision[2] of the Court of Appeals (CA) in CA-G.R. SP No.

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

154
and to transmit a copy of which to the supervising department of the said
bank, as required by the General Banking Act.

CONTRARY TO LAW. [Emphasis supplied.]

On May 28, 2001, Go pleaded not guilty to the offense charged.
After the arraignment, both the prosecution and accused Go took part in the pretrial conference where the marking of the voluminous evidence for the parties was

The Monetary Board may regulate the amount of credit accommodations

that may be extended, directly or indirectly, by banking institutions to
their directors, officers, or stockholders. However, the outstanding credit
accommodations which a bank may extend to each of its stockholders
owning two percent (2%) or more of the subscribed capital stock, its
directors, or its officers, shall be limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Provided, however, that loans and advances to
officers in the form of fringe benefits granted in accordance with rules and
regulations as may be prescribed by Monetary Board shall not be subject
to the preceding limitation. (As amended by PD 1795)

accomplished. After the completion of the marking, the trial court ordered the parties to
proceed to trial on the merits.
Before the trial could commence, however, Go filed on February 26, 2003[7] a motion to
quash the Information, which motion Go amended on March 1, 2003.[8] Go claimed that
the Information was defective, as the facts charged therein do not constitute
an offense under Section 83 of RA 337 which states:

No director or officer of any banking institution shall either directly or

indirectly, for himself or as the representative or agent of
another, borrow any of the deposits of funds of such banks, nor shall
hebecome a guarantor, indorser, or surety for loans from such bank, to
others, or in any manner be an obligor for money borrowed from the bank
or loaned by it, except with the written approval of the majority of the
directors of the bank, excluding the director concerned. Any such approval
shall be entered upon the records of the corporation and a copy of such
entry shall be transmitted forthwith to the appropriate supervising
department. The office of any director or officer of a bank who violates the
provisions of this section shall immediately become vacant and the
director or officer shall be punished by imprisonment of not less than one
year nor more than ten years and by a fine of not less than one thousand
nor more than ten thousand pesos.

In addition to the conditions established in the preceding paragraph, no

director or a building and loan association shall engage in any of the
operations mentioned in said paragraphs, except upon the pledge of
shares of the association having a total withdrawal value greater than the
amount borrowed. (As amended by PD 1795)

In support of his motion to quash, Go averred that based on the facts alleged in
the Information, he was being prosecuted for borrowing the deposits or funds of the
Orient Bank and/or acting as a guarantor, indorser or obligor for the banks loans to
other persons. The use of the word and/or meant that he was charged for being either a
borrower or a guarantor, or for being both a borrower and guarantor. Go claimed that the
charge was not only vague, but also did not constitute an offense. He posited that
Section 83 of RA 337 penalized only directors and officers of banking institutions who
acted either as borrower or as guarantor, but not as both.

Go further pointed out that the Information failed to state that his alleged act of
borrowing and/or guarantying was not among the exceptions provided for in the
law.According to Go, the second paragraph of Section 83 allowed banks to extend credit

155
accommodations to their directors, officers, and stockholders, provided it is limited to an

acted either as a borrower or a guarantor or as both borrower and guarantor merely set

amount equivalent to the respective outstanding deposits and book value of the paid-in

forth the different modes by which the offense was committed. It did not necessarily

capital contribution in the bank. Extending credit accommodations to bank directors,

mean that Go acted both as borrower and guarantor for the same loan at the same

officers, and stockholders is not per se prohibited, unless the amount exceeds the legal

time. It agreed with the prosecutions stand that the second paragraph of Section 83 of

limit. Since the Information failed to state that the amount he purportedly borrowed

RA 337 is not an exception to the first paragraph. Thus, the failure of the Information to

and/or guarantied was beyond the limit set by law, Go insisted that the acts so charged

state that the amount of the loan Go borrowed or guaranteed exceeded the legal limits

did not constitute an offense.

was, to the CA, an irrelevant issue. For these reasons, the CA annulled and set aside the
RTCs orders and ordered the reinstatement of the criminal charge against Go. After the
CAs denial of his motion for reconsideration,[10] Go filed the present appeal by certiorari.

Finding Gos contentions persuasive, the RTC granted Gos motion to quash the
Information on May 20, 2003. It denied on June 30, 2003 the motion for reconsideration
filed by the prosecution.

THE PETITION

The prosecution did not accept the RTC ruling and filed a petition for certiorari to

In his petition, Go alleges that the appellate court legally erred in overturning the

question it before the CA. The Information, the prosecution claimed, was sufficient. The

trial courts orders. He insists that the Information failed to allege the acts or omissions

word and/or did not materially affect the validity of the Information, as it merely stated a

complained of with sufficient particularity to enable him to know the offense being

mode of committing the crime penalized under Section 83 of RA 337. Moreover, the

charged; to allow him to properly prepare his defense; and likewise to allow the court to

prosecution asserted that the second paragraph of Section 83 (referring to the credit

render proper judgment.

accommodation limit) cannot be interpreted as an exception to what the first paragraph

provided. The second paragraph only sets borrowing limits that, if violated, render the
bank, not the director-borrower, liable. A violation of the second paragraph of Section 83

Repeating his arguments in his motion to quash, Go reads Section 83 of RA 337 as

under which Go is being prosecuted is therefore separate and distinct from a violation of

penalizing a director or officer of a banking institution for either borrowing the deposits

the first paragraph. Thus, the prosecution prayed that the orders of the RTC quashing the

or funds of the bank, or guaranteeing or indorsing loans to others, but not for

Information be set aside and the criminal case against Go be reinstated.

assuming both capacities. He claimed that the prosecutions shotgun approach in alleging
that he acted as borrower and/or guarantor rendered the Information highly defective for
failure to specify with certainty the specific act or omission complained of. To petitioner

On October 26, 2006, the CA rendered the assailed decision granting the
prosecutions petition for certiorari.[9] The CA declared that the RTC misread the law when
it decided to quash the Information against Go. It explained that the allegation that Go

Go, the prosecutions approach was a clear violation of his constitutional right to be
informed of the nature and cause of the accusation against him.

156
the court can pronounce judgment.[13] To broaden the scope of the right, the Rules
Additionally, Go reiterates his claim that credit accommodations by banks to their
directors and officers are legal and valid, provided that these are limited to their
outstanding deposits and book value of the paid-in capital contribution in the bank. The
failure to state that he borrowed deposits and/or guaranteed loans beyond this limit

authorize the quashal, upon motion of the accused, of an Information that fails to allege
the acts constituting the offense.[14] Jurisprudence has laid down the fundamental test in
appreciating a motion to quash an Information grounded on the insufficiency of the facts
alleged therein. We stated in People v. Romualdez[15] that:

rendered the Information defective. He thus asks the Court to reverse the CA decision to
reinstate the criminal charge.

In its Comment,[11] the prosecution raises the same defenses against Gos
contentions. It insists on the sufficiency of the allegations in the Information and prays
for the denial of Gos petition.

THE COURTS RULING

The Court does not find the petition meritorious and accordingly denies it.

The Accuseds Right to be Informed

The determinative test in appreciating a motion to quash xxx is the sufficiency of the
averments in the information, that is, whether the facts alleged, if hypothetically admitted,
would establish the essential elements of the offense as defined by law without considering
matters aliunde. As Section 6, Rule 110 of the Rules of Criminal Procedure requires, the
information only needs to state the ultimate facts; the evidentiary and other details can
be provided during the trial.

To restate the rule, an Information only needs to state the ultimate facts constituting the
offense, not the finer details of why and how the illegal acts alleged amounted to undue
injury or damage matters that are appropriate for the trial. [Emphasis supplied]

The facts and circumstances necessary to be included in the Information are determined by reference to the
definition and elements of the specific crimes. The Information must allege clearly and accurately the

Under the Constitution, a person who stands charged of a criminal offense has the

elements of the crime charged.[16]

right to be informed of the nature and cause of the accusation against him. [12] The Rules
of Court, in implementing the right, specifically require that the acts or omissions
complained of as constituting the offense, including the qualifying and aggravating
circumstances, must be stated in ordinary and concise language, not necessarily in the
language used in the statute, but in terms sufficient to enable a person of common
understanding to know what offense is being charged and the attendant qualifying and
aggravating circumstances present, so that the accused can properly defend himself and

Elements of Violation of
Section 83 of RA 337

157
Under Section 83, RA 337, the following elements must be present to constitute a violation of its first

officer who becomes in any manner an obligor for money borrowed from or loaned by the bank without

paragraph:

the written approval of the majority of the banks board of directors. To make a distinction between the act
of borrowing and guarantying is therefore unnecessary because in either situation, the director or officer

1.

the offender is a director or officer of any banking institution;

2.

the offender, either directly or indirectly, for himself or as representative or agent of another, performs

concerned becomes an obligor of the bank against whom the obligation is juridically demandable.

any of the following acts:

The language of the law is broad enough to encompass either act of borrowing or guaranteeing, or
a.

he borrows any of the deposits or funds of such bank; or

b.

he becomes a guarantor, indorser, or surety for loans from such bank to others, or

c.

he becomes in any manner an obligor for money borrowed from bank or loaned by it;

both. While the first paragraph of Section 83 is penal in nature, and by principle should be strictly construed in
favor of the accused, the Court is unwilling to adopt a liberal construction that would defeat the legislatures
intent in enacting the statute.The objective of the law should allow for a reasonable flexibility in its
construction. Section 83 of RA 337, as well as other banking laws adopting the same prohibition, [17] was enacted
to ensure that loans by banks and similar financial institutions to their own directors, officers, and stockholders

3.

the offender has performed any of such acts without the written approval of the majority of the

are above board.[18] Banks were not created for the benefit of their directors and officers; they cannot use the

directors of the bank, excluding the offender, as the director concerned.

assets of the bank for their own benefit, except as may be permitted by law. Congress has thus deemed it
essential to impose restrictions on borrowings by bank directors and officers in order to protect the public,
especially the depositors.[19] Hence, when the law prohibits directors and officers of banking institutions from
becoming in any manner an obligor of the bank (unless with the approval of the board), the terms of the

A simple reading of the above elements easily rejects Gos contention that the law penalizes a bank
director or officer only either for borrowing the banks deposits or funds or for guarantying loans by the bank,

prohibition shall be the standards to be applied to directors transactions such as those involved in the present
case.

but not for acting in both capacities. The essence of the crime is becoming an obligor of the bank without
securing the necessary written approval of the majority of the banks directors.
Credit accommodation limit is not an exception nor is it
an element of the
The second element merely lists down the various modes of committing the offense. The third mode,
by declaring that [no director or officer of any banking institution shall xxx] in any manner be an obligor for
money borrowed from the bank or loaned by it, in fact serves a catch-all phrase that covers any situation when
a director or officer of the bank becomes its obligor. The prohibition is directed against a bank director or

offense

158
Contrary to Gos claims, the second paragraph of Section 83, RA 337 does not provide for an exception
to a violation of the first paragraph thereof, nor does it constitute as an element of the offense charged. Section
83 of RA 337 actually imposes three restrictions: approval, reportorial, and ceiling requirements.

Evidently, the failure to observe the three requirements under Section 83 paves the way for the
prosecution of three different offenses, each with its own set of elements. A successful indictment for failing to
comply with the approval requirement will not necessitate proof that the other two were likewise not observed.

The approval requirement (found in the first sentence of the first paragraph of the law) refers to the
written approval of the majority of the banks board of directors required before bank directors and officers can
in any manner be an obligor for money borrowed from or loaned by the bank. Failure to secure the approval

Rules of Court allow amendment of insufficient

Information

renders the bank director or officer concerned liable for prosecution and, upon conviction, subjects him to the
penalty provided in the third sentence of first paragraph of Section 83.

Assuming that the facts charged in the Information do not constitute an offense, we find it erroneous for the
RTC to immediately order the dismissal of the Information, without giving the prosecution a chance to amend
it. Section 4 of Rule 117 states:

The reportorial requirement, on the other hand, mandates that any such approval should be entered
upon the records of the corporation, and a copy of the entry be transmitted to the appropriate supervising
department. The reportorial requirement is addressed to the bank itself, which, upon its failure to do so, subjects
it to quo warrantoproceedings under Section 87 of RA 337.[20]

The ceiling requirement under the second paragraph of Section 83 regulates the amount of credit
accommodations that banks may extend to their directors or officers by limiting these to an amount equivalent
to the respective outstanding deposits and book value of the paid-in capital contribution in the bank. Again, this

SEC. 4. Amendment of complaint or information.If the motion to quash is based on an

alleged defect of the complaint or information which can be cured by amendment, the court shall
order that an amendment be made.

If it is based on the ground that the facts charged do not constitute an offense, the
prosecution shall be given by the court an opportunity to correct the defect by
amendment. The motion shall be granted if the prosecution fails to make the amendment,
or the complaint or information still suffers from the same defect despite the
amendment. [Emphasis supplied]

is a requirement directed at the bank. In this light, a prosecution for violation of the first paragraph of Section
83, such as the one involved here, does not require an allegation that the loan exceeded the legal limit. Even if
the loan involved is below the legal limit, a written approval by the majority of the banks directors is still
required; otherwise, the bank director or officer who becomes an obligor of the bank is liable. Compliance with

Although an Information may be defective because the facts charged do not constitute an offense, the dismissal

the ceiling requirement does not dispense with the approval requirement.

of the case will not necessarily follow. The Rules specifically require that the prosecution should be given a
chance to correct the defect; the court can order the dismissal only upon the prosecutions failure to do so. The

159
RTCs failure to provide the prosecution this opportunity twice[21] constitutes an arbitrary exercise of power that

no longer in a position to compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.

was correctly addressed by the CA through the certiorari petition. This defect in the RTCs action on the case,
The Case

while not central to the issue before us, strengthens our conclusion that this criminal case should be resolved
through full-blown trial on the merits.

This is the main principle used in denying the present Petition for Review under Rule 45 of the
Rules of Court. Petitioner assails the December 22, 1998 Decision [1] of the Court of Appeals (CA) in
CA-GR CV No. 56203, the dispositive portion of which reads as follows:

WHEREFORE, we DENY the petitioners petition for review on certiorari and AFFIRM the
decision of the Court of Appeals in CA-G.R. SP No. 79149, promulgated onOctober 26,
2006, as well as its resolution of June 4, 2007. The Regional Trial Court, Branch
26, Manila is

directed

to PROCEED with

the

hearing

of

Criminal

Case

No.

99-

178551. Costs against the petitioner.

WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo
M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution, [3] which denied petitioners Motion for
Reconsideration.

SO ORDERED.

Modified by the CA was the March 6, 1997 Decision [4] of the Regional Trial Court (RTC) of Makati
City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
SECURITY
BANK
AND
TRUST
CUENCA, respondent.

COMPANY,

Inc., petitioner,

vs. RODOLFO

M.

DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the
creditor to obtain the consent of the surety to any material alteration in the principal loan agreement,
or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans
obtained in excess of the amount or beyond the period stipulated in the original agreement, absent
any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal officer or
major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus

WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M.
Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73
representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the
sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.
SO ORDERED.
The Facts

The facts are narrated by the Court of Appeals as follows: [5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a
corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the
Department of Environment and Natural Resources (DENR).

160
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation
[SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30
November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus
JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys
duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this
connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to
the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC
executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in
favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC
whereby he solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of
the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the
client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan
Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of
[s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly
executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of
defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant
Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal
Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder
during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from
[Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand
[n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the
amounts of the abovementioned additional loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and
requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant
SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and
defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to
restructure the past due obligations of defendant-appellant Sta. Ines.[Petitioner] Security Bank agreed to extend
to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be
applied to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness
to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,
Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be
applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant
Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,
Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security
Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand
[p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan
Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980

161
(Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together
with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D,
E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not
secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendantappellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of
[Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner]
Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos
(P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite
demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated
5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for
collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo,
x x x from which [Respondent] Cuenca appealed.

RL/74/596/88 P8,800,000.00
Ruling of the Court of Appeals

RL/74/597/88 P3,400,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such
novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman
and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by
that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice
to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.

To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner]
Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989
provides:

The appellate court also noted that the Credit Approval Memorandum had specified that the
credit accommodation was for a total amount of P8 million, and that its expiry date was November 30,
1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and
only for an amount not exceeding P8 million.

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE
MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The
loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose
stipulated hereinbelow.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety.Under
Article 2079 of the Civil Code, such extension extinguished the surety.

------------------TOTAL P12,200,000.00

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present
total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of
Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided
to materially alter or modify the principal obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues

In its Memorandum, petitioner submits the following for our consideration: [8]

162
The Courts Ruling

A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca
from liability as surety under the Indemnity Agreement for the payment of the principal
amount of twelve million two hundred thousand pesos (P12,200,000.00) under
Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges
due thereon;

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent
Cuencas liability under the Indemnity Agreement covered only availments on
SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and
made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC without
Respondent Cuencas consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan
Agreement novated the original credit accommodation and Cuencas liability under the Indemnity
Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any
substitution, renewal, extension, increase, amendment, conversion or revival of the said credit
accommodation. As preliminary matters, the procedural questions raised by respondent will also be
addressed.

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely
rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it
did not toll the period for filing the present Petition for Review. [9] Consequently, the Petition was filed
out of time.[10]
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.
[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court explained that a pro
forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence,
where the circumstances of a case do not show an intent on the part of the movant merely to delay
the proceedings, our Court has refused to characterize the motion as simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the
reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than
literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better
served by according the appellate court an effective opportunity to review the decision of the trial court on the
merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro
forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings
and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to

163
other modes must be accompanied by a written explanation why the service or filing was not done personally. A
violation of this Rule may be cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain a sufficient written
explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort [13] that the aforecited rule
was mandatory, and that only when personal service or filing is not practicable may resort to other
modes be had, which must then be accompanied by a written explanation as to why personal service
or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines
and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.
[14]
This explanation sufficiently shows that personal service was not practicable. In any event, we find
no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to
fully argue its cause.
First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.
Novation of a contract is never presumed. It has been held that [i]n the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on
every point.[15] Indeed, the following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and
(4) there is a valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were not more onerous. [17] Since the original
credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity
Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation [18] obtained under the 1980 credit
accomodation. This is evident from its explicit provision to liquidate the principal and the interest of
the earlier indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total
outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied
toliquidate the past due interest and penalty portion of the Indebtedness.[19] (Italics supplied.)
The testimony of an officer [20] of the bank that the proceeds of the 1989 Loan Agreement were
used to pay-off the original indebtedness serves to strengthen this ruling. [21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that
the loan was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative covenants not
found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to
time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively carry out the
provisions and purposes of this Loan Agreement. [23] Likewise, SIMC agreed that it would not create
any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in
any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article
1296 of the Civil Code, which provides:
ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations
may subsist only insofar as they may benefit third persons who did not give their consent.
Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation. [25]

164
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated
that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness.Moreover,
respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an
earlier case,[26] the Court explained the rationale of this provision in this wise:

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to be notified
of, or to give consent to, the same. [28] Respondents consent or waiver thereof is allegedly found in the
Indemnity Agreement, in which he held himself liable for the credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that
the novation of the original credit accommodation by the 1989 Loan Agreement is merely
its renewal, which connotes cessation of an old contract and birth of another one x x x.[29]

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without
the suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to
the creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period.

At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the Court held
inNational Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement
between the creditor and the principal debtor which essentially varies the terms of the principal
contract, without the consent of the surety, will release the surety from liability.

Binding Nature of the Credit Approval Memorandum

In this case, petitioners assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum
in holding that the credit accommodation was only for P8 million, and that it was for a period of one
year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that
document, contending that it was not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the
accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval
Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the
aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval
Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit
accommodation as contained in the very document it presented to the courts. Indeed, it cannot take
advantage of that document by agreeing to be bound only by those portions that are favorable to it,
while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg.,
391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the
total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine,
6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES
MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated
interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and
delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with
the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever
amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and
revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations
that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements
that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including
the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the
faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of
which are incorporated herein and made part hereof by reference.

165
While respondent held himself liable for the credit accommodation or any modification thereof,
such clause should be understood in the context of the P8 million limit and the November 30, 1981
term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original
credit accommodation, without informing or getting the consent of respondent who was solidarily
liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for
loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging
the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved
in favor of the surety x x x.Ambiguous contracts are construed against the party who caused the
ambiguity.[32] In the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we cannot sustain
petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did
not have absolute authority to unilaterally change the terms of the loan accommodation.Indeed, it
may do so only upon notice to the borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to
the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. [34] Following the banks
reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still
be valid as to respondent to whom no notice need be given. The latters liability would thus be more
burdensome than that of the former. Such untenable theory is contrary to the principle that a surety
cannot assume an obligation more onerous than that of the principal. [35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court
sustained a stipulation whereby the surety consented to be bound not only for the specified period,
but to any extension thereafter made, an extension x x x that could be had without his having to be
notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby further
agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the

Company under the same terms and conditions as herein provided without the necessity of executing
another indemnity agreement for the purpose and that we hereby equally waive our right to be
notified of any renewal or extension of the bond which may be granted under this indemnity
agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines
to modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the
1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. [37] In Dino v. CA,[38] the
Court held that a continuing guaranty is one which covers all transactions, including those arising in
the future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety
only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the
total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan
Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8
million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
obtained after the payment of the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically
provided that each suretyship is a continuing one which shall remain in full force and effect until this

166
bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety
was held liable even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were set down
in the Credit Approval Memorandum.
Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major
stockholder or corporate officer, as an additional security for loans granted to corporations. There are
at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited
to the corporate properties under the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be compelled to ensure that the loan would
be used for the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the
JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time,
he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position
then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to
a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having
been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to
act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who
was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation
would have revealed that respondent was no longer connected with the corporation at the time. As it
is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that
could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only
itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the
1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an
accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject
petitioners submission that respondent waived his right to be notified of, or to give consent to, any
modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the
expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER
INDUSTRIES, INC., AMANDA MALONJAO and RUFINO MALONJAO, respondents.
DECISION
KAPUNAN, J.:
This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the
Regional Trial Court, National Capital Region, Branch 38 in Civil Case No. 83-18464 for a sum of money.
The undisputed facts, as quoted from the respondent courts decision are as follows:
On March 9, 1978, Lomuyon Timber Industries, Inc. (hereafter, Lomuyon) agreed to sell to plaintiff its
receivables at a discount on a with recourse basis (Exh. A). It was agreed in that sale that should a receivable
remain unpaid, plaintiff, at its discretion, may impose a penalty fee of 3% per month. To secure the payment of
the receivables, the Malonjaos also executed in favor of plaintiff, a real estate mortgage over their real property
covered by Transfer Certificates of Title Nos. (445856) S-65586 and No. (162775) S-65585 (Exh. B).
Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to plaintiff for a
total consideration of P2,558,073.75 (Exhs. C, D, E and F), various receivables consisting of checks as follows:
TCBTC 618821 June 9, 1978 P371,319.58
TCBTC 618820 September 9, 1978 P371,319.58

167
TCBTC 618819 December 9, 1978 P371,319.58
TCBTC 618818 March 9, 1978 P371,319.58
TCBTC 618817 June 9, 1979 P371,319.58

On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price of the mortgaged
properties from defendants outstanding obligation, there remains a deficiency of P2,601,147.62 as of February
14, 1983, which as of May 31, 1983 amounted to P2,876,929.27 inclusive of interest and charges. As an
alternative cause of action, plaintiff alleged that it is entitled to recover from the defendant the total value of the
checks amounting to P2,239,237.10. Plaintiff further prayed that it be awarded exemplary damages, attorneys
fees and litigation expenses (Records, pp. 1-38).

TCBTC 618816 September 9, 1979 P371,319.58

TCBTC 618814 December 9, 1979 P371,319.58
TCBTC 618828 March 9, 1980 P371,319.58
MBTC 06659490 September 30, 1978 60,000.00
(Exhs. C-1, D-1, E-1, F-1 and G to G-7).
TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the
order of payee Lomuyon which in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and
Trust Company) check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao
who in turn, indorsed said check to plaintiff.
When plaintiff presented the checks for payment to the drawee banks, the same were dishonored for having
been drawn against insufficient funds (Exhs. H to H-7) except for TCBTC 618821.
Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the
penalty charges it has imposed thereon, (Exhs. I, J, K, L, L-1, M and N).
Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake foreclosure of the real
estate mortgage.
On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of
real estate mortgage dated September 28, 1981. In said petition, plaintiff alleged among others, that as of said
date, September 28, 1981, defendants outstanding obligation, inclusive of interest and charges, is P4,809,187.12
(Exh. O).

In their answer, defendants admitted having incurred the obligation with the plaintiff brought about by the
dishonor of the checks. However, defendants contended that plaintiffs computation of their outstanding
obligation is erroneous. Thus, by way of special affirmative defenses, defendants alleged that:
12. x x x.
13. The complaint states no cause of action;
14. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation
of the defendants;
15. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very
low;
16. Assuming for the sake of argument, that the outstanding obligation of the defendants as of September 26,
1981 (sic) was P4,809,187.12 per statement of account as alleged in the complaint and the alleged purchase
price at public auction was P4,233,874.00, the deficiency would only be P575,313.12 and not P2,601,147.62 as
erroneously alleged in the complaint.
17. No demand was ever made upon the defendant;
18. The interest and charges made by plaintiff is usurious and unconscionable (id., pp. 91-92).[1]
On January 11, 1981, the trial court rendered its decision with the following dispositive portion:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants;

On February 14, 1983, the Provincial Sheriff sold at public auction, defendants mortgaged properties to plaintiff
who was the highest bidder for P4,233,874.00. The following day, the Provincial Sheriff issued a Certificate of
Sale (Exh. P).

2. Dismissing defendants counterclaim; and

168
3. Ordering the plaintiff and defendants to pay the costs of suit.
SO ORDERED.[2]

outstanding obligation continue to earn interest and penalty charges from day to day. Thus, from the time of the
foreclosure sale on February 14, 1983 (P2,601,147.62) up to the filing of the complaint for the deficiency claim
on May 31, 1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC, private
respondents outstanding obligation to SIHI rose toP7,651,969.41.

On appeal, petitioner assigned the following errors committed by the trial court:
I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES OBLIGATION TO
SIHI AS OF THE TIME OF FORECLOSURE AUCTION SALE AMOUNTED TO P6,835,021.62 THUS,
AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT
OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62.
II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS
RECEIVABLES FROM THE DEFENDANTS.
III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY
AMOUNT FROM THE DEFENDANTS.[3]
On August 27, 1992, the respondent court rendered the assailed decision disallowing the claim for
deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly
iniquitous and unconscionable. The subsequent motion for reconsideration was, likewise, denied. Hence,
petitioner filed the instant petition raising the sole issue that:
THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW
BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE
FORECLOSURE AUCTION SALE.[4]
In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction sale
was sufficient to cover the principal obligation of the private respondent including interest, penalty and other
charges. Both the respondent court and the trial court took particular attention on the penalty charge of 3% a
month which was imposed on the principal obligation as a result of their default in payments. Undaunted by the
disallowance of its claim in the August 27, 1992 decision, petitioner reiterated its position in a motion for
reconsideration, averring that the respondent court and the trial court failed to reconcile the figures due it.
Petitioner asserts that as of September 26, 1981, private respondents obligation amounted to
P4,809,187.12. At that time of the foreclosure sale on February 14, 1983, the obligation to SIHI was computed
to be P6,833,021.62 inclusive of interest and penalty charges. Considering that the bid price of the foreclosed
properties was only P4,233,874.00, petitioner was still entitled to a deficiency of about
P2,601,147.62. Petitioner further added that until the original obligation is fully paid, private respondents

There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be
reduced by the courts if it is iniquitous or unconscionable. [5] Petitioner argues that while it recognizes the
authority of the court to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not
have the authority to delete the payment of the penalty charges altogether for this is in clear contravention
of Article 1229 and the law of contracts between the parties.
This contention is not well-taken.
The Court does not find any reversible error committed by the respondent court in ruling that the petitioner
was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per
Statement of Account dated September 21, 1981, the obligation of the private respondent was computed to
be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its
obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the private
respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the amount of
P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the outstanding obligation
of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be a balance of only about
P575,313.12.
Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as
claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency
altogether because it found that the principal obligation of the private respondent would not have ballooned to
such a horrendous amount of P4.8M as of September 21, 1991 if not for the penalty charge of 3% per month or
36% per annum. The trial court justified, to wit:
x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their
transactions, it is shown that the amount including interests and other charges, is P2,970,556.64. For a two year
period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809.187.12. In
other words, the money of the plaintiff has already earned interests and other charges to more or less
P1,638,630.48. As alleged in plaintiffs complaint, the total amount purchased by plaintiff was only for
P2,500,000.00. There is reason to believe that the P2,970,566.64 represented by the various checks include
therein, the interest and other charges upon their maturity dates. Deducting the amount of P2,500,000.00 from
P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff has already earned from the time
it has foreclosed defendants' properties has passed the P2,000,000.00.[6]

169
Contrary to petitioners contention, the respondent court acted in accordance to Article 1229 when it
declared that petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the
payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the
penalties as contended by the petitioner.
In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,[7] we held that:
xxx
On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken
into account. We do not agree, however, that payment of any amount as surcharges and penalties should
altogether be deleted. x x x
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that
surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally
iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and
equitable in another. This provision of law will have to be applied to the established facts of any given
case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court rules
the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
iniquitous and unconscionable. x x x
Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per
annum iniquitous and unconscionable. Petitioner computed the amount of P4,809,187.12 as the outstanding
obligation of the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner
defaulted in their payments. This amount was no longer questioned and was particularly taken into
consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983, obtaining a
sum of about P4,223,874.00. These foreclosed properties located in Makati [8] are undoubtedly valuable
properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding
obligation. Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its investment
and earned more than enough profit in two years (1978-1981) by way of penalty charges. Although petitioner
claims that the penalty charge was well within the banking and business practice, no proof was adduced

thereof. To allow the petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in
1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times
more than the original investment of about P2,558,073.75 is rather unwarranted. We quote with favor the
respondent courts ratiocination:
The lower court did not err in its ruling under its statement that since plaintiff had already recovered fully the
receivables from the defendants, the court, considering that the plaintiff for the two properties foreclosed by it
bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which
was only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the
defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped
imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the
properties it had foreclosed (Decision, p. 8). After due consideration and reflection on all the factual
circumstances obtaining in the case at bar, it is Our opinion that the lower court properly exercised its discretion
under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable.
x x x[9]
While the Court recognizes the right of the parties to enter into contracts and are expected ro comply with
the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when
necessary.Article 1229 of the New Civil Code clearly provides:
ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable.
Likewise, Article 2227 provides:
ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.

G.R. No. 107569 November 8, 1994

170
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.
Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in
CA G.R. CV No. 27195, the dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is
entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per
annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness
and to accordingly take the appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on
the indebtedness should, likewise, be charged interest at the rate of 12%per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise,
obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the
Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos,
as evidenced by a Credit Agreement. Under the Promissory Note covering the loan,
the loan was to be amortized over a period of three (3) years to end on March 29,
1985, at twelve (12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage over a
1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug,
Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of
P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage
over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a
loan value of P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever policy it
may adopt in the future; Provided, that the interest rate on this

accommodation shall be correspondingly decreased in the event that

the applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or
decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any
time without notice, beyond the stipulated rate of 12% but only "within the limits
allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on
the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGE, in
accordance with the provision hereof, shall be subject during the life
of this contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
On February 17, 1983, (private respondents) were granted an additional NACIDA
loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private
respondents) executed another Promissory Note, which was to mature on April 1,
1985. Other than the date of maturity, the second promissory note contained the
same terms and stipulations as the previous note. The parties likewise executed a
new Credit Agreement, changing the amount of the loan from P50,000.00 to
P100,000.00, but otherwise preserving the stipulations contained in the original
agreement.
As additional security for the loan, (private respondents) constituted another real
estate mortgage over 2 parcels of registered land, with a combined area of 311
square meters, located at Guadalupe, Cebu City. The land, upon which several
buildings are standing, was appraised by the PNB to have a value of P40,000.00 and
a loan value of P28,000.00.
In a letter dated August 1, 1984, the PNB informed (private respondents) "that the
interest rate of your CIGLF loan account with us is now 25% per annum plus a

171
penalty of 6% per annum on past dues." The PNB further increased this interest rate
to 30% on October 15, 1984; and to 42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had an
outstanding principal account of P81,000.00 of which P18,523.14 was credited to the
principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus,
as of said date, the unpaid principal obligation of (private respondent) amounted to
P62,830.32.
Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12%
interest and to condone the present interest and penalties due; but to no
avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific performance against petitioner
PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial
Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a release of
mortgage;
2. The PNB to pay pecuniary consequential damages for the destruction of (private
respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well as the costs of suit; and
4. Granting (private respondents') such other relief as may be found just and
equitable in the premises. 4
On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner
bank, and disallowed the increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled
(1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the
Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5

The petition is bereft of merit.

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future and provided,
that, the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease in maximum interest
rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.)
No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7,
to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be increased
in the event that the applicable maximum rate of interest is increased by law or by the
Monetary Board; Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in
the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board; Provided further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the
Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:

172
Sec. 1303. Interest and Other Charges. The rate of interest,
including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, shall not be subject to
any ceiling prescribed under or pursuant to the Usury Law, as
amended.

In order that obligations arising from contracts may have the force or law between the
parties, there must be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even
assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.
(Citation omitted.)

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law
and circular did not authorize either party to unilaterally raise the interest rate without the other's
consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement,
or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his
act has no more efficacy than if it had been done under duress or by a person of unsound mind. 6
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all
the parties must meet as to the proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always
a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right tounilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important modification
in their agreement, and would negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.

Private respondents are not also estopped from assailing the unilateral increases in interest rate
made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is
obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In the
case at bench, the circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of
Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 113926 October 23, 1996
SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA
VENTURA,respondents.
Questions of law which are of first impression are sought to be resolved in this case: Should the rate
of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in
excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central
Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per
annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of

173
promissory notes and stipulated interest rates of promissory notes and thereby impose a 12% interest
on the loans, in the absence of evidence justifying the imposition of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge
Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which
found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by the
court a quo from 23% per annum as agreed upon the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No.
TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One
Hundred Thousand Pesos (P100,000.00) payable in six monthly installments with a stipulated interest
of 23% per annum up to the fifth installment. 1
On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor of
petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos
(P100,000.00) in six (6) monthly installments plus 23% interest per annum. 2

WHEREFORE, premises above-considered, and plaintiff's claim having been duly

proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:
1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September
1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August
1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August
1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as
and by way of attorney's fees; and to
5. Pay the costs of this suit.
SO ORDERED. 6

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount
of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum. 3
On all the abovementioned promissory notes, private respondent Leila Ventura had signed as comaker. 4
Upon maturity which fell on the different dates below, the principal balance remaining on the notes
stood at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a
collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered
a judgment in favor of petitioner SBTC, the dispositive portion which reads:

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory
notes was 23%per annum;
(2) the interests awarded should be compounded quarterly from due date as provided
in the three (3) promissory notes;
(3) defendants Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
severally with defendant Eusebio without a need for demand upon her. 7
Consequently, an Order was issued by the court a quo denying the motion to grant the rates of
interest beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with
co-defendants Eusebio.
Hence, this petition.

174
The sole issue to be settled in this petition is whether or not the 23% rate of interest per
annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest as stipulated
on the three (3) promissory notes is 23% per annum. 8 The applicable provision of law is the Central
Bank Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which
state: 9
Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or judicial, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate
of interest, shall continue to be twelve per cent (12%) per annum.
CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain forbearances, to
wit:
Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of
interest for the loan or renewal thereof or the forbearance of any money, goods or
credits, and to change such rate or rates whenever warranted by prevailing economic
and social conditions: Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed different

maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries. 10
The court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.
All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular
No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend
the Usury Law but simply suspended the latter's effectivity.
Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left
with no alternative but to apply the same according to its clear language. As we have held in the case
of Quijano v.Development Bank of the Philippines: 12
. . . We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had
steadfastly adhered to the doctrine that its first and fundamental duty is the
application of the law according to its express terms, interpretation being called for
only when such literal application is impossible. No process of interpretation or
construction need be resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and unambiguous
terms, no discretion is left to the judiciary. It must see to it that is mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question
that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not
illegal. Furthermore, Article 1306 of the New Civil Code provides that contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or public policy. We find no valid
reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing
to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of money,
the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be
12% per annum. 13 Hence, only in the absence of a stipulation can the court impose the 12% rate of
interest.

175
The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are
binding between them. Respondent Eusebio, likewise, did not question any of the stipulations therein.
In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question the
decision and instead expressed his desire to negotiate with the petitioner bank for "terms within which
to settle his obligation." 14
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED
with the MODIFICATION that the rate of interest that should be imposed be 23% per annum.
SO ORDERED.
Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioners, vs. THE COURT OF
APPEALS and PHILIPPINE NATIONAL BANK,respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; BINDING EFFECT OF AGREEMENT BETWEEN PARTIES;
PREMISED ON THE PRINCIPLE OF MUTUALITY AND OBLIGATORY. - The binding effect of
any agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must
be mutuality between the parties based on their essential equality. Any contract which appears to
be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the
will of one of the parties, is likewise, invalid.
2. ID.; SPECIAL CONTRACTS; LOAN; INTEREST ARE REQUIRED TO BE EXPRESSLY
STIPULATED IN WRITING. - The manner of agreement is itself explicitly stipulated by the Civil
Code when it provides, in Article 1956 that No interest shall be due unless it has been expressly
stipulated in writing. What has been stipulated in writing from a perusal of interest rate provision
of the credit agreement signed between the parties is that petitioners were bound merely to pay
21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and (3) upon
agreement.
3. ID.; ID.; ID.; LIFTING OF USURY CEILING; DOES NOT GRANT BANKS CARTE
BLANCHE AUTHORITY TO RAISE INTEREST; RULE UNDER CB CIRCULAR 905. - While the
Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular
could possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their
assets. Borrowing represents a transfusion of capital from lending institutions to industries and
businesses in order to stimulate growth. This would not, obviously, be the effect of PNBs
unilateral and lopsided policy regarding the interest rates of petitioners borrowings in the instant
case.

4. ID.; ID.; ID.; ID.; CANNOT BE INVOKED TO JUSTIFY ESCALATION CLAUSES, NOT BEING A
GRANT OF SPECIFIC AUTHORITY. - Apart from violating the principle of mutuality of contracts,
there is authority for disallowing the interest rates imposed by respondent bank, for the credit
agreement specifically requires that the increase be within the limits allowed by law. In the case
of PNB vs. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No.
905 could not be properly invoked to justify the escalation clauses of such contracts, not being a
grant of specific authority.
5. ID.; ID.; ID.; ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY POTESTATIVE BUT
BASED ON REASONABLE AND VALID GROUNDS. - Escalation clauses are not basically
wrong or legally objectionable so long as they are not solely potestative but based on reasonable
and valid grounds. Here, as clearly demonstrated above, not only the increases of the interest
rates on the basis of the escalation clause patently unreasonable and unconscionable, but also
there are no valid and reasonable standards upon which the increases are anchored.
6. ID.; ID.; MORTGAGE; AUTOMATIC FORECLOSURE PROVISIONS OF PD 385; CAN BE
INVOKED AFTER SETTLEMENT OF QUESTION INVOLVING INTEREST AND ONLY AFTER
DEBTOR REFUSE TO MEET OBLIGATION FOLLOWING SUCH DETERMINATION. - In the
first place, because of the dispute regarding the interest rate increases, an issue which was
never settled on merit in the courts below, the exact amount of petitioners obligations could not
be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by
respondent only after settlement of the question involving the interest rate on the loan, and only
after the spouses refused to meet their obligations following such determination.
7. STATUTORY CONSTRUCTION; THE PHRASE WITHIN THE LIMITS ALLOWED BY LAW
REFERS TO LEGISLATIVE ENACTMENTS NOT ADMINISTRATIVE CIRCULARS. - The
escalation clause of the credit agreement requires that the same be made within the limits
allowed by law, obviously referring specifically to legislative enactments not administrative
circulars. Note that the phrase limits imposed by law, refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the Monetary Board. Had
the parties intended the word law to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction
between law or the Monetary Board Circulars in referring to mutually agreed upon reductions in
interest rates.
APPEARANCES OF COUNSEL
Cuevas De la Cuesta & De las Alas for petitioners.
Cruz Cruz & Navarro III collaborating counsel for petitioners.
PNB Legal Department for private respondent.
DECISION
KAPUNAN, J.:

176
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the
spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling
P18.0 Million pesos payable in a period of six years at an interest rate of 21 % per annum. To secure
the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square
meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong
Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was
executed between the parties. Pertinent portions of the said agreement are quoted below:

interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already
in default of their loan obligations.

SPECIAL CONDITIONS

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved
the supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which
was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21 %) per annum, payable semi-annually
in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the
loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent
(3%) per annum to be imposed on any amount remaining unpaid or not rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling
P7,735,004.66,2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984,
respondent bank, over petitioners protestations, raised the interest rate to 28%, allegedly pursuant to
Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a
high of 68% between March of 1984 to September, 1986. 4
Petitioners protested the increase in interest rates, to no avail. Before the loan was to mature in
March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a
writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by
Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could
unilaterally raise interest rates on the loan, pursuant to the credit agreements escalation clause, and
in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB
countered by ordering the extrajudicial foreclosure of petitioners mortgaged properties and scheduled
an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court,
on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of
the mortgaged property.

As a result of PNBs refusal of the tender of payment, petitioners, on March 8, 1990, formally
consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They
prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was
raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought
the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale of Marvin Plaza scheduled on March 12, 1990.
On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 was transferred to Branch 66 presided by Judge
Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by
Judge Ignacio Capulong.
For Judge Ignacio Capulongs refusal to lift the writ of preliminary injunction issued March 30,
1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent
Court of Appeals, assailing the following orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the
foreclosure sale of Marvin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent banks motion to lift the writ of
injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent banks subsequent motion to lift the writ of
preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent banks motion for reconsideration.

177
On August 27, 1993, respondent court rendered its decision setting aside the assailed orders
and upholding respondent banks right to foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent courts decision dated August 27, 1993 raises two
principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates
from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is
granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of
P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were
unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from
unilaterally raising the interest rate in the borrowers loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the principle of mutuality of contracts expressed in Article
1308 of the Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates
x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed
interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such
changes to once every twelve months.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled
principles:(1) that any obligation arising from contract has the force of law between the parties; and
(2) that there must be mutuality between the parties based on their essential equality. 6 Any contract
which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to
the will of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan
without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by
the Civil Code when it provides, in Article 1956 that No interest shall be due unless it has been
expressly stipulated in writing. What has been stipulated in writing from a perusal of interest rate
provision of the credit agreement signed between the parties is that petitioners were bound merely to
pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract
in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit agreement because the same plainly uses the phrase
interest rate agreed upon, in reference to the original 21% interest rate. The interest provision states:
(c) Interest and Charges

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the
private respondents loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them.
In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement
between the PNB and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker partys (the
debtor) participation being reduced to the alternative to take it or lease it (Qua vs. Law Union & Rock Insurance
Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.
PNBs successive increases of the interest rate on the private respondents loan, over the latters protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms may
be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment.
The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that no interest shall
be due unless it has been expressly stipulated in writing.

178
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay a higher rate than that.

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found
by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners loan, over the latters
vehement protests, were arbitrary.
Moreover, respondent banks reliance on C.B. Circular No. 905, Series of 1982 did not authorize
the bank, or any lending institution for that matter, to progressively increase interest rates on
borrowings to an extent which would have made it virtually impossible for debtors to comply with their
own obligations. True, escalation clauses in credit agreements are perfectly valid and do not
contravene public policy. Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing agreements between parties, which
agreements - while they may be the law between the contracting parties - implicitly incorporate
provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by
C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank
carte blanche authority to raise interest rates to levels which would either enslave its borrowers or
lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the
effect of PNBs unilateral and lopsided policy regarding the interest rates of petitioners borrowings in
the instant case.
Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the
increase be within the limits allowed by law. In the case of PNB v. Court of Appeals, cited above, this
Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be made
within the limits allowed by law, obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase limits imposed by law, refers only to the escalation
clause. However, the same agreement allows reduction on the basis of law or the Monetary Board.
Had the parties intended the word law to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction between
law or the Monetary Board Circulars in referring to mutually agreed upon reductions in interest rates.
This distinction was the subject of the Courts disquisition in the case of Banco Filipino Savings and
Mortgage Bank v. Navarro8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12%
to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:

a law
increasing
the lawful rates of interest
that may be charged
on this particular
kind of loan. (Paragraphing and italics supplied)
It is clear from the stipulation between the parties that the interest rate may be increased in the event
a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of
loan. The Escalation Clause was dependent on an increase of rate made by law alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. Although a circular duly issued is not
strictly a statute or a law, it has, however, the force and effect of law. (Italics supplied). An administrative
regulation adopted pursuant to law has the force and effect of law. That administrative rules and regulations
have the force of law can no longer be questioned.
The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines
quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the
guidelines, for a loans interest to be subject to the increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase in the event that any law or Central Bank regulation is promulgated
increasing the maximum rate for loans. The guidelines thus presuppose that a Central Bank regulation is not
within the term any law.
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding Section 7-a to
the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest
agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or
by the Monetary Board. To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate
that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:

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Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law
or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and italics supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that
there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board.
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
bank in contravention to the tenor of their credit agreement. That an increase in interest rates from
18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations, respondent bank was demanding P58,377,487.00
over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not
only the increases of the interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards upon which the increases
are anchored.
We go now to respondent banks claim that the principal issue in the case at bench involves its
right to foreclose petitioners properties under P.D. 385. We find respondents pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government financial
institutions would not be denied substantial cash inflows necessary to finance the governments
development projects all over the country by large borrowers who resort to litigation to prevent or
delay the governments collection of their debts or loans. 10 In facilitating collection of debts through its
automatic foreclosure provisions, the government is however, not exempted from observing
basic principles of law, and ordinary fairness and decency under the due process clause of the
Constitution.11
In the first place, because of the dispute regarding the interest rate increases, an issue which
was never settled on merit in the courts below, the exact amount of petitioners obligations could not
be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent
bank only after settlement of the question involving the interest rate on the loan, and only after the
spouses refused to meet their obligations following such determination. In Filipinas Marble
Corporation v. Intermediate Appellate Court,12 involving P.D. 385s provisions on mandatory
foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people
actually misappropriated and misspent the $5 million loan in whole or in part although the trial court
found that there is persuasive evidence that such acts were committed by the respondent. This matter
should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385
cannot automatically be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioners properties
under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It
would unduly prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan which was applied
wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan
where there was no failure of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas
Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug this iceberg of a scandal in the sugar industry during the
Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty
linen in the PHILSUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER
be repeated.
It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties
below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance
with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining
obligations with the respondent bank. The latter could not therefore claim that there was no honest-togoodness attempt on the part of the spouses to settle their obligations. Respondent banks rush to
inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts
below, in spite of the unsettled differences in interpretation of the credit agreement was obviously
made in bad faith, to gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and
progressive increases imposed by respondent PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan to an amount way over three times that which
was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in
the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August
27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE.
The case is remanded to the Regional Trial Court of Makati for further proceedings.

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SO ORDERED.
Bellosillo and Hermosisima, Jr., JJ., concur.
Padilla, J., No part, having handled (while in law practice) several cases adverse to petitioners.
Vitug, J., No part. One of the parties used to be a client.

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND
BANK OF THE PHILIPPINES, respondents.
DECISION
PANGANIBAN, J.:

Rollo, pp. 48-55.

Id., at, 165.

Id.

Id.

The PNB claimed that as of March 12, 1990, the spouses balance was P58,377,487.31, using the
increased interest rates for computing accrued interest.
6

Garcia v. Legarda, 21 SCRA 555 (1967).

196 SCRA 536, 543 (1991).

152 SCRA 346(1987).

Vitugs Compendium of Civil Law and Jurisprudence, Revised Edition, 1993, p. 533, citing
PNB v. IAC, 183 SCRA 133; PNB v. Court of Appeals, 196 SCRA 536.
10

Sections 1 and 2 of P.D. 385 provide:

Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days
from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the arrearages on such account,
concluding accrued interest and other obligations, including interest and other charges, as appearing
in the book of accounts and/or related records of the financial institution concerned. This shall be
without prejudice to the exercise by the government financial institution of such rights and/or
remedies available to them under their respective contracts with their debtors, including the right to
foreclose on loans, credits, accommodations, and/or guarantees on which the arrearages are less
than twenty percent (20%).
Section 2. No restraining order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such institution in compliance with
the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or
permanent injunction is sought by the borrower(s) or any third party or parties, except after due
hearing in which it is established by the borrower, and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filling of
foreclosure proceedings.

May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason
of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the
Decision promulgated on June 19, 1991 by respondent Court of Appeals [1] in CA-G.R. CV No. 24956,
upholding the validity and enforceability of the escalation by private respondent Land Bank of the
Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146
before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after
entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation
and memoranda. The stipulation reads in part:[2]
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17,
1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she
applied for a housing loan of P148,000.00, payable within 25 years from (respondent banks)
Provident Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latters duly authorized representative,
executed the Housing Loan Agreement, x x x ;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the
latters authorized representative, also executed a Real Estate Mortgage and Promissory Note, x x x;
4. That the loan x x x was actually given to (petitioner) Gilda Florendo, x x x, in her capacity as
employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioners) loan from
9% per annum to 17%, the said increase to take effect on March 19, 1985;

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6. That the details of the increase are embodied in (Landbanks) ManCom Resolution No. 85-08
dated March 19, 1985, x x x, and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series
of 1985), x x x;
7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7,
1985, x x x. Enclosed with the letter are a copy of the PF Memo Circular x x x and a Statement of
Account as ofMay 31, 1985, x x x;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank)
replied through a letter dated July 1, 1985, x x x. Enclosed with the letter is a Memorandum dated
June 26, 1985 of (respondent banks) legal counsel, A.B.F. Gaviola, Jr., x x x;
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest
or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently
maintained that the said increase is unlawful and unjustifiable. Because of (respondent banks)
repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;
10. That, just the same, despite (respondent banks) demands that (petitioners) pay the increased
interest or increased monthly installments, they (petitioners) have faithfully paid and discharged
their loan obligations, more particularly the monthly payment of the original stipulated installment
of P1,248.72. Disregarding (respondent banks) repeated demand for increased interest and monthly
installment, (petitioners) are presently up-to-date in the payments of their obligations under the
original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with
(respondent bank);

b. Paragraph (f) of the Real Estate Mortgage[4] which states:

The rate of interest charged on the obligation secured by this mortgage x x x, shall be
Subject, during the life of this contract, to such an increase/decrease in accordance with
prevailing rules, regulations and circulars of the Central Bank of the Philippines as the
Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and
subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of the
loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund)
Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of
bank employees who voluntarily secede (resign) from the Bank; the range of rates varied depending
upon the number of years service rendered by the employees concerned. The rates were made
applicable to those who had previously resigned from the bank as well as those who would be
resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with
authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said
escalation provisions in the housing loan agreement and the mortgage contract. The dispositive
portion of the said decision reads:[5]
WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring
that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly
amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment.

xxxxxxxxx
x x x x x x x x x.
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage
referred to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement,[3] which provides that, for as long as the
loan or any portion thereof or any sum that may be due and payable under the said loan agreement
remains outstanding, the borrower shall -f) Comply with all the rules and regulations of the program imposed by the LENDER and
to comply with all the rules and regulations that the Central Bank of the Philippines has
imposed or will impose in connection with the financing programs for bank officers and
employees in the form of fringe benefits.

Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous
and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank
likewise appealed and contested the propriety of having the increased interest rate apply only upon
the finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court,
holding that:[6]
x x x Among the salient provisions of the mortgage is paragraph (f) which provides that the interest
rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed

182
under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank
may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest
rate on their original loan. Such an agreement is a contractual one and the spouses are bound by
it. Escalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal
stability and to retain the value of money in long term contracts (Insular Bank of Asia and America
vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the
validity of an escalation clause such as the one which refers to an increase rate is that the contract
should also contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred
to above contains such provision.
A contract is binding on the parties no matter that a provision thereof later proves onerous and which
on hindsight, a party feels he should not have agreed to in the first place.
and disposed as follows:[7]
WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of
17% on the balance of the loan of the spouses shall be computed starting July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court a grave and patent error in not nullifying the respondent
banks unilateral increase of the interest rate and monthly amortizations of the loan -1. x x x (simply because of) a bare and unqualified stipulation that the interest rate may be increased;
2. x x x on the ground that the increase has no basis in the contracts between the parties;
3. x x x on the ground that the increase violates Section 7-A of the Usury Law;
4. x x x on the ground that the increase and the contractual provision that (respondent bank) relies
upon for the increase are contrary to morals, good customs, public order and public policy.[8]
The key issue may be simply presented as follows: Did the respondent bank have a valid and
legal basis to impose an increased interest rate on the petitioners housing loan?
The Courts Ruling

Basis for Increased Interest Rate

Petitioners argue that the HLA provision covers only administrative and other matters, and does
not include interest rates per se, since Article VI of the agreement deals with insurance on and
upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is
vague because it does not state if the prevailing CB rules and regulations referred to therein are
those prevailing at the time of the execution of these contracts or at the time of the increase or
decrease of the interest rate. They insist that the banks authority to escalate interest rates has not
been shown to be crystal-clear as a matter of fact and established beyond doubt. The contracts being
contracts of adhesion, any vagueness in their provisions should be interpreted in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it
does not make any reference to increases or decreases in the interest rate on loans. However,
paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and
therefore, the parties were and are bound by the said stipulation that (t)he rate of interest charged on
the obligation secured by this mortgage x x x, shall be subject, during the life of this contract, to such
an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central
Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank)
may prescribe for its debtors x x x. [9] Contrary to petitioners allegation, there is no vagueness in the
aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to
them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro,[10] this Court in essence ruled that in
general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar,[11] the
Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money in long term contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase
for resigned employees, it could not apply as to petitioner-employee because nowhere in the loan
agreement or mortgage contract is it provided that petitioner-wifes resignation will be a ground for the
adjustment of interest rates, which is the very bedrock of and the raison detre specified in said
ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No.
2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and

183
that escalation upon the will of the respondent bank is contrary to the principle of mutuality of
contracts, per Philippine National Bank vs. Court of Appeals.[12]
What is actually central to the disposition of this case is not really the validity of the escalation
clause but the retroactive enforcement of the ManCom Resolution as against petitioner-employee. In
the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule,
regulation or other issuance which would have triggered an application of the escalation clause as to
her factual situation.
In Banco Filipino,[13] this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed
the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation
clause in the loan agreement authorizing the bank to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should be enacted
increasing the lawful rates of interest that may be charged on this particular kind of loan. In said case,
the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB
Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.
In PNB vs. Court of Appeals,[14] this Court disallowed the increases in interest rate imposed by
the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own
Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which
were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on
January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued
February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate
ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These
and other relevant CB issuances had already come into existence prior to the perfection of the
housing loan agreement and mortgage contract, and thus it may be said that these regulations had
been taken into consideration by the contracting parties when they first entered into their loan
contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it
could have imposed an interest rate higher than 9% per annum rate for the housing loans of its
employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest
rate on petitioners loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an
increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees
acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as
employee resignations, which could have been used to trigger an application of the escalation clause
were considered barred or waived. If the intention were otherwise, they -- especially respondent bank
-- should have included such factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance with
prevailing rules, regulations and circulars of the Central Bank x x x as the Provident Fund Board x x x
may prescribe. The Banco Filipino and PNB doctrines are applicable four-square in this case. As a
matter of fact, the said escalation clause further provides that the increased interest rate shall only
take effect on the date of effectivity of (the) increase/decrease authorized by the CB rule, regulation or
circular. Without such CB issuance, any proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several cases [15]) that by virtue of
CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners contention that the
escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and
imposition of increased interest rates by the herein respondent bank is obviously violative of
theprinciple of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held
in PNB:[16]
In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that
the x x x loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as
a former bank employee was very knowledgeable concerning respondent banks lending rates and
procedures, and therefore, petitioners were on an equal footing with respondent bank as far as the
subject loan contract was concerned. That may have been true insofar as entering into the original
loan agreement and mortgage contract was concerned. However, that does not hold true when it
comes to the determination and imposition of escalated rates of interest as unilaterally provided in the
ManCom Resolution, where she had no voice at all in its preparation and application.

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To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
sweetheart loan at patently concessionary interest rates, which according to respondent bank is the
sweetest deal anyone could obtain and is an act of generosity considering that in 1985 lending rates
in the banking industry were peaking well over 30% p.a., [17] we need only point out that the bank had
the option to impose in its loan contracts the condition that resignation of an employee-borrower
would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it
would be totally unfair to now impose said condition, not to mention that it would violate the principle
of mutuality of consent in contracts. It goes without saying that such escalation ground can be
included in future contracts -- not to agreements already validly entered into.
Let it be clear that this Court understands respondent banks position that the concessional
interest rate was really intended as a means to remunerate its employees and thus an escalation due
to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus
the escalation provision could not be legally applied and enforced as against herein petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS
ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan
remains at nine (9) percent per annum and the monthly amortization at P1,248.72.
SO ORDERED.
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, vs. BANCOM FINANCE CORPORATION
(NOW UNION BANK OF THE PHILIPPINES),respondent.
DECISION
PANGANIBAN, J.:
An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The
purported buyer, not being the owner, cannot validly mortgage the subject property.Consequently,
neither does the buyer at the foreclosure sale acquire any title thereto.
Statement of the Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
March 30, 2001 Decision[1] of the Court of Appeals (CA) in CA-GR No. 58346. The decretal portion of
the challenged Decision reads as follows:

WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one is
rendered declaring BANCOMs right to the subject land as a purchaser in good faith and for value, and ordering
the cancellation of the Notice of Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement as to costs.
[2]

The Facts
The factual antecedents of the case are summarized by the Court of Appeals thus:
Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a 339,335
square meter or 33.9335 hectare parcel of agricultural land together with improvements located in Barangay
Pulang Yantoc, Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant Norma Sulit,
after being introduced by Candelaria Sanchez to Fr. Cruz, offered to purchase the land. Plaintiffs asking price
for the land was P700,000.00, but Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with
the agreement that titles would be transferred to Norma upon payment of the balance of P675,000.00.Norma
failed to pay the balance and proposed [to] Fr. Cruz to transfer the property to her but the latter refused,
obviously because he had no reason to trust Norma. But capitalizing on the close relationship of Candelaria
Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs execute a document of sale of the land in
favor of Candelaria who would then obtain a bank loan in her name using the plaintiffs land as collateral. On the
same day, Candelaria executed another Deed of Absolute Sale over the land in favor of Norma. In both
documents, it appeared that the consideration for the sale of the land was only P150,000.00. Pursuant to the
sale, Norma was able to effect the transfer of the title to the land in her name under TCT No. T-248262.
Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount
of P655,000.00 representing the balance of the actual price of the land. In a Special Agreement dated September
1, 1978, Norma assumed Candelarias obligation, stipulating to pay the plaintiffs the said amount within six
months on pain of fine or penalty in case of non-fulfillment. Unknown to the plaintiffs, Norma managed to
obtain a loan from Bancom in the amount of P569,000.00 secured by a mortgage over the land now titled in her
name.
On account of Normas failure to pay the amount stipulated in the Special Agreement and her subsequent
disappearance from her usual address, plaintiffs were prompted to file the herein complaint for the
reconveyance of the land.
Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in
default. On May 20, 1980, Bancom filed a motion for leave to intervene which was granted by the trial court. In
its Answer in Intervention, Bancom claimed priority as mortgagee in good faith; and that its contract of
mortgage with Norma had been executed before the annotation of plaintiffs interest in the title.

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Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was
foreclosed. At the subsequent auction sale, Bancom was declared the highest bidder and was issued the
corresponding certificate of sale over the land.
On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It ruled that
the contract of sale between plaintiffs and Candelaria was absolutely simulated. Consequently, the second
contract of sale, that is, between Candelaria and Norma, produced no legal effect. As for Bancom, the trial court
held that the Bank was not a mortgagee in good faith thus it can not claim priority of rights over plaintiffs
property.[3]
Ruling of the Court of Appeals

Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a
mortgagee in good faith, despite the fact that respondent Bancom was in truth and in fact a mortgagee in bad
faith over the subject property.
III
Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title [to] the
property did not disclose any irregularity that would arouse suspicion by respondent bank as to the condition of
the subject land despite the fact that questions and circumstances abound which would render respondent bank
not a mortgagee in good faith, and that the case of Sunshine Finance Investment Corporation vs. Intermediate
Appellate Court applies to the instant case.

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not
simulated. Thus, the Contract of Mortgage between Sulit and respondent was likewise valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because
they did not seek to annul the same but instead executed a special agreement to enforce payment of
the balance of the price in the amount of P665,000.00.[4]

IV
Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank possesses a
preferential right over petitioners on the subject land as a mortgagee in good faith.[6]
The above issues can be summed up into two: (1) the validity of the Deeds of Sale and
Mortgage and (2) the good faith of the mortgagee.

Furthermore, it upheld respondent as a mortgagee in good faith; ergo, it had a preferential right
to the land.
Hence, this Petition.[5]

This Courts Ruling

The Petition is meritorious.

Issues

First Issue:

In their Memorandum, petitioners raise the following issues for this Courts consideration:
I

Validity of the Sale and the Mortgage

Petitioners claim that the Deed of Sale [7] they executed with Sanchez, as well as the Deed of
Sale executed between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the
other hand, echoing the appellate court, respondent contends that petitioners intended to be bound
by those Deeds, and that the real estate mortgage over the subject property was valid.
[8]

Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended to
enter into a sale of the property in question and that the declarations of Petitioner Fr. Edilberto Cruz in Court
belied the court a quos finding that the Deeds of Sale in question were absolute simulations.
II

As a general rule, when the terms of a contract are clear and unambiguous about the intention of
the contracting parties, the literal meaning of its stipulations shall control. But if the words appear to
contravene the evident intention of the parties, the latter shall prevail over the former. [9] The real
nature of a contract may be determined from the express terms of the agreement, as well as from the
contemporaneous and subsequent acts of the parties thereto. [10]

186
On the other hand, simulation takes place when the parties do not really want the contract they
have executed to produce the legal effects expressed by its wordings. [11] Simulation or vices of
declaration may be either absolute or relative. Article 1345 of the Civil Code distinguishes an absolute
simulation from a relative one while Article 1346 discusses their effects, as follows:

ATTY. CABRERA
This is an action to annul a certain contract.
COURT

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not
intend to be bound at all; the latter when the parties conceal their true agreement.

He received the consideration stated in the contract. The witness may answer.

Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a third
person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their agreement.

WITNESS

In Rongavilla v. Court of Appeals,[12] we held that a deed of sale, in which the stated
consideration had not in fact been paid, was a false contract; that is void ab initio. Furthermore, Ocejo
v. Flores,[13] ruled that a contract of purchase and sale is null and void and produces no effect
whatsoever where it appears that [the] same is without cause or consideration which should have
been the motive thereof, or the purchase price which appears thereon as paid but which in fact has
never been paid by the purchaser to the vendor.

ATTY. CABRERA

[14]

Although the Deed of Sale between petitioners and Sanchez stipulated a consideration
of P150,000, there was actually no exchange of money between them. Petitioner Edilberto Cruz
narrated how the transaction came about:
ATTY. CABRERA:
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma
Sulit with whom you are transacting?
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring
the title from us, they can borrow money from the Bank. So it is a way of acquiring the
title from us, sir.
Q. This deed of sale marked Exhibit D which you just identified, stipulates a consideration
of P150,000.00. The question, Father, is - did you receive the P150,000.00?
ATTY. AGRAVANTE
Objection, your Honor, the document is the best evidence.

A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.

Q If you did not receive this P150,000.00 stated in this deed of sale that you and your
brother executed from Candelaria Sanchez, did you receive the said amount from
Norma Sulit or anybody else for that matter?
A Not a single centavo, sir.[15]
His claim was corroborated by Sanchez. She likewise said that the Deed of Sale [16] she executed
with Sulit, for which she did not receive any consideration was only for the purpose of placing the title
to the property in the latters name. She testified as follows:
Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.
Q I am showing to you this document which has already been marked when the
representative of the Register of Deeds produced the pertinent documents before the
court as Exhibit C, is this that document that you executed transferring the property in
the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit C, were you paid by Norma
Sulit the amount of P150,000.00 appearing in this Exhibit C?

187
ATTY BUYCO:
The question is leading, Your Honor.
COURT:

The failure of Sulit to take possession of the property purportedly sold to her was a clear badge
of simulation that rendered the whole transaction void and without force and effect, pursuant to Article
1409[26] of the Civil Code.[27] The fact that she was able to secure a Certificate of Title to the subject
property in her name did not vest her with ownership over it. [28] A simulated deed of sale has no legal
effect; consequently any transfer certificate of title (TCT) issued in consequence thereof should be
cancelled.[29] A simulated contract is not a recognized mode of acquiring ownership. [30]

Witness may answer.

Second Issue:
A No amount was given, sir. We prepared this document to transfer the title [to] her name
only.[17]
Respondent never offered any evidence to refute the foregoing testimonies. [18] On the contrary, it
even admitted that the stipulated consideration of P150,000 in the two Deeds of Sale had never been
actually paid by Sanchez to petitioners;[19] neither by Sulit to the former.[20]
Another telling sign of simulation was the complete absence of any attempt on the part of the
buyers -- Sanchez and Sulit -- to assert their alleged rights of ownership over the subject property.
[21]
This fact was confirmed by respondent which, however, tried to justify the non-occupancy of the
land by Sanchez and Sulit. Supposedly, because the two failed to pay the purchase price of the land,
they could not force petitioners to vacate it.[22]
The records clearly show that the two Deeds of Absolute Sale were executed over the same
property on the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged
by Sulit to Federal Insurance Company for P500,000. The mortgage was cancelled when she again
mortgaged the property to respondent for P569,000 on August 22, 1979. It is also undisputed that
petitioners did not receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral
to secure a loan from a bank. [23] Being merely a subterfuge, these agreements could not have been
the source of any consideration for the supposed sales. [24] Indeed, the execution of the two
documents on the same day sustains the position of petitioners that the Contracts of Sale were
absolutely simulated, and that they received no consideration therefor.[25]

Good Faith of Mortgagee

Petitioners argue that respondent was not a mortgagee in good faith because, at the time it
registered the real estate mortgage over the subject property, their adverse claim and notice of lis
pendens had already been annotated on the TCT (on October 30, 1979 and December 10, 1979,
respectively). On the other hand, respondent maintains that petitioners were the ones in bad faith,
because they already had knowledge of the existence of the mortgage over the property when they
caused the annotation of their adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the correctness
of the certificate of title and is no longer required to look behind the certificate in order to determine
the actual owner.[31] To do so would be contrary to the evident purpose of Section 39 of Act 496 which
we quote hereunder:
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the
same free of all encumbrances except those noted on said certificate, and any of the following encumbrances
which may be subsisting, namely:
First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of the
Philippine Islands which the statutes of the Philippine Islands cannot require to appear of record in the Registry.
Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral
thereof, where the certificate of title does not state that the boundaries of such highway, way, or irrigation canal
or lateral thereof, have been determined.

188
But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have
failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and
shall be held to pass with the land until cut off or extinguished by the registration of the servient estate, or in
any other manner.
This rule is, however, subject to the right of a person deprived of land through fraud to bring an
action for reconveyance, provided the rights of innocent purchasers for value and in good faith are not
prejudiced. An innocent purchaser for value or any equivalent phrase shall be deemed, under Section
38 of the same Act,[32] to include an innocent lessee, mortgagee or any other encumbrancer for value.
[33]

Respondent claims that, being an innocent mortgagee, it should not be required to conduct an
exhaustive investigation on the history of the mortgagors title before it could extend a loan. [34]
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike
private individuals, it is expected to exercise greater care and prudence in its dealings, including
those involving registered lands. [35] A banking institution is expected to exercise due diligence before
entering into a mortgage contract. [36] The ascertainment of the status or condition of a property offered
to it as security for a loan must be a standard and indispensable part of its operations. [37]
In Rural Bank of Compostela v. CA,[38] we held that a bank that failed to observe due diligence
was not a mortgagee in good faith. In the words of the ponencia:
x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not
apply to banks.
Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private
individuals, for their business is one affected with public interest, keeping in trust money belonging to their
depositors, which they should guard against loss by not committing any act of negligence which amounts to
lack of good faith by which they would be denied the protective mantle of the land registration statute, Act
[No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same
character and description. (Citations omitted)
Recently, in Adriano v. Pangilinan,[39] we said that the due diligence required of banks extended
even to persons regularly engaged in the business of lending money secured by real estate
mortgages.

The evidence before us indicates that respondent bank was not a mortgagee in good faith.
First, at the time the property was mortgaged to it, it failed to conduct an ocular inspection.
[41]
Judicial notice is taken of the standard practice for banks before they approve a loan: to send
representatives to the premises of the land offered as collateral and to investigate the ownership
thereof.[42] As correctly observed by the RTC, respondent, before constituting the mortgage over the
subject property, should have taken into consideration the following questions:
[40]

1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?
2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same
date, June 21, 1978 when she supposedly acquired it from the plaintiffs?
3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be compensated or
who might pose as obstacles to the mortgagees exercise of acts of dominion?
4) In an area as big as that property, [why] did they not verify if there were squatters?
5) What benefits or prospects thereof could the ultimate owner expect out of the property?
Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they
could have discovered that possession of the land was neither with Candelaria nor with Norma. [43]
Respondent was clearly wanting in the observance of the necessary precautions to ascertain the
flaws in the title of Sulit and to examine the condition of the property she sought to mortgage. [44] It
should not have simply relied on the face of the Certificate of Title to the property, as its ancillary
function of investing funds required a greater degree of diligence. [45] Considering the substantial loan
involved at the time, it should have exercised more caution. [46]
Moreover, the subject property, being situated in Bulacan, could have been easily and
conveniently inspected by respondent. A person who deliberately ignores a significant fact that would
create suspicion in an otherwise reasonable person is not an innocent purchaser for value. [47]
Second, respondent was already aware that there was an adverse claim and notice of lis
pendens annotated on the Certificate of Title when it registered the mortgage on March 14,
1980.Unless duly registered, a mortgage does not affect third parties like herein petitioners, as
provided under Section 51 of PD NO. 1529,[48] which we reproduce hereunder:

189
SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may convey,
mortgage, lease, charge or otherwise deal with the same in accordance with existing laws. He may use such
forms of deeds, mortgages, leases or other voluntary instruments [as] are sufficient in law. But no deed,
mortgage, lease, or other voluntary instrument except a will, purporting to convey or affect registered land, shall
take effect as a conveyance or bind the land, but shall operate only as a contract between the parties and as
evidence of authority to the clerk or register of deeds to make registration.

WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision
of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No costs.

The act of registration shall be the operative act to convey and affect the land, and in all cases under this Act the
registration shall be made in the office of the register of deeds for the province or city, where the land lies.

HUERTA ALBA RESORT INC., petitioner,

vs.
COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC., respondents.

True, registration is not the operative act for a mortgage to be binding between the parties. But to
third persons, it is indispensible.[49] In the present case, the adverse claim and the notice oflis
pendens were annotated on the title on October 30, 1979 and December 10, 1979, respectively; the
real estate mortgage over the subject property was registered by respondent only on March 14,
1980. Settled in this jurisdiction is the doctrine that a prior registration of a lien creates a preference.
[50]
Even a subsequent registration of the prior mortgage will not diminish this preference, which
retroacts to the date of the annotation of the notice of lis pendens and the adverse claim.[51] Thus,
respondents failure to register the real estate mortgage [52] prior to these annotations, resulted in the
mortgage being binding only between it and the mortgagor, Sulit. Petitioners, being third parties to the
mortgage, were not bound by it. [53] Contrary to respondents claim that petitioners were in bad faith
because they already had knowledge of the existence of the mortgage in favor of respondent when
they caused the aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this
mortgage when respondent intervened in the RTC proceedings. [54]
On the question of who has a preferential right over the property, the long-standing rule, as
provided by Article 2085[55] of the Civil Code,[56] is that only the absolute owner of the property can
constitute a valid mortgage on it. In case of foreclosure, a sale would result in the transmission only of
whatever rights the seller had over of the thing sold. [57]
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void.
[58]
Thus, they did not convey any rights that could ripen into valid titles. [59] Necessarily, the subsequent
real estate mortgage constituted by Sulit in favor of respondent was also null and void, because the
former was not the owner thereof. There being no valid real estate mortgage, there could also be no
valid foreclosure or valid auction sale, either. At bottom, respondent cannot be considered either as a
mortgagee or as a purchaser in good faith. This being so, petitioners would be in the same position
as they were before they executed the simulated Deed of Sale in favor of Sanchez. They are still the
owners of the property.[60]

SO ORDERED.
G.R. No. 128567

September 1, 2000

PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional errors. Public policy
dictates that once a judgment becomes final, executory and unappealable, the prevailing party should
not be denied the fruits of his victory by some subterfuge devised by the losing party. Unjustified delay
in the enforcement of a judgment sets at naught the role of courts in disposing justiciable
controversies with finality.
The Case
At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March 11,
1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21, 1995
and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case No. 895424. The aforesaid orders of the trial court held that petitioner had the right to redeem subject pieces
of property within the one-year period prescribed by Section 78 of Republic Act No. 337 otherwise
known as the General Banking Act.
Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right,
within one year after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:

190
In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19,
1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein
private respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to
Intercon Fund Resource, Inc. ("Intercon").
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to
P8.5 million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.

Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for
certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993,
on the finding that the Court of Appeals erred not in dismissing the appeal of petitioner.
Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied
with finality in this Court's Resolution promulgated on February 16, 1994. On March 10, 1994, leave
to present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing
by the Court en banc was filed, but to no avail. The Court resolved to deny the same on May 11,
1994.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover
to the private respondent, on the ground that the same was ultra vires. Petitioner also questioned
during the trial the correctness of the charges and interest on the mortgage debt in question.

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and
executory and was entered in the Book of Entries of Judgment.

On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura
J. Guerrero, came out with its decision "granting herein private respondent SMGI's complaint for
judicial foreclosure of mortgage", disposing as follows:

On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the
Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on
July 15, 1994.

"WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above principal from September 6, 1998, until fully
paid;
(4) 5% of the sum total of the above amounts, as reasonable attorney's fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt hereof by
the defendant. In default of such payment, the four parcels of land subject matter of the suit
including its improvements shall be sold to realize the mortgage debt and costs, in the
manner and under the regulations that govern sales of real estate under execution." 1
Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as CAG.R. CV No. 39243 before the Sixth Division of the appellate court, which dismissed the case on
June 29, 1993 on the ground of late payment of docket fees.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and
Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriff's
Sale for the auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set
Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of
Execution. To support its motion, petitioner invited attention and argued that the records of the case
were still with the Court of Appeals and therefore, issuance of the writ of execution was premature
since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and
petitioner had not yet defaulted in the payment thereof since no demand for its payment was made by
the private respondent. In petitioner's own words, the dispute between the parties was "principally on
the issue as to when the 150-day period within which Huerta Alba may exercise its equity of
redemption should be counted."
In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to quash the writ
of execution in Civil Case No. 89-5424, opining that subject judgment had become final and
executory and consequently, execution thereof was a matter of right and the issuance of the
corresponding writ of execution became its ministerial duty.

191
Challenging the said order granting execution, petitioner filed once more with the Court of Appeals
another petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP
No. 35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and the
private respondent was declared the highest bidder. Thus, private respondent was awarded subject
bidded pieces of property. The covering Certificate of Sale issued in its favor was registered with the
Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court
to "clarify" whether or not the twelve (12) month period of redemption for ordinary execution applied in
the case.
On September 26, 1994, the trial court ruled that the period of redemption of subject property should
be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of
Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to
Set Aside Said Order, contending that the said Order materially altered the Decision dated April 30,
1992 "which declared that the satisfaction of the judgment shall be in the manner and under the
regulation that govern sale of real estate under execution."
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised by
the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within which
petitioner may redeem subject properties should be computed from the date petitioner was notified of
the Entry of Judgment in G.R. No. 112044; and that the 150-day period within which petitioner may
exercise its equity of redemption expired on September 11, 1994.

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No.
35086. In its Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period
of one hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt
on or before July 29, 1994 by the trial court of the records of Civil Case No. 89-5424 from the Court of
Appeals. So also, petitioner maintained that it may not be considered in default, even after the
expiration of 150 days from July 29, 1994, because prior demand to pay was never made on it by the
private respondent. According to petitioner, it was therefore, premature for the trial court to issue a
writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the
pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioner's motion for reconsideration in CAG.R. SP No. 35086. Absent any further action with respect to the denial of the subject motion for
reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of Sale
before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP No.
35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the private
respondent. The pertinent Order declared that all pending incidents relating to the Order dated
September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of Title
to subject pieces of property were then issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking
"clarification" of the date of commencement of the one (1) year period for the redemption of the
properties in question.

Thus:
"Petitioner must have received the resolution of the Supreme Court dated February 16, 1994
denying with finality its motion for reconsideration in G.R. No. 112044 before March 14, 1994,
otherwise the Supreme Court would not have made an entry of judgment on March 14,
1994. While, computing the 150-day period. Petitioner may have until September 11, 1994.
within which to pay the amounts covered by the judgment, such period has already expired
by this time, and therefore, this Court has no more reason to pass upon the parties' opposing
contentions, the same having become moot and academic." 2 (Emphasis supplied).

In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become final and
executory; ratiocinating thus:
"We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but
which we believe was prepared by a lawyer who wishes to hide under the cloak of anonymity,
as a veiled attempt to buy time and to delay further the disposition of this case.

192
Our decision of September 30, 1994 never dealt on the right and period of redemption of
petitioner, but was merely circumscribed to the question of whether respondent judge could
issue a writ of execution in its Civil Case No. 89-5424 . . .
We further ruled that the one-hundred fifty day period within which petitioner may exercise
its equity of redemption should be counted, not from the receipt of respondent court of the
records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of
judgment made by the appellate court.
But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial. and as such the mortgagor
has only the equity not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group,. Inc., is a
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification."3 (Emphasis supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner
should have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of
R.A. No. 337; but again, petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995, the private
respondent filed a Motion for Issuance of Writ of Possession with the trial court.
During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance
and asked for time to interpose opposition to the Motion for Issuance of Writ of Possession.
On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of Possession,
petitioner filed a "Motion to Compel Private Respondent to Accept Redemption." It was the first time
petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the
General Banking Act; theorizing that the original mortgagee, being a credit institution, its assignment
of the mortgage credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A.

No. 337. Therefore, it should have the right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner which concluded that in view of its "right of
redemption," the issuance of the titles over subject parcels of land to the private respondent was
irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private
respondent's motion for a writ of possession, opining that Section 78 of the General Banking Act was
applicable and therefore, the petitioner had until October 21, 1995 to redeem the said parcels of land,
said Order ruled as follows:
"It is undisputed that Intercon is a credit institution from which defendant obtained a loan
secured with a real estate mortgage over four (4) parcels of land. Assuming that the mortgage
debt had not been assigned to plaintiff, there is then no question that defendant would have a
right of redemption in case of foreclosure, judicially or extrajudicially, pursuant to the above
quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant lost its right of redemption by
virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or
credit institution. The issue is resolved in the negative. The right of redemption in this case is
vested by law and is therefore an absolute privilege which defendant may not lose even
though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of Appeals,
106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78
because all that may be needed to deprive a defaulting mortgagor of his right of redemption is
to assign his mortgage debt from a bank or credit institution to one which is not. Protection of
defaulting mortgagors, which is the avowed policy behind the provision, would not be
achieved if the ruling were otherwise. Consequently, defendant still possesses its right of
redemption which it may exercise up to October 21, 1995 only, which is one year from the
date of registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175
SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendant's right of redemption has not yet expired, the
cancellation of defendant's transfer certificates of title and the issuance of new ones in lieu
thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating
reconveyance (see Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for Issuance of Writ of Possession is hereby denied;

193
(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an
amount computed according to the terms stated in the Writ of Execution dated July
15, 1994 plus all other related costs and expenses mentioned under Section 78, RA
337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the
defendant the following titles of the four (4) parcels of land, namely TCT Nos. V38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to
register the certificate of sale dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum thereof upon the transfer
certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now
deemed resolved.

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE

COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED
"WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION
BUT ONLY THE EQUITY OF REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT
PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE
RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE
ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.5

SO ORDERED."4
In its comment on the petition, private respondent countered that:
Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to
no avail. In its Order dated September 4, 1995, the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4,
1995 of the trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition
and Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for
entertaining the same, the Court referred the petition to the Court of Appeals, for proper
determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the
petition and set aside the trial court's Order dated July 21, 1995 and Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition, placing reliance on the
assignment of errors, that:

"A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED

WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT
OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE
FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT,
PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF
ITS ALLEGED 'RIGHT OF REDEMPTION. HDAECI
D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION' OVER THE
SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE 'LAW OF THE
CASE."'6
And by way of Reply, petitioner argued, that:

I
I.

194
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337.
II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1)
YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.
III.
THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING HERE:
(1)
THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL
CASE NO. 89-5424.
(2)
THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE
EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL
CASE NO. 89-5424.

(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO.
35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED 'WITH
FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF
REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY NOTE THE
MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL
JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO BEGIN
WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY
BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY
BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION,
THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE
MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY
NOTE THE MOTION. EASIHa
II.

The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not
the petitioner has the one-year right of redemption of subject properties under Section 78 of Republic
Act No. 337 otherwise known as the General Banking Act.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED
BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT.

The petition is not visited by merit.

III.
Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on
the submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086;
contending thus:

195
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY
AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO
RECOGNIZE SUCH RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA
ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO AID
RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has
been adjudged to have was only the equity of redemption over subject properties. On the distinction
between the equityof redemption and right of redemption, the case of Gregorio Y. Limpin vs.
Intermediate Appellate Court,7 comes to the fore. Held the Court in the said case:
"The equity of redemption is, to be sure, different from and should not be confused with
the right of redemption.
The right of redemption in relation to a mortgage understood in the sense of a prerogative
to re-acquire mortgaged property after registration of the foreclosure sale exists only in the
case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial
foreclosure except only where the mortgagee is the Philippine National Bank or a bank or
banking institution.

granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the
General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the foreclosure sale which right may be
exercised within a period of one (1) year, counted from the date of registration of the
certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage
if the mortgagee is not the PNB or a bank or banking institution. In such a case, the
foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the rights
of all the parties to the action and to vest their rights in the purchaser.' There then exists only
what is known as the equity of redemption. This is simply the right of the defendant
mortgagor to extinguish the mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment becomes final, in accordance with
Rule 68, or even after the foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that
'. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including
interest and costs, and shall render judgment for the sum so found due and order the same to
be paid into court within a period of not less than ninety (90) days from the date of the service
of such order, and that in default of such payment the property be sold to realize the
mortgage debt and costs.'
This is the mortgagor's equity (not right) of redemption which, as above stated, may be
exercised by him even beyond the 90-day period 'from the date of service of the order,' and
even after the foreclosure sale itself, provided it be before the order of confirmation of the
sale. After such order of confirmation, no redemption can be effected any longer." 8 (Emphasis
supplied)

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriff's certificate of foreclosure
sale.

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

Where the foreclosure is judicially effected, however, no equivalent right of redemption exists.
The law declares that a judicial foreclosure sale 'when confirmed be an order of the court. . . .
shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law.' Such rights
exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are those

Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a
credit institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated
differently, it is the submission of petitioner that it should be allowed to redeem subject properties
within one year from the date of sale as a result of the foreclosure of the mortgage constituted
thereon.

196
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right
under Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court
of the foreclosure sale, and within one (1) year from the date of registration of the certificate of sale.
Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance
of Writ of Possession, did petitioner file a Motion to Compel Private Respondent to Accept
Redemption, invoking for the very first time its alleged right to redeem subject properties under to
Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem
under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial
stages of the proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in interest was
a credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely asked
the trial court to clarify whether the sale of subject properties was execution sale or judicial
foreclosure sale.
So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside
Said Order dated October 13, 1994, petitioner again was silent on its alleged right under Section 78
of R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit
institution. Petitioner just argued that the aforementioned Order materially altered the trial court's
Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and
of the predecessor in interest of private respondent as a credit institution, when the trial court came
out with an order on February 10, 1995, confirming the sale of subject properties in favor of private
respondent and declaring that all pending incidents with respect to the Order dated September 26,
1994 had become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of
Appeals, seeking "clarification" of the date of commencement of the one (1) year redemption period
for the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No.
337 nor did it invite attention to its present stance that private respondent's predecessor-in-interest
was a credit institution. Consequently, in its Resolution dated March 20, 1995, the Court of Appeals
ruled on the said motion thus:

"But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial, and as such. the mortgagor
has only the equity. not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group. Inc., is
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification."9 (Emphasis supplied).
If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section
78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the factual
question of whether or not private respondent's predecessor in interest was a credit institution. As
was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the court, . . shall
operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law'," 10 which confer on the
mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale. Thus,
the claim that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 since
private respondent's predecessor-in-interest is a credit institution is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the compliant for judicial
foreclosure.
". . . A counterclaim is, most broadly, a cause of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a claim which. if established, will defeat or in some
way qualify a judgment or relief to which plaintiff is otherwise entitled It is sometimes defined
as any cause of action arising in contract available against any action also arising in contract
and existing at the time of the commencement of such an action. It is frequently defined by
the codes as a cause of action arising out of the contract or transaction set forth in the
complaint as the foundation of the plaintiff's claim, or connected with the subject of the
action."11 (emphasis supplied)

197
"The counterclaim is in itself a distinct and independent cause of action, so that when
properly stated as such, the defendant becomes, in respect to the matters stated by him, an
actor, and there are two simultaneous actions pending between the same parties, wherein
each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive as well
as a defensive plea and is not necessarily confined to the justice of the plaintiff's claim. It
represents the right of the defendant to have the claims of the parties counterbalanced in
whole or in part, and judgment to be entered in excess, if any. A counterclaim stands on the
same footing, and is to be tested be the same rules, as if it were an independent
action."12 (emphasis supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in its answer its
purported right under Section 78 of R.A. No. 337:
". . . The rules of counterclaim are designed to enable the disposition of a whole controversy
of interested parties' conflicting claims, at one time and in one action, provided all parties' be
brought before the court and the matter decided without prejudicing the rights of any party." 13
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337
precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the party
fails to raise the question in the early stages of the proceedings. 14 Thus, "a party to a case who failed
to invoked his claim in the main case, while having the opportunity to do so, will be precluded,
subsequently, from invoking his claim, even if it were true, after the decision has become final,
otherwise the judgment may be reduced to a mockery and the administration of justice may be placed
in disrepute."15
All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing
petitioner to introduce evidence that private respondent's predecessor-in-interest was a credit
institution, and to thereafter rule that the petitioner was entitled to avail of the provisions of Section 78
of R.A. No. 337. In effect, the trial court permitted the petitioner to accomplish what the latter failed to
do before the Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A. No. 337
although the Court of Appeals in CA-G.R. no. 35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or credit institution was never brought before
(the Court of Appeals) squarely." The said pronouncement by the Court of Appeals unerringly signified
that petitioner did not make a timely assertion of any right under Section 78 of R.A. No. 337 in all the
stages of the proceedings below.
Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-ininterest of the private respondent is a credit institution. Thus, when the trial court, and the Court of

Appeals repeatedly passed upon the issue of whether or not petitioner had the right of redemption or
equity of redemption over subject properties in the decisions, resolutions and orders, particularly in
Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747,
it was unmistakable that the petitioner was adjudged to just have the equity of redemption without any
qualification whatsoever, that is, without any right of redemption allowed by law.
The "law of case" holds that petitioner has the equity of redemption without any qualification.
There is, therefore, merit in private respondent's contention that to allow petitioner to belatedly invoke
its right under Section 78 of R.A. No. 337 will disturb the "law of the case." However, private
respondent's statement of what constitutes the "law of the case" is not entirely accurate. The "law of
the case" is not simply that the defendant possesses an equity of redemption. As the Court has
stated, the "law of the case" holds that petitioner has the equity of the redemption without any
qualification whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No.
337. Whether or not the "law of the case" is erroneous is immaterial, it still remains the "law of the
case". A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in
CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the
repeated attempts of petitioner to forestall so simple a matter as making the security given for a just
debt to answer for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the
rights of all the parties to the action and to vest their rights in private respondent. There then existed
only what is known as the equity of redemption, which is simply the right of the petitioner to extinguish
the mortgage and retain ownership of the property by paying the secured debt within the 90-day
period after the judgment became final. There being an explicit finding on the part of the Court of
Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 that the herein petitioner
failed to exercise its equity of redemption within the prescribed period, redemption can no longer be
effected. The confirmation of the sale and the issuance of the transfer certificates of title covering the
subject properties to private respondent was then, in order. The trial court therefore, has the
ministerial duty to place private respondent in the possession of subject properties.
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring
null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial
Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.

198
UNION BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, APOLONIA DE JESUS
GREGORIO, LUCIANA DE JESUS GREGORIO, GONZALO VINCOY, married to
TRINIDAD GREGORIO VINCOY, respondents.
R ES OLUTION
DE LEON, JR., J.:
This is a motion for reconsideration of the resolution of this Court dated July 12, 1999 dismissing the
petition for review on certiorari filed by petitioner Union Bank of the Philippines which assailed the decision of
the Court of Appeals (a) upholding the validity of the real estate mortgage executed by respondents Gonzalo
and Trinidad Vincoy in favor of petitioner as security for a loan in the principal amount of Two Million Pesos
(P2,000,000.00), and (b) fixing the redemption price of the property mortgaged at Three Million Two Hundred
Ninety Thousand Pesos (P3,290,000.00) representing the purchase price of the said property at the foreclosure
sale plus one percent (1%) monthly interest from April 19, 1991, the date of the foreclosure sale, until its
redemption pursuant to Section 30, Rule 39 of the Rules of Court.
The following are the factual antecedents.
On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their residence in favor
of petitioner to secure the payment of a loan to Delco Industries (Phils.), Incorporated [1] in the amount of Two
Million Pesos (P2,000,000.00). For failure of the respondents to pay the loan at its date of maturity, petitioner
extrajudicially foreclosed the mortgage and scheduled the foreclosure sale on April 10, 1991. The petitioner
submitted the highest bid of Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) at the
foreclosure sale. Accordingly, a certificate of sale was issued to petitioner and duly annotated at the back of the
Transfer Certificate of Title covering the property on May 8, 1991.[2]
Prior to the expiration of the redemption period on May 8, 1992, the respondents filed a complaint for
annulment of mortgage with the lower court. In their complaint, respondents alleged that the subject property
mortgaged to petitioner had in fact been constituted as a family home as early as October 27, 1989. Among the
beneficiaries of the said family home are the sisters of respondent Trinidad Vincoy, namely Apolonia and
Luciana De Jesus Gregorio whose consent to the mortgage was not obtained. [3] Respondents thus assailed the
validity of the mortgage on the ground that Article 158 of the Family Code [4] prohibits the execution, forced
sale, attachment or any other encumbrance of a family home without the written consent of majority of the
beneficiaries thereof of legal age.[5] On the other hand, petitioner maintained that the mortgaged property of
respondents could not be legally constituted as a family home because its actual value exceeded Three Hundred
Thousand Pesos (P300,000.00), the maximum value for a family home in urban areas as stipulated in Article
157 of the Family Code.[6]

The lower court rendered judgment declaring the constitution of the family home void and the mortgage
executed in favor of the petitioner valid. It held, among others, that Article 158 of the Family Code was not
applicable to respondents family home as the value of the latter at the time of its alleged constitution exceeded
Three Hundred Thousand Pesos (P300,000.00).[7] It also ordered respondent Gonzalo Vincoy and/or Delco
Industries (Phils.), Inc. to pay petitioner his and/or its outstanding obligation as of February 15, 1993 in the
amount of Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four
Centavos (P4,816,194.44) including such sums that may accrue by way of interests and penalties. [8]
Aggrieved, respondents appealed to the Court of Appeals contending that the lower court erred in finding
that their family home was not duly constituted, and that the mortgage in favor of petitioner is
valid.Respondents also claimed that the correct amount sufficient for the redemption of their property as of
February 15, 1993 is Two Million Seven Hundred Seventy-Three Thousand Seven Hundred Twelve Pesos and
Eighty-Seven Centavos (P2,773,712.87)[9] and not Four Million Eight Hundred Sixteen Thousand One Hundred
Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) as found by the lower court.
In a decision promulgated on June 4, 1997, the Court of Appeals sustained the finding of the lower court
that the alleged family home of the respondents did not fall within the purview of Article 157 of the Family
Code as its value at the time of its constitution was more than the maximum value of Three Hundred Thousand
Pesos (P300,000.00). Hence, the Court of Appeals upheld the validity of the mortgage executed over the said
property in favor of the petitioner.[10] However, it found that the amount sufficient for the redemption of the
foreclosed property is Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) equivalent to the
purchase price at the foreclosure sale plus one percent (1%) monthly interest from April 19, 1991 up to the date
of redemption[11] pursuant to Section 30, Rule 39 of the Rules of Court.[12]
Dissatisfied with the ruling of the Court of Appeals, the petitioner filed a petition for review on certiorari
with this Court submitting the following issues for resolution:
1. The Court of Appeals resolves an issue of redemption which was not even directly raised by the parties and
contrary to the evidence on record.
2. Assuming without admitting that respondents are entitled to redemption, the price set by the Court of Appeals
is not based on law.[13]
Petitioner contends, first of all, that in allowing the respondents to redeem the subject foreclosed property,
the Court of Appeals completely ignored the fact that neither respondents complaint before the lower court nor
their brief filed before the Court of Appeals prayed for the redemption of the said property. On the contrary,
respondents had consistently insisted on the nullity of the mortgage. Thus, to allow them to redeem the property
would contradict the very theory of their case.[14]

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Petitioner also contends that the respondents had already lost their right to redeem the foreclosed property
when they failed to exercise their right of redemption by paying the redemption price within the period provided
for by law.[15] In the event, however, that the Court upholds the right of the respondents to redeem the said
property, the petitioner claims that it is not Section 30, Rule 39 of the Rules of Court that applies in determining
the amount sufficient for redemption but Section 78 of the General Banking Act as amended by Presidential
Decree No. 1828[16] which provides:
xxx. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or
debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial
payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under
the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the
costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution
and sale and as a result of the custody of the said property less the income received from the property. [Italics
supplied].
This Court dismissed the petition in a Resolution promulgated on July 12, 1999 on the ground that the
Court of Appeals did not commit any reversible error and that the petition raises mere questions of fact already
amply passed upon by the appellate court.[17] Hence, the instant motion for reconsideration.

Respondents raised the issue of redemption for the first time only on appeal in contesting the amount
ordered by the lower court to be paid by respondents to the petitioner. Thus, the actuation of the Court of
Appeals in allowing the respondents to redeem the subject foreclosed property is not legally permissible. In
petitions for review or appeal under Rule 45 of the Rules of Court, the appellate tribunal is limited to the
determination of whether the lower court committed reversible error.[20]
It is settled jurisprudence that an issue which was neither averred in the complaint nor raised during the
trial in the court below cannot be raised for the first time on appeal as it would be offensive to the basic rules of
fair play, justice and due process.[21] On this ground alone, the Court of Appeals should have completely ignored
the issue of respondents right to redeem the subject foreclosed property. In addition, a reason just as glaringly
obvious exists for declaring the respondents right of redemption already non-existent one year after May 8,
1991, the date of the registration of the sale at public auction.
Pursuant to Section 78 of the General Banking Act, a mortgagor whose real property has been sold at a
public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, shall
have the right, within one year after the sale of the real estate to redeem the property. The one-year period is
actually to be reckoned from the date of the registration of the sale. [22] Clearly therefore, respondents had only
until May 8, 1992 to redeem the subject foreclosed property. Their failure to exercise that right of redemption
by paying the redemption price within the period prescribed by law effectively divested them of said right. It
bears reiterating that during the one year redemption period, respondents never attempted to redeem the subject
property but instead persisted in their theory that the mortgage is null and void. To allow them now to redeem
the same property would, as petitioner aptly puts it, be letting them have their cake and eat it too.

We are persuaded to reconsider.

First of all, it is important to note that this case was decided by the lower court on the basis only of the
pleadings submitted by the parties. No trial was conducted, thus, no evidence other than that submitted with the
pleadings could be considered.
A careful scrutiny of the pleadings filed by the respondents before the lower court reveals that at no time
did the respondents pray that they be allowed to redeem the subject foreclosed property. [18] On the other hand,
respondents never wavered from the belief that the mortgage over the said property is, in the first place, void for
having been executed over a duly constituted family home without the consent of the beneficiaries thereof.After
upholding the validity of the mortgage, the lower court ordered respondent Gonzalo Vincoy and/or Delco
Industries, Inc. to pay petitioner the amount of Four Million Eight Hundred Sixteen Thousand One Hundred
Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) plus interests and penalties representing Vincoys
and/or Delcos outstanding obligation to petitioner as of February 15, 1993. [19] There is no mention whatsoever
of respondents right to redeem the property.

It cannot also be argued that the action for annulment of the mortgage filed by the respondents tolled the
running of the one year period of redemption. In the case of Sumerariz v. Development Bank of the Philippines,
[23]
petitioners therein contended that the one-year period to redeem the property foreclosed by respondent was
suspended by the institution of an action to annul the foreclosure sale filed three (3) days before the expiration
of the period. To this we ruled that:
We have not found, however, any statute or decision in support of this pretense. Moreover, up to now plaintiffs
have not exercised the right of redemption. Indeed, although they have intimated their wish to redeem the
property in question, they have not deposited the amount necessary therefor. It may not be amiss to note that,
unlike Section 30 of Rule 39 of the Rules of Court, which permits the extension of the period of redemption of
mortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to Section 9 of Republic Act No.
85, which governs the redemption of property mortgaged to the Bank does no contain a similar provision.Again
this question has been definitely settled by the previous case declaring that plaintiffs right of redemption has
already been extinguished in view of their failure to exercise it within the statutory period."[24]

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Also, in the more recent case of Vaca v. Court of Appeals,[25] we declared that the pendency of an action
questioning the validity of a mortgage cannot bar the issuance of the writ of possession after title to the property
has been consolidated in the mortgagee.[26] The implication is clear: the period of redemption is not interrupted
by the filing of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee
who acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a
writ of possession issued in his favor.
To rule otherwise, and allow the institution of an action questioning the validity of a mortgage to suspend
the running of the one year period of redemption would constitute a dangerous precedent. A likely offshoot of
such a ruling is the institution of frivolous suits for annulment of mortgage intended merely to give the
mortgagor more time to redeem the mortgaged property.
As a final word, although the issue pertaining to the correct amount for the redemption of the subject
foreclosed property has been rendered moot by the foregoing, a point of clarification should perhaps be made as
to the applicable legal provision. Petitioners contention that Section 78 of the General Banking Act governs the
determination of the redemption price of the subject property is meritorious. In Ponce de Leon v. Rehabilitation
Finance Corporation,[27] this Court had occasion to rule that Section 78 of the General Banking Act had the
effect of amending Section 6 of Act No. 3135[28] insofar as the redemption price is concerned when the
mortgagee is a bank, as in this case, or a banking or credit institution. [29] The apparent conflict between the
provisions of Act No. 3135 and the General Banking Act was, therefore, resolved in favor of the latter, being a
special and subsequent legislation. This pronouncement was reiterated in the case of Sy v. Court of
Appeals[30] where we held that the amount at which the foreclosed property is redeemable is the amount due
under the mortgage deed, or the outstanding obligation of the mortgagor plus interest and expenses in
accordance with Section 78 of the General Banking Act. [31] It was therefore manifest error on the part of the
Court of Appeals to apply in the case at bar the provisions of Section 30 Rule 39 of the Rules of Court in fixing
the redemption price of the subject foreclosed property.
WHEREFORE, the motion for reconsideration is hereby GRANTED. This Courts Resolution dated July
12, 1999 is MODIFIED insofar as respondents are found to have lost their right to redeem the subject
foreclosed property.
SO ORDERED.
REGISTER of DEEDS OF MANILA, petitioner-appellee,
vs.
CHINA BANKING CORPORATION, respondent-appellant.

Office of the Solicitor General for petitioner-appellee.

Sycip-Salazar, Luna and Associates for respondent-appellant.
Alfonso Ponce Enrile as Amicus Curiae.
DIZON, J.:
Appeal from a resolution of the Land Registration Commission holding "that the deed of transfer in
favor of an alien bank, subject of the present Consulta, is unregisterable for being in contravention of
the Constitution of the Philippines".
In an information filed on June 16, 1953 in the Court of First Instance of Manila (Criminal Case No.
22908) Alfonso Pangilinan and one Guillermo Chua were charged with qualified theft, the money
involved amounting to P275,000.00. On September 18, 1956, Pangilinan and his wife, Belen Sta.
Ana, executed a public instrument entitled DEED OF TRANSFER whereby, after admitting his civil
liability in favor of his employer, the China Banking Corporation, in relation to the offense aforesaid,
he ceded and transferred to the latter, in satisfaction thereof, a parcel of land located in the City of
Manila, registered in the name of "Belen Sta. Ana, married to Alfonso Pangilinan" (Transfer Certificate
of Title No. 32230). On October 24, 1956 the deed was presented for registration to the Register of
Deeds of the City of Manila, but because the transferee the China Banking Corporation was
alien-owned and, as such, barred from acquiring lands in the Philippines, in accordance with the
provisions of Section 5, Article XIII of the Constitution of the Philippines, said officer submitted the
matter of its registration to the Land Registration Commission for resolution. After granting the parties
concerned ample opportunity to submit their views upon the issue, the Commission issued the
resolution appealed from.
Plainly stated, the question before Us is whether appellant an alien-owned bank can acquire
ownership of the residential lot covered by Transfer Certificate of Title No. 32230 by virtue of the deed
of transfer mentioned heretofore (Vide pages 1-6 of the Record on Appeal).
Maintaining the affirmative, appellant argues that: (a) the temporary holding of land by an alien-owned
commercial bank under a public instrument such as the deed of transfer in question "bears no
reasonable connection with the constitutional purpose" underlying the provisions of Section 5, Article
XIII of the Constitution of the Philippines; hence, such holding or acquisition "was not within the
contemplation of the framers of the Constitution"; (b) by judicial as well as by executive-administrative
an legislative construction, the constitutional prohibition against alien landholding does not preclude
enjoyment by aliens of temporary rights and land; (c) under the provisions of Section 25 of Republic
Act No. 337 (General Banking Act) an alien or an alien-owned commercial bank may acquire land in

201
the Philippines subject to the obligation of disposing of it within 5 years from the date of its
acquisition. 1wph1.t
Upon the other hand, the argument supporting the appealed resolution is that the privilege of
acquiring real estate granted to commercial banks under the provisions of Section 25 of Republic Act
No. 337 was not intended as an amendment, much less as a nullification of the constitutional
prohibition against alien acquisition of lands in the Philippines, the same being merely an exception to
the general rule, under existing banking and corporation laws, that banks and corporations can
engage only in the particular business for which they were specifically created; that a mere statute,
like the republic act relied upon by, appellant, cannot amend the Constitution; that in connection with
the particular constitutional prohibition involved herein, it is the character and nature of the
possession whether in strict ownership or otherwise and not the length of possession that is
material, the result being that, if real property is to be held in ownership, an alien may not legally do
so even for a single day.
After considering the arguments adduced by appellant in its brief, jointly with those expounded in the
briefs submitted by Alfonso Ponce Enrile and William H. Quasha and Associates, as amici curiae, on
the one hand, and on the other, those relied upon in the brief submitted by the Office of the Solicitor
General on behalf of the Commission, we are inclined to uphold, as we do uphold, the appealed
resolution.
To support its view appellant relies particularly upon paragraphs (c) and (d), Section 25 of Republic
Act 337 which read as follows: .
SEC. 25. Any commercial bank may purchase, hold, and convey real estate for the following
purposes:
xxx

xxx

xxx

(c) Such shall be conveyed to it in satisfaction of debts previously contracted in the course of
its dealings; .
(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds
held by it and such as it shall purchase to secure debts due to it.
But no such bank shall hold the possession of any real estate under mortgage or trust deed,
or the title and possession of any real estate purchased to secure any debt due to it, for a
longer period than five years.

Assuming, arguendo, that under the provisions of the aforesaid Act any commercial bank, whether
alien-owned or controlled or not, may purchase and hold real estate for the specific purposes and in
the particular cases enumerated in Section 25 thereof, we find that the case before Us does not fall
under anyone of them.
Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to purchase and hold such
real estate as shall be conveyed to it in satisfaction of debts previously contracted in the course of its
dealings, We deem it quite clear and free from doubt that the "debts" referred to in this provision are
only those resulting from previous loans and other similar transactions made or entered into by a
commercial bank in the ordinary course of its business as such. Obviously, whatever "civil liability"
arising from the criminal offense of qualified theft was admitted in favor of appellant bank by its
former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar transaction had
between the two parties in the ordinary course of banking business.
Neither do the provisions of paragraph (d) of the Same section apply to the present case because the
deed of transfer in question can in no sense be considered as a sale made by virtue of a judgment,
decree, mortgage, or trust deed held by appellant bank. In the same manner it cannot be said that the
real property in question was purchased by appellant "to secure debts due to it", considering that, as
stated heretofore, the term debt employed in the pertinent legal provision can logically refer only to
such debts as may become payable to appellant bank as a result of a banking transaction.
That the constitutional prohibition under consideration has for its purpose the preservation of the
patrimony of the nation can not be denied, but appellant and the amici curiae claim that it should be
liberally construed so that the prohibition be limited to the permanent acquisition of real estate by
aliens whether natural or juridical persons. This, of course, would make legal the ownership
acquired by appellant bank by virtue of the deed of transfer mentioned heretofore, subject to its
obligation to dispose of it in accordance with law, within 5 years from the date of its acquisition. We
can not give assent to this contention, in view of the fact that the constitutional prohibition in question
is absolute in terms. We have so held in Ong Sui Si Temple vs. The Register of Deeds of Manila (G.
R. No. L-6776, prom. May 21, 1955) where we said, inter alia, the following:
We are of the opinion that the Court below has correctly held that in view of the absolute
terms of section 5, Title XIII, of the Constitution, the provisions of Act 271 of the old Philippine
Commission must be deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that

202
Save in cases of hereditary succession no private agricultural land shall be
transferred or assigned except to individuals, corporations or associations qualified to
acquire or hold lands of the public domain in the Philippines.
the Constitution makes no exception in favor of religious associations. Neither is there any
such saving found in Sections 1 and 2 of Article XIII, restricting the acquisition of public
agricultural lands and other natural resources to "corporations or associations at least sixty
per centum of the capital of which is owned by such citizens" (of the Philippines). (Emphasis
ours) .
Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239) where a lease
of a parcel of land for a total period of 50 years in favor of an alien corporation was held to be
registerable, the reason we gave for such ruling was that a lease unlike a sale does not involve
the transfer of dominion over the land, the clear implication from this being that transfer of ownership
over land, even for a limited period of time, is not permissible in view of the constitutional prohibition.
The reason for this is manifestly the desire and purpose of the Constitution to place and keep in the
hands of the people the ownership over private lands in order not to endanger the integrity of the
nation. Inasmuch as when an alien buys land he acquires and will naturally exercise ownership over
the same, either permanently or temporarily, to that extent his acquisition jeopardizes the purpose of
the Constitution.
Some may say that this construction is too narrow and unwise; to this we answer that it is not our
privilege to determine the wisdom or lack of wisdom of this constitutional mandate. It is, rather, Our
sworn duty to enforce it free from qualifications and distinctions that tend to render futile the
constitutional intent.

MELO, J.:
The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify via the
petitioner forcertiorari before us refers to respondent court's major conclusion arrived at in CA-G.R.
CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ) barring petitioner from foreclosing the subject realty
on account of prescription. Petitioner begs to differ, insisting that the period during which it was placed
under receivership by the Central Bank is akin to a caso fortuito and should not thus be reckoned
against it.
Both petitioner and private respondent accepted the synthesized factual backdrop formulated by
respondent court, to wit:
This an appeal by both plaintiff and defendant from the decision of the Regional Trial
Court of the National Capital Judicial 29 September 1988, in Civil Case No. 977-NW,
which directed plaintiff-appellant to pay defendant-appellant the personal obligation of
the spouses Guarin to defendant-appellant in the amount of P62,500.00, together
with the interest, penalties, and bank charges due thereon, and ordering defendantappellant thereafter to: (1) release the real estate mortgage executed by the spouses
Lorenzo K. Guarin and Liwayway J. Guarin in favor of defendant bank on 16
February 1967; (2) return to surrender to plaintiff-appellant, as successor-in-interest
of the spouses Guarin, the latter's Owner's Duplicate of Title No. 177014; (3) pay
plaintiff-appellant P20,000.00 as and for attorney's fees; and, (4) pay the costs of suit.
The established fact are:

WHEREFORE, the resolution appealed from is hereby affirmed, with costs.

G.R. No. 97218 May 17, 1993
PROVIDENT SAVINGS BANK, petitioner,
vs.
COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON CHUA, respondents.
Gonzales, Batiller, Bilog & Associates for petitioner.
Resty R. Villanueva for private respondent.

On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin

(Guarins) obtained a loan from defendant-appellant in the amount of P62,500.00
payable on or before 20 June 1967. As security for the loan, they executed a real
estate mortgage in favor of defendant-appellant over a parcel of land covered by TCT
No. 177014. (Exhs. C and D).
In September, 1972, defendant-appellant was placed under receivership by the
Central Bank of the Philippines until 27 July 1981 when the receivership was set
aside by the Honorable Supreme Court.

203
On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel
informing that the mortgaged property would be sold at public auction on 27
December 1984, assured he and his wife had every intention of paying their
obligation and requesting for a recomputation of their account and a postponement of
the foreclosure sale. (Exh. 1).
On 10 February 1986, the Guarins received a Statement of Account from defendantappellant showing two outstanding accounts as of 15 February 1986. One was
account of Lorenzo K. Guarin in the amount of P591,088.80, and the other was the
account of L.K. Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27
(Attachment to Exh. 2)
On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he
was ready and willing to pay his obligation in the total amount of P591,088.80 as
recomputed by defendant-appellant whenever defendant-appellant was already to
receive the payment and inquiring as to when his mortgaged title would be available
for him to pick up. (Exh. 2)
Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make
payment at its office in Makati, Metro Manila, but that the mortgaged title could not be
released to him even after the payment of the obligation of P591,088.80 as it also
served as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to
defendant-appellant which was undertaken by Lorenzo K. Guarin in his personal
capacity and as president of the corporation. (Exh. 3)
On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the
mortgaged property of the Guarins had been offered to him as payment of the
judgment he obtained against the Guarins in Civil Case No. Q-47465 entitled,
"Wilson Chua vs. Lorenzo K. Guarin", and requesting for defendant-appellant's
conformity to the assignment and expressing his willingness to pay for the obligation
of Mr. Guarin so that the title could be released by defendant-appellant. (Exh. 4)
On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute
Sale With Assumption of Mortgaged whereby the Guarins sold the mortgaged
property to Guarins sold the appellant for the sum of P250,000.00 and plaintiffappellant undertook to assume the mortgaged obligation of the Guarins with
defendant-appellant which as of 15 February 1985 amounted to P591,088.80.(Exh.
B).

On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of

the judgment in Civil Case No. Q-47645, the mortgaged property had been sold to
him by the Guarins, as evidenced by the Deed of Sale enclosed for guidance and
information of defendant-appellant. He requested that he be allowed to pay the loan
secured by the mortgaged, otherwise, he would be constrained to bring the matter to
court. (Exh. 5) In reply, defendant-appellant, on 11 August 1986, informed plaintiffappellant that his request could be granted if he would settle the obligation of L.K.
Guarin Manufacturing Co., Inc., as well and defendant-appellant's letter to Mr. Guarin
dated 27 February 1986. (Exh. 6)
On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendantappellant informing that plaintiff-appellant had purchased the mortgaged property
from the Guarin's and requesting that the owner's copy of TCT No. 177014 in the
possession of defendant-appellant be released to him so that he can register the sale
and have the title to the property transferred in his name. He likewise, informed
defendant-appellant that it had lost whatever right or action had against the Guarins
because of prescription. (Exh. E) Defendant-appellant replied on 10 August 1987
stating the reasons why they could not comply with plaintiff-appellant's demands.
(Exh. F)
On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant
to compel the latter to: (1) release the real estate mortgaged executed by the Guarins
in favor of defendant-appellant on 16 February 1967; (2) return or surrender to
plaintiff-appellant, as successor-in-interest of the Guarins, the latter's owner's
duplicate of TCT No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual
and/or consequential damages, moral damages as may be proved during the trial,
exemplary damages as may be reasonably assessed by the court, and attorney's
fees of P50,00.00. Defendant-appellant answered the complaint thereof and setting
up special and affirmative defenses. After trial, judgment was rendered as stated in
the opening paragraph hereof from which both parties appealed . . . . (pp. 3537, Rollo.)
Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to
initiate the action to compel the release of the real estate mortgage and the delivery of the owner's
duplicate copy of the certificate of title, respondent court noted that Wilson Chua can be considered a
real-property-in-interest because he is the successor-in-interest of the Guarins who is naturally
entitled to the realty as against the so-called right of Provident Savings Bank, as mortgagee, to
foreclose the mortgage which had become stale through sheer lapse of time. The matter of novation

204
in the form of substitution of the debtor without corresponding acquiesence of the mortgagee was
viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-bank
in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the change of
obligors, which act was construed as equivalent to consent.
To the question of whether petitioner can still foreclose the subject realty, respondent court gave a
negative response on account of the absence of proof to indicate that the bank was precluded from
collecting indebtedness while it was under receivership from September, 1972 until July 20,1981.
Thus, there was no legal interruption of the pres-criptive period to speak of, said respondent court,
which intervened between June 20, 1967, the date the mortgage matured, and June 20, 1977 the last
day within which petitioner could have foreclosed the mortgage.
Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's
assumption of the mortgage on July 10, 1986 as tantamount to an explicit acknowledgement that the
obligation was outstanding and had not yet prescribed.
As a result of these observations, respondent court reversed the decision of the trial court insofar as it
ordered Wilson Chua to pay the sum of P591,088.80 to the bank and affirmed the other dispositions
made the court of origin (p. 42, Rollo).
Following the unfavorable judgment, the bank filed a motion for reconsideration and a motion for new
trial premised on newly discovered evidence relative to a statement of account unearthed by the
bank's liaison officer from the loose folders on October 18, 1990 which it believed to be of legal
significance to the case. But respondent court was unperturbed, observing that the vital piece of
document could have been located in the course of trial had the slightest degree of prudence been
exercised, considering that the statement of account sprouted the same day the liaison officer was
advised to take an inventory of the records ( p. 45, Rollo).
Hence, the petitioner at bar.
Consistent with its theory premised on fuerza major, petitioner insists that it can not be blamed for not
lifting a finger, so speak, during the period when it was enjoined by the Central Bank on September
15, 1972 from transacting business until this Court affirmed on July 27,1981 the decision of the Court
of Appeals annulling the proscription against petitioner in Central Bank vs. Court of Appeals (106
SCRA 143 [1981]. We are not unaware of the rule laid down in Teal Motor Co. vs. Court of First
Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on the Philippine
Commercial Laws, 1986 Revised ed., p.125) that the appointment of a receiver does not dissolve the
corporation nor does it interfere with the exercise of its corporate rights. But this principles is, of

course, applicable to a situation where there is no restraint imposed on the corporation, unlike in the
case at bar where petitioner Provident Savings Bank was specifically forbidden and immobilized from
doing business in the Philippines on September 15, 1972 through Monetary Board Resolution No.
1766 until 1981 when the decision in Central Bank vs. Court of Appeals (supra, at p. 150) was
rendered. The question which immediately crops up is whether a foreclose proceeding falls within the
purview of the phrase "doing business". In Mentholatum Co., Inc., et al. vs. Mangaliman, et al. (72
Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term was
construed by Justice Laurel to refer to:
. . . a continuity of commercial dealings and arrangements, and contemplates to that
extent, the exercise of some of the words or the normally incident to, and in
progressive prosecution of, the purpose ands object of its organizations. (p. 528;
emphasis supplied.)
Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as a
preparatory measure to acquiring or holding property for petitioner as a saving bank under Section 34
of the General Banking Act. Like any other banking institution, petitioner is vested with the usual
attributes and powers of a corporation under Section 36 of the Corporation Code (Vitug, Pandect of
Commercial Law and Jurisprudence, 1990 ed., p. 475). The prerogative of a bank to foreclose is
implicit from and is even necessary to enforce collection of secured debts under Section 36(11) and
45 of the Corporation Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher,
206; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1990
ed., p. 325).
When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such
bank, that bank would not be able to do new business, i.e., to grant new loans or to
accept new deposits. However, the receiver of the bank is obliged to collect debts owing to the bank,
which debts form part of the assets of the bank. The receiver must assemble the assets and pay the
obligation of the bank under receivership, and take steps to prevent dissipation of such assets.
Accordingly, the the receiver of the bank is obliged to collect pre-existing debts due to the bank, and
in connection therewith, to foreclose mortgages securing debts. This is not to ignore The Philippine
Trust Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply rejected the objections of
certain creditors to the report of a receiver, that is, objections that the receiver did not report the
collection made before the beginning of his receivership. It would follow that the bank is bound by the
acts, or failure to act, of the receiver. At the same time, the receiver is liable to the bank for culpable
or negligent failure to collect the assets of such bank and to safeguard said assets.

205
Having arrived at the conclusion that the foreclosure is part of bank's business activity which could
not have been pursued by the receiver then because of the circumstances discussed in the Central
Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza
mayor in 1972 on account on the prohibition imposed by the Monetary Board against petitioner from
transacting business, until the directive of the board was nullified in 1981. Indeed, the period during
which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against
him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far
from the possession cease and when prescription starts anew, it will be entirely a new one. This
concept should not be equated with suspension where the past period is included in the computation
being added to the period after prescription is resumed (4 Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when the
closure of was set aside in 1981, the period of ten years within which to foreclose under Article 1142
of the New Civil Code began to run again and, therefore, the action filed on August 21, 1986 to
compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's own suit
foreclosure had prescribed. What exacerbates the situation is the letter of private respondent
requesting petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by
the mortgage as the result of the Deed of Sale executed by the Guarins in his favor on July 10, 1986
(pp. 36-37, Rollo). In point of law, this written communication is synonymous to an express
acknowledgment of the obligation and had the effect of interrupting the prescription for the second
time (Article 1155, New Civil Code; Osmea vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50).
And this piece of document necessarily estops private respondent from setting up prescription vis-avis his unfounded supposition that acknowledgment of the debt is of no moment because the right of
the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and
58, Rollo).
Contrary to respondent court's prescription of the existence of novation, the evidence at hand does
not buttress a finding along this line from the mere fact that petitioner supposedly did not question the
substitution when the bank reacted to private respondent's offer to pay the loan (p. 39, Rollo). What
seems to have escaped respondent court's attention was the condition imposed by the petitioner that
it will grant private respondent's request if the latter will also shoulder the obligation incurred by
Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo). The consent of the
petitioner to the substitution, as creditor, was thus erroneously appreciated.
With the conclusions reached, we need not discuss the other issues raised in the petition.
WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990, including the
resolution dated February 6, 1991 of respondent court are hereby set aside and another one entered
dismissing Wilson Chua's complaint. No special pronouncement is made to costs.

G.R. No. L-18343

September 30, 1965

PHILIPPINE NATIONAL BANK and EDUARDO Z. ROMUALDEZ, in his capacity as President of

the Philippine National Bank, plaintiffs-appellants,
vs.
EMILIO A. GANCAYCO and FLORENTINO FLOR, Special Prosecutors of the Dept. of
Justice, defendants-appellees.
Ramon B. de los Reyes and Zoilo P. Perlas for plaintiffs-appellants.
Villamor & Gancayco for defendants-appellees.

REGALA, J.:
The principal question presented in this case is whether a bank can be compelled to disclose the
records of accounts of a depositor who is under investigation for unexplained wealth.
This question arose when defendants Emilio A. Gancayco and Florentino Flor, as special prosecutors
of the Department of Justice, required the plaintiff Philippine National Bank to produce at a hearing to
be held at 10 a.m. on February 20, 1961 the records of the bank deposits of Ernesto T. Jimenez,
former administrator of the Agricultural Credit and Cooperative Administration, who was then under
investigation for unexplained wealth. In declining to reveal its records, the plaintiff bank invoked
Republic Act No. 1405 which provides:
SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of
impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of
public officials, or in cases where the money deposited or invested is the subject matter of the
litigation.
The plaintiff bank also called attention to the penal provision of the law which reads:

206
SEC. 5. Any violation of this law will subject the offender upon conviction, to an imprisonment
of not more than five years or a fine of not more than twenty thousand pesos or both, in the
discretion of the court.
On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No.
3019) in support of their claim of authority and demanded anew that plaintiff Eduardo Z. Romualdez,
as bank president, produce the records or he would be prosecuted for contempt. The law invoked by
the defendant states:
SEC. 8. Dismissal due to unexplained wealth. If in accordance with the provisions of
Republic Act Numbered One thousand three hundred seventy-nine, a public official has been
found to have acquired during his incumbency, whether in his name or in the name of other
persons, an amount of property and/or money manifestly out of proportion to his salary and to
his other lawful income, that fact shall be a ground for dismissal or removal. Properties in the
name of the spouse and unmarried children of such public official may be taken into
consideration, when their acquisition through legitimate means cannot be satisfactorily
shown. Bank deposits shall be taken into consideration in the enforcement of this section,
notwithstanding any provision of law to the contrary.
Because of the threat of prosecution, plaintiffs filed an action for declaratory judgment in the Manila
Court of First Instance. After trial, during which Senator Arturo M. Tolentino, author of the Anti-Graft
and Corrupt Practices Act testified, the court rendered judgment, sustaining the power of the
defendants to compel the disclosure of bank accounts of ACCFA Administrator Jimenez. The court
said that, by enacting section 8 of, the Anti-Graft and Corrupt Practices Act, Congress clearly
intended to provide an additional ground for the examination of bank deposits. Without such
provision, the court added prosecutors would be hampered if not altogether frustrated in the
prosecution of those charged with having acquired unexplained wealth while in public
office.1awphl.nt
From that judgment, plaintiffs appealed to this Court. In brief, plaintiffs' position is that section 8 of the
Anti-Graft Law "simply means that such bank deposits may be included or added to the assets of the
Government official or employee for the purpose of computing his unexplained wealth if and when the
same are discovered or revealed in the manner authorized by Section 2 of Republic Act 1405, which
are (1) Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order of a
competent court in cases of bribery or dereliction of duty of public officials; and (4) In cases where the
money deposited or invested is the subject matter of the litigation."

In support of their position, plaintiffs contend, first, that the Anti-Graft Law (which took effect on August
17, 1960) is a general law which cannot be deemed to have impliedly repealed section 2 of Republic
Act No. 1405 (which took effect on Sept. 9, 1955), because of the rule that repeals by implication are
not favored. Second, they argue that to construe section 8 of the Anti-Graft Law as allowing inquiry
into bank deposits would be to negate the policy expressed in section 1 of Republic Act No. 1405
which is "to give encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be utilized by banks in authorized loans to assist in
the economic development of the country."
Contrary to their claim that their position effects a reconciliation of the provisions of the two laws,
plaintiffs are actually making the provisions of Republic Act No. 1405 prevail over those of the AntiGraft Law, because even without the latter law the balance standing to the depositor's credit can be
considered provided its disclosure is made in any of the cases provided in Republic Act No. 1405.
The truth is that these laws are so repugnant to each other than no reconciliation is possible. Thus,
while Republic Act No. 1405 provides that bank deposits are "absolutely confidential ... and [therefore]
may not be examined, inquired or looked into," except in those cases enumerated therein, the AntiGraft Law directs in mandatory terms that bank deposits "shall be taken into consideration in the
enforcement of this section, notwithstanding any provision of law to the contrary." The only conclusion
possible is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No.
1405 by providing additional exception to the rule against the disclosure of bank deposits.
Indeed, it is said that if the new law is inconsistent with or repugnant to the old law, the presumption
against the intent to repeal by implication is overthrown because the inconsistency or repugnancy
reveals an intent to repeal the existing law. And whether a statute, either in its entirety or in part, has
been repealed by implication is ultimately a matter of legislative intent. (Crawford, The Construction of
Statutes, Secs. 309-310. Cf. Iloilo Palay and Corn Planters Ass'n v. Feliciano, G.R. No. L-24022,
March 3, 1965).
The recent case of People v. De Venecia, G.R. No. L-20808, July 31, 1965 invites comparison with
this case. There it was held:
The result is that although sec. 54 [Rev. Election Code] prohibits a classified civil service
employee from aiding any candidate, sec. 29 [Civil Service Act of 1959] allows such classified
employee to express his views on current political problems or issues, or to mention the
name of his candidate for public office, even if such expression of views or mention of names
may result in aiding one particular candidate. In other words, the last paragraph of sec. 29 is
an exception to sec. 54; at most, an amendment to sec. 54.

207
With regard to the claim that disclosure would be contrary to the policy making bank deposits
confidential, it is enough to point out that while section 2 of Republic Act 1405 declares bank deposits
to be "absolutely confidential," it nevertheless allows such disclosure in the following instances: (1)
Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order of a
competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the
money deposited is the subject matter of the litigation. Cases of unexplained wealth are similar to
cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot
be excepted from the rule making bank deposits confidential. The policy as to one cannot be different
from the policy as to the other. This policy express the motion that a public office is a public trust and
any person who enters upon its discharge does so with the full knowledge that his life, so far as
relevant to his duty, is open to public scrutiny.

to receive the plaintiff's evidence. On January 20, 1970 judgment by default was rendered against the
defendants.
To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the defendant B &
B Forest Development Corporation with the China Banking Corporation. Accordingly, a notice of
garnishment was issued by the Deputy Sheriff of the trial court and served on said bank through its
cashier, Tan Kim Liong. In reply, the bank' cashier invited the attention of the Deputy Sheriff to the
provisions of Republic Act No. 1405 which, it was alleged, prohibit the disclosure of any information
relative to bank deposits. Thereupon the plaintiff filed a motion to cite Tan Kim Liong for contempt of
court.

CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants,

vs.
HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila,
Branch VIII, and VICENTE G. ACABAN, respondents-appellees.

In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim Liong
was ordered "to inform the Court within five days from receipt of this order whether or not there is a
deposit in the China Banking Corporation of defendant B & B Forest Development Corporation, and if
there is any deposit, to hold the same intact and not allow any withdrawal until further order from this
Court." Tan Kim Liong moved to reconsider but was turned down by order of March 27, 1972. In the
same order he was directed "to comply with the order of this Court dated March 4, 1972 within ten
(10) days from the receipt of copy of this order, otherwise his arrest and confinement will be ordered
by the Court." Resisting the two orders, the China Banking Corporation and Tan Kim Liong instituted
the instant petition.

Sy Santos, Del Rosario and Associates for petitioners-appellants.

The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads:

WHEREFORE, the decision appealed from is affirmed, without pronouncement as to costs.

G.R. No. L-34964 January 31, 1973

Tagalo, Gozar and Associates for respondents-appellees.

MAKALINTAL, J.:
The only issue in this petition for certiorari to review the orders dated March 4, 1972 and March 27,
1972, respectively, of the Court of First Instance of Manila in its Civil Case No. 75138, is whether or
not a banking institution may validly refuse to comply with a court process garnishing the bank
deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405. *
On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista Logging
Co., Inc., B & B Forest Development Corporation and Marino Bautista for the collection of a sum of
money. Upon motion of the plaintiff the trial court declared the defendants in default for failure to
answer within the reglementary period, and authorized the Branch Clerk of Court and/or Deputy Clerk

Sec. 2. All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby considered
as of absolutely confidential nature and may not be examined, inquired or looked into
by any person, government official, bureau or office, except upon written permission
of the depositor, or in cases of impeachment, or upon order of a competent court in
cases of bribery or dereliction of duty of public officials, or in cases where the money
deposited or invested is the subject matter of the litigation.
Sec 3. It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

208
Sec. 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand
pesos or both, in the discretion of the court.
The petitioners argue that the disclosure of the information required by the court does not fall within
any of the four (4) exceptions enumerated in Section 2, and that if the questioned orders are complied
with Tan Kim Liong may be criminally liable under Section 5 and the bank exposed to a possible
damage suit by B & B Forest Development Corporation. Specifically referring to this case, the position
of the petitioners is that the bank deposit of judgment debtor B & B Forest Development Corporation
cannot be subject to garnishment to satisfy a final judgment against it in view of the aforequoted
provisions of law.
We do not view the situation in that light. The lower court did not order an examination of or inquiry
into the deposit of B & B Forest Development Corporation, as contemplated in the law. It merely
required Tan Kim Liong to inform the court whether or not the defendant B & B Forest Development
Corporation had a deposit in the China Banking Corporation only for purposes of the garnishment
issued by it, so that the bank would hold the same intact and not allow any withdrawal until further
order. It will be noted from the discussion of the conference committee report on Senate Bill No. 351
and House Bill No. 3977, which later became Republic Act 1405, that it was not the intention of the
lawmakers to place bank deposits beyond the reach of execution to satisfy a final judgment. Thus:
Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the
Committee on Ways and Means to clarify this further. Suppose an individual has a tax
case. He is being held liable by the Bureau of Internal Revenue for, say, P1,000.00
worth of tax liability, and because of this the deposit of this individual is attached by
the Bureau of Internal Revenue.
Mr. RAMOS. The attachment will only apply after the court has pronounced sentence
declaring the liability of such person. But where the primary aim is to determine
whether he has a bank deposit in order to bring about a proper assessment by the
Bureau of Internal Revenue, such inquiry is not authorized by this proposed law.
Mr. MARCOS. But under our rules of procedure and under the Civil Code, the
attachment or garnishment of money deposited is allowed. Let us assume, for
instance, that there is a preliminary attachment which is for garnishment or for
holding liable all moneys deposited belonging to a certain individual, but such
attachment or garnishment will bring out into the open the value of such deposit. Is
that prohibited by this amendment or by this law?

Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the
inquiry is made only for the purpose of satisfying a tax liability already declared for
the protection of the right in favor of the government; but when the object is merely to
inquire whether he has a deposit or not for purposes of taxation, then this is fully
covered by the law.
Mr. MARCOS. And it protects the depositor, does it not?
Mr. RAMOS. Yes, it protects the depositor.
Mr. MARCOS. The law prohibits a mere investigation into the existence and the
amount of the deposit.
Mr. RAMOS. Into the very nature of such deposit.
Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment
or attachment of the deposit is not allowed?
Mr. RAMOS. No, without judicial authorization.
Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as
well as the substantive law on the matter is amended?
Mr. RAMOS. Yes. That is the effect.
Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the
liability of an individual for taxation purposes and this judgment is sought to be
executed ... in the execution of that judgment, does this bill, or this proposed law, if
approved, allow the investigation or scrutiny of the bank deposit in order to execute
the judgment?
Mr. RAMOS. To satisfy a judgment which has become executory.
Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and
the deposit is half a million, will this bill allow scrutiny into the deposit in order that the
judgment may be executed?

209
Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation
to the Government, but not to determine whether a deposit has been made in
evasion of taxes.

EMMANUEL C. OATE and ECON HOLDINGS CORPORATION, petitioners,

vs.
HON. ZUES C. ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of
Makati, and SUN LIFE ASSURANCE COMPANY OF CANADA, respondents.

xxx xxx xxx

G.R. No. 107491 February 21, 1994
Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery
of a sum of money the plaintiff wishes to attach the properties of the defendant to
insure the satisfaction of the judgment. Once the judgment is rendered, does the
gentleman mean that the plaintiff cannot attach the bank deposit of the defendant?
Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to
which I replied that outside the very purpose of this law it could be reached by
attachment.

BRUNNER DEVELOPMENT CORPORATION, petitioner,

vs.
HON. ZUES C. ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of
Makati, and SUN LIFE ASSURANCE COMPANY OF CANADA, respondents.
Florante A. Bautista for petitioner in G.R. No. 107303.
Andin & Andin Law Offices for Brunner Development Corporation.

Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?

Quasha, Asperilla, Ancheta, Pena & Nolasco for Sun Life Assurance Company of Canada.
Mr. RAMOS. That is so.
(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840,
July 27, 1955).
It is sufficiently clear from the foregoing discussion of the conference committee report of the two
houses of Congress that the prohibition against examination of or inquiry into a bank deposit under
Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed
there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is
purely incidental to the execution process. It is hard to conceive that it was ever within the intention of
Congress to enable debtors to evade payment of their just debts, even if ordered by the Court,
through the expedient of converting their assets into cash and depositing the same in a bank.
WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby
affirmed, with costs against the petitioners-appellants.

NOCON, J.:
These are separate petitions for certiorari with a prayer for temporary restraining order filed by
Emmanuel C. Oate and Econ Holdings Corporation (in G.R. No. 107303), and Brunner Development
Corporation (in G.R. No. 107491), both of which assail several orders issued by respondent Judge
Zues C. Abrogar in Civil Case No. 91-3506.
The pertinent facts are as follows: On December 23, 1991, respondent Sun Life Assurance Company
of Canada (Sun Life, for brevity) filed a complaint for a sum of money with a prayer for the immediate
issuance of a writ of attachment against petitioners, and Noel L. Dio, which was docketed as Civil
Case No. 91-3506 and raffled to Branch 150 of the RTC Makati, presided over by respondent Judge.
The following day, December 24, 1991, respondent Judge issued an order granting the issuance of a
writ of attachment, and the writ was actually issued on December 27, 1991.

G.R. No. 107303 February 21, 1994

On January 3, 1992, upon Sun Life's ex-parte motion, the trial court amended the writ of attachment
to reflect the alleged amount of the indebtedness. That same day, Deputy Sheriff Arturo C. Flores,
accompanied by a representative of Sun Life, attempted to serve summons and a copy of the
amended writ of attachment upon petitioners at their known office address at 108 Aguirre St., Makati

210
but was not able to do so since there was no responsible officer to receive the same. 1 Nonetheless,
Sheriff Flores proceeded, over a period of several days, to serve notices of garnishment upon several
commercial banks and financial institutions, and levied on attachment a condominium unit and a real
property belonging to petitioner Oate.
Summons was eventually served upon petitioners on January 9, 1992, while defendant Dio was
served with summons on January 16, 1992.
On January 21, 1992, petitioners filed an "Urgent Motion to Discharge/Dissolve Writ of Attachment."
That same day, Sun Life filed an ex-parte motion to examine the books of accounts and ledgers of
petitioner Brunner Development Corporation (Brunner, for brevity) at the Urban Bank, Legaspi Village
Branch, and to obtain copies thereof, which motion was granted by respondent Judge. The
examination of said account took place on January 23, 1992. Petitioners filed a motion to nullify the
proceedings taken thereat since they were not present.
On January 30, 1992, petitioners and their co-defendants filed a memorandum in support of the
motion to discharge attachment. Also on that same day, Sun Life filed another motion for examination
of bank accounts, this time seeking the examination of Account No. 0041-0277-03 with the Bank of
Philippine Islands (BPI) which, incidentally, petitioners claim not to be owned by them and the
records of Philippine National Bank (PNB) with regard to checks payable to Brunner. Sun Life asked
the court to order both banks to comply with the notice of garnishment.
On February 6, 1992, respondent Judge issued an order (1) denying petitioners' and the codefendants' motion to discharge the amended writ of attachment, (2) approving Sun Life's additional
attachment, (3) granting Sun Life's motion to examine the BPI account, and (4) denying petitioners'
motion to nullify the proceedings of January 23, 1992.
On March 12, 1992, petitioners filed a motion for reconsideration of the February 6, 1992 order. On
September 6, 1992, respondent Judge denied the motion for reconsideration.
Hence, the instant petitions. Petitioners' basic argument is that respondent Judge had acted with
grave abuse of discretion amounting to lack or in excess of jurisdiction in (1) issuing ex parte the
original and amended writs of preliminary attachment and the corresponding notices of garnishment
and levy on attachment since the trial court had not yet acquired jurisdiction over them; and (2)
allowing the examination of the bank records though no notice was given to them.
We find both petitions unmeritorious.

Petitioners initially argue that respondent Judge erred in granting Sun Life's prayer for a writ of
preliminary attachment on the ground that the trial court had not acquired jurisdiction over them. This
argument is clearly unavailing since it is well-settled that a writ of preliminary attachment may be
validly applied for and granted even before the defendant is summoned or is heard from. 2 The
rationale behind this rule was stated by the Court in this wise:
A preliminary attachment may be defined, paraphrasing the Rules of Court, as the
provisional remedy in virtue of which a plaintiff or other proper party may, at the
commencement of the action or any time thereafter, have the property of the adverse
party taken into the custody of the court as security for the satisfaction of any
judgment that may be recovered. It is a remedy which is purely statutory in respect of
which the law requires a strict construction of the provisions granting it. Withal no
principle, statutory or jurisprudential, prohibits its issuance by any court before
acquisition of jurisdiction over the person of the defendant.
Rule 57 in fact speaks of the grant of the remedy "at the commencement of the
action or at any time thereafter." The phrase "at the commencement of the action,"
obviously refers to the date of the filing of the complaint which, as abovepointed
out, its the date that marks "the commencement of the action;" and the reference
plainly is to a time before summons is served on the defendant or even before
summons issues. What the rule is saying quite clearly is that after an action is
properly
commenced by the filing of the complaint and the payment of all requisite docket
and other fees the plaintiff may apply for and obtain a writ of preliminary
attachment upon fulfillment of the pertinent requisites laid down by law, and that he
may do so at any time, either before or after service of summons on the defendant.
And this indeed, has been the immemorial practice sanctioned by the courts: for the
plaintiff or other proper party to incorporate the application for attachment in the
complaint or other appropriate pleading (counterclaim, cross-claim, third-party claim)
and for the Trial Court to issue the writ ex-parte at the commencement of the action if
it finds the application otherwise sufficient in form and substance. 3
Petitioners then contended that the writ should have been discharged since the ground on which it
was issued fraud in contracting the obligation was not present. This cannot be considered a
ground for lifting the writ since this delves into the very complaint of the Sun Life. As this Court stated
in Cuatro v. Court of Appeals: 4

211
Moreover, an attachment may not be dissolved by a showing of its irregular or
improper issuance if it is upon a ground which is at the same time the applicant's
cause of action in the main case since an anomalous situation would result if the
issues of the main case would be ventilated and resolved in a mere hearing of the
motion (Davao Light and Power Co., Inc. vs. Court of Appeals, supra, The
Consolidated Bank and Trust Corp. (Solidbank) vs. Court of Appeals, 197 SCRA 663
[1991]).
In the present case, one of the allegation in petitioner's complaint below is that the
defendant spouses induced the plaintiff to grant the loan by issuing postdated checks
to cover the installment payments and a separate set of postdated checks for
payment of the stipulated interest (Annex "B"). The issue of fraud, then, is clearly
within the competence of the lower court in the main action. 5
The fact that a criminal complaint for estafa filed by Sun Life against the petitioners was dismissed by
the Provincial Prosecutor of Rizal for Makati on April 21, 1992 and was upheld by the Provincial
Prosecutor on July 13, 1992 is of no moment since the same can be indicative only of the absence of
criminal liability, but not of civil liability. Besides, Sun Life had elevated the case for review to the
Department of Justice, where the case is presently pending.
Finally, petitioners argue that the enforcement of the writ was invalid since it undisputedly preceded
the actual service of summons by six days at most. Petitioners cite the decisions in Sievert vs. Court
of Appeals, et al. 6 andBAC Manufacturing and Sales Corp. vs. Court of Appeals, et al., 7 wherein this
Court held that enforcement of the writ of attachment can not bind the defendant in view of the failure
of the trial court to acquire jurisdiction over the defendant through either summons or his voluntary
appearance.
We do not agree entirely with petitioners. True, this Court had held in a recent decision that the
enforcement of writ of attachment may not validly be effected until and unless proceeded or
contemporaneously accompanied by service of summons. 8
But we must distinguish the case at bar from the Sievert and BAC Manufacturing cases. In those two
cases,summons was never served upon the defendants. The plaintiffs therein did not even attempt to
cause service of summons upon the defendants, right up to the time the cases went up to this Court.
This is not true in the case at bar. The records reveal that Sheriff Flores and Sun Life did attempt a
contemporaneous service of both summons and the writ of attachment on January 3, 1992, but we
stymied by the absence of a responsible officer in petitioners' offices. Note is taken of the fact that
petitioners Oate and Econ Holdings admitted in their answer 9that the offices of both Brunner

Development Corporation and Econ Holdings were located at the same address and that petitioner
Oate is the President of Econ Holdings while petitioner Dio is the President of Brunner
Development Corporation as well as a stockholder and director of Econ Holdings.
Thus, an exception to the established rule on the enforcement of the writ of attachment can be made
where a previous attempt to serve the summons and the writ of attachment failed due to factors
beyond the control of either the plaintiff or the process server, provided that such service is effected
within a reasonable period thereafter.
Several reasons can be given for the exception. First, there is a possibility that a defendant, having
been alerted of plaintiffs action by the attempted service of summons and the writ of attachment,
would put his properties beyond the reach of the plaintiff while the latter is trying to serve the
summons and the writ anew. By the time the plaintiff may have caused the service of summons and
the writ, there might not be any property of the defendant left to attach.
Second, the court eventually acquired jurisdiction over the petitioners six days later. To nullify the
notices of garnishment issued prior thereto would again open the possibility that petitioners would
transfer the garnished monies while Sun Life applied for new notices of garnishment.
Third, the ease by which a writ of attachment can be obtained is counter-balanced by the ease by
which the same can be discharged: the defendant can either make a cash deposit or post a counterbond equivalent to the value of the property attached. 10 The petitioners herein tried to have the writ of
attachment discharged by posting a counter-bond, the same was denied by respondent Judge on the
ground that the amount of the counter-bond was less than that of Sun Life's bond.
II.
Petitioners' second ground assail the acts of respondent Judge in allowing the examination of Urban
Banks' records and in ordering that the examination of the bank records of BPI and PNB as invalid
since no notice of said examinations were ever given them. Sun Life grounded its requests for the
examination of the bank accounts on Section 10, Rule 57 of the Rules of Court, which provided, to
wit:
Sec. 10. Examination of party whose property is attached and persons indebted to
him or controlling his property; delivery of property to officer. Any person owing
debts to the party whose property is attached or having in his possession or under his
control any credit or other personal property belonging to such party, may be required
to attend before the court in which the action is pending, or before a commissioner

212
appointed by the court and be examined on oath respecting the same. The party
whose property is attached may also be required to attend for the purpose of giving
information respecting his property, and may be examined on oath. The court may,
after such examination, order personal property capable of manual delivery belonging
to him, in the possession of the person so required to attend before the court, to be
delivered to the clerk or court, sheriff, or other proper officer on such terms as may be
just, having reference to any lien thereon or claim against the same, to await the
judgment in the action.
It is clear from the foregoing provision that notice need only be given to the garnishee, but the person
who is holding property or credits belonging to the defendant. The provision does not require that
notice be furnished the defendant himself, except when there is a need to examine said defendant
"for the purpose of giving information respecting his property.

(1) In an examination made in the course of a special or general examination of a bank that is specifically
authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank
fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to
establish such fraud or irregularity,
(2) In an examination made by an independent auditor hired by the bank to conduct its regular audit
provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of
the bank,
(3) Upon written permission of the depositor,
(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or

Furthermore, Section 10 Rule 57 is not incompatible with Republic Act No. 1405, as amended, "An
Act Prohibiting Disclosure or Inquiry Into, Deposits With Any Banking Institution and Providing Penalty
Therefore," for Section 2 therefore provides an exception "in cases where the money deposited or
invested is the subject matter of the litigation."

(6) In cases where the money deposited or invested in the subject matter of the litigation.

The examination of the bank records is not a fishing expedition, but rather a method by which Sun
Life could trace the proceeds of the check it paid to petitioners.

The facts are not disputed.

WHEREFORE, the instant petitions are hereby DISMISSED. The temporary restraining order issued
on June 28, 1993 is hereby lifted.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.
UNION BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and ALLIED BANK
CORPORATION, respondents.
DECISION

Whether or not the case at bar falls under the last exception is the issue in the instant petition.

On March 21, 1990, a check (Check No. 11669677) dated March 31, 1990 in the amount of One Million
Pesos (P1,000,000.00) was drawn against Account No. 0111-01854-8 with private respondent Allied Bank
payable to the order of one Jose Ch. Alvarez. The payee deposited the check with petitioner Union Bank who
credited the P1,000,000.00 to the account of Mr. Alvarez. On May 21, 1990, petitioner sent the check for
clearing through the Philippine Clearing House Corporation (PCHC). When the check was presented for
payment, a clearing discrepancy was committed by Union Banks clearing staff when the amount of One Million
Pesos (P1,000,000.00) was erroneously under-encoded to One Thousand Pesos (P1,000.00) only.
Petitioner only discovered the under-encoding almost a year later. Thus, on May 7, 1991, Union Bank
Notified Allied Bank of the discrepancy by way of a charge slip for Nine Hundred Ninety-Nine Thousand Pesos
(P999,000.00) for automatic debiting against the account of Allied Bank. The latter, however, refused to accept
the charge slip since [the] transaction was completed per your [Union Banks] original instruction and clients
account is now insufficiently funded.

KAPUNAN, J.:
Section 2 of the Law on Secrecy of Bank Deposits, [1] as amended, declares bank deposits to be absolutely
confidential except:

Subsequently, Union Bank filed a complaint against Allied Bank before the PCHC Arbitration Committee
(Arbicom), praying that:

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judgment be rendered in favor of plaintiff against defendant sentencing it to pay plaintiff:

The Court of Appeals affirmed the dismissal of the petition, ruling that the case was not one where the
money deposited is the subject matter of the litigation.

1. The sum of NINE HUNDRED NINETY-NINE THOUSAND PESOS (P999,000.00);

2. The sum of THREE HUNDRED SIXTY-ONE AND FOUR HUNDRED EIGHTY AND 20/XX P361,480.20
as of October 9, 1991 representing reimbursements for opportunity losses and interest at the rate of 24% per
annum arising from actual losses sustained by plaintiff as of May 21, 1990;
3. The amount for attorneys fees at the rate of 25% of any and all sums due;

Petitioner collecting bank itself in its complaint filed before the PCHC, Arbicom Case No. 91-068, clearly
stated that its cause of action against defendant arose from defendants deliberate violation of the provisions of
the PCHC Rule Book, Sec. 25.3, specifically on Under-Encoding of check amouting to P1,000,000.00 drawn
upon defendants Tondo Branch which was deposited with plaintiff herein on May 20, 1990, xxx which was
erroneously encoded at P1,000.00 which defendant as the receiving bank thereof, never called nor notified the
plaintiff of the error committed thus causing actual losses to plaintiff in the principal amount of P999,000.00
exclusive of opportunity losses and interest.

4. Penalty Charges at the rate of 1/8 of 1% of P999,000.00 from May 22, 1990 until payment thereof.
5. Exemplary and punitive damages against the defendant in such amounts as may be awarded by this Tribunal
in order to serve a lesson to all member-Banks under the PCHC umbrella to striclty comply with the provisions
thereof;
6. The costs of suit which includes filing fee in addition to litigation expenses which shall be proven in the
course of arbitration.
7. Such other damages thay may be awarded by this Tribunal.[2]
Thereafter, Union Bank filed in the Regional Trial court (RTC) of Makati a petition for the examination of
Account No. 111-01854-8. Judgment on the arbitration case was held in abeyance pending the resolution of said
petition.
Upon motion of private respondent, the RTC dismissed Union Banks petition. The RTC held that:
The case of the herein petitioner does not fall under any of the foregoing exceptions to warrant a disclosure of
or inquiry into the ledgers/books of account of Allied Checking Account No. 111-01854-8. Needless to say, the
complaint filed by herein petitioner against Allied Banking Corporation before the Philippine Clearing House
Corporation (PCHC) Arbitration Committee and docketed therein as Arb[i]com Case No. 91-068 (Annex A,
petition) is not one for bribery or dereliction of duty of public officials much less is there any showing that the
subject matter thereof is the money deposited in the account in question. Petitioners complaint primarily
hing[e]s on the alleged deliberate violation by Allied Bank Corporation of the provisions of the PCHC Rule
Book, Sec. 25[.]3, and as principal reliefs, it seeks for [sic] the recovery of amounts of money as a consequence
of an alleged under-coding of check amount to P1,000,000.00 and damage[s] by way of loss of interest income.
[3]

Furthermore, a reading of petitioner collecting banks complaint in the Arbicom case shows that its thrust is
directed against respondent drawee banks alleged failure to inform the former of the under-encoding when Sec.
25.3 of the PCHC Rule Book is clear that it is receiving banks (respondent drawee bank herein) duty and
obligation to notify the erring bank (petitioner collecting bank herein) of any such under-encoding of any check
amount submitted for clearing within the member banks of the PCHC not later than 10:00 a.m. of the following
clearing day and prays that respondent drawee bank be held liable to petitioner collecting bank for penalties in
view of the latters violation of the notification requirement.
Prescinding from the above, we see no cogent reason to depart from the time-honored general banking rule that
all deposits of whatever nature with banks are considered of absolutely confidential nature and may not be
examined, inquired or looked into by any person, government official, bureau or office and corollarily, that it is
unlawful for any official or employee of a bank to disclose to any person any information concerning deposits.
Nowhere in petitioner collecting banks complaint filed before the PCHC does it mention of the amount it seeks
to recover from Account No. 0111-018548 itself, but speaks of P999,000.00 only as an incident of its alleged
opportunity losses and interest as a result of its own employees admitted error in encoding the check.
The money depositied in Account No. 0111-018548 is not the subject matter of the litigation in the Arbicom
case for as clearly stated by petitioner itself, it is the alleged violation by respondent of the rules and regulations
of the PCHC.[4]
Union Bank is now before this Court insisting that the money deposited in Account No. 0111-01854-8 is
the subject matter of the litigation Petitioner cites the case of Mathay vs. Consolidated Bank and TrustCompany,
[5]
where we defined subject matter of the action, thus:

214
xxx By the phrase subject matter of the action is meant the physical facts, the things real or personal, the money,
lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by
the defendant.

Failing in that duty, petitioner holds private respondent directly liable for the P999,000.00 and other damages. It
does not appear that petitioner is seeking reimbursement from the account of the drawer. This much is evident
in petitioners complaint before the Arbicom.

Petitioner contends that the Court of Appeals confuses the cause of action with the subject of the action.
In Yusingco vs. Ong Hing Lian,[6] petitioner points out, this Court distinguished the two concepts.

xxx plaintiffs cause of action against defendant arose from defendants deliberate violation of the provisions of
the PCHC Rule Book, Sec. 25.3, specifically on Under-Encoding of check amounting to P1,000,000.00 drawn
upon defendants Tondo Branch which was deposited with plaintiff herein sometime on May 20, 1990. From the
check amount of P1,000,000.00, it was instead erroneously encoded at P1,000.00 which defendant as the
receiving bank thereof, never called nor notified the plaintiff of the error committed thus causing actual losses
to plaintiff in the principal amount of P999,000.00 exclusive of opportunity losses and interest thereon
whatsoever. xxx[8]

xxx The cause of action is the legal wrong threatened or committed, while the object of the action is to prevent
or redress the wrong by obtaining some legal relief; but the subject of the action is neither of these since it is not
the wrong or the relief demanded, the subject of the action is the matter or thing with respect to which the
controversy has arisen, concerning which the wrong has been done, and this ordinarily is the property, or the
contract and its subject matter, or the thing in dispute.
The argument is well taken. We note with approval the difference between the subject of the action from
the cause of action. We also find petitioners definition of the phrase subject matter of the action is consistent
with the term subject matter of the litigation, as the latter is used in the Bank Deposits Secrecy Act.
In Mellon Bank, N.A. vs. Magsino,[7] where the petitioner bank inadvertently caused the transfer of the
amount of US$1,000,000.00 instead of only US$1,000.00, the Court sanctioned the examination of the bank
accounts where part of the money was subsequently caused to be deposited:
Section 2 of [Republic Act No. 1405] allows the disclosure of bank deposits in cases where the money
deposited is the subject matter of the litigation. Inasmuch as Civil Case No. 26899 is aimed at recovering the
amount converted by the Javiers for their own benefit, necessarily, an inquiry into the wherabouts of the
illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons
other than the one responsible for the illegal acquisition.
Clearly, Mellon Bank involved a case where the money deposited was the subject matter of the litigation
since the money so deposited was the very thing in dispute. This, however, is not the case here.
Petitioners theory is that private respondent Allied Bank should have informed petitioner of the underencoding pursuant to the provisions of Section 25.3.1 of the PCHC Handbook, which states:
25.3.1. The Receiving Bank should inform the erring Bank about the under-encoding of amount not later than
10:00 A.M. of the following clearing day.

Petitioner even requested private respondents Branch Manager for reimbursement from private respondents
account through the automatic debiting system.
2.7. On May 6, 1991, plaintiffs Senior Vice-President, Ms. ERLINDA V. VALENTON wrote defendants Tondo
Branch Manager, Mr. RODOLFO JOSE on the incident and requested assistance in facilitating correction of the
erroneous coding with request for reimbursement thru the industrys automatic debiting of defendants account.[9]
Further, petitioner rejected private respondents proposal that the drawer issue postdated checks in favor of
petitioner since the identity and credit standing of the depositor were unknown to petitioner.
2.9. On May 23, 1991, defendants Branch Manager, the same Mr. Rodolfo Jose wrote plaintiffs Ms. Erlinda
Valenton again insisting on the execution of the Quitclaim and Release in favor of defendant as the Branch has
endeavored to negotiate with its client for the collection of such amount. Upon a reading of the terms of the
Quitclaim and Release being proposed by defendant, the unmistakable fact lies that again defendant attempts for
the second time to take advantage of plaintiffs plight by indicating that the terms of the payment of the principal
amount of P999,000.00 is by way of several personal postdated checks up to March 21, 1992 from a person
whose identity is not even disclosed to plaintiff.
To an ordinary person aggrieved already by having been taken advantage of for 620 days more or less, the
proposal of defendant could not be acceptable for the reason that aside from the interest lost already for the use
of its money by another party, no assurance is made as to the actual collection thereof from a party whose credit
standing, the recipient is not at all aware of.[10]
Petitioner also believed that it had no privity with the depositor:

215
2.12. Plaintiff then replied to defendants letter by requesting that in lieu of the post-dated checks from
defendants client with whom plaintiff has no privity whatsoever, if the defendant could tender the full payment
of the amount of P999,000.00 in defendants own Managers check and that plaintiff is willing to forego its
further claims for interest and losses for a period of 620 days, more or less.[11]
The following argument adduced by petitioner in the Arbicom case leaves no doubt that petitioner is
holding private respondent itself liable for the discrepancy:
Defendant by its acceptance thru the clearing exchange of the check deposit from its client cannot be said to be
free from any liability for the unpaid portion of the check amount considering that defendant as the drawee
bank, is remiss in its duty of verifying possible technicalities on the face of the check.
Since the provisions of the PCHC Rule Book has so imposed upon the defendant being the Receiving Bank of a
discrepant check item to give that timely notification and defendant failing to comply with such requirement,
then it can be said that defendant is guilty of negligence. He who is guilty of negligence in the performance of
its [sic] duty is liable for damages. (Art. 1170, New Civil Code.)
Art. 1172 of the Civil Code provides that:
Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the circumstances.[] [12]
Petitioner points to its prayer in its complaint to show that it sought reimbursement from the drawers
account. The prayer, however, does not specifically state that it was seeking recovery of the amount from the
depositors account. Petitioner merely asked that judgment be rendered in favor of plaintiff against
defendant sentencing it to pay plaintiff: 1. The sum of NINE HUNDRED NINETY-NINE THOUSAND PESOS
(P999,000.00).[13]
On the other hand, the petition before this court reveals that the true purpose for the examination is to aid
petitioner in proving the extent of Allied Banks liability:

Hence, the amount actually debited from the subject account becomes very material and germane to petitioners
claim for reimbursement as it is only upon examination of subject account can it be proved that indeed a
discrepancy in the amount credited to petitioner was committed, thereby, rendering respondent Allied Bank
liable to petitioner for the deficiency. The money deposited in aforesaid account is undeniably the subject matter
of the litigation since the issue in the Arbicom case is whether respondent Bank should be held liable to
petitioner for reimbursement of the amount of money constituting the difference between the amount of the
check and the amount credited to petitioner, that is, P999,000.00, which has remained deposited in aforesaid
account.
On top of the allegations in the complaint, which can be verified only by examining the subject bank account,
the defense of respondent Allied Bank that the reimbursement cannot be made since clients account is not
sufficiently funded at the time petitioner sent its Charge Slip, bolsters petitioners contention that the money in
subject account is the very subject matter of the pending Arbicom case.
Indeed, to prove the allegations in its Complaint before the PCHC Arbitration Committee, and to rebut private
respondents defense on the matter, petitioner needs to determine:
1. how long respondent Allied Bank had willfully or negligently allowed the difference of P999,000.00 to be
maintained in the subject account without remitting the same to petitioner;
2. whether indeed the subject account was no longer sufficiently funded when petitioner sent its charge slip for
reimbursement to respondent bank on May 7, 1991; and
3. whether or not respondent Allied Banks actuations in refusing to immediately reimburse the discrepancy was
attended by good or bad faith.
In other words, only a disclosure of the pertinent details and information relating to the transactions involving
subject account will enable petitioner to prove its allegations in the pending Arbicom case. xxx[14]
In short, petitioner is fishing for information so it can determine the culpability of private respondent and
the amount of damages it can recover from the latter. It does not seek recovery of the very money contained in
the deposit. The subject matter of the dispute may be the amount of P999,000.00 that petitioner seeks from
private respondent as a result of the latters alleged failure to inform the former of the discrepancy; but it is not
the P999,000.00 deposited in the drawers account. By the terms of R.A. No. 1405, the money deposited itself
should be the subject matter of the litigation.
That petitioner feels a need for such information in order to establish its case against private respondent
does not, by itself, warrant the examination of the bank deposits. The necessity of the inquiry, or the lack

216
thereof, is immaterial since the case does not come under any of the exceptions allowed by the Bank Deposits
Secrecy Act.
WHEREFORE, the petition is DENIED.

It is worth mentioning that the power of the Ombudsman to investigate and to require the production and
inspection of records and documents is sanctioned by the 1987 Philippine Constitution, Republic Act No. 6770,
otherwise known as the Ombudsman Act of 1989 and under existing jurisprudence on the matter. It must be
noted that R. A. 6770 especially Section 15 thereof provides, among others, the following powers, functions and
duties of the Ombudsman, to wit:

SO ORDERED.
xxx
LOURDES T. MARQUEZ, in her capacity as Branch Manager, Union Bank of the
Philippines, petitioners, vs. HON. ANIANO A. DESIERTO, (in his capacity as OMBUDSMAN,
Evaluation and Preliminary Investigation Bureau, Office of the Ombudsman, ANGEL C.
MAYOR-ALGO, JR., MARY ANN CORPUZ-MANALAC and JOSE T. DE JESUS, JR., in their
capacities as Chairman and Members of the Panel, respectively, respondents.

(8) Administer oaths, issue subpoena and subpoena duces tecum and take testimony in any investigation or
inquiry, including the power to examine and have access to bank accounts and records;
(9) Punish for contempt in accordance with the Rules of Court and under the same procedure and with the same
penalties provided therein.

DECISION
PARDO, J.:

Clearly, the specific provision of R.A. 6770, a later legislation, modifies the law on the Secrecy of Bank
Deposits (R.A. 1405) and places the office of the Ombudsman in the same footing as the courts of law in this
regard.[2]

In the petition at bar, petitioner seeks to-a. Annul and set aside, for having been issued without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack of jurisdiction, respondents order dated September 7, 1998 in OMB-0-970411, In Re: Motion to Cite Lourdes T. Marquez for indirect contempt, received by counsel of September
9, 1998, and their order dated October 14, 1998, denying Marquezs motion for reconsideration dated
September 10, 1998, received by counsel on October 20, 1998.
b. Prohibit respondents from implementing their order dated October 14, 1998, in proceeding with the
hearing of the motion to cite Marquez for indirect contempt, through the issuance by this Court of a
temporary restraining order and/or preliminary injunction.[1]
The antecedent facts are as follows:
Sometime in May 1998, petitioner Marquez received an Order from the Ombudsman Aniano A. Desierto
dated April 29, 1998, to produce several bank documents for purposes of inspection in camera relative to
various accounts maintained at Union Bank of the Philippines, Julia Vargas Branch, where petitioner is the
branch manager. The accounts to be inspected are Account Nos. 011-37270, 240-020718, 245-30317-3 and 24530318-1, involved in a case pending with the Ombudsman entitled, Fact-Finding and Intelligence Bureau
(FFIB) v. Amado Lagdameo, et. al. The order further states:

The basis of the Ombudsman in ordering an in camera inspection of the accounts is a trail of managers
checks purchased by one George Trivinio, a respondent in OMB-0-97-0411, pending with the office of the
Ombudsman.
It would appear that Mr. George Trivinio, purchased fifty one (51) Managers Checks (MCs) for a total
amount of P272.1 Million at Traders Royal Bank, United Nations Avenue branch, on May 2 and 3, 1995. Out of
the 51 MCs, eleven (11) MCs
in the amount of P70.6 million, were deposited and credited to an account maintained at the Union Bank,
Julia Vargas Branch.[3]
On May 26, 1998, the FFIB panel met in conference with petitioner Lourdes T. Marquez and Atty. Fe B.
Macalino at the banks main office, Ayala Avenue, Makati City. The meeting was for the purpose of allowing
petitioner and Atty. Macalino to view the checks furnished by Traders Royal Bank. After convincing themselves
of the veracity of the checks, Atty. Macalino advised Ms. Marquez to comply with the order of the Ombudsman.
Petitioner agreed to an in camera inspection set on June 3, 1998.[4]
However, on June 4, 1998, petitioner wrote the Ombudsman explaining to him that the accounts in
question cannot readily be identified and asked for time to respond to the order. The reason forwarded by
petitioner was that despite diligent efforts and from the account numbers presented, we can not identify these

217
accounts since the checks are issued in cash or bearer. We surmised that these accounts have long been dormant,
hence are not covered by the new account number generated by the Union Bank system. We therefore have to
verify from the Interbank records archives for the whereabouts of these accounts.[5]

accounts in question. Moreover, on June 16, 1998, the Ombudsman issued another order stating that unless
petitioner appeared before the FFIB with the documents requested, petitioner manager would be charged with
indirect contempt and obstruction of justice.

The Ombudsman, responding to the request of the petitioner for time to comply with the order, stated:
firstly, it must be emphasized that Union Bank, Julia Vargas Branch was the depositary bank of the subject
Traders Royal Bank Managers Checks (MCs), as shown at its dorsal portion and as cleared by the Philippine
Clearing House, not the International Corporate Bank.

In the meantime,[9] on July 14, 1998, the lower court denied petitioners prayer for a temporary restraining
order and stated thus:

Notwithstanding the fact that the checks were payable to cash or bearer, nonetheless, the name of the
depositor(s) could easily be identified since the account numbers x x x where said checks were deposited are
identified in the order.

After hearing the arguments of the parties, the court finds the application for a Temporary Restraining Order to
be without merit.

Thus, on June 16, 1998, the Ombudsman issued an order directing petitioner to produce the bank
documents relative to the accounts in issue. The order states:

Since the application prays for the restraint of the respondent, in the exercise of his contempt powers under
Section 15 (9) in relation to paragraph (8) of R.A. 6770, known as The Ombudsman Act of 1989, there is no
great or irreparable injury from which petitioners may suffer, if respondent is not so restrained. Respondent
should he decide to exercise his contempt powers would still have to apply with the court. x x x Anyone who,
without lawful excuse x x x refuses to produce documents for inspection, when thereunto lawfully required
shall be subject to discipline as in case of contempt of Court and upon application of the individual or body
exercising the power in question shall be dealt with by the Judge of the First Instance (now RTC) having
jurisdiction of the case in a manner provided by law (section 580 of the Revised Administrative Code). Under
the present Constitution only judges may issue warrants, hence, respondent should apply with the Court for the
issuance of the warrant needed for the enforcement of his contempt orders. It is in these proceedings where
petitioners may question the propriety of respondents exercise of his contempt powers. Petitioners are not
therefore left without any adequate remedy.

Viewed from the foregoing, your persistent refusal to comply with Ombudsmans order is unjustified, and is
merely intended to delay the investigation of the case. Your act constitutes disobedience of or resistance to a
lawful order issued by this office and is punishable as Indirect Contempt under Section 3(b) of R.A. 6770. The
same may also constitute obstruction in the lawful exercise of the functions of the Ombudsman which is
punishable under Section 36 of R.A. 6770.[7]

The questioned orders were issued with the investigation of the case of Fact-Finding and Intelligence Bureau vs.
Amado Lagdameo, et. el., OMB-0-97-0411, for violation of R.A. 3019. Since petitioner failed to show prima
facie evidence that the subject matter of the investigation is outside the jurisdiction of the Office of the
Ombudsman, no writ of injunction may be issued by this Court to delay this investigation pursuant to Section
14 of the Ombudsman Act of 1989.[10]

Even assuming that the accounts xxx were already classified as dormant accounts, the bank is still required
to preserve the records pertaining to the accounts within a certain period of time as required by existing banking
rules and regulations.
And finally, the in camera inspection was already extended twice from May 13, 1998 to June 3, 1998,
thereby giving the bank enough time within which to sufficiently comply with the order.[6]

On July 10, 1998, petitioner together with Union Bank of the Philippines, filed a petition for declaratory
relief, prohibition and injunction[8] with the Regional Trial Court, Makati City, against the Ombudsman.
The petition was intended to clear the rights and duties of petitioner. Thus, petitioner sought a declaration
of her rights from the court due to the clear conflict between R. A. No. 6770, Section 15 and R. A. No. 1405,
Sections 2 and 3.
Petitioner prayed for a temporary restraining order (TRO) because the Ombudsman and other persons
acting under his authority were continuously harassing her to produce the bank documents relative to the

On July 20, 1998, petitioner filed a motion for reconsideration based on the following grounds:
a. Petitioners application for Temporary Restraining Order is not only to restrain the Ombudsman
from exercising his contempt powers, but to stop him from implementing his Orders dated April
29,1998 and June 16,1998; and
b. The subject matter of the investigation being conducted by the Ombudsman at petitioners premises
is outside his jurisdiction.[11]

218
On July 23, 1998, the Ombudsman filed a motion to dismiss the petition for declaratory relief [12] on the
ground that the Regional Trial Court has no jurisdiction to hear a petition for relief from the findings and orders
of the Ombudsman, citing R. A. No. 6770, Sections 14 and 27. On August 7, 1998, the Ombudsman filed an
opposition to petitioners motion for reconsideration dated July 20, 1998.[13]
On August 19, 1998, the lower court denied petitioners motion for reconsideration, [14] and also the
Ombudsmans motion to dismiss.[15]

The issue is whether petitioner may be cited for indirect contempt for her failure to produce the documents
requested by the Ombudsman. And whether the order of the Ombudsman to have an in camera inspection of the
questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A. No. 1405).
An examination of the secrecy of bank deposits law (R. A. No. 1405) would reveal the following
exceptions:
1. Where the depositor consents in writing;

On August 21, 1998, petitioner received a copy of the motion to cite her for contempt, filed with the Office
of the Ombudsman by Agapito B. Rosales, Director, Fact Finding and Intelligence Bureau (FFIB). [16]
On August 31, 1998, petitioner filed with the Ombudsman an opposition to the motion to cite her in
contempt on the ground that the filing thereof was premature due to the petition pending in the lower court.
[17]
Petitioner likewise reiterated that she had no intention to disobey the orders of the Ombudsman. However,
she wanted to be clarified as to how she would comply with the orders without her breaking any law,
particularly R. A. No. 1405.[18]
Respondent Ombudsman panel set the incident for hearing on September 7, 1998. [19] After hearing, the
panel issued an order dated September 7, 1998, ordering petitioner and counsel to appear for a continuation of
the hearing of the contempt charges against her.[20]
On September 10, 1998, petitioner filed with the Ombudsman a motion for reconsideration of the above
order.[21] Her motion was premised on the fact that there was a pending case with the Regional Trial Court,
Makati City,[22] which would determine whether obeying the orders of the Ombudsman to produce bank
documents would not violate any law.
The FFIB opposed the motion,[23] and on October 14, 1998, the Ombudsman denied the motion by order
the dispositive portion of which reads:
Wherefore, respondent Lourdes T. Marquezs motion for reconsideration is hereby DENIED, for lack of merit.
Let the hearing of the motion of the Fact Finding Intelligence Bureau (FFIB) to cite her for indirect contempt be
intransferrably set to 29 October 1998 at 2:00 oclock p.m. at which date and time she should appear personally
to submit her additional evidence. Failure to do so shall be deemed a waiver thereof.[24]
Hence, the present petition.[25]

2. Impeachment case;
3. By court order in bribery or dereliction of duty cases against public officials;
4. Deposit is subject of litigation;
5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in the case of PNB vs. Gancayco [26]
The order of the Ombudsman to produce for in camera inspection the subject accounts with the Union
Bank of the Philippines, Julia Vargas Branch, is based on a pending investigation at the Office of the
Ombudsman against Amado Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e) and (g) relative to the
Joint Venture Agreement between the Public Estates Authority and AMARI.
We rule that before an in camera inspection may be allowed, there must be a pending case before a court
of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject
matter of the pending case before the court of competent jurisdiction. The bank personnel and the account
holder must be notified to be present during the inspection, and such inspection may cover only the account
identified in the pending case.
In Union Bank of the Philippines v. Court of Appeals, we held that Section 2 of the Law on
Secrecy of Bank Deposits, as amended, declares bank deposits to be absolutely confidential
except:
(1) In an examination made in the course of a special or general examination of a bank that is
specifically authorized by the Monetary Board after being satisfied that there is reasonable
ground to believe that a bank fraud or serious irregularity has been or is being committed and that
it is necessary to look into the deposit to establish such fraud or irregularity,

219
(2) In an examination made by an independent auditor hired by the bank to conduct its regular audit
provided that the examination is for audit purposes only and the results thereof shall be for the
exclusive use of the bank,

CORONA, C.J.,
Chairperson
VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

-versus-

(3) Upon written permission of the depositor,

(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or
(6) In cases where the money deposited or invested is the subject matter of the litigation [27]

THE HONORABLE 15THDIVISION OF THE

COURT OF APPEALS and INDUSTRIAL BANK
OF KOREA, TONG YANG MERCHANT BANK,
HANAREUM BANKING CORP., LAND BANK
OF THE PHILIPPINES, WESTMONT BANK and
DOMSAT HOLDINGS, INC.,
Respondents.
Promulgated:

In the case at bar, there is yet no pending litigation before any court of competent authority. What is
existing is an investigation by the office of the Ombudsman. In short, what the Office of the Ombudsman would
wish to do is to fish for additional evidence to formally charge Amado Lagdameo, et. al., with the
Sandiganbayan. Clearly, there was no pending case in court which would warrant the opening of the bank
account for inspection.
Zones of privacy are recognized and protected in our laws. The Civil Code provides that "[e]very person
shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons" and
punishes as actionable torts several acts for meddling and prying into the privacy of another. It also holds a
public officer or employee or any private individual liable for damages for any violation of the rights and
liberties of another person, and recognizes the privacy of letters and other private communications. The Revised
Penal Code makes a crime of the violation of secrets by an officer, the revelation of trade and industrial secrets,
and trespass to dwelling. Invasion of privacy is an offense in special laws like the Anti-Wiretapping Law, the
Secrecy of Bank Deposits Act, and the Intellectual Property Code.[28]
IN VIEW WHEREOF, we GRANT the petition. We order the Ombudsman to cease and desist from
requiring Union Bank Manager Lourdes T. Marquez, or anyone in her place to comply with the order dated
October 14, 1998, and similar orders. No costs.

June 8, 2011
x ----------------------------------------------------------------------------------------x
DECISION
PEREZ, J.:
The subject of this petition for certiorari is the Decision[1] of the Court of Appeals in CA-G.R. SP No.
82647 allowing the quashal by the Regional Trial Court (RTC) of Makati of a subpoena for the production of
bank ledger. This case is incident to Civil Case No. 99-1853, which is the main case for collection of sum of
money with damages filed by Industrial Bank of Korea, Tong Yang Merchant Bank, First Merchant Banking
Corporation, Land Bank of the Philippines, and Westmont Bank (now United Overseas Bank), collectively
known as the Banks against Domsat Holdings, Inc. (Domsat) and the Government Service Insurance System
(GSIS). Said case stemmed from a Loan Agreement,[2]whereby the Banks agreed to lend United States (U.S.)
$11 Million to Domsat for the purpose of financing the lease and/or purchase of a Gorizon Satellite from the
International Organization of Space Communications (Intersputnik). [3]

SO ORDERED.
GOVERNMENT
INSURANCE SYSTEM,
Petitioner,

SERVICE

G.R. No. 189206

Present:

The controversy originated from a surety agreement by which Domsat obtained a surety bond from
GSIS to secure the payment of the loan from the Banks. We quote the terms of the Surety Bond in its entirety.[4]
Republic of the Philippines
GOVERNMENT SERVICE INSURANCE SYSTEM

220
GENERAL INSURANCE FUND
GSIS Headquarters, Financial Center
Roxas Boulevard, Pasay City
G(16) GIF Bond 027461

contract/agreements, then this obligation shall be null and void; otherwise, it shall remain in
full force and effect.
WITNESS OUR HANDS AND SEALS this 13th day of December 1996 at Pasay City,
Philippines.

SURETYBOND
KNOW ALL MEN BY THESE PRESENTS:
That we, DOMSAT HOLDINGS, INC., represented by its President as PRINCIPAL,
and the GOVERNMENT SERVICE INSURANCE SYSTEM, as Administrator of the
GENERAL INSURANCE FUND, a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal office in the City of Pasay, Metro Manila,
Philippines as SURETY, are held and firmly bound unto the OBLIGEES: LAND BANK OF
THE PHILIPPINES, 7th Floor, Land Bank Bldg. IV. 313 Sen. Gil J. Puyat Avenue, Makati
City; WESTMONT BANK, 411 Quintin Paredes St., Binondo, Manila: TONG YANG
MERCHANT BANK, 185, 2-Ka, Ulchi-ro, Chungk-ku, Seoul, Korea; INDUSTRIAL BANK
OF KOREA, 50, 2-Ga, Ulchi-ro, Chung-gu, Seoul, Korea; and FIRST MERCHANT
BANKING CORPORATION, 199-40, 2-Ga, Euliji-ro, Jung-gu, Seoul, Korea, in the sum, of
US $ ELEVEN MILLION DOLLARS ($11,000,000.00) for the payment of which sum, well
and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these presents.

DOMSAT HOLDINGS, INC GOVERNMENT SERVICE INSURANCE

Principal SYSTEM
General Insurance Fund
By: By:
CAPT. RODRIGO A. SILVERIO AMALIO A. MALLARI
President Senior Vice-President
General Insurance Group

When Domsat failed to pay the loan, GSIS refused to comply with its obligation reasoning that Domsat
did not use the loan proceeds for the payment of rental for the satellite. GSIS alleged that Domsat, with
Westmont Bank as the conduit, transferred the U.S. $11 Million loan proceeds from the Industrial Bank of
Korea to Citibank New York account of Westmont Bank and from there to the Binondo Branch of Westmont
Bank.[5] The Banks filed a complaint before the RTC of Makati against Domsat and GSIS.

THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:

WHEREAS, the above bounden PRINCIPAL, on the 12 th day of December, 1996
entered into a contract agreement with the aforementioned OBLIGEES to fully and faithfully
Guarantee the repayment of the principal and interest on the loan granted
the PRINCIPAL to be used for the financing of the two (2) year lease of a
Russian Satellite from INTERSPUTNIK, in accordance with the terms and
conditions of the credit package entered into by the parties.
This bond shall remain valid and effective until the loan including interest
has been fully paid and liquidated,
a copy of which contract/agreement is hereto attached and made part hereof;
WHEREAS, the aforementioned OBLIGEES require said PRINCIPAL to give a
good and sufficient bond in the above stated sum to secure the full and faithful performance
on his part of said contract/agreement.
NOW, THEREFORE, if the PRINCIPAL shall well and truly perform and fulfill all the
undertakings, covenants, terms, conditions, and agreements stipulated in said

In the course of the hearing, GSIS requested for the issuance of a subpoena duces tecum to the
custodian of records of Westmont Bank to produce the following documents:
1.
Ledger covering the account of DOMSAT Holdings, Inc. with Westmont Bank
(now United Overseas Bank), any and all documents, records, files, books, deeds, papers,
notes and other data and materials relating to the account or transactions of DOMSAT
Holdings, Inc. with or through the Westmont Bank (now United Overseas Bank) for the
period January 1997 to December 2002, in his/her direct or indirect possession, custody or
control (whether actual or constructive), whether in his/her capacity as Custodian of Records
or otherwise;
2.
All applications for cashiers/ managers checks and bank transfers funded by the
account of DOMSAT Holdings, Inc. with or through the Westmont Bank (now United
Overseas Bank) for the period January 1997 to December 2002, and all other data and
materials covering said applications, in his/her direct or indirect possession, custody or
control (whether actual or constructive), whether in his/her capacity as Custodian of Records
or otherwise;

221
3.
Ledger covering the account of Philippine Agila Satellite, Inc. with Westmont
Bank (now United Overseas Bank), any and all documents, records, files, books, deeds,
papers, notes and other data and materials relating to the account or transactions of Philippine
Agila Satellite, Inc. with or through the Westmont bank (now United Overseas Bank) for the
period January 1997 to December 2002, in his/her direct or indirect possession, custody or
control (whether actual or constructive), whether in his/her capacity as Custodian of Records
or otherwise;

On 26 June 2003, another Order was issued by the RTC denying the motion for reconsideration filed by the

4.
All applications for cashiers/managers checks funded by the account of
Philippine Agila Satellite, Inc. with or through the Westmont Bank (now United Overseas
Bank) for the period January 1997 to December 2002, and all other data and materials
covering said applications, in his/her direct or indirect possession, custody or control (whether
actual or constructive), whether in his/her capacity as Custodian of Records or otherwise. [6]

reconsideration filed by GSIS was denied on 30 December 2003.

The RTC issued a subpoena decus tecum on 21 November 2002.[7] A motion to quash was filed by the
banks on three grounds: 1) the subpoena is unreasonable, oppressive and does not establish the relevance of the
documents sought; 2) request for the documents will violate the Law on Secrecy of Bank Deposits; and 3) GSIS
failed to advance the reasonable cost of production of the documents. [8] Domsat also joined the banks motion to
quash through its Manifestation/Comment.[9] On 9 April 2003, the RTC issued an Order denying the motion to
quash for lack of merit. We quote the pertinent portion of the Order, thus:
After a careful consideration of the arguments of the parties, the Court did not find
merit in the motion.
The serious objection appears to be that the subpoena is violative of the Law on
Secrecy of Bank Deposit, as amended. The law declares bank deposits to be absolutely
confidential except: x x x (6) In cases where the money deposited or invested is the subject
matter of the litigation.
The case at bench is for the collection of a sum of money from defendants that
obtained a loan from the plaintiff. The loan was secured by defendant GSIS which was the
surety. It is the contention of defendant GSIS that the proceeds of the loan was deviated to
purposes other than to what the loan was extended. The quashal of the subpoena would deny
defendant GSIS its right to prove its defenses.
WHEREFORE, for lack of merit the motion is DENIED.[10]

banks.[11] On 1 September 2003 however, the trial court granted the second motion for reconsideration filed
by the banks. The previous subpoenas issued were consequently quashed.[12] The trial court invoked the ruling
in Intengan v. Court of Appeals,[13] where it was ruled that foreign currency deposits are absolutely confidential
and may be examined only when there is a written permission from the depositor. The motion for

Hence, these assailed orders are the subject of the petition for certiorari before the Court of Appeals. GSIS
raised the following arguments in support of its petition:
I.
Respondent Judge acted with grave abuse of discretion when it favorably considered
respondent banks (second) Motion for Reconsideration dated July 9, 2003 despite the fact that
it did not contain a notice of hearing and was therefore a mere scrap of paper.
II.
Respondent judge capriciously and arbitrarily ignored Section 2 of the Foreign Currency
Deposit Act (RA 6426) in ruling in his Orders dated September 1 and December 30, 2003 that
the US$11,000,000.00 deposit in the account of respondent Domsat in Westmont Bank is
covered by the secrecy of bank deposit.
III.
Since both respondent banks and respondent Domsat have disclosed during the trial the
US$11,000,000.00 deposit, it is no longer secret and confidential, and petitioner GSIS right to
inquire into what happened to such deposit can not be suppressed.[14]

The Court of Appeals addressed these issues in seriatim.

The Court of Appeals resorted to a liberal interpretation of the rules to avoid miscarriage of justice when it
allowed the filing and acceptance of the second motion for reconsideration. The appellate court also
underscored the fact that GSIS did not raise the defect of lack of notice in its opposition to the second motion
for reconsideration. The appellate court held that failure to timely object to the admission of a defective motion
is considered a waiver of its right to do so.

222
The Court of Appeals declared that Domsats deposit in Westmont Bank is covered by Republic Act No. 6426 or

Contract and/or Memorandum between Domsat and/or Philippine Agila Satellite and Intersputnik for the

the Bank Secrecy Law. We quote the pertinent portion of the Decision:

acquisition and/or lease of a Gorizon Satellite. The appellate court believed that the production of these
documents does not involve the examination of Domsats account since it will never be known how much

It is our considered opinion that Domsats deposit of $11,000,000.00 in Westmont Bank is

covered by the Bank Secrecy Law, as such it cannot be examined, inquired or looked into
without the written consent of its owner. The ruling in Van Twest vs. Court of Appeals was
rendered during the effectivity of CB Circular No. 960, Series of 1983, under Sec. 102
thereof, transfer to foreign currency deposit account or receipt from another foreign currency
deposit account, whether for payment of legitimate obligation or otherwise, are not eligible
for deposit under the System.
CB Circular No. 960 has since been superseded by CB Circular 1318 and later by CB Circular
1389. Section 102 of Circular 960 has not been re-enacted in the later Circulars. What is
applicable now is the decision in Intengan vs. Court of Appeals where the Supreme Court has
ruled that the under R.A. 6426 there is only a single exception to the secrecy of foreign
currency deposits, that is, disclosure is allowed only upon the written permission of the
depositor. Petitioner, therefore, had inappropriately invoked the provisions of Central Bank
(CB) Circular Nos. 343 which has already been superseded by more recently issued CB
Circulars. CB Circular 343 requires the surrender to the banking system of foreign exchange,
including proceeds of foreign borrowings. This requirement, however, can no longer be found
in later circulars.
In its Reply to respondent banks comment, petitioner appears to have conceded that what is
applicable in this case is CB Circular 1389. Obviously, under CB 1389, proceeds of foreign
borrowings are no longer required to be surrendered to the banking system.
Undaunted, petitioner now argues that paragraph 2, Section 27 of CB Circular 1389 is
applicable because Domsats $11,000,000.00 loan from respondent banks was intended to be
paid to a foreign supplier Intersputnik and, therefore, should have been paid directly to
Intersputnik and not deposited into Westmont Bank. The fact that it was deposited to the local
bank Westmont Bank, petitioner claims violates the circular and makes the deposit lose its
confidentiality status under R.A. 6426. However, a reading of the entire Section 27 of CB
Circular 1389 reveals that the portion quoted by the petitioner refers only to the
procedure/conditions of drawdown for service of debts using foreign exchange. The abovesaid provision relied upon by the petitioner does not in any manner prescribe the conditions
before any foreign currency deposit can be entitled to the confidentiality provisions of R.A.
6426.[15]
Anent the third issue, the Court of Appeals ruled that the testimony of the incumbent president of
Westmont Bank is not the written consent contemplated by Republic Act No. 6426.

money was deposited into it or withdrawn therefrom and how much remains therein.
On 29 February 2008, the Court of Appeals rendered the assailed Decision, the decretal portion of which reads:
WHEREFORE, the petition is partially GRANTED. Accordingly, the assailed Order dated
December 30, 2003 is hereby modified in that the quashal of the subpoena for the production
of Domsats bank ledger in Westmont Bank is upheld while respondent court is hereby ordered
to issue subpoena duces tecum ad testificandum directing the records custodian of Westmont
Bank to bring to court the following documents:
a)

applications for cashiers or managers checks by respondent Domsat through Westmont

Bank from January 1997 to December 2002;

b)

bank transfers by respondent Domsat through Westmont Bank from January 1997 to
December 2002; and

c)

copy of an agreement and/or contract and/or memorandum between respondent Domsat

and/or Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a
Gorizon satellite.

No pronouncement as to costs.[16]
GSIS filed a motion for reconsideration which the Court of Appeals denied on 19 June 2009. Thus, the
instant petition ascribing grave abuse of discretion on the part of the Court of Appeals in ruling that Domsats
deposit with Westmont Bank cannot be examined and in finding that the banks second motion for
reconsideration in Civil Case No. 99-1853 is procedurally acceptable. [17]
This Court notes that GSIS filed a petition for certiorari under Rule 65 of the Rules of Court to assail
the Decision and Resolution of the Court of Appeals. Petitioner availed of the improper remedy as the appeal
from a final disposition of the Court of Appeals is a petition for review under Rule 45 and not a special civil
action under Rule 65.[18]Certiorari under Rule 65 lies only when there is no appeal, nor plain, speedy and

The Court of Appeals however upheld the issuance of subpoena praying for the production of applications for
cashiers or managers checks by Domsat through Westmont Bank, as well as a copy of an Agreement and/or

adequate remedy in the ordinary course of law. That action is not a substitute for a lost appeal in general; it is

223
not allowed when a party to a case fails to appeal a judgment to the proper forum. [19] Where an appeal is
available, certiorari will not prosper even if the ground therefor is grave abuse of discretion. Accordingly, when
a party adopts an improper remedy, his petition may be dismissed outright.

[20]

The Banks counter the arguments of GSIS as a mere rehash of its previous arguments before the Court
of Appeals. They justify the issuance of the subpoena as an interlocutory matter which may be reconsidered
anytime and that the pro forma rule has no application to interlocutory orders.

Yet, even if this procedural infirmity is discarded for the broader interest of justice, the petition sorely
lacks merit.

It appears that only GSIS appealed the ruling of the Court of Appeals pertaining to the quashal of
the subpoena for the production of Domsats bank ledger with Westmont Bank. Since neither Domsat nor the

GSIS insists that Domsats deposit with Westmont Bank can be examined and inquired into. It anchored

Banks interposed an appeal from the other portions of the decision, particularly for the production of

its argument on Republic Act No. 1405 or the Law on Secrecy of Bank Deposits, which allows the disclosure of

applications for cashiers or managers checks by Domsat through Westmont Bank, as well as a copy of an

bank deposits in cases where the money deposited is the subject matter of the litigation. GSIS asserts that the

agreement and/or contract and/or memorandum between Domsat and/or Philippine Agila Satellite and

subject matter of the litigation is the U.S. $11 Million obtained by Domsat from the Banks to supposedly

Intersputnik for the acquisition and/or lease of a Gorizon satellite, the latter became final and executory.

finance the lease of a Russian satellite from Intersputnik. Whether or not it should be held liable as a surety for
the principal amount of U.S. $11 Million, GSIS contends, is contingent upon whether Domsat indeed utilized
the amount to lease a Russian satellite as agreed in the Surety Bond Agreement. Hence, GSIS argues that the

GSIS invokes Republic Act No. 1405 to justify the issuance of the subpoena while the banks cite
Republic Act No. 6426 to oppose it. The core issue is which of the two laws should apply in the instant case.

whereabouts of the U.S. $11 Million is the subject matter of the case and the disclosure of bank deposits relating
to the U.S. $11 Million should be allowed.

Republic Act No. 1405 was enacted in 1955. Section 2 thereof was first amended by Presidential
Decree No. 1792 in 1981 and further amended by Republic Act No. 7653 in 1993. It now reads:

GSIS also contends that the concerted refusal of Domsat and the banks to divulge the whereabouts of
the U.S. $11 Million will greatly prejudice and burden the GSIS pension fund considering that a substantial
portion of this fund is earmarked every year to cover the surety bond issued.
Lastly, GSIS defends the acceptance by the trial court of the second motion for reconsideration filed by
the banks on the grounds that it is pro forma and did not conform to the notice requirements of Section 4, Rule
15 of the Rules of Civil Procedure.[21]
Domsat denies the allegations of GSIS and reiterates that it did not give a categorical or affirmative written
consent or permission to GSIS to examine its bank statements with Westmont Bank.
The Banks maintain that Republic Act No. 1405 is not the applicable law in the instant case because
the Domsat deposit is a foreign currency deposit, thus covered by Republic Act No. 6426. Under said law, only
the consent of the depositor shall serve as the exception for the disclosure of his/her deposit.

Section 2. All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in
cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of
duty of public officials, or in cases where the money deposited or invested is the subject
matter of the litigation.
Section 8 of Republic Act No. 6426, which was enacted in 1974, and amended by Presidential Decree
No. 1035 and later by Presidential Decree No. 1246, provides:
Section 8. Secrecy of Foreign Currency Deposits. All foreign currency deposits
authorized under this Act, as amended by Presidential Decree No. 1035, as well as foreign
currency deposits authorized under Presidential Decree No. 1034, are hereby declared as and
considered of an absolutely confidential nature and, except upon the written permission of the
depositor, in no instance shall foreign currency deposits be examined, inquired or looked into
by any person, government official, bureau or office whether judicial or administrative or

224
legislative or any other entity whether public or private; Provided, however, That said foreign
currency deposits shall be exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body
whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov.
21, 1977.)

that Citibank violated Republic Act No. 1405. This Court ruled that since the accounts in question are U.S.
dollar deposits, the applicable law therefore is not Republic Act No. 1405 but Republic Act No. 6426.
The above pronouncement was reiterated in China Banking Corporation v. Court of Appeals,[26] where
respondent accused his daughter of stealing his dollar deposits with Citibank. The latter allegedly received the

On the one hand, Republic Act No. 1405 provides for four (4) exceptions when records of deposits

checks from Citibank and deposited them to her account in China Bank. The subject checks were presented in

may be disclosed. These are under any of the following instances: a) upon written permission of the depositor,

evidence. Asubpoena was issued to employees of China Bank to testify on these checks. China Bank argued

(b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of

that the Citibank dollar checks with both respondent and/or her daughter as payees, deposited with China Bank,

public officials or, (d) when the money deposited or invested is the subject matter of the litigation, and e) in

may not be looked into under the law on secrecy of foreign currency deposits. This Court highlighted the

cases of violation of the Anti-Money Laundering Act (AMLA), the Anti-Money Laundering Council (AMLC)

exception to the non-disclosure of foreign currency deposits, i.e., in the case of a written permission of the

may inquire into a bank account upon order of any competent court. [22] On the other hand, the lone exception to

depositor, and ruled that respondent, as owner of the funds unlawfully taken and which are undisputably now

the non-disclosure of foreign currency deposits, under Republic Act No. 6426, is disclosure upon the written

deposited with China Bank, he has the right to inquire into the said deposits.

permission of the depositor.

Applying Section 8 of Republic Act No. 6426, absent the written permission from Domsat, Westmont
These two laws both support the confidentiality of bank deposits. There is no conflict between
them. Republic Act No. 1405 was enacted for the purpose of giving encouragement to the people to deposit

Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise, it might expose itself to
criminal liability under the same act.[27]

their money in banking institutions and to discourage private hoarding so that the same may be properly utilized
by banks in authorized loans to assist in the economic development of the country. [23] It covers all bank deposits

The basis for the application of subpoena is to prove that the loan intended for Domsat by the Banks

in the Philippines and no distinction was made between domestic and foreign deposits.Thus, Republic Act No.

and guaranteed by GSIS, was diverted to a purpose other than that stated in the surety bond. The Banks,

1405 is considered a law of general application. On the other hand, Republic Act No. 6426 was intended to

however, argue that GSIS is in fact liable to them for the proper applications of the loan proceeds and not vice-

encourage deposits from foreign lenders and investors. [24] It is a special law designed especially for foreign

versa. We are however not prepared to rule on the merits of this case lest we pre-empt the findings of the lower

currency deposits in the Philippines. A general law does not nullify a specific or special law. Generalia

courts on the matter.

[25]

specialibus non derogant.

Therefore, it is beyond cavil that Republic Act No. 6426 applies in this case.
The third issue raised by GSIS was properly addressed by the appellate court. The appellate court

Intengan v. Court of Appeals affirmed the above-cited principle and categorically declared that for foreign

maintained that the judge may, in the exercise of his sound discretion, grant the second motion for

currency deposits, such as U.S. dollar deposits, the applicable law is Republic Act No. 6426.

reconsideration despite its being pro forma. The appellate court correctly relied on precedents where this Court
set aside technicality in favor of substantive justice. Furthermore, the appellate court accurately pointed out that

In said case, Citibank filed an action against its officers for persuading their clients to transfer their
dollar deposits to competitor banks. Bank records, including dollar deposits of petitioners, purporting to
establish the deception practiced by the officers, were annexed to the complaint. Petitioners now complained

petitioner did not assail the defect of lack of notice in its opposition to the second motion of reconsideration,
thus it can be considered a waiver of the defect.

225
xxx xxx xxx

WHEREFORE, the petition for certiorari is DISMISSED. The Decision dated 29 February 2008 and
19 June 2009 Resolution of the Court of Appeals are herebyAFFIRMED.
SO ORDERED.

[G.R. No. 128996. February 15, 2002]

CARMEN LL. INTENGAN, ROSARIO LL. NERI, and RITA P. BRAWNER, petitioners, vs. COURT
OF APPEALS, DEPARTMENT OF JUSTICE, AZIZ RAJKOTWALA, WILLIAM FERGUSON,
JOVEN REYES, and VIC LIM, respondents.
DECISION

4.1 The investigation in which I was asked to participate was undertaken because the bank had found
records/evidence showing that Mr. Dante L. Santos and Ms. Malou Genuino, contrary to their disclosures and
the aforementioned bank policy, appeared to have been actively engaged in business endeavors that were in
conflict with the business of the bank. It was found that with the use of two (2) companies in which they have
personal financial interest, namely Torrance Development Corporation and Global Pacific Corporation, they
managed or caused existing bank clients/depositors to divert their money from Citibank, N.A., such as those
placed in peso and dollar deposits and money placements, to products offered by other companies that were
commanding higher rate of yields. This was done by first transferring bank clients monies to Torrance and
Global which in turn placed the monies of the bank clients in securities, shares of stock and other certificates of
third parties. It also appeared that out of these transactions, Mr. Dante L. Santos and Ms. Marilou Genuino
derived substantial financial gains.
5.1 In the course of the investigation, I was able to determine that the bank clients which Mr. Santos and Ms.
Genuino helped/caused to divert their deposits/money placements with Citibank, NA. to Torrance and Global
(their family corporations) for subsequent investment in securities, shares of stocks and debt papers in other
companies were as follows:
xxx

DE LEON, JR., J.:

b) Carmen Intengan

Before us is a petition for review on certiorari, seeking the reversal of the Decision[1] dated July 8,
1996 of the former Fifteenth Division[2] of the Court of Appeals in CA-G.R. SP No. 37577 as well as its
Resolution[3] dated April 16, 1997 denying petitioners motion for reconsideration. The appellate court,
in its Decision, sustained a resolution of the Department of Justice ordering the withdrawal of
informations for violation of Republic Act No. 1405 against private respondents.

xxx
d) Rosario Neri
xxx

The facts are:

On September 21, 1993, Citibank filed a complaint for violation of section 31, [4] in relation to
section 144[5] of the Corporation Code against two (2) of its officers, Dante L. Santos and Marilou
Genuino. Attached to the complaint was an affidavit [6] executed by private respondent Vic Lim, a vicepresident of Citibank. Pertinent portions of his affidavit are quoted hereunder:
2.1 Sometime this year, the higher management of Citibank, N.A. assigned me to assist in the investigation of
certain anomalous/highly irregular activities of the Treasurer of the Global Consumer Group of the bank,
namely, Dante L. Santos and the Asst. Vice President in the office of Mr. Dante L. Santos, namely Ms. Marilou
(also called Malou) Genuino. Ms. Marilou Genuino apart from being an Assistant Vice President in the office of
Mr. Dante L. Santos also performed the duties of an Account Officer. An Account Officer in the office of Mr.
Dante L. Santos personally attends to clients of the bank in the effort to persuade clients to place and keep their
monies in the products of Citibank, NA., such as peso and dollar deposits, mortgage backed securities and
money placements, among others.

i) Rita Brawner
All the above persons/parties have long standing accounts with Citibank, N.A. in savings/dollar deposits and/or
in trust accounts and/or money placements.
As evidence, Lim annexed bank records purporting to establish the deception practiced
by Santos and Genuino. Some of the documents pertained to the dollar deposits of petitioners
Carmen Ll. Intengan, Rosario Ll. Neri, and Rita P. Brawner, as follows:
a) Annex A-6[7] - an Application for Money Transfer in the amount of US $140,000.00,
executed by Intengan in favor of Citibank $ S/A No. 24367796, to be debited from her
Account No. 22543341;

226
b) Annex A-7[8] - a Money Transfer Slip in the amount of US $45,996.30, executed by
Brawner in favor of Citibank $ S/A No. 24367796, to be debited from her Account No.
22543236; and

The amounts covered by the checks represent the shares of Santos and Genuino in the margins Global
and/or Torrance had realized out of the placements [using the diverted monies of the Citibank clients] made
with the other companies.

c) Annex A-9[9] - an Application for Money Transfer in the amount of US $100,000.00,

executed by Neri in favor of Citibank $ S/A No. 24367796, to be debited from her
Account No. 24501018.

Fifth step: At the same time, Global and/or Torrance would also issue its/their check(s) drawn against its/their
Citibank accounts in favor of the bank client.

In turn, private respondent Joven Reyes, vice-president/business manager of the Global

Consumer Banking Group of Citibank, admits to having authorized Lim to state the names of the
clients involved and to attach the pertinent bank records, including those of petitioners. [10] He states
that private respondents Aziz Rajkotwala and William Ferguson, Citibank, N.A. Global Consumer
Banking Country Business Manager and Country Corporate Officer, respectively, had no hand in the
disclosure, and that he did so upon the advice of counsel.
In his memorandum, the Solicitor General described the scheme as having been conducted in
this manner:
First step: Santos and/or Genuino would tell the bank client that they knew of financial products of other
companies that were yielding higher rates of interests in which the bank client can place his money. Acting on
this information, the bank client would then authorize the transfer of his funds from his Citibank account to the
Citibank account of either Torrance or Global.
The transfer of the Citibank clients deposits was done through the accomplishment of either an Application For
Managers Checks or a Term Investment Application in favor of Global or Torrance that was prepared/filed by
Genuino herself.
Upon approval of the Application for Managers Checks or Term Investment Application, the funds of the bank
client covered thereof were then deposited in the Citibank accounts of Torrance and/or Global.
Second step: Once the said fund transfers had been effected, Global and/or Torrance would then issue its/ their
checks drawn against its/their Citibank accounts in favor of the other companies whose financial products, such
as securities, shares of stocks and other certificates, were offering higher yields.
Third step: On maturity date(s) of the placements made by Torrance and/or Global in the other companies, using
the monies of the Citibank client, the other companies would then. return the placements to Global
and/orTorrance with the corresponding interests earned.
Fourth step: Upon receipt by Global and/or Torrance of the remittances from the other companies, Global
and/or Torrance would then issue its/their own checks drawn against their Citibank accounts in favor
of Santos and Genuino.

The check(s) cover the principal amount (or parts thereof) which the Citibank client had previously transferred,
with the help of Santos and/or Genuino, from his Citibank account to the Citibank account(s) of Global and/or
Torrance for placement in the other companies, plus the interests or earnings his placements in other companies
had made less the spreads made by Global, Torrance, Santos and Genuino.
The complaints which were docketed as I.S. Nos. 93-9969, 93-10058 and 94-1215 were
subsequently amended to include a charge of estafa under Article 315, paragraph 1(b)[11] of the
Revised Penal Code.
As an incident to the foregoing, petitioners filed respective motions for the exclusion and physical
withdrawal of their bank records that were attached to Lims affidavit.
In due time, Lim and Reyes filed their respective counter-affidavits. [12] In separate Memoranda
dated March 8, 1994 and March 15, 1994 2nd Assistant Provincial Prosecutor Hermino T. Ubana, Sr.
recommended the dismissal of petitioners complaints. The recommendation was overruled by
Provincial Prosecutor Mauro M. Castro who, in a Resolution dated August 18, 1994,[13]directed the
filing of informations against private respondents for alleged violation of Republic Act No. 1405,
otherwise known as the Bank Secrecy Law.
Private respondents counsel then filed an appeal before the Department of Justice (DOJ).
On November 17, 1994, then DOJ Secretary Franklin M. Drilon issued a Resolution [14] ordering,inter
alia, the withdrawal of the aforesaid informations against private respondents. Petitioners motion for
reconsideration[15] was denied by DOJ Acting Secretary Demetrio G. Demetria in a Resolution
dated March 6, 1995.[16]
Initially, petitioners sought the reversal of the DOJ resolutions via a petition
for certiorari and mandamus filed with this Court, docketed as G.R. No. 119999-120001. However, the
former First Division of this Court, in a Resolution dated June 5, 1995,[17] referred the matter to the
Court of the Appeals, on the basis of the latter tribunals concurrent jurisdiction to issue the
extraordinary writs therein prayed for. The petition was docketed as CA-G.R. SP No. 37577 in the
Court of Appeals.
On July 8, 1996, the Court of Appeals rendered judgment dismissing the petition in CA-G.R. SP
No. 37577 and declared therein, as follows:
Clearly, the disclosure of petitioners deposits was necessary to establish the allegation that Santos and Genuino
had violated Section 31 of the Corporation Code in acquiring any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence. To substantiate the alleged scheme of Santos and

227
Genuino, private respondents had to present the records of the monies which were manipulated by the two
officers which included the bank records of herein petitioners.
Although petitioners were not the parties involved in IS. No. 93-8469, their accounts were relevant to the
complete prosecution of the case against Santos and Genuino and the respondent DOJ properly ruled that the
disclosure of the same falls under the last exception of R.A. No. 1405. That ruling is consistent with the
principle laid down in the case of Mellon Bank, N.A. vs. Magsino (190 SCRA 633) where the Supreme Court
allowed the testimonies on the bank deposits of someone not a party to the case as it found that said bank
deposits were material or relevant to the allegations in the complaint. Significantly, therefore, as long as the
bank deposits are material to the case, although not necessarily the direct subject matter thereof, a disclosure of
the same is proper and falls within the scope of the exceptions provided for by R.A. No. 1405.

PETITIONERS DEPOSITS ARE NOT INVOLVED IN ANY LITIGATION BETWEEN

PETITIONERS AND RESPONDENTS. THERE IS NO LITIGATION BETWEEN THE PARTIES,
MUCH LESS ONE INVOLVING PETITIONERS DEPOSITS AS THE SUBJECT MATTER
THEREOF.
(2)
EVEN ASSUMING ARGUENDO THAT THERE IS A LITIGATION INVOLVING PETITIONERS
DEPOSITS AS THE SUBJECT MATTER THEREOF, PRIVATE RESPONDENTS DISCLOSURES
OF PETITIONERS DEPOSITS ARE NEVERTHELESS ILLEGAL FOR WANT OF THE
REQUISITE COURT ORDER, IN VIOLATION OF R.A. NO. 1405.

xxx xxx xxx

III.

Moreover, the language of the law itself is clear and cannot be subject to different interpretations. A reading of
the provision itself would readily reveal that the exception or in cases where the money deposited or invested is
the subject matter of the litigation is not qualified by the phrase upon order of competent Court which refers
only to cases of bribery or dereliction of duty of public officials.

THEREFORE, PETITIONERS ARE ENTITLED TO PROSECUTE PRIVATE RESPONDENTS FOR

VIOLATIONS OF R.A. NO. 1405 FOR HAVING ILLEGALLY DISCLOSED PETITIONERS
CONFIDENTIAL BANK DEPOSITS AND RECORDS IN IS. NO. 93-8469.

Petitioners motion for reconsideration was similarly denied in a Resolution dated April 16, 1997.
Appeal was made in due time to this Court.

Apart from the reversal of the decision and resolution of the appellate court as well as the
resolutions of the Department of Justice, petitioners pray that the latter agency be directed to issue a
resolution ordering the Provincial Prosecutor of Rizal to file the corresponding informations for
violation of Republic Act No. 1405 against private respondents.

The instant petition was actually denied by the former Third Division of this Court in a
Resolution[18] dated July 16, 1997, on the ground that petitioners had failed to show that a reversible
error had been committed. On motion, however, the petition was reinstated [19] and eventually given
due course.[20]
In assailing the appellate courts findings, petitioners assert that the disclosure of their bank
records was unwarranted and illegal for the following reasons:
I.
IN BLATANT VIOLATION OF R.A. NO. 1405, PRIVATE RESPONDENTS ILLEGALLY MADE
DISCLOSURES OF PETITIONERS CONFIDENTIAL BANK DEPOSITS FOR THEIR SELFISH
ENDS IN PROSECUTING THEIR COMPLAINT IN IS. NO. 93-8469 THAT DID NOT INVOLVE
PETITIONERS.
II.
PRIVATE RESPONDENTS DISCLOSURES DO NOT FALL UNDER THE FOURTH EXCEPTION OF
R.A. NO. 1405 (i.e., in cases where the money deposited or invested is the subject matter of the litigation),
NOR UNDER ANY OTHER EXCEPTION:
(1)

The petition is not meritorious.

Actually, this case should have been studied more carefully by all concerned. The finest legal
minds in the country - from the parties respective counsel, the Provincial Prosecutor, the Department
of Justice, the Solicitor General, and the Court of Appeals - all appear to have overlooked a single
fact which dictates the outcome of the entire controversy. A circumspect review of the record shows
us the reason. The accounts in question are U.S. dollar deposits; consequently, the applicable law
is not Republic Act No. 1405 but Republic Act (RA) No. 6426, known as the Foreign Currency Deposit
Act of the Philippines, section 8 of which provides:
Sec. 8. Secrecy of Foreign Currency Deposits.- All foreign currency deposits authorized under this Act, as
amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential
Decree No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon
the written permission of the depositor, in no instance shall such foreign currency deposits be examined,
inquired or looked into by any person, government official bureau or office whether judicial or administrative
or legislative or any other entity whether public or private: Provided, however, that said foreign currency
deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative
body, government agency or any administrative body whatsoever.[21] (italics supplied)

228
Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency
deposits, that is, disclosure is allowed only upon the written permission of the depositor. Incidentally,
the acts of private respondents complained of happened before the enactment on September 29,
2001 of R.A. No. 9160 otherwise known as the Anti-Money Laundering Act of 2001.
A case for violation of Republic Act No. 6426 should have been the proper case brought against
private respondents. Private respondents Lim and Reyes admitted that they had disclosed details of
petitioners dollar deposits without the latters written permission. It does not matter if that such
disclosure was necessary to establish Citibanks case against Dante L. Santos and Marilou Genuino.
Lims act of disclosing details of petitioners bank records regarding their foreign currency deposits,
with the authority of Reyes, would appear to belong to that species of criminal acts punishable by
special laws, called malum prohibitum. In this regard, it has been held that:
While it is true that, as a rule and on principles of abstract justice, men are not and should not be held criminally
responsible for acts committed by them without guilty knowledge and criminal or at least evil intent xxx, the
courts have always recognized the power of the legislature, on grounds of public policy and compelled by
necessity, the great master of things, to forbid in a limited class of cases the doing of certain acts, and to make
their commission criminal without regard to the intent of the doer. xxx In such cases no judicial authority has
the power to require, in the enforcement of the law, such knowledge or motive to be shown. As was said in the
case of State vs. McBrayer xxx:
It is a mistaken notion that positive, willful intent, as distinguished from a mere intent, to violate the criminal
law, is an essential ingredient in every criminal offense, and that where there is the absence of such intent there
is no offense; this is especially so as to statutory offenses. When the statute plainly forbids an act to be done,
and it is done by some person, the law implies conclusively the guilty intent, although the offender was honestly
mistaken as to the meaning of the law he violates. When the language is plain and positive, and the offense is
not made to depend upon the positive, willful intent and purpose, nothing is left to interpretation.[22]
Ordinarily, the dismissal of the instant petition would have been without prejudice to the filing of
the proper charges against private respondents. The matter would have ended here were it not for the
intervention of time, specifically the lapse thereof. So as not to unduly prolong the settlement of the
case, we are constrained to rule on a material issue even though it was not raised by the parties. We
refer to the issue of prescription.
Republic Act No. 6426 being a special law, the provisions of Act No. 3326, [23] as amended by Act
No. 3763, are applicable:

SECTION 1. Violations penalized by special acts shall, unless otherwise provided in such acts, prescribe in
accordance with the following rules: (a) after a year for offences punished only by a fine or by imprisonment for
not more than one month, or both: (b) after four years for those punished by imprisonment for more than one
month, but less than two years; (c) after eight years for those punished by imprisonment for two years or more,
but less than six years; and (d) after twelve years for any other offence punished by imprisonment for six years
or more, except the crime of treason, which shall prescribe after twenty years: Provided, however, That all
offences against any law or part of law administered by the Bureau of Internal Revenue shall prescribe after five
years. Violations penalized by municipal ordinances shall prescribe after two months.
Violations of the regulations or conditions of certificates of public convenience issued by the Public Service
Commission shall prescribe after two months.
SEC. 2. Prescription shall begin to run from the day of the commission of the violation of the law, and if the
same be not known at the time, from the discovery thereof and the institution of judicial proceedings for its
investigation and punishment.
The prescription shall be interrupted when proceedings are instituted against the guilty person, and shall begin
to run again if the proceedings are dismissed for reasons not constituting jeopardy.
A violation of Republic Act No. 6426 shall subject the offender to imprisonment of not less than
one year nor more than five years, or by a fine of not less than five thousand pesos nor more than
twenty-five thousand pesos, or both.[24] Applying Act No. 3326, the offense prescribes in eight years.
[25]
Per available records, private respondents may no longer be haled before the courts for violation of
Republic Act No. 6426. Private respondent Vic Lim made the disclosure in September of 1993 in his
affidavit submitted before the Provincial Fiscal. [26] In her complaint-affidavit,[27]Intengan stated that she
learned of the revelation of the details of her foreign currency bank account on October 14, 1993. On
the other hand, Neri asserts that she discovered the disclosure onOctober 24, 1993. [28] As to Brawner,
the material date is January 5, 1994.[29] Based on any of these dates, prescription has set in. [30]
The filing of the complaint or information in the case at bar for alleged violation of Republic Act
No. 1405 did not have the effect of tolling the prescriptive period. For it is the filing of the complaint or
information corresponding to the correct offense which produces that effect. [31]
It may well be argued that the foregoing disquisition would leave petitioners with no remedy in
law. We point out, however, that the confidentiality of foreign currency deposits mandated by Republic
Act No. 6426, as amended by Presidential Decree No. 1246, came into effect as far back as
1977. Hence, ignorance thereof cannot be pretended. On one hand, the existence of laws is a matter
of mandatory judicial notice;[32] on the other, ignorantia legis non excusat.[33] Even during the
pendency of this appeal, nothing prevented the petitioners from filing a complaint charging the correct
offense against private respondents. This was not done, as everyone involved was content to submit
the case on the basis of an alleged violation of Republic Act No. 1405 (Bank Secrecy Law), however,
incorrectly invoked.[34]
WHEREFORE, the petition is hereby DENIED. No pronouncement as to costs.

229
SO ORDERED.

[11]

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

ARTICLE 315. Swindling (estafa).-Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by: xxx

1. With unfaithfulness or abuse of confidence, namely: xxx

[1]

Rollo, pp. 61-70.

[2]

Former Presiding Justice Salome A. Montoya, (ret.), ponente, with Justice Godardo A. Jacinto and
Justice Maximiano C. Asuncion, concurring.

[3]

Rollo, p. 72.

[4]

SEC. 31. Liability of directors, trustees or officers-Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the corporation, its stockholders
or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
[5]

SEC. 144. Violations of the Code. -Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not
less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or
both, in the discretion of the court. If the violation is committed by a corporation, the same
may, after notice and hearing, be dissolved in appropriate proceedings before the Securities
and Exchange Commission; Provided, That such dissolution shall not preclude the institution
of appropriate action against the director, trustee or officer of the corporation responsible for
said violation; Provided, further, That nothing in this section shall be construed to repeal the
other causes for dissolution of a corporation provided in this Code.

[6]

Rollo, pp. 94-104.

[7]

Rollo, p. 575.

[8]

Rollo, p. 576.

[9]

Rollo, p. 577.

[10]

Counter-affidavit of Joven Reyes, Rollo, pp. 123-126.

(b) By misappropriating or converting, to the prejudice of another, money, goods, or any other
personal property received by the offender in trust, or on commission, or for administration, or
under any other obligation involving the duty to make delivery of, or to return the same, even
though such obligation be totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property; xxx
[12]

Ferguson and Rajkotwala failed to file theirs, and so were held to have waived their right.

[13]

Annex G of the petition, Rollo, pp. 153-168.

[14]

Annex A-2, Rollo, pp. 73-84.

[15]

Annex J, Rollo, pp. 286-315.

[16]

Annex A-3, Rollo, pp. 85-87.

[17]

CA Rollo, p. 290.

[18]

Rollo, p. 514.

[19]

Resolution dated September 22, 1997; Rollo, p. 530.

[20]

Resolution dated September 11, 2000; Rollo, p. 751.

[21]

The absolute confidentiality of foreign currency deposits, subject to the lone exception, was
introduced by Presidential Decree No. 1246 promulgated on November 21, 1977.

[22]

U.S. v. Siy Cong Bieng, et al., 30 Phil. 577, 579-580 (1915).

[23]

An Act to Establish Periods of Prescription for Violations Penalized by Special Acts and Municipal
Ordinances and to Provide When Prescription Shall Begin to Run.

[24]

Section 10, R.A. No. 6426.

[25]

It is true that Republic Act No. 6426 prescribes, as an alternative penalty, a fine ranging from five
thousand pesos to twenty-five thousand pesos. However, this cannot be used as the basis for
determining prescription, as was done in People v. Basalo (101 Phil. 57 [1957]), inasmuch as
Article 90 of the Revised Penal Code does not apply to offenses punishable under special
laws (People v. Ching Lak, 103 Phil. 1149 [1958]).

[26]

The exact date cannot be determined, it being unintelligible from the photocopies contained in
the rollo.

[27]

Rollo, p. 90.

[28]

Complaint-Affidavit of Rosario LL. Neri, Rollo, p. 108.

230
[29]

Complaint-Affidavit of Rita P. Brawner, Rollo, p. 114.

1.) Declaring the respective rights and duties of petitioners and respondents;

[30]

In Presidential Ad Hoc Fact-Finding Committee on Behest Loans v. Desierto, 317 SCRA 272, 298
(1999), citing People v. Duque, 212 SCRA 607, 613-614 (1992), we held, to wit: In the nature
of things, acts made criminal by special laws are frequently not immoral or obviously criminal
in themselves; for this reason, the applicable statute requires that if the violation of the special
law is not known at the time, prescription begins to run only from the discovery
thereof, i.e., discovery of the unlawful nature of the constitutive act or acts.

2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to the
provisions of the Constitution, hence void; because its provision that "Foreign
currency deposits shall be exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government agency or any administrative
body whatsoever

[31]

Cf. People v. Abuy, 5 SCRA 222, 226-227(1962).

[32]

Revised Rules on Evidence, Rule 129, section 1.

[33]

Art. 3, New Civil Code. Ignorance of the law excuses no one from compliance therewith.

[34]

This complacency is amply evidenced by the rollo of this case, which consists of more than 900
pages. The rollo of CA-G.R. SP No. 37577 appears to be of even greater length.

i.) has taken away the right of petitioners to have the bank deposit of
defendant Greg Bartelli y Northcott garnished to satisfy the judgment
rendered in petitioners' favor in violation of substantive due process
guaranteed by the Constitution;
ii.) has given foreign currency depositors an undue favor or a class
privilege in violation of the equal protection clause of the
Constitution;

G.R. No. 94723 August 21, 1997

KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father and Natural Guardian,
and Spouses FEDERICO N. SALVACION, JR., and EVELINA E. SALVACION, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and GREG
BARTELLI y NORTHCOTT, respondents.

TORRES, JR., J.:

In our predisposition to discover the "original intent" of a statute, courts become the unfeeling pillars
of the status quo. Ligle do we realize that statutes or even constitutions are bundles of compromises
thrown our way by their framers. Unless we exercise vigilance, the statute may already be out of tune
and irrelevant to our day.
The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued restraining the
respondents from applying and enforcing Section 113 of Central Bank Circular No.
960;
b.) After hearing, judgment be rendered:

iii.) has provided a safe haven for criminals like the herein
respondent Greg Bartelli y Northcott since criminals could escape
civil liability for their wrongful acts by merely converting their money
to a foreign currency and depositing it in a foreign currency deposit
account with an authorized bank.
The antecedent facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner
Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained
Karen Salvacion for four days, or up to February 7, 1989 and was able to rape the child once on
February 4, and three times each day on February 5, 6, and 7, 1989. On February 7, 1989, after
policemen and people living nearby, rescued Karen, Greg Bartelli was arrested and detained at the
Makati Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar Check No.
368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK Bank Book No. 104-1087588 (Peso Acct.); 3.) Dollar Account China Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877;
5.) Philippine Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in
seducing the complainant.
On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against Greg Bartelli,
Criminal Case No. 801 for Serious Illegal Detention and Criminal Cases Nos. 802, 803, 804, and 805

231
for four (4) counts of Rape. On the same day, petitioners filed with the Regional Trial Court of Makati
Civil Case No. 89-3214 for damages with preliminary attachment against Greg Bartelli. On February
24, 1989, the day there was a scheduled hearing for Bartelli's petition for bail the latter escaped from
jail.

Ms. Erlinda S. Carolino

12 Pres. Osmena Avenue
South Admiral Village
Paranaque, Metro Manila

On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte Motion for the Issuance of
Warrant of Arrest and Hold Departure Order. Pending the arrest of the accused Greg Bartelli y
Northcott, the criminal cases were archived in an Order dated February 28, 1989.

Dear Ms. Carolino:

Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22, 1989 granting
the application of herein petitioners, for the issuance of the writ of preliminary attachment. After
petitioners gave Bond No. JCL (4) 1981 by FGU Insurance Corporation in the amount of
P100,000.00, a Writ of Preliminary Attachment was issued by the trial court on February 28, 1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on China Banking
Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff of Makati, China Banking
Corporation invoked Republic Act No. 1405 as its answer to the notice of garnishment served on it.
On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman sent his reply to China Banking
Corporation saying that the garnishment did not violate the secrecy of bank deposits since the
disclosure is merely incidental to a garnishment properly and legally made by virtue of a court order
which has placed the subject deposits in custodia legis. In answer to this letter of the Deputy Sheriff of
Makati, China Banking Corporation, in a letter dated March 20, 1989, invoked Section 113 of Central
Bank Circular No. 960 to the effect that the dollar deposits or defendant Greg Bartelli are exempt from
attachment, garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body, whatsoever.
This prompted the counsel for petitioners to make an inquiry with the Central Bank in a letter dated
April 25, 1989 on whether Section 113 of CB Circular No. 960 has any exception or whether said
section has been repealed or amended since said section has rendered nugatory the substantive
right of the plaintiff to have the claim sought to be enforced by the civil action secured by way of the
writ of preliminary attachment as granted to the plaintiff under Rule 57 of the Revised Rules of Court.
The Central Bank responded as follows:
May 26, 1989

This is in reply to your letter dated April 25, 1989 regarding your inquiry on Section
113, CB Circular No. 960 (1983).
The cited provision is absolute in application. It does not admit of any exception, nor
has the same been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the country's banking
system which would help in the development of the economy. There is no intention to
render futile the basic rights of a person as was suggested in your subject letter. The
law may be harsh as some perceive it, but it is still the law. Compliance is, therefore,
enjoined.
Very truly yours,
(SGD) AGAPITO S. FAJARDO
Director 1
Meanwhile, on April 10, 1989, the trial court granted petitioners' motion for leave to serve summons
by publication in the Civil Case No. 89-3214 entitled "Karen Salvacion, et al. vs. Greg Bartelli y
Northcott." Summons with the complaint was a published in the Manila Times once a week for three
consecutive weeks. Greg Bartelli failed to file his answer to the complaint and was declared in default
on August 7, 1989. After hearing the case ex-parte, the court rendered judgment in favor of petitioners
on March 29, 1990, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against
defendant, ordering the latter:
1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral damages;

232
2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and Evelina E.
Salvacion the amount of P150,000.00 each or a total of P300,000.00 for both of
them;
3. To pay plaintiffs exemplary damages of P100,000.00; and
4. To pay attorney's fees in an amount equivalent to 25% of the total amount of
damages herein awarded;
5. To pay litigation expenses of P10,000.00; plus

In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati Cinema
Square, with her friend Edna Tangile whiling away her free time. At about 3:30 p.m.
while she was finishing her snack on a concrete bench in front of Plaza Fair, an
American approached her. She was then alone because Edna Tangile had already
left, and she was about to go home. (TSN, Aug. 15, 1989, pp. 2 to 5)
The American asked her name and introduced himself as Greg Bartelli. He sat beside
her when he talked to her. He said he was a Math teacher and told her that he has a
sister who is a nurse in New York. His sister allegedly has a daughter who is about
Karen's age and who was with him in his house along Kalayaan Avenue. (TSN, Aug.
15, 1989, pp. 4-5)

6. Costs of the suit.

SO ORDERED.
The heinous acts of respondent Greg Bartelli which gave rise to the award were related in graphic
detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the municipal jail of Makati but
was able to escape therefrom on February 24, 1989 as per report of the Jail Warden
of Makati to the Presiding Judge, Honorable Manuel M. Cosico of the Regional Trial
Court of Makati, Branch 136, where he was charged with four counts of Rape and
Serious Illegal Detention (Crim. Cases Nos. 802 to 805). Accordingly, upon motion of
plaintiffs, through counsel, summons was served upon defendant by publication in
the Manila Times, a newspaper of general circulation as attested by the Advertising
Manager of the Metro Media Times, Inc., the publisher of the said newspaper.
Defendant, however, failed to file his answer to the complaint despite the lapse of the
period of sixty (60) days from the last publication; hence, upon motion of the plaintiffs,
through counsel, defendant was declared in default and plaintiffs were authorized to
present their evidence ex parte.
In support of the complaint, plaintiffs presented as witnesses the minor Karen E.
Salvacion, her father, Federico N. Salvacion, Jr., a certain Joseph Aguilar and a
certain Liberato Madulio, who gave the following testimony:
Karen took her first year high school in St. Mary's Academy in Pasay City but has
recently transferred to Arellano University for her second year.

The American asked Karen what was her favorite subject and she told him it's
Pilipino. He then invited her to go with him to his house where she could teach
Pilipino to his niece. He even gave her a stuffed toy to persuade her to teach his
niece. (Id., pp. 5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to reach the
defendant's house along Kalayaan Avenue. (Id., p. 6)
When they reached the apartment house, Karen noticed that defendant's alleged
niece was not outside the house but defendant told her maybe his niece was inside.
When Karen did not see the alleged niece inside the house, defendant told her
maybe his niece was upstairs, and invited Karen to go upstairs. (Id., p. 7)
Upon entering the bedroom defendant suddenly locked the door. Karen became
nervous because his niece was not there. Defendant got a piece of cotton cord and
tied Karen's hands with it, and then he undressed her. Karen cried for help but
defendant strangled her. He took a packing tape and he covered her mouth with it
and he circled it around her head. (Id., p. 7)
Then, defendant suddenly pushed Karen towards the bed which was just near the
door. He tied her feet and hands spread apart to the bed posts. He knelt in front of
her and inserted his finger in her sex organ. She felt severe pain. She tried to shout
but no sound could come out because there were tapes on her mouth. When
defendant withdrew his finger it was full of blood and Karen felt more pain after the
withdrawal of the finger. (Id., p. 8)

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He then got a Johnson's Baby Oil and he applied it to his sex organ as well as to her
sex organ. After that he forced his sex organ into her but he was not able to do so.
While he was doing it, Karen found it difficult to breathe and she perspired a lot while
feeling severe pain. She merely presumed that he was able to insert his sex organ a
little, because she could not see. Karen could not recall how long the defendant was
in that position. (Id. pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also told Karen to take
a shower and he untied her hands. Karen could only hear the sound of the water
while the defendant, she presumed, was in the bathroom washing his sex organ.
When she took a shower more blood came out from her. In the meantime, defendant
changed the mattress because it was full of blood. After the shower, Karen was
allowed by defendant to sleep. She fell asleep because she got tired crying. The
incident happened at about 4:00 p.m. Karen had no way of determining the exact
time because defendant removed her watch. Defendant did not care to give her food
before she went to sleep. Karen woke up at about 8:00 o'clock the following morning.
(Id., pp. 9-10)
The following day, February 5, 1989, a Sunday, after a breakfast of biscuit and coke
at about 8:30 to 9:00 a.m. defendant raped Karen while she was still bleeding. For
lunch, they also took biscuit and coke. She was raped for the second time at about
12:00 to 2:00 p.m. In the evening, they had rice for dinner which defendant had
stored downstairs; it was he who cooked the rice that is why it looks like "lugaw". For
the third time, Karen was raped again during the night. During those three times
defendant succeeded in inserting his sex organ but she could not say whether the
organ was inserted wholly.
Karen did not see any firearm or any bladed weapon. The defendant did not tie her
hands and feet nor put a tape on her mouth anymore but she did not cry for help for
fear that she might be killed; besides, all the windows and doors were closed. And
even if she shouted for help, nobody would hear her. She was so afraid that if
somebody would hear her and would be able to call the police, it was still possible
that as she was still inside the house, defendant might kill her. Besides, the
defendant did not leave that Sunday, ruling out her chance to call for help. At
nighttime he slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times, once in the morning for
thirty minutes after a breakfast of biscuits; again in the afternoon; and again in the

evening. At first, Karen did not know that there was a window because everything
was covered by a carpet, until defendant opened the window for around fifteen
minutes or less to let some air in, and she found that the window was covered by
styrofoam and plywood. After that, he again closed the window with a hammer and
he put the styrofoam, plywood, and carpet back. (Id., pp. 14-15)
That Monday evening, Karen had a chance to call for help, although defendant left
but kept the door closed. She went to the bathroom and saw a small window covered
by styrofoam and she also spotted a small hole. She stepped on the bowl and she
cried for help through the hole. She cried: "Maawa no po kayo so akin. Tulungan n'yo
akong makalabas dito. Kinidnap ako!" Somebody heard her. It was a woman,
probably a neighbor, but she got angry and said she was "istorbo". Karen pleaded for
help and the woman told her to sleep and she will call the police. She finally fell
asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)
She woke up at 6:00 o'clock the following morning, and she saw defendant in bed,
this time sleeping. She waited for him to wake up. When he woke up, he again got
some food but he always kept the door locked. As usual, she was merely fed with
biscuit and coke. On that day, February 7, 1989, she was again raped three times.
The first at about 6:30 to 7:00 a.m., the second at about 8:30 9:00, and the third
was after lunch at 12:00 noon. After he had raped her for the second time he left but
only for a short while. Upon his return, he caught her shouting for help but he did not
understand what she was shouting about. After she was raped the third time, he left
the house. (TSN, Aug. 15, 1989, pp. 16-17) She again went to the bathroom and
shouted for help. After shouting for about five minutes, she heard many voices. The
voices were asking for her name and she gave her name as Karen Salvacion. After a
while, she heard a voice of a woman saying they will just call the police. They were
also telling her to change her clothes. She went from the bathroom to the room but
she did not change her clothes being afraid that should the neighbors call for the
police and the defendant see her in different clothes, he might kill her. At that time
she was wearing a T-shirt of the American because the latter washed her dress. (Id.,
p. 16)
Afterwards, defendant arrived and he opened the door. He asked her if she had
asked for help because there were many policemen outside and she denied it. He
told her to change her clothes, and she did change to the one she was wearing on
Saturday. He instructed her to tell the police that she left home and willingly; then he

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went downstairs but he locked the door. She could hear people conversing but she
could not understand what they were saying. (Id., p. 19)
When she heard the voices of many people who were conversing downstairs, she
knocked repeatedly at the door as hard as she could. She heard somebody going
upstairs and when the door was opened, she saw a policeman. The policeman asked
her name and the reason why she was there. She told him she was kidnapped.
Downstairs, he saw about five policemen in uniform and the defendant was talking to
them. "Nakikipag-areglo po sa mga pulis," Karen added. "The policeman told him to
just explain at the precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in front of the house.
They rode the car of a certain person she called Kuya Boy together with defendant,
the policeman, and two of her neighbors whom she called Kuya Bong Lacson and
one Ate Nita. They were brought to Sub-Station I and there she was investigated by a
policeman. At about 2:00 a.m., her father arrived, followed by her mother together
with some of their neighbors. Then they were brought to the second floor of the police
headquarters. (Id., p. 21)
At the headquarters, she was asked several questions by the investigator. The
written statement she gave to the police was marked as Exhibit A. Then they
proceeded to the National Bureau of Investigation together with the investigator and
her parents. At the NBI, a doctor, a medico-legal officer, examined her private parts. It
was already 3:00 in the early morning of the following day when they reached the
NBI. (TSN, Aug. 15, 1989, p. 22) The findings of the medico-legal officer has been
marked as Exhibit B.
She was studying at the St. Mary's Academy in Pasay City at the time of the incident
but she subsequently transferred to Apolinario Mabini, Arellano University, situated
along Taft Avenue, because she was ashamed to be the subject of conversation in
the school. She first applied for transfer to Jose Abad Santos, Arellano University
along Taft Avenue near the Light Rail Transit Station but she was denied admission
after she told the school the true reason for her transfer. The reason for their denial
was that they might be implicated in the case. (TSN, Aug. 15, 1989, p. 46)
xxx xxx xxx

After the incident, Karen has changed a lot. She does not play with her brother and
sister anymore, and she is always in a state of shock; she has been absent-minded
and is ashamed even to go out of the house. (TSN, Sept. 12, 1989, p. 10) She
appears to be restless or sad, (Id., p. 11) The father prays for P500,000.00 moral
damages for Karen for this shocking experience which probably, she would always
recall until she reaches old age, and he is not sure if she could ever recover from this
experience. (TSN, Sept. 24, 1989, pp. 10-11)
Pursuant to an Order granting leave to publish notice of decision, said notice was published in the
Manila Bulletin once a week for three consecutive weeks. After the lapse of fifteen (15) days from the
date of the last publication of the notice of judgment and the decision of the trial court had become
final, petitioners tried to execute on Bartelli's dollar deposit with China Banking Corporation. Likewise,
the bank invoked Section 113 of Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down to two:
May this Court entertain the instant petition despite the fact that original jurisdiction in petitions for
declaratory relief rests with the lower court? Should Section 113 of Central Bank Circular No. 960 and
Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency Deposit
Act be made applicable to a foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing that
"Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body whatsoever."
should be adjudged as unconstitutional on the grounds that: 1.) it has taken away the right of
petitioners to have the bank deposit of defendant Greg Bartelli y Northcott garnished to satisfy the
judgment rendered in petitioners' favor in violation of substantive due process guaranteed by the
Constitution; 2.) it has given foreign currency depositors an undue favor or a class privilege in
violation of the equal protection clause of the Constitution; 3.) it has provided a safe haven for
criminals like the herein respondent Greg Bartelli y Northcott since criminals could escape civil liability
for their wrongful acts by merely converting their money to a foreign currency and depositing it in a
foreign currency deposit account with an authorized bank; and 4.) The Monetary Board, in issuing
Section 113 of Central Bank Circular No. 960 has exceeded its delegated quasi-legislative power
when it took away: a.) the plaintiffs substantive right to have the claim sought to be enforced by the
civil action secured by way of the writ of preliminary attachment as granted by Rule 57 of the Revised
Rules of Court; b.) the plaintiffs substantive right to have the judgment credit satisfied by way of the

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writ of execution out of the bank deposit of the judgment debtor as granted to the judgment creditor
by Rule 39 of the Revised Rules of Court, which is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that the Monetary Board in
issuing Section 113 of CB Circular No. 960 did not exceed its power or authority because the subject
Section is copied verbatim from a portion of R.A. No. 6426 as amended by P.D. 1246. Hence, it was
not the Monetary Board that grants exemption from attachment or garnishment to foreign currency
deposits, but the law (R.A. 6426 as amended) itself; that it does not violate the substantive due
process guaranteed by the Constitution because a.) it was based on a law; b.) the law seems to be
reasonable; c.) it is enforced according to regular methods of procedure; and d.) it applies to all
members of a class.
Expanding, the Central Bank said; that one reason for exempting the foreign currency deposits from
attachment, garnishment or any other order or process of any court, is to assure the development and
speedy growth of the Foreign Currency Deposit System and the Offshore Banking System in the
Philippines; that another reason is to encourage the inflow of foreign currency deposits into the
banking institutions thereby placing such institutions more in a position to properly channel the same
to loans and investments in the Philippines, thus directly contributing to the economic development of
the country; that the subject section is being enforced according to the regular methods of procedure;
and that it applies to all foreign currency deposits made by any person and therefore does not violate
the equal protection clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is needed to promote the public
interest and the general welfare; that the State cannot just stand idly by while a considerable segment
of the society suffers from economic distress; that the State had to take some measures to encourage
economic development; and that in so doing persons and property may be subjected to some kinds of
restraints or burdens to secure the general welfare or public interest. Respondent Central Bank also
alleges that Rule 39 and Rule 57 of the Revised Rules of Court provide that some properties are
exempted from execution/attachment especially provided by law and R.A. No. 6426 as amended is
such a law, in that it specifically provides, among others, that foreign currency deposits shall be
exempted from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.

For its part, respondent China Banking Corporation, aside from giving reasons similar to that of
respondent Central Bank, also stated that respondent China Bank is not unmindful of the inhuman
sufferings experienced by the minor Karen E. Salvacion from the beastly hands of Greg Bartelli; that it
is only too willing to release the dollar deposit of Bartelli which may perhaps partly mitigate the
sufferings petitioner has undergone; but it is restrained from doing so in view of R.A. No. 6426 and
Section 113 of Central Bank Circular No. 960; and that despite the harsh effect of these laws on
petitioners, CBC has no other alternative but to follow the same.
This Court finds the petition to be partly meritorious.
Petitioner deserves to receive the damages awarded to her by the court. But this petition for
declaratory relief can only be entertained and treated as a petition for mandamus to require
respondents to honor and comply with the writ of execution in Civil Case No. 89-3214.
This Court has no original and exclusive jurisdiction over a petition for declaratory relief. 2 However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as one for mandamus. 3
Here is a child, a 12-year old girl, who in her belief that all Americans are good and in her gesture of
kindness by teaching his alleged niece the Filipino language as requested by the American, trustingly
went with said stranger to his apartment, and there she was raped by said American tourist Greg
Bartelli. Not once, but ten times. She was detained therein for four (4) days. This American tourist was
able to escape from the jail and avoid punishment. On the other hand, the child, having received a
favorable judgment in the Civil Case for damages in the amount of more than P1,000,000.00, which
amount could alleviate the humiliation, anxiety, and besmirched reputation she had suffered and may
continue to suffer for a long, long time; and knowing that this person who had wronged her has the
money, could not, however get the award of damages because of this unreasonable law. This
questioned law, therefore makes futile the favorable judgment and award of damages that she and
her parents fully deserve. As stated by the trial court in its decision,
Indeed, after hearing the testimony of Karen, the Court believes that it was
undoubtedly a shocking and traumatic experience she had undergone which could
haunt her mind for a long, long time, the mere recall of which could make her feel so
humiliated, as in fact she had been actually humiliated once when she was refused
admission at the Abad Santos High School, Arellano University, where she sought to
transfer from another school, simply because the school authorities of the said High
School learned about what happened to her and allegedly feared that they might be
implicated in the case.

236
xxx xxx xxx
The reason for imposing exemplary or corrective damages is due to the wanton and
bestial manner defendant had committed the acts of rape during a period of serious
illegal detention of his hapless victim, the minor Karen Salvacion whose only fault
was in her being so naive and credulous to believe easily that defendant, an
American national, could not have such a bestial desire on her nor capable of
committing such a heinous crime. Being only 12 years old when that unfortunate
incident happened, she has never heard of an old Filipino adage that in every forest
there is a
snake, . . . . 4
If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom how the
incentive for foreign currency deposit could be more important than his child's rights to said award of
damages; in this case, the victim's claim for damages from this alien who had the gall to wrong a child
of tender years of a country where he is a mere visitor. This further illustrates the flaw in the
questioned provisions.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's
economy was in a shambles; when foreign investments were minimal and presumably, this was the
reason why said statute was enacted. But the realities of the present times show that the country has
recovered economically; and even if not, the questioned law still denies those entitled to due process
of law for being unreasonable and oppressive. The intention of the questioned law may be good when
enacted. The law failed to anticipate the iniquitous effects producing outright injustice and inequality
such as the case before us.
It has thus been said that
But I also know, 5 that laws and institutions must go hand in hand with the progress of
the human mind. As that becomes more developed, more enlightened, as new
discoveries are made, new truths are disclosed and manners and opinions change
with the change of circumstances, institutions must advance also, and keep pace
with the times. . . We might as well require a man to wear still the coat which fitted
him when a boy, as civilized society to remain ever under the regimen of their
barbarous ancestors.
In his Comment, the Solicitor General correctly opined, thus:

The present petition has far-reaching implications on the right of a national to obtain
redress for a wrong committed by an alien who takes refuge under a law and
regulation promulgated for a purpose which does not contemplate the application
thereof envisaged by the alien. More specifically, the petition raises the question
whether the protection against attachment, garnishment or other court process
accorded to foreign currency deposits by PD No. 1246 and CB Circular No. 960
applies when the deposit does not come from a lender or investor but from a mere
transient or tourist who is not expected to maintain the deposit in the bank for long.
The resolution of this question is important for the protection of nationals who are
victimized in the forum by foreigners who are merely passing through.
xxx xxx xxx
. . . Respondents China Banking Corporation and Central Bank of the Philippines
refused to honor the writ of execution issued in Civil Case No. 89-3214 on the
strength of the following provision of Central Bank Circular No. 960:
Sec. 113. Exemption from attachment. Foreign currency deposits
shall be exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever.
Central Bank Circular No. 960 was issued pursuant to Section 7 of Republic Act No.
6426:
Sec. 7. Rules and Regulations. The Monetary Board of the Central
Bank shall promulgate such rules and regulations as may be
necessary to carry out the provisions of this Act which shall take
effect after the publication of such rules and regulations in the Official
Gazette and in a newspaper of national circulation for at least once a
week for three consecutive weeks. In case the Central Bank
promulgates new rules and regulations decreasing the rights of
depositors, the rules and regulations at the time the deposit was
made shall govern.
The aforecited Section 113 was copied from Section 8 of Republic Act NO. 6426, as
amended by P.D. 1246, thus:

237
Sec. 8. Secrecy of Foreign Currency Deposits. All foreign
currency deposits authorized under this Act, as amended by
Presidential Decree No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034, are hereby declared
as and considered of an absolutely confidential nature and, except
upon the written permission of the depositor, in no instance shall
such foreign currency deposits be examined, inquired or looked into
by any person, government official, bureau or office whether judicial
or administrative or legislative or any other entity whether public or
private: Provided, however, that said foreign currency deposits shall
be exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever.
The purpose of PD 1246 in according protection against attachment, garnishment
and other court process to foreign currency deposits is stated in its whereases, viz.:
WHEREAS, under Republic Act No. 6426, as amended by
Presidential Decree No. 1035, certain Philippine banking institutions
and branches of foreign banks are authorized to accept deposits in
foreign currency;
WHEREAS, under the provisions of Presidential Decree No. 1034
authorizing the establishment of an offshore banking system in the
Philippines, offshore banking units are also authorized to receive
foreign currency deposits in certain cases;
WHEREAS, in order to assure the development and speedy growth
of the Foreign Currency Deposit System and the Offshore Banking
System in the Philippines, certain incentives were provided for under
the two Systems such as confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest income of depositors
who are nonresidents and are not engaged in trade or business in
the Philippines;
WHEREAS, making absolute the protective cloak of confidentiality
over such foreign currency deposits, exempting such deposits from
tax, and guaranteeing the vested rights of depositors would better

encourage the inflow of foreign currency deposits into the banking

institutions authorized to accept such deposits in the Philippines
thereby placing such institutions more in a position to properly
channel the same to loans and investments in the Philippines, thus
directly contributing to the economic development of the country;
Thus, one of the principal purposes of the protection accorded to foreign currency
deposits is "to assure the development and speedy growth of the Foreign Currency
Deposit system and the Offshore Banking in the Philippines" (3rd Whereas).
The Offshore Banking System was established by PD No. 1034. In turn, the purposes
of PD No. 1034 are as follows:
WHEREAS, conditions conducive to the establishment of an offshore
banking system, such as political stability, a growing economy and
adequate communication facilities, among others, exist in the
Philippines;
WHEREAS, it is in the interest of developing countries to have as
wide access as possible to the sources of capital funds for economic
development;
WHEREAS, an offshore banking system based in the Philippines will
be advantageous and beneficial to the country by increasing our
links with foreign lenders, facilitating the flow of desired investments
into the Philippines, creating employment opportunities and expertise
in international finance, and contributing to the national development
effort.
WHEREAS, the geographical location, physical and human
resources, and other positive factors provide the Philippines with the
clear potential to develop as another financial center in Asia;
On the other hand, the Foreign Currency Deposit system was created by PD. No.
1035. Its purposes are as follows:
WHEREAS, the establishment of an offshore banking system in the
Philippines has been authorized under a separate decree;

238
WHEREAS, a number of local commercial banks, as depository bank
under the Foreign Currency Deposit Act (RA No. 6426), have the
resources and managerial competence to more actively engage in
foreign exchange transactions and participate in the grant of foreign
currency loans to resident corporations and firms;
WHEREAS, it is timely to expand the foreign currency lending
authority of the said depository banks under RA 6426 and apply to
their transactions the same taxes as would be applicable to
transaction of the proposed offshore banking units;
It is evident from the above [Whereas clauses] that the Offshore Banking System and
the Foreign Currency Deposit System were designed to draw deposits from
foreign lenders and investors (Vide second Whereas of PD No. 1034; third Whereas
of PD No. 1035). It is these deposits that are induced by the two laws and given
protection and incentives by them.
Obviously, the foreign currency deposit made by a transient or a tourist is not the kind
of deposit encouraged by PD Nos. 1034 and 1035 and given incentives and
protection by said laws because such depositor stays only for a few days in the
country and, therefore, will maintain his deposit in the bank only for a short time.

enriquecerse tortizeramente con dano de otro." Simply stated, when the statute is silent or
ambiguous, this is one of those fundamental solutions that would respond to the vehement urge of
conscience. (Padilla vs. Padilla, 74 Phil. 377).
It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a
device by accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the expense
of the innocent.
Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding the
final and executory judgment of the lower court against the Central Bank Circular protecting the
foreign depositor? Shielding or protecting the dollar deposit of a transient alien depositor against
injustice to a national and victim of a crime? This situation calls for fairness against legal tyranny.
We definitely cannot have both ways and rest in the belief that we have served the ends of justice.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD No. 1246, insofar
as it amends Section 8 of R.A. No. 6426 are hereby held to be INAPPLICABLE to this case because
of its peculiar circumstances. Respondents are hereby REQUIRED to COMPLY with the writ of
execution issued in Civil Case No. 89-3214, "Karen Salvacion, et al. vs. Greg Bartelli y Northcott, by
Branch CXLIV, RTC Makati and to RELEASE to petitioners the dollar deposit of respondent Greg
Bartelli y Northcott in such amount as would satisfy the judgment.

Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his

dollars with respondent China Banking Corporation only for safekeeping during his
temporary stay in the Philippines.

SO ORDERED.

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

PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, ROSA AQUERO, GERARD YU, ERIC YU, MINA YU, ELIZABETH
NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA, LORNA ACUB, represented by
their Attorney-in-Fact, JOHN FRANCIS COTAOCO, respondents.

In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the
questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to
a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the
New Civil Code which provides that "in case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail. "Ninguno non deue

G.R. No. 118917 December 22, 1997

KAPUNAN, J.:
Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the
Court of Appeals affirming with modification the decision of the Regional Trial Court holding petitioner

239
liable for the value of thirteen (13) certificates of time deposit (CTDs) in the possession of private
respondents.
The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in money market placements
with the Premiere Financing Corporation (PFC) in the sum of P10,000.00 each for
which they were issued by the PFC corresponding promissory notes and checks. On
the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of
plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but
the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the
promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the
subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each
stating, among others, that the same certifies that the bearer thereof has deposited
with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per
annum; that the certificate is insured up to P15,000.00 with the PDIC; and that the
maturity date thereof is on November 3, 1983 (Exhs. "B", "B-1 to "B-12").
On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to
encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian
requested Cotaoco for a deferment or an extension of a few days to enable the RSB
to raise the amount to pay for the same (Exh. "D"). Cotaoco agreed. Despite said
extension, the RSB still failed to pay the value of the certificates. Instead, RSB
advised Cotaoco to file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued
Resolution No. 788 (Exh. "2", Records, p. 159) suspending the operations of the
RSB. Eventually, the records of RSB were secured and its deposit liabilities were
eventually determined. On December 7, 1984, the Monetary Board issued Resolution
No. 1496 (Exh. "1") liquidating the RSB. Subsequently, a masterlist or inventory of
the RSB assets and liabilities was prepared. However, the certificates of time deposit
of plaintiffs-appellees were not included in the list on the ground that the certificates
were not funded by the PFC or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims
for the amount of the certificates (Exhs. "C," "C-1" to "C-12"). Sabina Yu, James
Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their
certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To

their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal
Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07
(Exh. "B") issued by PFC for the aforementioned certificates was returned by the
drawee bank for having been drawn against insufficient funds; and said check was
not replaced by the PFC, resulting in the cancellation of the certificates as
indebtedness or liabilities of
RSB. 1
Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC,
RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an
answer.
On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs,
jointly and severally, the amount corresponding to the latter's certificates of time deposit.
Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari,
prohibition andmandamus before the Court of Appeals praying that the writ of execution issued by the
trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its decision granting the Central Bank's petition
but dismissing the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following
errors:
I
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND
CONSIDERATION
III
THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE
INSURED PETITIONER SHOULD BE HELD LIABLE FOR THE SAME.

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We deal jointly with petitioner's first and third assigned errors.
Relying on this Court's ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and
Trust Company, 2 the Court of Appeals concluded that the subject CTDs are negotiable. Petitioner, on
the other hand, contends that the CTDs are non-negotiable since they do not contain an
unconditional promise or order to pay a sum certain in money nor are they made payable to order or
bearer, as required by Section 1 of the Negotiable Instruments Law.
Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The
Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by
the provisions of the special law creating it. 3 The liability of the PDIC for insured deposits therefore
is statutory and, under Republic Act No. 3591, 4 as amended, such liability rests upon the existence of
deposits with the insured bank, not on the negotiability or non-negotiability of the certificates
evidencing these deposits.
The authority for this conclusion finds support in decisions by American state courts applying their
respective bank guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of
the certificates of deposit in their possession entitled them to be paid out of the bank guaranty fund, a
contention that the courts uniformly rejected.

. . . Whatever the status of the plaintiffs may be as holders in due course under the
Negotiable Instruments Law, they cannot be assignees of a deposit which was not
made, and cannot be entitled to the benefit of a guaranty which did not come into
existence. . . .
In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American
State Bank v.Foster, 6 which arose from the same facts as the Fourth National Bank case. There, the
Court held:
. . . Even if the plaintiff were to be regarded as an innocent purchaser of the
certificates as negotiable instruments, its situation would be in no wise bettered so far
as relate to a claim against the guaranty fund. The fund protects deposits only. And if
no deposit is made, or no deposit within the protection of the guaranty law, the
transfer of a certificate cannot impose a liability on the fund. . . . where a certificate of
deposit is given under such circumstances that it is not protected by the guaranty
fund, although that fact is not indicated by anything on its face, its indorsement to an
innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State
v. Farmers' Stale Bank:7

Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson 5 argued that:
. . . the court should hold the certificates to be guaranteed because they are
negotiable instruments, and were acquired by the present holders in due course;
otherwise it is said certificates of deposit will be deprived of the quality of commercial
paper. Certificates of deposit have been regarded as the highest form of collateral.
They are of wide currency in the banking and business worlds, and are particularly
useful to persons of small means, because they bear interest, and may be readily
cashed; therefore to deprive them of the benefit of the guaranty fund would be a
calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs' contention to be without merit, ruling
thus:
. . . The argument confuses negotiability of commercial paper with statutory guaranty
of deposits. The guaranty is something extrinsic to all forms of evidence of bank
obligation; and negotiability of instruments has no dependence on existence or
nonexistence of the guaranty.

In this contention we think the appellants fail to distinguish between the liability of the
maker of a negotiable instrument, which rests upon the law pertaining to negotiable
paper, and the liability of the guaranty fund, which is purely statutory. The
circumstances under which the guaranty fund may be liable are entirely apart from
the law pertaining to negotiable paper. A holder of a certificate of deposit in a bank
who seeks to hold the guaranty fund liable for its payment must show that the
transaction leading up to the issuance of the certificate was such that the law holds
the guaranty fund liable for its payment. . . .
The Farmers' State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home
State Bank of Dunning 8 and in State v. Kilgore State Bank. 9 The same ruling was adopted by the
Supreme Court of South Dakota inMildenstein v. Hirning. 10
In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable.
Subsequently, however, respondent court deemed the issue immaterial, albeit for entirely different
reasons.

241
. . . Besides, whether the certificates are negotiable or not is of no moment. The fact
remains that the certificates categorically state that their bearer [sic] have a deposit in
the RSB; that the same will mature on November 3, 1993; and that the certificates
are insured by PDIC. 11
We disagree with respondent court's rationale. The fact that the certificates state that the certificates
are insured by PDIC does not ipso facto make the latter liable for the same should the contingency
insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of
R.A. No. 3519, and statements in the certificates that the same are insured by PDIC are not binding
upon the latter.
. . . The mere fact that a certificate recites on its face that a certain sum has been
deposited, or that officers of the bank may have stated that the deposit is protected
by the guaranty law, does not make the guaranty fund liable for payment, if in fact a
deposit has not been made . . . . The banks have nothing to do with the guaranty
fund as such. It is a fund raised by assessments against all state banks, administered
by officers of the state to protect deposits in banks. . . . 12

A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the
equivalent of money is received by a bank:
Sec. 3. As used in this Act
(f) The term "deposit" means the unpaid balance of money or its equivalent received
by a bank in the usual course of business and for which it has given or is obliged to
give credit to a commercial, checking, savings, time or thrift account or which is
evidenced by passbook, check and/or certificate of deposit printed or issued in
accordance with Central Bank rules and regulations and other applicable laws,
together with such other obligations of a bank which, consistent with banking usage
and practices, the Board of Directors shall determine and prescribe by regulations to
be deposit liabilities of the Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of
Appeals, in resolving who between RSB and PFC issued the certificates to private respondents,
answered this question in the negative. A perusal of the impugned decision, however, reveals that
such finding is grounded entirely on speculation, and thus, cannot bind this Court: 13

We come now to petitioner's second assigned error.

In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a
corresponding deposit be placed in the insured bank. This is implicit from a reading of the following
provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit Insurance Corporation . . . which
shall insure, as provided, the deposits of all banks which are entitled to the benefits of
insurance under this Act . . . . (Emphasis supplied).
xxx xxx xxx
Sec. 10(a) . . .
xxx xxx xxx
(c) Whenever an insured bank shall have been closed on account of insolvency,
payment of the insured deposits in such bank shall be made by the Corporation as
soon as possible . . . .(Emphasis supplied.)

Equally unimpressive is the contention of PDIC and RSB that the certificates were
issued to PFC which did not acquire the same for value because the check issued by
the latter for the certificates bounced for insufficiency of funds. First,
granting arguendo that the certificates were originally issued in favor of PFC, such
issuance could only give rise to the presumption that the amount stated in the
certificates have been deposited to RSB. Had not PFC deposited the amount stated
therein, then RSB would have surely refused to issue the certificates certifying to
such fact. Second, why did not RSB demand that PFC pay the certificates or file a
claim against PFC on the ground that the latter failed to pay for the value of the
certificates? It could very well be that the reason why RSB did not run after PFC for
payment of the value of the certificates was because the instruments were issued to
the latter by RSB for value or were already paid to RSB by plaintiffs-appellees. Third,
if it is true that at the time RSB issued the certificates to PFC, the instruments were
paid for with checks still to be encashed, then why did not RSB specifically state in
the certificates that the validity thereof hinges on the encashment of said check?
Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount
stated in the certificates, the latter is not be such reason freed from civil liability to
plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the
amount stated therein to whoever is the bearer upon its presentment for encashment.

242
Truly, there is no reason to depart from the established principle that where a bank
issues a certificate of deposit acknowledging a deposit made with a third person or
an officer of the bank, or with another bank representing it to be the certificate of the
bank, upon which assurance the depositor accepts it, the bank is liable for the
amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the
Decision on p. 3 thereof). 14
Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB
Deputy Liquidator, testified that RSB received three (3) checks in consideration for the issuance of
several CTDs, including the ones in dispute. The first check amounted to P159,153.93, the second,
P121,665.95, and the third, P125,846.07 In consideration of the third check, private respondents
received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of
P10,000.00 each or a total of P130,000.00. To conform with the value of the third check, CTD No.
09648 was "chopped," and only the sum of P5,846.07 was credited in favor of private respondents.
The first two checks "made good in the clearing" while the third was returned for being "drawn against
insufficient funds."
The check in question appears on the records as Exhibit "3" (for
Regent), 15 and is described in RSB's offer or evidence as "Traders Royal Bank Check No. 292555
dated September 22, 1983 covering the amount or P125,846.07 . . . issued by Premiere Financing
Corporation." 16 At the back of said check are the words "Refer to Drawer," 17 indicating that the
drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of
the check's dishonor, RSB cancelled the corresponding as evidence by an RSB "ticket" dated
November 4, 1983. 18
These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB
receiving any money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore
came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the certificates of
time deposit held by private respondents.
ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals
REVERSED. Petitioner is absolved from any liability to private respondents.
SO ORDERED.
G.R. No. 141297

October 8, 2001

DOMINGO R. MANALO, petitioner,

vs.
COURT OF APPEALS (Special Twelfth Division) and PAIC SAVINGS AND MORTGAGE
BANK, respondents.
PUNO, J.:
This petition for certiorari seeks the review of the Decision of the Court of Appeals in C.A.-G.R. SP.
No. 50341 promulgated December 23, 1999, which affirmed an Order issued by the Regional Trial
Court, Branch 112, Pasay City, in Civil Case No. 9011 dated December 9, 1998.
On July 19, 1983, S. Villanueva Enterprises, represented by its president, Therese Villanueva Vargas,
obtained a loan of three million pesos (P3,000,000.00) and one million pesos (P1,000,000.00) from
the respondent PAIC Savings and Mortgage Bank and the Philippine American Investments
Corporation (PAIC), respectively. To secure payment of both debts, Vargas executed in favor of the
respondent and PAIC a Joint First Mortgage1 over two parcels of land registered under her name.
One of the lots, located in Pasay City with an area of nine hundred nineteen square meters (919 sq.
m.) and covered by TCT No. 6076, is the subject of the present case. Section 2 of the mortgage
contract states that "the properties mortgaged therein shall include all buildings and improvements
existing on the mortgaged property at the time of the execution of the mortgage contract and
thereafter."2
S. Villanueva Enterprises defaulted in paying the amortizations due. Despite repeated demands from
the respondent, it failed to settle its loan obligation. Accordingly, respondent instituted extrajudicial
foreclosure proceedings over the mortgaged lots. On August 22, 1984, the Pasay City property was
sold at a public auction to the respondent itself, after tendering the highest bid. The respondent then
caused the annotation of the corresponding Sheriff's Certificate of Sale 3 on the title of the land on
December 4, 1984. After the lapse of one year, or the statutory period extended by law to a mortgagor
to exercise his/her right of redemption, title was consolidated in respondent's name for failure of
Vargas to redeem.
On October 29, 1986, the Central Bank of the Philippines filed a Petition 4 for assistance in the
liquidation of the respondent with the Regional Trial Court. The petition was given due course in an
Order5 dated May 19, 1987.
It appears that from the years 1986 to 1991, Vargas negotiated with the respondent (through its then
liquidator, the Central Bank) for the repurchase of the foreclosed property. The negotiations, however,
fizzled out as Vargas cannot afford the repurchase price fixed by the respondent based on the

243
appraised value of the land at that time. On October 4, 1991, Vargas filed a case for annulment of
mortgage and extrajudicial foreclosure sale before Branch 116 of the Pasay City Regional Trial Court.
On July 22, 1993, the court rendered a decision6 dismissing the complaint and upholding the validity
of the mortgage and foreclosure sale. On appeal, the appellate court upheld the assailed judgment
and declared the said mortgage and foreclosure proceedings to be in accord with law.7 This decision
of the Court of Appeals subsequently became final and executory when we summarily dismissed
Vargas' Petition for Review on Certiorari for having been filed beyond the reglementary period. 8
In the meantime, on June 22, 1992, respondent petitioned the Regional Trial Court, Branch 112, of
Pasay City, herein court a quo, for the issuance of a writ of possession for the subject property in Civil
Case No. 9011. This is in view of the consolidation of its ownership over the same as mentioned
earlier. Vargas and S. Villanueva Enterprises, Inc. filed their opposition thereto. After which, trial
ensued.
During the pendency of Civil Case No. 9011 (for the issuance of a writ of possession), Vargas, on
December 23, 1992, executed a Deed of Absolute Sale 9 selling, transferring, and conveying
ownership of the disputed lot in favor of a certain Armando Angsico. Notwithstanding this sale,
Vargas, still representing herself to be the lawful owner of the property, leased the same to petitioner
Domingo R. Manalo on August 25, 1994. Pertinent provisions of the lease agreement 10 state:
"3. (a) The lease is for a period of ten year lease (sic), involving 450 square meters, a portion
of the above 919 square meter property.
x x x (d) The LESSEE has to introduce into the said 450 square meter premises
improvements thereon (sic) consisting of one story building to house a Karaoke Music
Restaurant Business, which improvements constructed thereof (sic), upon the termination of
the lease contract, by said LESSEE be surrendered in favor of the LESSOR (sic).'' 11
Later, on June 29, 1997, Armando Angsico, as buyer of the property, assigned his rights therein to
petitioner.12
On April 21, 1998, the court a quo granted the petition for the issuance of the Writ of
Possession.13 The writ was subsequently issued on April 24, 1998, the pertinent portion of which
reads:14
"NOW THEREFORE you are hereby commanded that you cause oppositors THERESE
VILLANUEVA VARGAS and S. VILLANUEVA ENTERPRISES, INC. and any and all persons
claiming rights or title under them, to forthwith vacate and surrender the possession of subject

premises in question known as that parcel of land and improvements covered by TCT No.
6076 of the Registry of Deeds of Pasay City; you are hereby further ordered to take
possession and deliver to the petitioner PAIC SAVINGS AND MORTGAGE BANK the subject
parcel of land and improvements."
Shortly, on May 8, 1998, S. Villanueva Enterprises and Vargas moved for its quashal. 15 Thereafter on
June 25, 1998, petitioner, on the strength of the lease contract and Deed of Assignment made in his
favor, submitted a Permission to File an Ex-parte Motion to Intervene.16 It bears mentioning, however,
that before petitioner sought intervention in the present case, he had separately instituted a
Complaint for Mandamus, docketed as Civil Case No. 98-0868 before another branch 17 of the Pasay
City RTC to compel PAIC Bank to allow him to repurchase the subject property.
On October 7, 1998, the court a quo denied the Motion to Quash and Motion to Intervene filed
respectively by Vargas and petitioner.18 A Motion for Reconsideration and a Supplemental Motion for
Reconsideration were filed by the petitioner which, however, were similarly denied on December 9,
1998.
Petitioner then sought relief with the Court of Appeals, filing therein a Petition for Certiorari. While this
was awaiting resolution, he entered into another lease agreement, 19 this time with the respondent,
represented by its liquidator, over the same 450 sq. m. portion of the lot. The contract fixed a period of
one month beginning January 28, 1999, renewable for another month at the exclusive option of the
lessor, respondent PAIC Bank.
On December 23, 1999, the appellate court rendered the impugned Decision, dismissing the petition,
thus:
"All told, WE find the Order, subject of the instant Petition for Certiorari and Prohibition, to be
not without rational bases and we observe that the court a quo, in issuing its questioned
Order, committed no grave abuse of discretion amounting to lack of jurisdiction.
WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED and the
assailed December 9, 1998 Order is AFFIRMED in all respects.
SO ORDERED."20
Hence, this appeal, where petitioner raises and argues the following legal issues:

244
"I. Whether or not public respondent acted without or in excess of its jurisdiction and/or was
patently in error when it affirmed the denial of petitioner's motion for intervention, despite the
fact that he has a legal interest, being a lessee and an assignee of the property subject
matter of this case.
II. Whether or not the public respondent committed grave abuse of discretion when it held
that what are required to be instituted before the liquidation court are those claims against the
insolvent banks only considering that the private respondent bank is legally dead due to
insolvency and considering further that there is already a liquidation court (Regional Trial
Court of Makati, Branch 57, docketed as Spec. Pro. No. M-1280) which is exclusively vested
with jurisdiction to hear all matters and incidents on liquidation pursuant to Section 29,
Republic Act No. 265, otherwise known as The Central Bank Act, as amended.
III. Whether or not the public respondent committed grave abuse of discretion and/or was
patently in error in affirming the ruling of the trial court, totally disregarding the arguments
raised in petitioner's supplemental motion for reconsideration only through a minute order and
without taking into consideration the fact that there is a pending action in another court (RTC,
Pasay City, Branch 231 ) which presents a prejudicial question to the case at bar.
IV. Whether or not the petitioner is estopped from questioning private respondent's ownership
when it entered into a contract of lease involving the property in question." 21
We will first resolve the jurisdictional and procedural questions raised by the petitioner.
I.
Petitioner postulates that the lower court should have dismissed respondent's "Ex-Parte Petition for
Issuance of Writ of Possession" in Civil Case No. P-9011 for want of jurisdiction over the subject
matter of the claim. The power to hear the same, he insists, exclusively vests with the Liquidation
Court pursuant to Section 29 of Republic Act No. 265, otherwise known as The Central Bank Act. 22 He
then cites our decision in Valenzuela v. Court of Appeals,23 where we held that "if there is a judicial
liquidation of an insolvent bank, all claims against the bank should be filed in the liquidation
proceeding." For going to another court, the respondent, he accuses, is guilty of forum shopping.
These contentions can not pass judicial muster. The pertinent portion of Section 29 states:
"x x x The liquidator designated as hereunder provided shall, by the Solicitor General, file a
petition in the Regional Trial Court reciting the proceedings which have been taken and

praying the assistance of the court in the liquidation of such institution. The court shall have
jurisdiction in the same proceedings to assist in the adjudication of disputed claims against
the bank or non-bank financial intermediary performing quasi-banking functions and the
enforcement of individual liabilities of the stockholders and do all that is necessary to
preserve the assets of such institution and to implement the liquidation plan approved by the
Monetary Board, x x x"24 (emphasis supplied.)
Petitioner apparently failed to appreciate the correct meaning and import of the above-quoted law.
The legal provision only finds operation in cases where there are claims against an insolvent bank. In
fine, the exclusive jurisdiction of the liquidation court pertains only to the adjudication of claims
against the bank. It does not cover the reverse situation where it is the bank which files a claim
against another person or legal entity.
This interpretation of Section 29 becomes more obvious in the light of its intent. The requirement that
all claims against the bank be pursued in the liquidation proceedings filed by the Central Bank is
intended to prevent multiplicity of actions against the insolvent bank and designed to establish due
process and orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to
avoid injustice and arbitrariness.25 The lawmaking body contemplated that for convenience, only one
court, if possible, should pass upon the claims against the insolvent bank and that the liquidation
court should assist the Superintendents of Banks and regulate his operations. 26
It then ought to follow that petitioner's reliance on Section 29 and the Valenzuela case is misplaced.
The Petition for the Issuance of a Writ of Possession in Civil Case No. 9011 is not in the nature of a
disputed claim against the bank. On the contrary, it is an action instituted by the respondent
bank itself for the preservation of its asset and protection of its property. It was filed upon the instance
of the respondent's liquidator in order to take possession of a tract of land over which it has
ownership claims.
To be sure, the liquidator took the proper course of action when it applied for a writ in the Pasay City
RTC. Act 3135,27 entitled An Act to Regulate the Sale of Property Under Special Powers Inserted In or
Annexed To Real Estate Mortgages, mandates that jurisdiction over a Petition for Writ of Possession
lies with the court of the province, city, or municipality where the property subject thereof is situated.
This is sanctioned by Section 7 of the said Act, thus:
"SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition
the Court of First Instance of the province or place where the property or any part thereof is
situated, to give him possession thereof during the redemption period, furnishing bond in an
amount equivalent to the use of the property for a period of twelve months, to indemnify the

245
debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act x x x"28 (emphasis supplied)
Since the land subject of this controversy is located in Pasay City, then the city's RTC should rightly
take cognizance of the case, to the exclusion of other courts.
Anent petitioner's auxiliary contention that respondent should be held guilty of forum shopping for not
filing the case in the liquidation court, suffice it to state here that the doctrine only ponders situations
where two (or more) cases are pending before different tribunals. 29 Well to point, we have laid down
the yardstick to determine whether a party violated the rule against forum shopping as where the
elements of litis pendentia are present or where a final judgment in one case will amount to res
judicata in the other.30 Inasmuch as the case at bar is the only one filed by the respondent for the
issuance of a writ of possession over the subject property, there is no occasion for the doctrine to
apply.
Petitioner next casts doubt on the capacity of the respondent to continue litigating the petition for the
issuance of the writ. He asserts that, being under liquidation, respondent bank is already a "dead"
corporation that cannot maintain the suit in the RTC. Hence, no writ may be issued in its favor.
The argument is devoid of merit. A bank which had been ordered closed by the monetary board
retains its juridical personality which can sue and be sued through its liquidator. The only limitation
being that the prosecution or defense of the action must be done through the liquidator. 31 Otherwise,
no suit for or against an insolvent entity would prosper. In such situation, banks in liquidation would
lose what justly belongs to them through a mere technicality.32
That the law allows a bank under liquidation to participate in an action can be clearly inferred
from the third paragraph of the same Section 29 of The Central Bank Act earlier quoted,
which authorizes or empowers a liquidator to institute actions, thus: "x x x and he (liquidator)
may in the name of the bank or non-bank financial intermediary performing quasi-banking
functions and with the assistance of counsel as he may retain, institute such actions as may
be necessary in the appropriate court to collect and recover accounts and assets of such
institution or defend any action filed against the institution." 33 (emphasis supplied.)
It is therefore beyond dispute that respondent was legally capacitated to petition the court a quo for
the issuance of the writ.
II.

Petitioner likewise proffers one other procedural obstacle, which is the pendency of Civil Case No. 980868 in Branch 231 of Pasay City RTC. The said action is the complaint he filed against the
respondent for the latter to receive and accept the redemption price of eighteen million pesos for the
subject property. He argues that the primary issue therein constitutes a prejudicial question in relation
to the present case in that if the Court therein will grant petitioner's prayer, then this will necessarily
negate the possessory writ issued by the court a quo.
Again, we are not persuaded. A prejudicial question is one which arises in a case the resolution of
which is a logical antecedent of the issue involved therein, and the cognizance of which pertains to
another tribunal.34 It generally comes into play in a situation where a civil action and a criminal action
are both pending and there exists in the former an issue which must be preemptively resolved before
the criminal action may proceed, because howsoever the issue raised in the civil action is resolved
would be determinative juris et de jure of the guilt or innocence of the accused in the criminal case.
The rationale behind the principle of prejudicial question is to avoid two conflicting decisions. 35
Here, aside from the fact that Civil Case No. 98-0868 and the present one are both civil in nature and
therefore no prejudicial question can arise from the existence of the two actions, 36 it is apparent that
the former action was instituted merely to frustrate the Court's ruling in the case at bar granting the
respondent the right to possess the subject property. It is but a canny and preemptive maneuver on
the part of the petitioner to delay, if not prevent, the execution of a judgment adverse to his interests.
It bears stressing that the complaint for mandamus was filed only on May 7, 1998, sixteen days after
the lower court granted respondent's petition and thirteen days after it issued the writ. It cannot then
possibly prejudice a decided case.
At any rate, it taxes our imagination why the questions raised in Case No. 98-0868 must be
considered determinative of Case No. 9011. The basic issue in the former is whether the respondent,
as the purchaser in the extra-judicial foreclosure proceedings, may be compelled to have the property
repurchased or resold to a mortgagor's successor-in-interest (petitioner): while that in the latter is
merely whether the respondent, as the purchaser in the extrajudicial foreclosure proceedings, is
entitled to a writ of possession after the statutory period for redemption has expired. The two cases,
assuming both are pending, can proceed separately and take their own direction independent of each
other.
III.
Having disposed of the jurisdictional and procedural issues, we now come to the merits of the case.
Petitioner seeks intervention in this case by virtue of the lease agreement and the deed of
assignment executed in his favor by the mortgagor (Vargas) and an alleged buyer (Angsico) of the

246
land, respectively. He posits that as a lessee and assignee in possession of the foreclosed real
estate, he automatically acquires interest over the subject matter of the litigation. This interest is
coupled with the fact that he introduced improvements thereon, consisting of a one-storey building
which houses a karaoke-music restaurant, allegedly to the tune of fifteen million pesos
(P15,000,000.00). Enforcing the writ, he adds, without hearing his side would be an injustice to him.
Intervention is a remedy by which a third party, not originally impleaded in the proceeding, becomes a
litigant therein to enable him to protect or preserve a right or interest which may be affected by such
proceeding.37 The pertinent provision is stated in Section 1, Rule 19 of the 1997 Rules of Civil
Procedure, thus:
"SECTION 1. Who may intervene. A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so situated
as to be adversely affected by a distribution or other disposition of property in the custody of
the court or of an officer thereof may, with leave of court, be allowed to intervene in the
action. The court shall consider whether or not the intervention will unduly delay or prejudice
the adjudication of the rights of the original parties, and whether or not the intervenor's rights
may be fully protected in a separate proceeding." 38
Intervention is not a matter of right but may be permitted by the courts only when the statutory
conditions for the right to intervene is shown.39 Thus, the allowance or disallowance of a motion to
intervene is addressed to the sound discretion of the court. 40 In determining the propriety of letting a
party intervene in a case, the tribunal should not limit itself to inquiring whether "a person (1) has a
legal interest in the matter in litigation; (2) or in the success of either of the parties; (3) or an interest
against both; (4) or when is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof." 41 Just as important, as we
have stated in Big Country Ranch Corporation v. Court of Appeals,42 is the function to consider
whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully protected in a separate
proceeding.
The period within which a person may intervene is also restricted. Section 2, Rule 19 of the 1997
Rules of Civil Procedure requires:
"SECTION 2. Time to intervene. The motion to intervene may be filed at any time before
the rendition of judgment by the trial court, x x x"

After the lapse of this period, it will not be warranted anymore. This is because, basically, intervention
is not an independent action but is ancillary and supplemental to an existing litigation. 43
Taking into account these fundamental precepts, we rule that the petitioner may not properly
intervene in the case at bar. His insistence to participate in the proceeding is an unfortunate case of
too little, too late.
In the first place, petitioner's Ex-parte Permission to File a Motion to Intervene was submitted to the
RTC only on June 25, 1998. At that stage, the lower court had already granted respondent's petition
for the writ in an Order dated April 21, 1998. It had issued the Writ of Possession on April 24, 1998.
Petitioner's motion then was clearly out of time, having been filed only at the execution stage. For that
reason alone, it must meet the consequence of denial. While it is true that on May 8, 1998, Vargas
and S. Villanueva Enterprises moved to quash the writ, that did not in any way affect the nature of the
RTC's Order as an adjudication on the merits. The issuance of the Order is in essence a rendition of
judgment within the purview of Section 2, Rule 19.
Allowing petitioner to intervene, furthermore, will serve no other purpose but to unduly delay the
execution of the writ, to the prejudice of the respondent. This cannot be countenanced considering
that after the consolidation of title in the buyer's name, for failure of the mortgagor to redeem, the writ
of possession becomes a matter of right.44 Its issuance to a purchaser in an extrajudicial foreclosure
is merely a ministerial function.45 As such, the court neither exercises its official discretion nor
judgment.46 If only to stress the writ's ministerial character, we have, in previous cases, disallowed
injunction to prohibit its issuance,47 just as we have held that issuance of the same may not be stayed
by a pending action for annulment of mortgage or the foreclosure itself. 48
Even if he anchors his intervention on the purported interest he has over the land and the
improvements thereon, petitioner, still, should not be allowed to do so. He admits that he is a mere
lessee and assignee. Whatever possessory rights he holds only emanate from that of Vargas, from
whom he leased the lot, and from whom his assignor/predecessor-in-interest bought it. Therein lies
the precariousness of his title. Petitioner cannot validly predicate his supposed interest over the
property in litigation on that of Vargas, for the simple reason that as early as December 4, 1985, the
latter has already been stripped of all her rights over the land when she, as mortgagor, failed to
redeem it. A mortgagor has only one year within which to redeem her foreclosed real estate. 49 After
that period, she loses all her interests over it. This is in consonance with Section 78 of the General
Banking Act, 50viz.:
"x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or the provisions

247
of this Act, the mortgagor or debtor whose real property has been sold at public auction,
judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking
or credit institution, within the purview of this Act shall have the right, within one year after the
sale of the real estate mortgage as a result of the foreclosure of the respective mortgage, to
redeem the property by paying the amount fixed by the court in the order or execution x x
x"51 (emphasis supplied.)

BERNARDITA R. MACARIOLA, complainant,

vs.
HONORABLE ELIAS B. ASUNCION, Judge of the Court of First Instance of Leyte, respondent.

MAKASIAR, J:
Being herself bereft of valid title and rights, Vargas can not legitimately convey any to some other
person. She could not have lawfully sold the land to Angsico nor leased it to petitioner for her own
account. It is axiomatic that one can not transmit what one does not have. 52 It ought to follow that
petitioner could not have acquired any right or interest from Vargas.
Withal, all is not lost for the petitioner. He can still fully protect his rights in Civil Case No. 98-0868 or
the complaint for mandamus he filed before Branch 231 of the Pasay City RTC. There, he can
ventilate his side to a fuller extent as that would be the more appropriate venue for elucidating
whatever legal basis he alleges in compelling the respondent to sell to him the currently disputed
land.
IV.
This brings us to petitioner's final point. He briefly asserts that his act of entering into a lease contract
with the respondent should not affect his right to redeem the subject property.
The possible legal implication of the lease on the petitioner's act of trying to redeem the disputed lot is
a question which, in our opinion, can best be resolved in the mandamus complaint. Whether the
agreement must be construed as a waiver on his part of exercising his purported right of redemption
is an issue best left for the court therein to decide. Whether by acknowledging the legality of the
respondent's claim and title over the land at the time of the execution of the contract, he likewise
perpetually barred himself from redeeming the same is a matter which can be addressed most aptly
in that pending action. Hence, there is presently no need for us to squarely rule on this ultimate point.
IN VIEW WHEREOF, finding no cogent reason to disturb the assailed Decision, the instant petition is
hereby DENIED.
SO ORDERED.
A.M. No. 133-J May 31, 1982

In a verified complaint dated August 6, 1968 Bernardita R. Macariola charged respondent Judge Elias
B. Asuncion of the Court of First Instance of Leyte, now Associate Justice of the Court of Appeals,
with "acts unbecoming a judge."
The factual setting of the case is stated in the report dated May 27, 1971 of then Associate Justice
Cecilia Muoz Palma of the Court of Appeals now retired Associate Justice of the Supreme Court, to
whom this case was referred on October 28, 1968 for investigation, thus:
Civil Case No. 3010 of the Court of First Instance of Leyte was a complaint for
partition filed by Sinforosa R. Bales, Luz R. Bakunawa, Anacorita Reyes, Ruperto
Reyes, Adela Reyes, and Priscilla Reyes, plaintiffs, against Bernardita R. Macariola,
defendant, concerning the properties left by the deceased Francisco Reyes, the
common father of the plaintiff and defendant.
In her defenses to the complaint for partition, Mrs. Macariola alleged among other
things that; a) plaintiff Sinforosa R. Bales was not a daughter of the deceased
Francisco Reyes; b) the only legal heirs of the deceased were defendant Macariola,
she being the only offspring of the first marriage of Francisco Reyes with Felisa
Espiras, and the remaining plaintiffs who were the children of the deceased by his
second marriage with Irene Ondez; c) the properties left by the deceased were all the
conjugal properties of the latter and his first wife, Felisa Espiras, and no properties
were acquired by the deceased during his second marriage; d) if there was any
partition to be made, those conjugal properties should first be partitioned into two
parts, and one part is to be adjudicated solely to defendant it being the share of the
latter's deceased mother, Felisa Espiras, and the other half which is the share of the
deceased Francisco Reyes was to be divided equally among his children by his two
marriages.
On June 8, 1963, a decision was rendered by respondent Judge Asuncion in Civil
Case 3010, the dispositive portion of which reads:

248
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court,
upon a preponderance of evidence, finds and so holds, and hereby
renders judgment (1) Declaring the plaintiffs Luz R. Bakunawa,
Anacorita Reyes, Ruperto Reyes, Adela Reyes and Priscilla Reyes
as the only children legitimated by the subsequent marriage of
Francisco Reyes Diaz to Irene Ondez; (2) Declaring the plaintiff
Sinforosa R. Bales to have been an illegitimate child of Francisco
Reyes Diaz; (3) Declaring Lots Nos. 4474, 4475, 4892, 5265, 4803,
4581, 4506 and 1/4 of Lot 1145 as belonging to the conjugal
partnership of the spouses Francisco Reyes Diaz and Felisa Espiras;
(4) Declaring Lot No. 2304 and 1/4 of Lot No. 3416 as belonging to
the spouses Francisco Reyes Diaz and Irene Ondez in common
partnership; (5) Declaring that 1/2 of Lot No. 1184 as belonging
exclusively to the deceased Francisco Reyes Diaz; (6) Declaring the
defendant Bernardita R. Macariola, being the only legal and forced
heir of her mother Felisa Espiras, as the exclusive owner of one-half
of each of Lots Nos. 4474, 4475, 4892, 5265, 4803, 4581, 4506; and
the remaining one-half (1/2) of each of said Lots Nos. 4474, 4475,
4892, 5265, 4803, 4581, 4506 and one-half (1/2) of one-fourth (1/4)
of Lot No. 1154 as belonging to the estate of Francisco Reyes Diaz;
(7) Declaring Irene Ondez to be the exclusive owner of one-half (1/2)
of Lot No. 2304 and one-half (1/2) of one-fourth (1/4) of Lot No.
3416; the remaining one-half (1/2) of Lot 2304 and the remaining
one-half (1/2) of one-fourth (1/4) of Lot No. 3416 as belonging to the
estate of Francisco Reyes Diaz; (8) Directing the division or partition
of the estate of Francisco Reyes Diaz in such a manner as to give or
grant to Irene Ondez, as surviving widow of Francisco Reyes Diaz, a
hereditary share of. one-twelfth (1/12) of the whole estate of
Francisco Reyes Diaz (Art. 996 in relation to Art. 892, par 2, New
Civil Code), and the remaining portion of the estate to be divided
among the plaintiffs Sinforosa R. Bales, Luz R. Bakunawa, Anacorita
Reyes, Ruperto Reyes, Adela Reyes, Priscilla Reyes and defendant
Bernardita R. Macariola, in such a way that the extent of the total
share of plaintiff Sinforosa R. Bales in the hereditary estate shall not
exceed the equivalent of two-fifth (2/5) of the total share of any or
each of the other plaintiffs and the defendant (Art. 983, New Civil
Code), each of the latter to receive equal shares from the hereditary
estate, (Ramirez vs. Bautista, 14 Phil. 528; Diancin vs. Bishop of
Jaro, O.G. [3rd Ed.] p. 33); (9) Directing the parties, within thirty days

after this judgment shall have become final to submit to this court, for
approval a project of partition of the hereditary estate in the
proportion above indicated, and in such manner as the parties may,
by agreement, deemed convenient and equitable to them taking into
consideration the location, kind, quality, nature and value of the
properties involved; (10) Directing the plaintiff Sinforosa R. Bales and
defendant Bernardita R. Macariola to pay the costs of this suit, in the
proportion of one-third (1/3) by the first named and two-thirds (2/3)
by the second named; and (I 1) Dismissing all other claims of the
parties [pp 27-29 of Exh. C].
The decision in civil case 3010 became final for lack of an appeal, and on October
16, 1963, a project of partition was submitted to Judge Asuncion which is marked
Exh. A. Notwithstanding the fact that the project of partition was not signed by the
parties themselves but only by the respective counsel of plaintiffs and defendant,
Judge Asuncion approved it in his Order dated October 23, 1963, which for
convenience is quoted hereunder in full:
The parties, through their respective counsels, presented to this
Court for approval the following project of partition:
COMES NOW, the plaintiffs and the defendant in the above-entitled
case, to this Honorable Court respectfully submit the following
Project of Partition:
l. The whole of Lots Nos. 1154, 2304 and 4506 shall belong
exclusively to Bernardita Reyes Macariola;
2. A portion of Lot No. 3416 consisting of 2,373.49 square meters
along the eastern part of the lot shall be awarded likewise to
Bernardita R. Macariola;
3. Lots Nos. 4803, 4892 and 5265 shall be awarded to Sinforosa
Reyes Bales;
4. A portion of Lot No. 3416 consisting of 1,834.55 square meters
along the western part of the lot shall likewise be awarded to
Sinforosa Reyes-Bales;

249
5. Lots Nos. 4474 and 4475 shall be divided equally among Luz
Reyes Bakunawa, Anacorita Reyes, Ruperto Reyes, Adela Reyes
and Priscilla Reyes in equal shares;

SO ORDERED.

6. Lot No. 1184 and the remaining portion of Lot No. 3416 after
taking the portions awarded under item (2) and (4) above shall be
awarded to Luz Reyes Bakunawa, Anacorita Reyes, Ruperto Reyes,
Adela Reyes and Priscilla Reyes in equal shares, provided, however
that the remaining portion of Lot No. 3416 shall belong exclusively to
Priscilla Reyes.

(SGD) ELIAS B. ASUNCION Judge

WHEREFORE, it is respectfully prayed that the Project of Partition

indicated above which is made in accordance with the decision of the
Honorable Court be approved.
Tacloban City, October 16, 1963.
(SGD) BONIFACIO RAMO Atty. for the Defendant Tacloban City
(SGD) ZOTICO A. TOLETE Atty. for the Plaintiff Tacloban City
While the Court thought it more desirable for all the parties to have
signed this Project of Partition, nevertheless, upon assurance of both
counsels of the respective parties to this Court that the Project of
Partition, as above- quoted, had been made after a conference and
agreement of the plaintiffs and the defendant approving the above
Project of Partition, and that both lawyers had represented to the
Court that they are given full authority to sign by themselves the
Project of Partition, the Court, therefore, finding the above-quoted
Project of Partition to be in accordance with law, hereby approves
the same. The parties, therefore, are directed to execute such
papers, documents or instrument sufficient in form and substance for
the vesting of the rights, interests and participations which were
adjudicated to the respective parties, as outlined in the Project of
Partition and the delivery of the respective properties adjudicated to
each one in view of said Project of Partition, and to perform such
other acts as are legal and necessary to effectuate the said Project
of Partition.

Given in Tacloban City, this 23rd day of October, 1963.

EXH. B.
The above Order of October 23, 1963, was amended on November 11, 1963, only for
the purpose of giving authority to the Register of Deeds of the Province of Leyte to
issue the corresponding transfer certificates of title to the respective adjudicatees in
conformity with the project of partition (see Exh. U).
One of the properties mentioned in the project of partition was Lot 1184 or rather onehalf thereof with an area of 15,162.5 sq. meters. This lot, which according to the
decision was the exclusive property of the deceased Francisco Reyes, was
adjudicated in said project of partition to the plaintiffs Luz, Anacorita Ruperto, Adela,
and Priscilla all surnamed Reyes in equal shares, and when the project of partition
was approved by the trial court the adjudicatees caused Lot 1184 to be subdivided
into five lots denominated as Lot 1184-A to 1184-E inclusive (Exh. V).
Lot 1184-D was conveyed to Enriqueta D. Anota, a stenographer in Judge Asuncion's
court (Exhs. F, F-1 and V-1), while Lot 1184-E which had an area of 2,172.5556 sq.
meters was sold on July 31, 1964 to Dr. Arcadio Galapon (Exh. 2) who was issued
transfer certificate of title No. 2338 of the Register of Deeds of the city of Tacloban
(Exh. 12).
On March 6, 1965, Dr. Arcadio Galapon and his wife Sold a portion of Lot 1184-E with
an area of around 1,306 sq. meters to Judge Asuncion and his wife, Victoria S.
Asuncion (Exh. 11), which particular portion was declared by the latter for taxation
purposes (Exh. F).
On August 31, 1966, spouses Asuncion and spouses Galapon conveyed their
respective shares and interest in Lot 1184-E to "The Traders Manufacturing and
Fishing Industries Inc." (Exit 15 & 16). At the time of said sale the stockholders of the
corporation were Dominador Arigpa Tan, Humilia Jalandoni Tan, Jaime Arigpa Tan,
Judge Asuncion, and the latter's wife, Victoria S. Asuncion, with Judge Asuncion as
the President and Mrs. Asuncion as the secretary (Exhs. E-4 to E-7). The Articles of

250
Incorporation of "The Traders Manufacturing and Fishing Industries, Inc." which we
shall henceforth refer to as "TRADERS" were registered with the Securities and
Exchange Commission only on January 9, 1967 (Exh. E) [pp. 378-385, rec.].
Complainant Bernardita R. Macariola filed on August 9, 1968 the instant complaint dated August 6,
1968 alleging four causes of action, to wit: [1] that respondent Judge Asuncion violated Article 1491,
paragraph 5, of the New Civil Code in acquiring by purchase a portion of Lot No. 1184-E which was
one of those properties involved in Civil Case No. 3010 decided by him; [2] that he likewise violated
Article 14, paragraphs I and 5 of the Code of Commerce, Section 3, paragraph H, of R.A. 3019,
otherwise known as the Anti-Graft and Corrupt Practices Act, Section 12, Rule XVIII of the Civil
Service Rules, and Canon 25 of the Canons of Judicial Ethics, by associating himself with the Traders
Manufacturing and Fishing Industries, Inc., as a stockholder and a ranking officer while he was a
judge of the Court of First Instance of Leyte; [3] that respondent was guilty of coddling an impostor
and acted in disregard of judicial decorum by closely fraternizing with a certain Dominador Arigpa Tan
who openly and publicly advertised himself as a practising attorney when in truth and in fact his name
does not appear in the Rolls of Attorneys and is not a member of the Philippine Bar; and [4] that there
was a culpable defiance of the law and utter disregard for ethics by respondent Judge (pp. 1-7, rec.).
Respondent Judge Asuncion filed on September 24, 1968 his answer to which a reply was filed on
October 16, 1968 by herein complainant. In Our resolution of October 28, 1968, We referred this case
to then Justice Cecilia Muoz Palma of the Court of Appeals, for investigation, report and
recommendation. After hearing, the said Investigating Justice submitted her report dated May 27,
1971 recommending that respondent Judge should be reprimanded or warned in connection with the
first cause of action alleged in the complaint, and for the second cause of action, respondent should
be warned in case of a finding that he is prohibited under the law to engage in business. On the third
and fourth causes of action, Justice Palma recommended that respondent Judge be exonerated.
The records also reveal that on or about November 9 or 11, 1968 (pp. 481, 477, rec.), complainant
herein instituted an action before the Court of First Instance of Leyte, entitled "Bernardita R.
Macariola, plaintiff, versus Sinforosa R. Bales, et al., defendants," which was docketed as Civil Case
No. 4235, seeking the annulment of the project of partition made pursuant to the decision in Civil
Case No. 3010 and the two orders issued by respondent Judge approving the same, as well as the
partition of the estate and the subsequent conveyances with damages. It appears, however, that
some defendants were dropped from the civil case. For one, the case against Dr. Arcadio Galapon
was dismissed because he was no longer a real party in interest when Civil Case No. 4234 was filed,
having already conveyed on March 6, 1965 a portion of lot 1184-E to respondent Judge and on
August 31, 1966 the remainder was sold to the Traders Manufacturing and Fishing Industries, Inc.
Similarly, the case against defendant Victoria Asuncion was dismissed on the ground that she was no

longer a real party in interest at the time the aforesaid Civil Case No. 4234 was filed as the portion of
Lot 1184 acquired by her and respondent Judge from Dr. Arcadio Galapon was already sold on
August 31, 1966 to the Traders Manufacturing and Fishing industries, Inc. Likewise, the cases against
defendants Serafin P. Ramento, Catalina Cabus, Ben Barraza Go, Jesus Perez, Traders
Manufacturing and Fishing Industries, Inc., Alfredo R. Celestial and Pilar P. Celestial, Leopoldo Petilla
and Remedios Petilla, Salvador Anota and Enriqueta Anota and Atty. Zotico A. Tolete were dismissed
with the conformity of complainant herein, plaintiff therein, and her counsel.
On November 2, 1970, Judge Jose D. Nepomuceno of the Court of First Instance of Leyte, who was
directed and authorized on June 2, 1969 by the then Secretary (now Minister) of Justice and now
Minister of National Defense Juan Ponce Enrile to hear and decide Civil Case No. 4234, rendered a
decision, the dispositive portion of which reads as follows:
A. IN THE CASE AGAINST JUDGE ELIAS B. ASUNCION
(1) declaring that only Branch IV of the Court of First Instance of Leyte has
jurisdiction to take cognizance of the issue of the legality and validity of the Project of
Partition [Exhibit "B"] and the two Orders [Exhibits "C" and "C- 3"] approving the
partition;
(2) dismissing the complaint against Judge Elias B. Asuncion;
(3) adjudging the plaintiff, Mrs. Bernardita R. Macariola to pay defendant Judge Elias
B. Asuncion,
(a) the sum of FOUR HUNDRED THOUSAND PESOS
[P400,000.00] for moral damages;
(b) the sum of TWO HUNDRED THOUSAND PESOS [P200,000.001
for exemplary damages;
(c) the sum of FIFTY THOUSAND PESOS [P50,000.00] for nominal
damages; and
(d) he sum of TEN THOUSAND PESOS [PI0,000.00] for Attorney's
Fees.

251
B. IN THE CASE AGAINST THE DEFENDANT MARIQUITA
VILLASIN, FOR HERSELF AND FOR THE HEIRS OF THE
DECEASED GERARDO VILLASIN
(1) Dismissing the complaint against the defendants Mariquita Villasin and the heirs
of the deceased Gerardo Villasin;
(2) Directing the plaintiff to pay the defendants Mariquita Villasin and the heirs of
Gerardo Villasin the cost of the suit.
C. IN THE CASE AGAINST THE DEFENDANT SINFOROSA R.
BALES, ET AL., WHO WERE PLAINTIFFS IN CIVIL CASE NO. 3010

(1) Dismissing the complaint against defendants Sinforosa R. Bales, Adela R. Herrer,
Priscilla R. Solis, Luz R. Bakunawa, Anacorita R. Eng and Ruperto O. Reyes.
D. IN THE CASE AGAINST DEFENDANT BONIFACIO RAMO
(1) Dismissing the complaint against Bonifacio Ramo;
(2) Directing the plaintiff to pay the defendant Bonifacio Ramo the cost of the suit.
SO ORDERED [pp. 531-533, rec.]
It is further disclosed by the record that the aforesaid decision was elevated to the Court of Appeals
upon perfection of the appeal on February 22, 1971.
I
WE find that there is no merit in the contention of complainant Bernardita R. Macariola, under her first
cause of action, that respondent Judge Elias B. Asuncion violated Article 1491, paragraph 5, of the
New Civil Code in acquiring by purchase a portion of Lot No. 1184-E which was one of those
properties involved in Civil Case No. 3010. 'That Article provides:
Article 1491. The following persons cannot acquire by purchase, even at a public or
judicial action, either in person or through the mediation of another:

xxx xxx xxx

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and
other officers and employees connected with the administration of justice, the
property and rights in litigation or levied upon an execution before the court within
whose jurisdiction or territory they exercise their respective functions; this prohibition
includes the act of acquiring by assignment and shall apply to lawyers, with respect
to the property and rights which may be the object of any litigation in which they may
take part by virtue of their profession [emphasis supplied].
The prohibition in the aforesaid Article applies only to the sale or assignment of the property which is
the subject of litigation to the persons disqualified therein. WE have already ruled that "... for the
prohibition to operate, the sale or assignment of the property must take place during the pendency of
the litigation involving the property" (The Director of Lands vs. Ababa et al., 88 SCRA 513, 519 [1979],
Rosario vda. de Laig vs. Court of Appeals, 86 SCRA 641, 646 [1978]).
In the case at bar, when the respondent Judge purchased on March 6, 1965 a portion of Lot 1184-E,
the decision in Civil Case No. 3010 which he rendered on June 8, 1963 was already final because
none of the parties therein filed an appeal within the reglementary period; hence, the lot in question
was no longer subject of the litigation. Moreover, at the time of the sale on March 6, 1965,
respondent's order dated October 23, 1963 and the amended order dated November 11,
1963 approving the October 16, 1963 project of partition made pursuant to the June 8, 1963 decision,
had long become final for there was no appeal from said orders.
Furthermore, respondent Judge did not buy the lot in question on March 6, 1965 directly from the
plaintiffs in Civil Case No. 3010 but from Dr. Arcadio Galapon who earlier purchased on July 31,
1964 Lot 1184-E from three of the plaintiffs, namely, Priscilla Reyes, Adela Reyes, and Luz R.
Bakunawa after the finality of the decision in Civil Case No. 3010. It may be recalled that Lot 1184 or
more specifically one-half thereof was adjudicated in equal shares to Priscilla Reyes, Adela Reyes,
Luz Bakunawa, Ruperto Reyes and Anacorita Reyes in the project of partition, and the same was
subdivided into five lots denominated as Lot 1184-A to 1184-E. As aforestated, Lot 1184-E was sold
on July 31, 1964 to Dr. Galapon for which he was issued TCT No. 2338 by the Register of Deeds of
Tacloban City, and on March 6, 1965 he sold a portion of said lot to respondent Judge and his wife
who declared the same for taxation purposes only. The subsequent sale on August 31, 1966 by
spouses Asuncion and spouses Galapon of their respective shares and interest in said Lot 1184-E to
the Traders Manufacturing and Fishing Industries, Inc., in which respondent was the president and his
wife was the secretary, took place long after the finality of the decision in Civil Case No. 3010 and of
the subsequent two aforesaid orders therein approving the project of partition.

252
While it appears that complainant herein filed on or about November 9 or 11, 1968 an action before
the Court of First Instance of Leyte docketed as Civil Case No. 4234, seeking to annul the project of
partition and the two orders approving the same, as well as the partition of the estate and the
subsequent conveyances, the same, however, is of no moment.
The fact remains that respondent Judge purchased on March 6, 1965 a portion of Lot 1184-E from Dr.
Arcadio Galapon; hence, after the finality of the decision which he rendered on June 8, 1963 in Civil
Case No. 3010 and his two questioned orders dated October 23, 1963 and November 11, 1963.
Therefore, the property was no longer subject of litigation.
The subsequent filing on November 9, or 11, 1968 of Civil Case No. 4234 can no longer alter, change
or affect the aforesaid facts that the questioned sale to respondent Judge, now Court of Appeals
Justice, was effected and consummated long after the finality of the aforesaid decision or orders.
Consequently, the sale of a portion of Lot 1184-E to respondent Judge having taken place over one
year after the finality of the decision in Civil Case No. 3010 as well as the two orders approving the
project of partition, and not during the pendency of the litigation, there was no violation of paragraph
5, Article 1491 of the New Civil Code.
It is also argued by complainant herein that the sale on July 31, 1964 of Lot 1184-E to Dr. Arcadio
Galapon by Priscilla Reyes, Adela Reyes and Luz R. Bakunawa was only a mere scheme to conceal
the illegal and unethical transfer of said lot to respondent Judge as a consideration for the approval of
the project of partition. In this connection, We agree with the findings of the Investigating Justice thus:

On this point, I agree with respondent that there is no evidence in the record showing
that Dr. Arcadio Galapon acted as a mere "dummy" of respondent in acquiring Lot
1184-E from the Reyeses. Dr. Galapon appeared to this investigator as a respectable
citizen, credible and sincere, and I believe him when he testified that he bought Lot
1184-E in good faith and for valuable consideration from the Reyeses without any
intervention of, or previous understanding with Judge Asuncion (pp. 391- 394, rec.).
On the contention of complainant herein that respondent Judge acted illegally in approving the project
of partition although it was not signed by the parties, We quote with approval the findings of the
Investigating Justice, as follows:
1. I agree with complainant that respondent should have required the signature of the
parties more particularly that of Mrs. Macariola on the project of partition submitted to
him for approval; however, whatever error was committed by respondent in that
respect was done in good faith as according to Judge Asuncion he was assured by
Atty. Bonifacio Ramo, the counsel of record of Mrs. Macariola, That he was
authorized by his client to submit said project of partition, (See Exh. B and tsn p. 24,
January 20, 1969). While it is true that such written authority if there was any, was not
presented by respondent in evidence, nor did Atty. Ramo appear to corroborate the
statement of respondent, his affidavit being the only one that was presented as
respondent's Exh. 10, certain actuations of Mrs. Macariola lead this investigator to
believe that she knew the contents of the project of partition, Exh. A, and that she
gave her conformity thereto. I refer to the following documents:

And so we are now confronted with this all-important question whether or not the
acquisition by respondent of a portion of Lot 1184-E and the subsequent transfer of
the whole lot to "TRADERS" of which respondent was the President and his wife the
Secretary, was intimately related to the Order of respondent approving the project of
partition, Exh. A.

1) Exh. 9 Certified true copy of OCT No. 19520 covering Lot 1154 of the Tacloban
Cadastral Survey in which the deceased Francisco Reyes holds a "1/4 share" (Exh.
9-a). On tills certificate of title the Order dated November 11, 1963, (Exh. U)
approving the project of partition was duly entered and registered on November 26,
1963 (Exh. 9-D);

Respondent vehemently denies any interest or participation in the transactions

between the Reyeses and the Galapons concerning Lot 1184-E, and he insists that
there is no evidence whatsoever to show that Dr. Galapon had acted, in the purchase
of Lot 1184-E, in mediation for him and his wife. (See p. 14 of Respondent's
Memorandum).

2) Exh. 7 Certified copy of a deed of absolute sale executed by Bernardita Reyes

Macariola onOctober 22, 1963, conveying to Dr. Hector Decena the one-fourth share
of the late Francisco Reyes-Diaz in Lot 1154. In this deed of sale the vendee stated
that she was the absolute owner of said one-fourth share, the same having been
adjudicated to her as her share in the estate of her father Francisco Reyes Diaz as
per decision of the Court of First Instance of Leyte under case No. 3010 (Exh. 7-A).
The deed of sale was duly registered and annotated at the back of OCT 19520 on
December 3, 1963 (see Exh. 9-e).

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253
In connection with the abovementioned documents it is to be noted that in the project
of partition dated October 16, 1963, which was approved by respondent on October
23, 1963, followed by an amending Order on November 11, 1963, Lot 1154 or rather
1/4 thereof was adjudicated to Mrs. Macariola. It is this 1/4 share in Lot 1154 which
complainant sold to Dr. Decena on October 22, 1963, several days after the
preparation of the project of partition.
Counsel for complainant stresses the view, however, that the latter sold her onefourth share in Lot 1154 by virtue of the decision in Civil Case 3010 and not because
of the project of partition, Exh. A. Such contention is absurd because from the
decision, Exh. C, it is clear that one-half of one- fourth of Lot 1154 belonged to the
estate of Francisco Reyes Diaz while the other half of said one-fourth was the share
of complainant's mother, Felisa Espiras; in other words, the decision did not
adjudicate the whole of the one-fourth of Lot 1154 to the herein complainant (see
Exhs. C-3 & C-4). Complainant became the owner of the entire one-fourth of Lot
1154 only by means of the project of partition, Exh. A. Therefore, if Mrs. Macariola
sold Lot 1154 on October 22, 1963, it was for no other reason than that she was wen
aware of the distribution of the properties of her deceased father as per Exhs. A and
B. It is also significant at this point to state that Mrs. Macariola admitted during the
cross-examination that she went to Tacloban City in connection with the sale of Lot
1154 to Dr. Decena (tsn p. 92, November 28, 1968) from which we can deduce that
she could not have been kept ignorant of the proceedings in civil case 3010 relative
to the project of partition.
Complainant also assails the project of partition because according to her the
properties adjudicated to her were insignificant lots and the least valuable.
Complainant, however, did not present any direct and positive evidence to prove the
alleged gross inequalities in the choice and distribution of the real properties when
she could have easily done so by presenting evidence on the area, location, kind, the
assessed and market value of said properties. Without such evidence there is
nothing in the record to show that there were inequalities in the distribution of the
properties of complainant's father (pp. 386389, rec.).
Finally, while it is. true that respondent Judge did not violate paragraph 5, Article 1491 of the New
Civil Code in acquiring by purchase a portion of Lot 1184-E which was in litigation in his court, it was,
however, improper for him to have acquired the same. He should be reminded of Canon 3 of the
Canons of Judicial Ethics which requires that: "A judge's official conduct should be free from the
appearance of impropriety, and his personal behavior, not only upon the bench and in the

performance of judicial duties, but also in his everyday life, should be beyond reproach." And as aptly
observed by the Investigating Justice: "... it was unwise and indiscreet on the part of respondent to
have purchased or acquired a portion of a piece of property that was or had been in litigation in his
court and caused it to be transferred to a corporation of which he and his wife were ranking officers at
the time of such transfer. One who occupies an exalted position in the judiciary has the duty and
responsibility of maintaining the faith and trust of the citizenry in the courts of justice, so that not only
must he be truly honest and just, but his actuations must be such as not give cause for doubt and
mistrust in the uprightness of his administration of justice. In this particular case of respondent, he
cannot deny that the transactions over Lot 1184-E are damaging and render his actuations open to
suspicion and distrust. Even if respondent honestly believed that Lot 1184-E was no longer in
litigation in his court and that he was purchasing it from a third person and not from the parties to the
litigation, he should nonetheless have refrained from buying it for himself and transferring it to a
corporation in which he and his wife were financially involved, to avoid possible suspicion that his
acquisition was related in one way or another to his official actuations in civil case 3010. The conduct
of respondent gave cause for the litigants in civil case 3010, the lawyers practising in his court, and
the public in general to doubt the honesty and fairness of his actuations and the integrity of our courts
of justice" (pp. 395396, rec.).
II
With respect to the second cause of action, the complainant alleged that respondent Judge violated
paragraphs 1 and 5, Article 14 of the Code of Commerce when he associated himself with the
Traders Manufacturing and Fishing Industries, Inc. as a stockholder and a ranking officer, said
corporation having been organized to engage in business. Said Article provides that:
Article 14 The following cannot engage in commerce, either in person or by proxy,
nor can they hold any office or have any direct, administrative, or financial
intervention in commercial or industrial companies within the limits of the districts,
provinces, or towns in which they discharge their duties:
1. Justices of the Supreme Court, judges and officials of the department of public
prosecution in active service. This provision shall not be applicable to mayors,
municipal judges, and municipal prosecuting attorneys nor to those who by chance
are temporarily discharging the functions of judge or prosecuting attorney.
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254
5. Those who by virtue of laws or special provisions may not engage in commerce in
a determinate territory.
It is Our considered view that although the aforestated provision is incorporated in the Code of
Commerce which is part of the commercial laws of the Philippines, it, however, partakes of the nature
of a political law as it regulates the relationship between the government and certain public officers
and employees, like justices and judges.
Political Law has been defined as that branch of public law which deals with the organization and
operation of the governmental organs of the State and define the relations of the state with the
inhabitants of its territory (People vs. Perfecto, 43 Phil. 887, 897 [1922]). It may be recalled that
political law embraces constitutional law, law of public corporations, administrative law including the
law on public officers and elections. Specifically, Article 14 of the Code of Commerce partakes more
of the nature of an administrative law because it regulates the conduct of certain public officers and
employees with respect to engaging in business: hence, political in essence.

constitution or institutions of the new sovereign, may be continued in force if the

conqueror shall so declare by affirmative act of the commander-in-chief during the
war, or by Congress in time of peace. (Ely's Administrator vs. United States, 171 U.S.
220, 43 L. Ed. 142). In the case of American and Ocean Ins. Cos. vs. 356 Bales of
Cotton (1 Pet. [26 U.S.] 511, 542, 7 L. Ed. 242), Chief Justice Marshall said:
On such transfer (by cession) of territory, it has never been held that
the relations of the inhabitants with each other undergo any change.
Their relations with their former sovereign are dissolved, and new
relations are created between them and the government which has
acquired their territory. The same act which transfers their country,
transfers the allegiance of those who remain in it; and the law which
may be denominated political, is necessarily changed, although that
which regulates the intercourse and general conduct of individuals,
remains in force, until altered by the newly- created power of the
State.

It is significant to note that the present Code of Commerce is the Spanish Code of Commerce of
1885, with some modifications made by the "Commission de Codificacion de las Provincias de
Ultramar," which was extended to the Philippines by the Royal Decree of August 6, 1888, and took
effect as law in this jurisdiction on December 1, 1888.

Likewise, in People vs. Perfecto (43 Phil. 887, 897 [1922]), this Court stated that: "It is a general
principle of the public law that on acquisition of territory the previous political relations of the ceded
region are totally abrogated. "

Upon the transfer of sovereignty from Spain to the United States and later on from the United States
to the Republic of the Philippines, Article 14 of this Code of Commerce must be deemed to have been
abrogated because where there is change of sovereignty, the political laws of the former sovereign,
whether compatible or not with those of the new sovereign, are automatically abrogated, unless they
are expressly re-enacted by affirmative act of the new sovereign.

There appears no enabling or affirmative act that continued the effectivity of the aforestated provision
of the Code of Commerce after the change of sovereignty from Spain to the United States and then to
the Republic of the Philippines. Consequently, Article 14 of the Code of Commerce has no legal and
binding effect and cannot apply to the respondent, then Judge of the Court of First Instance, now
Associate Justice of the Court of Appeals.

Thus, We held in Roa vs. Collector of Customs (23 Phil. 315, 330, 311 [1912]) that:

It is also argued by complainant herein that respondent Judge violated paragraph H, Section 3 of
Republic Act No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act, which provides
that:

By well-settled public law, upon the cession of territory by one nation to another,
either following a conquest or otherwise, ... those laws which are political in their
nature and pertain to the prerogatives of the former government immediately cease
upon the transfer of sovereignty. (Opinion, Atty. Gen., July 10, 1899).
While municipal laws of the newly acquired territory not in conflict with the, laws of
the new sovereign continue in force without the express assent or affirmative act of
the conqueror, the political laws do not. (Halleck's Int. Law, chap. 34, par. 14).
However, such political laws of the prior sovereignty as are not in conflict with the

Sec. 3. Corrupt practices of public officers. In addition to acts or omissions of

public officers already penalized by existing law, the following shall constitute corrupt
practices of any public officer and are hereby declared to be unlawful:
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255
(h) Directly or indirectly having financial or pecuniary interest in any
business, contract or transaction in connection with which he
intervenes or takes part in his official capacity, or in which he is
prohibited by the Constitution or by any Iaw from having any interest.
Respondent Judge cannot be held liable under the aforestated paragraph because there is no
showing that respondent participated or intervened in his official capacity in the business or
transactions of the Traders Manufacturing and Fishing Industries, Inc. In the case at bar, the business
of the corporation in which respondent participated has obviously no relation or connection with his
judicial office. The business of said corporation is not that kind where respondent intervenes or takes
part in his capacity as Judge of the Court of First Instance. As was held in one case involving the
application of Article 216 of the Revised Penal Code which has a similar prohibition on public officers
against directly or indirectly becoming interested in any contract or business in which it is his official
duty to intervene, "(I)t is not enough to be a public official to be subject to this crime; it is necessary
that by reason of his office, he has to intervene in said contracts or transactions; and, hence, the
official who intervenes in contracts or transactions which have no relation to his office cannot commit
this crime.' (People vs. Meneses, C.A. 40 O.G. 11th Supp. 134, cited by Justice Ramon C. Aquino;
Revised Penal Code, p. 1174, Vol. 11 [1976]).
It does not appear also from the records that the aforesaid corporation gained any undue advantage
in its business operations by reason of respondent's financial involvement in it, or that the corporation
benefited in one way or another in any case filed by or against it in court. It is undisputed that there
was no case filed in the different branches of the Court of First Instance of Leyte in which the
corporation was either party plaintiff or defendant except Civil Case No. 4234 entitled "Bernardita R.
Macariola, plaintiff, versus Sinforosa O. Bales, et al.,"wherein the complainant herein sought to
recover Lot 1184-E from the aforesaid corporation. It must be noted, however, that Civil Case No.
4234 was filed only on November 9 or 11, 1968 and decided on November 2, 1970 by CFI Judge
Jose D. Nepomuceno when respondent Judge was no longer connected with the corporation, having
disposed of his interest therein on January 31, 1967.
Furthermore, respondent is not liable under the same paragraph because there is no provision in both
the 1935 and 1973 Constitutions of the Philippines, nor is there an existing law expressly prohibiting
members of the Judiciary from engaging or having interest in any lawful business.
It may be pointed out that Republic Act No. 296, as amended, also known as the Judiciary Act of
1948, does not contain any prohibition to that effect. As a matter of fact, under Section 77 of said law,
municipal judges may engage in teaching or other vocation not involving the practice of law after
office hours but with the permission of the district judge concerned.

Likewise, Article 14 of the Code of Commerce which prohibits judges from engaging in commerce is,
as heretofore stated, deemed abrogated automatically upon the transfer of sovereignty from Spain to
America, because it is political in nature.
Moreover, the prohibition in paragraph 5, Article 1491 of the New Civil Code against the purchase by
judges of a property in litigation before the court within whose jurisdiction they perform their duties,
cannot apply to respondent Judge because the sale of the lot in question to him took place after the
finality of his decision in Civil Case No. 3010 as well as his two orders approving the project of
partition; hence, the property was no longer subject of litigation.
In addition, although Section 12, Rule XVIII of the Civil Service Rules made pursuant to the Civil
Service Act of 1959 prohibits an officer or employee in the civil service from engaging in any private
business, vocation, or profession or be connected with any commercial, credit, agricultural or
industrial undertaking without a written permission from the head of department, the same, however,
may not fall within the purview of paragraph h, Section 3 of the Anti-Graft and Corrupt Practices Act
because the last portion of said paragraph speaks of a prohibition by the Constitution or law on any
public officer from having any interest in any business and not by a mere administrative rule or
regulation. Thus, a violation of the aforesaid rule by any officer or employee in the civil service, that is,
engaging in private business without a written permission from the Department Head may not
constitute graft and corrupt practice as defined by law.
On the contention of complainant that respondent Judge violated Section 12, Rule XVIII of the Civil
Service Rules, We hold that the Civil Service Act of 1959 (R.A. No. 2260) and the Civil Service Rules
promulgated thereunder, particularly Section 12 of Rule XVIII, do not apply to the members of the
Judiciary. Under said Section 12: "No officer or employee shall engage directly in any private
business, vocation, or profession or be connected with any commercial, credit, agricultural or
industrial undertaking without a written permission from the Head of Department ..."
It must be emphasized at the outset that respondent, being a member of the Judiciary, is covered by
Republic Act No. 296, as amended, otherwise known as the Judiciary Act of 1948 and by Section 7,
Article X, 1973 Constitution.
Under Section 67 of said law, the power to remove or dismiss judges was then vested in the
President of the Philippines, not in the Commissioner of Civil Service, and only on two grounds,
namely, serious misconduct and inefficiency, and upon the recommendation of the Supreme Court,
which alone is authorized, upon its own motion, or upon information of the Secretary (now Minister) of
Justice to conduct the corresponding investigation. Clearly, the aforesaid section defines the grounds
and prescribes the special procedure for the discipline of judges.

256
And under Sections 5, 6 and 7, Article X of the 1973 Constitution, only the Supreme Court can
discipline judges of inferior courts as well as other personnel of the Judiciary.

Practices Act as well as Section 12, Rule XVIII of the Civil Service Rules promulgated pursuant to the
Civil Service Act of 1959, the impropriety of the same is clearly unquestionable because Canon 25 of
the Canons of Judicial Ethics expressly declares that:

It is true that under Section 33 of the Civil Service Act of 1959: "The Commissioner may, for ...
violation of the existing Civil Service Law and rules or of reasonable office regulations, or in the
interest of the service, remove any subordinate officer or employee from the service, demote him in
rank, suspend him for not more than one year without pay or fine him in an amount not exceeding six
months' salary." Thus, a violation of Section 12 of Rule XVIII is a ground for disciplinary action against
civil service officers and employees.
However, judges cannot be considered as subordinate civil service officers or employees subject to
the disciplinary authority of the Commissioner of Civil Service; for, certainly, the Commissioner is not
the head of the Judicial Department to which they belong. The Revised Administrative Code (Section
89) and the Civil Service Law itself state that the Chief Justice is the department head of the Supreme
Court (Sec. 20, R.A. No. 2260) [1959]); and under the 1973 Constitution, the Judiciary is the only
other or second branch of the government (Sec. 1, Art. X, 1973 Constitution). Besides, a violation of
Section 12, Rule XVIII cannot be considered as a ground for disciplinary action against judges
because to recognize the same as applicable to them, would be adding another ground for the
discipline of judges and, as aforestated, Section 67 of the Judiciary Act recognizes only two grounds
for their removal, namely, serious misconduct and inefficiency.
Moreover, under Section 16(i) of the Civil Service Act of 1959, it is the Commissioner of Civil Service
who has original and exclusive jurisdiction "(T)o decide, within one hundred twenty days, after
submission to it, all administrative cases against permanent officers and employees in the
competitive service, and, except as provided by law, to have final authority to pass upon their
removal, separation, and suspension and upon all matters relating to the conduct, discipline, and
efficiency of such officers and employees; and prescribe standards, guidelines and regulations
governing the administration of discipline" (emphasis supplied). There is no question that a judge
belong to the non-competitive or unclassified service of the government as a Presidential appointee
and is therefore not covered by the aforesaid provision. WE have already ruled that "... in interpreting
Section 16(i) of Republic Act No. 2260, we emphasized that only permanent officers and employees
who belong to the classified service come under the exclusive jurisdiction of the Commissioner of
Civil Service" (Villaluz vs. Zaldivar, 15 SCRA 710,713 [1965], Ang-Angco vs. Castillo, 9 SCRA 619
[1963]).
Although the actuation of respondent Judge in engaging in private business by joining the Traders
Manufacturing and Fishing Industries, Inc. as a stockholder and a ranking officer, is not violative of the
provissions of Article 14 of the Code of Commerce and Section 3(h) of the Anti-Graft and Corrupt

A judge should abstain from making personal investments in enterprises which are
apt to be involved in litigation in his court; and, after his accession to the bench, he
should not retain such investments previously made, longer than a period sufficient to
enable him to dispose of them without serious loss. It is desirable that he should, so
far as reasonably possible, refrain from all relations which would normally tend to
arouse the suspicion that such relations warp or bias his judgment, or prevent his
impartial attitude of mind in the administration of his judicial duties. ...
WE are not, however, unmindful of the fact that respondent Judge and his wife had withdrawn on
January 31, 1967 from the aforesaid corporation and sold their respective shares to third parties, and
it appears also that the aforesaid corporation did not in anyway benefit in any case filed by or against
it in court as there was no case filed in the different branches of the Court of First Instance of Leyte
from the time of the drafting of the Articles of Incorporation of the corporation on March 12, 1966, up
to its incorporation on January 9, 1967, and the eventual withdrawal of respondent on January 31,
1967 from said corporation. Such disposal or sale by respondent and his wife of their shares in the
corporation only 22 days after the incorporation of the corporation, indicates that respondent realized
that early that their interest in the corporation contravenes the aforesaid Canon 25. Respondent
Judge and his wife therefore deserve the commendation for their immediate withdrawal from the firm
after its incorporation and before it became involved in any court litigation
III
With respect to the third and fourth causes of action, complainant alleged that respondent was guilty
of coddling an impostor and acted in disregard of judicial decorum, and that there was culpable
defiance of the law and utter disregard for ethics. WE agree, however, with the recommendation of
the Investigating Justice that respondent Judge be exonerated because the aforesaid causes of
action are groundless, and WE quote the pertinent portion of her report which reads as follows:
The basis for complainant's third cause of action is the claim that respondent
associated and closely fraternized with Dominador Arigpa Tan who openly and
publicly advertised himself as a practising attorney (see Exhs. I, I-1 and J) when in
truth and in fact said Dominador Arigpa Tan does not appear in the Roll of Attorneys
and is not a member of the Philippine Bar as certified to in Exh. K.

257
The "respondent denies knowing that Dominador Arigpa Tan was an "impostor" and
claims that all the time he believed that the latter was a bona fide member of the bar.
I see no reason for disbelieving this assertion of respondent. It has been shown by
complainant that Dominador Arigpa Tan represented himself publicly as an attorneyat-law to the extent of putting up a signboard with his name and the words "Attorneyat Law" (Exh. I and 1- 1) to indicate his office, and it was but natural for respondent
and any person for that matter to have accepted that statement on its face value.
"Now with respect to the allegation of complainant that respondent is guilty of
fraternizing with Dominador Arigpa Tan to the extent of permitting his wife to be a
godmother of Mr. Tan's child at baptism (Exh. M & M-1), that fact even if true did not
render respondent guilty of violating any canon of judicial ethics as long as his
friendly relations with Dominador A. Tan and family did not influence his official
actuations as a judge where said persons were concerned. There is no tangible
convincing proof that herein respondent gave any undue privileges in his court to
Dominador Arigpa Tan or that the latter benefitted in his practice of law from his
personal relations with respondent, or that he used his influence, if he had any, on
the Judges of the other branches of the Court to favor said Dominador Tan.
Of course it is highly desirable for a member of the judiciary to refrain as much as
possible from maintaining close friendly relations with practising attorneys and
litigants in his court so as to avoid suspicion 'that his social or business relations or
friendship constitute an element in determining his judicial course" (par. 30, Canons
of Judicial Ethics), but if a Judge does have social relations, that in itself would not
constitute a ground for disciplinary action unless it be clearly shown that his social
relations be clouded his official actuations with bias and partiality in favor of his
friends (pp. 403-405, rec.).
In conclusion, while respondent Judge Asuncion, now Associate Justice of the Court of Appeals, did
not violate any law in acquiring by purchase a parcel of land which was in litigation in his court and in
engaging in business by joining a private corporation during his incumbency as judge of the Court of
First Instance of Leyte, he should be reminded to be more discreet in his private and business
activities, because his conduct as a member of the Judiciary must not only be characterized with
propriety but must always be above suspicion.
WHEREFORE, THE RESPONDENT ASSOCIATE JUSTICE OF THE COURT OF APPEALS IS
HEREBY REMINDED TO BE MORE DISCREET IN HIS PRIVATE AND BUSINESS ACTIVITIES.
SO ORDERED.

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R.
CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate
Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the
15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional
Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the
petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho
Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent,
Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R.
Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent as
follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a
contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2).
To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No.
DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president,
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To

258
enable the defendant-appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is

ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

At the back of the trust receipt is a printed form to be accomplished by two sureties
who, by the very terms and conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail to pay the total amount or
any portion of the drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile machineries and installed
the same at its factory site at 69 Obudan Street, Quezon City.

SO ORDERED. 3

Sometime in 1967, the defendant-appellant ceased business operation (sic). On

December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton
Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the
textile machineries in the defendant-appellant's factory were sold to AIC
Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V,
and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount of P956,384.95
was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In
their respective answers, the defendants interposed identical special defenses, viz.,
the complaint states no cause of action; if there is, the same has prescribed; and the
plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine
Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974
until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same
not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause
of action thereon has not accrued, hence, the instant case is premature.

With costs against defendant Philippine Rayon Mills, Inc.

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to
reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a)
disregarding its right to reimbursement from the private respondents for the entire unpaid balance of
the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby
violating the principle of the third party payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing
to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of
P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt
(Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty
at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor
of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple
guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence
which provide that such liability had already attached; (f) contravening the judicial admissions of
Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts
(Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine
Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and last
assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and there is a clear showing that the
payment is justified. In the instant case, the relationship existing between the petitioner and Philippine
Rayon is governed by specific contracts, namely the application for letters of credit, the promissory
note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11")
which had not been presented to and were not accepted by Philippine Rayon, petitioner was not
justified in unilaterally paying the amounts stated therein. The public respondent did not agree with
the petitioner's claim that the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior
acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand
for payment can be made.

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Public respondent also disagreed with the petitioner's contention that private respondent Chi is
solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his
signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches
only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the
trust receipt made the latter automatically liable thereon because the so-called solidary guaranty
clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two
(2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not
acknowledged before a notary public. Besides, even granting that it was executed and acknowledged
before a notary public, Chi cannot be held liable therefor because the records fail to show that
petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal
remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054
of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's
liability would therefore arise only when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its Resolution of
11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal
issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY
ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT
AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER
MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT
UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER
THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE
TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR;
AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF
RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE
PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE

PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS
RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM
RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the
Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner;
both parties were also required to submit their respective memoranda which they subsequently
complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the latter situation,
whether the case should have been dismissed on the ground of lack
of cause of action as there was no prior exhaustion of Philippine
Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the
two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter
after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive)
did not arise because the same were not presented for acceptance. In short, both courts concluded
that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon.
We are unable to agree with this proposition. The transaction in the case at bar stemmed from
Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and import loom and textile machinery from

260
Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
application. As correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit,
plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit
from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay
plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against
said plaintiff bank together with any accruing commercial charges, interest, etc.
pursuant to the terms and conditions stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the request of a
customer that the issuer will honor drafts or other demands for payment upon compliance with the
conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant
case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. Presentment for
acceptance must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than
at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any

party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument.

15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts.
Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable
upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time
within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1)
were duly accepted as indicated on their face (sic), and upon such acceptance
should have been paid forthwith. These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on demand
(a) When so it is expressed to be payable on
demand, or at sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards
the person so issuing, accepting, or indorsing it, payable on demand. (emphasis
supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any
accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued were sight drafts
And even if these were not sight drafts, thereby necessitating acceptance, it would be the

261
petitioner and not Philippine Rayon which had to accept the same for the latter was not
the drawee. Presentment for acceptance is defined an the production of a bill of exchange to
a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in
ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's
liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof. Such is the essence of
the letter of credit issued by the petitioner. A different conclusion would violate the principle
upon which commercial letters of credit are founded because in such a case, both the
beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be
placed at the mercy of Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of
credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt
by a purchaser of the merchandise, during which interval great price changes may
occur. Buyers and sellers struggle for the advantage of position. The seller is
desirous of being paid as surely and as soon as possible, realizing that the vendee at
a distant point has it in his power to reject on trivial grounds merchandise on arrival,
and cause considerable hardship to the shipper. Letters of credit meet this condition
by affording celerity and certainty of payment. Their purpose is to insure to a seller
payment of a definite amount upon presentation of documents. The bank deals only
with documents. It has nothing to do with the quality of the merchandise. Disputes as
to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the issuing
bank when the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not
holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the
nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and thereby
lends the aid of capital, of credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the fundamental factor in
the transaction, the banker's advance of money and credit, should receive the
amplest protection. Accordingly, in order to secure that the banker shall be repaid at
the critical point that is, when the imported goods finally reach the hands of the

intended vendee the banker takes the full title to the goods at the very beginning;
he takes it as soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that title as his
indispensable security until the goods are sold in the United States and the vendee is
called upon to pay for them. This security is not an ordinary pledge by the importer to
the banker, for the importer has never owned the goods, and moreover he is not able
to deliver the possession; but the security is the complete title vested originally in the
bankers, and this characteristic of the transaction has again and again been
recognized and protected by the courts. Of course, the title is at bottom a security
title, as it has sometimes been called, and the banker is always under the obligation
to reconvey; but only after his advances have been fully repaid and after the importer
has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided
by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner thereof or in the person who has
advanced payment, until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or
by his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January
1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in
this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby
the entruster, who owns or holds absolute title or security interests' over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document called the "trust receipt" wherein the
entrustee binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation
to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or
for other purposes substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said machinery
to good use and have profited by its operation and/or disposition but very recent information that (sic)

262
reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and
therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for
the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale
or other disposition of the same that they may have made, notwithstanding demands therefor;
defendants have fraudulently misapplied or converted to their own use any money realized from the
lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by
the trust receipt, such relief is covered by the general prayer for "such further and other relief as may
be just and equitable on the premises."24 And although it is true that the petitioner commenced a
criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from
enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of
the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appear in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct
from the criminal action, may be brought by the injured party in cases of defamation, fraud and
physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the public
respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not
bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt,
which petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with
the foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or nonfulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.)
Anacleto
Chi
ANACLE
R. CHI 26
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we
jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's
liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1",
will make it an actionable document. It should be noted that Exhibit "C-1" was
prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it
was to be signed and executed by two persons. It was signed only by defendantappellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in
that capacity. The last sentence of the guaranty clause is incomplete. Furthermore,
the plaintiff-appellant also failed to have the purported guarantee clause
acknowledged before a notary public. All these show that the alleged guaranty
provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had neither exhausted the
property of the defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and
subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor fails to comply with his
obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the
obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space

263
therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be
held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had
signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the
two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one hand and the petitioner on the other with
respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible
as between them, i.e., it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited
to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be
strictly construed against the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause
was effectively disregarded simply because it was not signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony
or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The
attestation by witnesses and the acknowledgement before a notary public are not required by law to
make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form
they may have been entered into, provided all the essential requisites for their validity are present;
however, when the law requires that a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of
another, the law merely requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before
a notary public is required to make the same a public document, under Article 1358 of the Civil Code,
a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi,
namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims
that because of the said criminal proceedings, Chi would be answerable for the civil liability arising
therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such
civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the
civil liability arising from the criminal offense." Both are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which provides for the
correct solution. It is clear that if the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense. The penalty referred to is
imprisonment, the duration of which would depend on the amount of the fraud as provided for in
Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these entities which are
made liable for the civil liability arising from the criminal offense. This is the import of the clause
"without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier,
since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was
acting well within its rights in filing an independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against private
respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof,
on the theory that Chi is not liable on the trust receipt in any capacity either as surety or as
guarantor because his signature at the dorsal portion thereof was useless; and even if he could be
bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code,

264
be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on
Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he shall only be liable for those costs
incurred after being judicially required to pay. 36 Interest and damages, being accessories of the
principal obligation, should also be paid; these, however, shall run only from the date of the filing of
the complaint. Attorney's fees may even be allowed in appropriate cases. 37

Simply stated, there is as yet no cause of action against Chi.

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by
Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent
of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as
attorney's fees in favor of the petitioner.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action
against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against
private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

4. Although an ordinary personal guarantor not a mortgagor or pledgor may

demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent Chi as a codefendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of
the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the
petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733
and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in
Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby
entered:

Sec. 6. Permissive joinder of parties. All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of
transactions is alleged to exist, whether jointly, severally, or in the alternative, may,
except as otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to all such
plaintiffs or to all such defendants may arise in the action; but the court may make
such orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in which he may
have no interest.

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on

the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive)
and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner:
(a) the amounts due thereon in the total sum of P956,384.95 as of 15
September 1974, with interest thereon at six percent (6%) per
annum from 16 September 1974 until it is fully paid, less whatever
may have been applied thereto by virtue of foreclosure of mortgages,
if any; (b) a sum equal to ten percent (10%) of the aforesaid amount
as attorney's fees; and (c) the costs.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to
permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It
will save the parties unnecessary work, trouble and expense. 35

2. Declaring private respondent Anacleto R. Chi secondarily liable on

the trust receipt and ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the date of the filing of
the complaint in Civil Case No. Q-19312 until the same is fully paid

265
as well as the costs and attorney's fees in the sum of P10,000.00 if
the writ of execution for the enforcement of the above awards
against Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO,
JOHN DOE AND JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as
adversaries in seeking a definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an
Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch,
for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover
the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private
respondent Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and
transmitting, along with the bank's communication,

the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty.
Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo
Dueas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was
no need for confirmation because the letter of credit would not have been transmitted if it were not
genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of
credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of
polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list,
export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of
Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage
and mail issuance." 1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina
Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment
under the letter of credit and sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second
availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export
declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a
telex from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept
Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of
the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to
Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also investigated Inter-Resin's President
Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally
charged for estafa through falsification of commercial documents. The case, however, was eventually
dismissed by the Rizal Provincial Fiscal who found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft
for US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the other hand,
Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also
to the balance US$1,461,400.00 covering the second shipment.

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On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand;
(b) the telex declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay,
but even assuming that the letter of credit was fake, "the fault should be borne by the BA which was
careless and negligent" 5 for failing to utilize its modern means of communication to verify with Bank
of Ayudhya in Thailand the authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict supervision, inspection and
verification of government officers who have in their favor the presumption of regularity in the
performance of official functions; and (d) Bank of America failed to prove the participation of InterResin or its employees in the alleged fraud as, in fact, the complaint for estafa through falsification of
documents was dismissed by the Provincial Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner
Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the genuineness
and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank
or as a confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by the letter
of credit; and (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of
America may recover against Inter-Resin under the draft executed in its partial availment of the letter
of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of
being only an advising bank; (b) the findings of the trial court that the ropes have actually been
shipped is binding on the Court; and, (c) Bank of America cannot recover from Inter-Resin because
the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into the mess, it may be well to
start by recalling how, in its modern use, a letter of credit is employed in trade transactions.

A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods
before paying. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter
of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize
the seller to draw drafts and engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit. 10 The buyer and the seller agree on what
documents are to be presented for payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the
required shipping documents or documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires. The bank then obtains possession of the documents upon paying
the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers
the documents of title over the goods, while the buyer acquires said documents and control over the
goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of
any breach of the main sales contract. By this so-called "independence principle," the bank
determines compliance with the letter of credit only by examining the shipping documents presented;
it is precluded from determining whether the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the
letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper document of
titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who in
compliance with the contract of sale ships the goods to the buyer and delivers the documents of title
and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in international trade practice, may
be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of
credit issued by a lesser known issuing bank; or, of apaying bank, 17 which undertakes to encash the

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drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft
discounted.
Being a product of international commerce, the impact of this commercial instrument transcends
national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately
provide for its governance. This country is no exception. Our own Code of Commerce basically
introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great
reliance has been placed on commercial usage and practice, which, in any case, can be justified by
the universal acceptance of the autonomy of contract rules. The rules were later developed into what
is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the
International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there
are other principles, which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed. We have further observed that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of credit not only between or
among banks themselves but also between banks and the seller or the buyer, as the case may be,
the applicability of the U.C.P. is undeniable.

obligations of the parties, the interests of justice dictate that the court should consider and resolve
them. The rule that only issues or theories raised in the initial proceedings may be taken up by a party
thereto on appeal should only refer to independent, not concomitant matters, to support or oppose the
cause of action or defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is
in reality not existent on matters that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions
of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising
fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked
Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds
thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter
of credit is to be drawn under the account of General Chemicals (buyer) only means the same had to
be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the
letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he
enclosure issolely an advise of credit opened by the abovementioned correspondent and conveys no
engagement by us." 24This written reservation by Bank of America in limiting its obligation only to
being an advising bank is in consonance with the provisions of U.C.P.

The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is
outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on
appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of
credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is
dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22

As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying
Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare
statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay,
Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect
of novating the letter of credit and Bank of America's letter of advise, 26 nor can it justify the conclusion
that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot
claim to have been all that free from fault. As the seller, the issuance of the letter of credit should have
obviously been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the
letter of credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In the
ordinary course of business, the perfection of contract precedes the issuance of a letter of credit.

In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life Assurance Co.,
Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance and close relation to the former and as long as
they arise from the matters on record, the court has the authority to include them in its discussion of
the controversy and to pass upon them just as well. In brief, in those cases where questions not
particularly raised by the parties surface as necessary for the complete adjudication of the rights and

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising
bank. The view that Bank of America should have first checked the authenticity of the letter of credit
with bank of Ayudhya, by using advanced mode of business communications, before dispatching the
same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume
no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any
messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of

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any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent
authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New
Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance to unaided senses
that is not or may not be borne out by more rigorous examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of credit when the corresponding
draft for partial availment thereunder and the required documents were later negotiated with it by
Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted independently as a negotiating bank,
thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other banks with which to negotiate the
draft and the documents.) As a negotiating bank, Bank of America has a right to recourse against the
issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to
assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that might have
likewise warranted the application of the Negotiable Instruments Law and possible then allowed it to
even go after the indorsers of the draft, this failure, 32/ nonetheless, does not preclude petitioner
bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having
received P10,219,093.20 from bank of America on the letter of credit and in having executed the
corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right of
reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek
indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya
disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship existing
between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the
credit are indicated to be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the negotiating bank may be one and
the same does not affect its rights and obligations in either capacity, although a
special agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products,
is really of no consequence. In the operation of a letter of credit, the involved banks deal only with
documents and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did
issue the letter of credit and whether or not the main contract of sale that has given rise to the letter of
credit has been breached, are not relevant to this controversy. They are matters, instead, that can
only be of concern to the herein parties in an appropriate recourse against those, who, unfortunately,
are not impleaded in these proceedings.
In fine, we hold that
First, given the factual findings of the courts below, we conclude that petitioner Bank of America has
acted merely as a notifying bank and did not assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment
as beneficiary of the letter of credit which has been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified
parties, can be made, in this instance, there being no sufficient evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the filing of the complaint until fully paid.
No costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.

# Footnotes
1 Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati,
p. 15.
2 The Bank of Ayudhya expressed impossibility of availment against the abovementioned letter of credit because the same had been issued, for the account of
Siam Union Metal L.P. (not General Chemicals of Thailand), for a different amount

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covering "zinc highgrade," and in favor of Electrolytic Zinc Co. of Australasia Ltd. (not
Inter-Resin) (Exh. "Q", Record, p. 27).
3 The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America,
Manila, stated that General Chemicals of Thailand received the bill of lading but
denied having ordered them. However, Bank of America, Bangkok, doubted that it
could hold the merchandise in favor of Bank of America, Manila, as it did not have the
documents (Exhs. "R" and "R-1," Record, pp. 28-29).
4 The dispositive portion reads : "WHEREFORE, in view of the foregoing, judgment is
hereby rendered as follows: 1. ordering the dismissal of the complaint for lack of
merit; 2. defendant's counterclaim with the Court found to be tenable and meritorious;
3. plaintiff BA is hereby ordered to pay the defendants the Peso equivalent of
US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4.
plaintiff is hereby ordered to pay the defendants attorney's fees in the amount of
P30,000.00; 5. ordering the dissolution and lifting of the attachment issued by the
Court against defendants' properties' and 6. with costs against plaintiff" (Decision in
Civil case No. 41021, p. 209).
5 Decision in Civil Case No. 41021, p. 21.
6 Decision in Civil Case No. 41021, pp. 23-24.
7 CA-G.R. CV No. 24236, prom. 28 January 1992; Lapea, Jr., ponente, Guingona
and Santiago, concurring.
8 Petition, pp. 13-14.
9 See extensive discussions in William S. Shaterian Export-Import Banking: The
Instruments and Operations Utilized by American Exporters and Importers and their
Banks in Financing Foreign Trade (The Ronal Press Company: New York, 1947, pp.
284-374), James J. White and Robert S. Summers (eds) Uniform Commercial Code
(West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William
J. Davey Legal Problems of International Economic Relations: Cases, Materials and
Text on the National and International Economic Relations, 2nd Ed. (West Publishing
Co., St. Paul, pp. 52-63).

10 Article 10 of the U.C.P. defines an irrevocable letter of credit as one that

"constitutes a definite undertaking of the issuing bank, provided that the stipulated
documents are presented and that the terms and conditions of the credit are
complied with: i. if the credit provides for sight payment to pay, or that payment will
be made; ii. if the credit provides for deferred payment to pay, or that payment will
be made, on the date(s) determinable in accordance with the stipulations of the
credit; iii. if the credit provides for acceptance to accept drafts drawn by the
beneficiary if he credit stipulates that they are to be drawn on the issuing bank, or to
be responsible for their acceptance and payment at maturity if the credit stipulates
that they are to be drawn on the applicant for the credit or any other drawee
stipulated in the credit; iv. if the credit provides for negotiation to pay without
recourse to drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at
sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in
the credit other than the issuing bank itself, or to provide for negotiation by another
bank and to pay, as above, if such negotiation is not effected.
11 Article 17 of the U.C.P. states: "Banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents
or superimposed thereon; nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence
of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever."
According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the
transaction between the bank and the beneficiary as a "paper transaction." By that
they mean the bank issuer's agent should be able to sit with a necktie and a white
shirt at a desk in a bank and by looking at papers that are presented to him
determine whether the bank is obliged to make payment or not. He is not obligated
and, indeed, is foreclosed from donning his overalls and going into the field to
determine whether the underlying contract has been performed. This is the principal
reason why careful courts and lawyers state that the letter of credit is not a
guarantee. In a typical guarantee the guarantor will are to make payments if, and
openly if, the customer has failed to fulfill his obligation on the underlying contract. If
his obligation has been avoided because of the acts of the beneficiary, typically there
would be no obligation to guarantee and thus no duty on the guarantor to pay. Letters
of credit are different, and they are explicitly and consciously designed to be different

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in this respect. In effect, the beneficiary under a letter of credit has bargained for the
right to be paid and thus often to be the defendant instead of the plaintiff in the
ensuing litigation on the underlying contract, to be sued at home instead of being a
plaintiff abroad . . . ."
12 "The buyer of the merchandise, who is also the buyer of the credit instrument, is
the party who initiates the operation. His contract is with the bank which is to issue
the instrument and is represented by the Commercial Credit of Agreement form which
he signs, supported by a mutually made promises contained in the Agreement"
(Shaterian, op. cit. pp. 291-292).
13 "The Opening Bank, usually the buyer's bank, is the bank which actually issues
the instrument. It is also known as the Issuing Bank. The selection of the opening
bank is important. It should be a strong bank, well known and well regarded in
international trading circles. This is the reason . . . smaller banks do not attempt to
issue their own commercial credit instruments but take advantage of the facilities
of . . . much larger, stronger, and better known correspondent banks . . . The purpose
of commercial credit may not be readily accomplished unless the opening bank is
well known and well regarded" (Shaterian, op. cit., p. 292).
14 "The seller of the merchandise is called the Beneficiary of the credit instrument.
The instrument is addressed to him and in his favor. It is a written contract of the
bank which cannot compel the beneficiary to ship and avail himself of the benefits of
the instrument, the seller may recover from the bank the value of his shipment if
made within the terms of the instrument, even though he has not given the bank any
direct consideration for the bank's promises contained in the instrument. By a stretch
of imagination, as in order to support the instrument as a two-sided contract,
supported by mutually given considerations, the courts seem to hold that the
commission paid or to be paid by the buyer of the bank is also the consideration
flowing from the seller to the bank" (Shaterian, op. cit., p. 292).
15 "Whenever the instrument is not delivered to the buyer and by him mailed to the
beneficiary, the opening bank will advise the existence of the credit to the beneficiary
through its corresponding bank operating in the same locality as the seller. Such
correspondent bank becomes the Notifying Bank. The services of a notifying bank
must always be utilized if the credit is to be advised to the beneficiary by cable . . ."
(Shaterian, op. cit., p. 292).

16 "Whenever the beneficiary stipulates that the obligation of the opening bank shall
be also made the obligation of a bank himself, we have what is known as the a
confirmed commercial credit and the bank local to the beneficiary becomes the
Confirming Bank. In view of the fact that commercial credits issued by American
banks in favor of foreign sellers are invariably issued only by . . . larger well known
banks, no seller requests that they be confirmed by another bank. The standing of
the . . . opening bank is good enough. But many foreign banks are not particularly
strong or well known, compared with . . . banks issuing these credit instruments.
Indeed, many banks operating abroad are only known through the Banker's Almanac.
They serve a useful purpose in their own small communities and perhaps maintain
dollars account with the larger . . . banks. But their names are quite meaningless to
the . . . . exporter, and when the foreign buyer offers to his . . . seller a credit
instrument issued by such a bank, the seller may not receive the protection and other
facilities which an instrument issued by a large, strong, and well known bank will give
him. To overcome this, he requests that the credit as issued by the local bank of the
foreign buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . .
bank with which the local bank of the buyer carries a dollar account. The liability of
the confirming bank is a primary one and is not contingent in any sense of the word.
It is as if the credit were issued by the opening and confirming banks jointly, thus
giving the beneficiary or a holder for value of drafts drawn under the credit, the right
to proceed against either or both banks, the moment the credit instrument has been
breached. The confirming bank receives a commission for its confirmation from the
opening bank which the opening bank, in turn, passes on to the buyer of the
merchandise" (Shaterian, op. cit., pp. 294-295).
17 "The Paying Bank is the bank on which the drafts are to be drawn. It may be the
opening bank, it may be a bank other than the opening bank and not inn the city of
the beneficiary, or it may be a bank in the city of the beneficiary, usually the advising
bank. If the beneficiary is to draw and receive payment in his own currency, the
notifying bank will be indicated as the paying bank also. When the draft is to be paid
in this manner, the paying bank assumes no responsibility but merely pays the
beneficiary and debits the payment immediately to the account which the opening
bank has with it. If the opening bank maintains no account with the paying bank, the
paying bank reimburses itself by drawing a bill of exchange on the opening bank, in
dollars, for the equivalent of the local currency paid to the beneficiary, at its buying
rate for dollar exchange. The beneficiary is entirely out of the transaction because his
draft is completely discharged by payment, and the credit arrangement between the
paying bank and the opening bank does not concern him" (Shaterian, op. cit., pp.
293-294).

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18 "If the draft contemplated by the credit instrument is to be drawn on the opening
bank or on another designated bank not in the city of the seller, any bank in the city of
the seller which buys or discounts the draft of the beneficiary becomes a Negotiating
Bank. As a rule, whenever the facilities of a notifying bank are used, the beneficiary is
apt to offer his drafts to the notifying bank for negotiation, thus giving the notifying
bank the character of a negotiating bank also. By negotiating the beneficiary's drafts,
the negotiating bank becomes "an endorser and bona fide holder" of the drafts and
within the protection of the credit instrument. It is also protected by the drawer's a
signature, as the drawer's contingent liability, as drawer, continues until discharged
by the actual payment of the bills of exchange" (Shaterian, op. cit., p. 293).

23 76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198
SCRA 300; Macenas vs. Court of Appeals, 180 SCRA 83; Sociedad Europea de
Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. vs. Lianga
Timber Co., Inc. 76 SCRA 223.
24 Exh. "C," Records, p. 17.
25 "The banks involved charge a modest commission for their various services. The
higher the risk that the bank assumes, the higher the commission (e.g., to confirm an
L/C is riskier than merely transmitting an advise of credit) (Jackson and
Davey, op. cit., p. 53).

19 G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576.

20 "The Uniform Customs and Practices for documentary credits were first published
in 1933. The current version was adopted by the International Chamber of
Commerce Council in 1983 and published as Publication No. 400 in July of that year.
This current version has the blessing of the United Nations Commission on
International Trade Law (UNCITRAL). The Uniform Customs and Practices are not
'law' because of the act of any legislature or court, but because they have been
explicitly and implicitly made part of the contract of letters of credit. . . . [M]any of the
letters of credit in the United States are governed by the Uniform Custom and
Practices and not by the UCC (Uniform Commercial Code) . . .
"In general, the UCP is much more detailed than the UCC. It clearly shows the tracks
of many bankers and bank lawyers walking back and forth across its surface . . .
"Every lawyer who deals at any time with a letter of credit should have read the
UVCP at least once. The lawyer who deals routinely with such letters or who advises
a bank or beneficiary in a circumstance where litigation is threatened or commenced
should look more closely at the UCP." (White and Summers, op. cit., pp. 881-883).
21 No. L-24821, 16 October 1970; 35 SCRA 256.
22 See Feati Bank vs. Court of Appeals, 196 SCRA 576.

26 See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special
power of attorney is required "[T]o bind the principal to render some service without
compensation" and "[T]o obligate the principal as a guarantor or surety." Art. 1887
states that "the agent shall act in accordance with the instructions of the principal".
Moreover, Art. 1888 enjoins the agent from carrying out "an agency if its execution
would manifestly result in loss or damage to the principal."
27 In fact, Inter-Resin's pro forma invoice (Exh. "A") sent to General Chemicals, on
the basis of which the letter of credit was apparently issued, demanded for a
confirmed and irrevocable letter of credit.
28 The suspicion that no contract of sale was perfected between Inter-Resin and
General Chemicals may find support in the absence of a written memorandum of the
sale or any other document showing that General Chemicals ordered the goods, and
the Comment of Inter-Resin detailing the material events of this case but,
surprisingly, failed to categorically state or show that such contract was consented to
by the parties.
29 Article 8 of U.C.P. states : "A credit may be advised to a beneficiary through
another bank (the advising bank) without engagement on the part of the advising
bank, but that bank shall take reasonable care to check the apparent authenticity of
the credit which it advises. (Revised 1983, ICC No. 400; reproduced in Jackson and
Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination.
30 1983 ed., p. 96.

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31 See Shaterian, op. cit., p. 293.
32 In this respect, its belated theory before us and its motion for reconsideration of
the assailed decision should be rejected for being iniquitous under the
circumstances. In fact, Bank of America has failed to present the draft and, more
substantially, Inter-Resin has not been afforded full opportunity to refute by evidence
this new argument of Bank of America. In short, we find the records insufficient to
arrive at a just determination on this fact that can allow us to apply the Negotiable
Instruments Law thereon.

". . . Because of this credit should describe the goods in general terms only and the
buyer should trust that the seller will ship the exact merchandise ordered. If the buyer
is not satisfied with the moral standing of the seller, he should not open the credit but
buy on open account basis, or subject the draft terms with the additional requirement
that the draft need not be paid until after the buyer has had an opportunity to examine
the gods to make sure that he has received exactly what he ordered"
(Shaterian, op. cit., pp. 352-354).

33 Philip W. Thayer, "Irrevocable Credits on International Commerce: Their Legal

Effects," Columbia Law Review (1937), vol. 37, pp. 1357-1358.
34 "Both in the application form for import credits and in the regulations governing
our export credits, it is definitely provided that the banks involved shall not be made
responsible for the genuineness of the documents submitted under commercial
credits. If the buyer of merchandise has sufficient confidence in the integrity of the
seller against shipping documents to be tendered to the bank by the seller, as
provided by the credit instrument, it follows that the same confidence should extend
to the tendering of genuine documents. If the seller is dishonest, he need not attempt
to defraud the buyer by the tender of forged documents. he can obtain the desired
evil end with less opportunity for prompt detection by shipping inferior goods or no
goods at all. The carrier does not pry into the cases and packages to make sure that
the merchandise is, in fact, as described in the bill of lading and invoices which are
prepared by the shipper. The tender of forged documents for the purpose of obtaining
money is a crime and the seller who commits such crime is prosecuted and jailed.
". . . Neither can the interested banks assume responsibility for the character or
quality of the goods shipped nor for the terms of the sale contract not incorporated
and made part of the credit instrument. How could they? While the parties to the sale
contract may be experts as to the involved merchandise the banks are not, generally
speaking, sufficiently versed in the fine points of each and every class of
merchandise which they finance. Even assuming the bank has men in its employ who
can qualify as experts in certain lines of merchandising, it would not wish to extend
this sort of service without adequate compensation but such service is not a banking
function.

KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF APPEALS; REGIONAL
TRIAL COURT OF MANILA, BR. 21; and SEA-LAND SERVICE, INC., respondents.
DECISION

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PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a
consignee? Will an alleged overshipment justify the consignees refusal to receive the goods
described in the bill of lading? When may interest be computed on unpaid demurrage charges?

Statement of the Case

These are the main questions raised in this petition assailing the Decision [1] of the Court of
Appeals[2] promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the
decision[3] dated September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of
Manila, Branch 21. The dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its
cause of action and right to relief. Accordingly, judgment is hereby rendered in favor of the
Plaintiff and against Defendant, ordering the Defendant to pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the
extrajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorneys fees and litigation
expenses.
Send copy to respective counsel of the parties.
SO ORDERED.[4]

The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed
to do business in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong
terminal a sealed container, Container No. SEAU 67523, containing seventy-six bales of
unsorted waste paper for shipment to defendant (herein petitioner), Keng Hua Paper
Products, Co. in Manila. A bill of lading (Exh. A) to cover the shipment was issued by the
plaintiff.

On July 9, 1982, the shipment was discharged at the Manila International Container
Port. Notices of arrival were transmitted to the defendant but the latter failed to discharge
the shipment from the container during the free time period or grace period. The said
shipment remained inside the plaintiffs container from the moment the free time period
expired on July 29, 1982 until the time when the shipment was unloaded from the container
on November 22, 1983, or a total of four hundred eighty-one (481) days. During the 481day period, demurrage charges accrued. Within the same period, letters demanding
payment were sent by the plaintiff to the defendant who, however, refused to settle its
obligation which eventually amounted to P67,340.00. Numerous demands were made on
the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil
action for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it
purchased fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste
Paper, as manifested in Letter of Credit No. 824858 (Exh. 7. p. 110. Original Record)
issued by Equitable Banking Corporation, with partial shipment permitted; that under
the letter of credit, the remaining balance of the shipment was only ten (10) metric tons as
shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment plaintiff
was asking defendant to accept was twenty (20) metric tons which is ten (10) metric tons
more than the remaining balance; that if defendant were to accept the shipment, it would be
violating Central Bank rules and regulations and custom and tariff laws; that plaintiff had no
cause of action against the defendant because the latter did not hire the former to carry the
merchandise; that the cause of action should be against the shipper which contracted the
plaintiffs services and not against defendant; and that the defendant duly notified the
plaintiff about the wrong shipment through a letter dated January 24, 1983 (Exh. D for
plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for demurrage, attorneys fees and
expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court
erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting petitioners
contention that there was overshipment, (3) ruling that petitioners recourse was against the
shipper, and (4) computing legal interest from date of extrajudicial demand. [5]
Respondent Court of Appeals denied the appeal and affirmed the lower courts decision in toto. In
a subsequent resolution,[6] it also denied the petitioners motion for reconsideration.
Hence, this petition for review.[7]

The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;

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II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
III. Whether or not petitioner was correct in not accepting the overshipment;
IV. Whether or not the award of legal interest from the date of private respondents extrajudicial
demand was proper;[8]
In the main, the case revolves around the question of whether petitioner was bound by the bill of
lading. We shall, thus, discuss the above four issues as they intertwine with this main question.

The Courts Ruling

The petition is partly meritorious. We affirm petitioners liability for demurrage, but modify the
interest rate thereon.

Main Issue: Liability Under the Bill of Lading

A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake specific
responsibilities and assume stipulated obligations.[9] A bill of lading delivered and accepted constitutes
the contract of carriage even though not signed, [10] because the (a)cceptance of a
paper containing the terms of a proposed contract generally constitutes an acceptance of the contract
and of all of its terms and conditions of which the acceptor has actual or constructive notice. [11] In a
nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its
contents, gives rise to the presumption that the same was a perfected and binding contract. [12]
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract
between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private
Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee
were liable for the payment of demurrage charges for the failure to discharge the containerized
shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower courts
found petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the
carrier and ship and hold them harmless against, and the carrier shall have a lien on the
goods for, all expenses and charges for mending cooperage, baling, repairing or
reconditioning the goods, or the van, trailers or containers, and all expenses incurred in
protecting, caring for or otherwise made for the benefit of the goods, whether the goods be
damaged or not, and for any payment, expense, penalty fine, dues, duty, tax or impost,
loss, damage, detention,demurrage, or liability of whatsoever nature, sustained or incurred

by or levied upon the carrier or the ship in connection with the goods or by reason of the
goods being or having been on board, or because of shippers failure to procure consular or
other proper permits, certificates or any papers that may be required at any port or place or
shippers failure to supply information or otherwise to comply with all laws, regulations and
requirements of law in connection with the goods of from any other act or omission of the
shipper or consignee:(Underscoring supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never
gave its consent thereto. Although petitioner admits physical acceptance of the bill of lading, it argues
that its subsequent actions belie the finding that it accepted the terms and conditions printed therein.
[13]
Petitioner cites as support the Notice of Refused or On Hand Freight it received on November 2,
1982 from private respondent, which acknowledged that petitioner declined to accept the
shipment. Petitioner adds that it sent a copy of the said notice to the shipper on December 29,
1982. Petitioner points to its January 24, 1983 letter to the private respondent, stressing that its
acceptance of the bill of lading would be tantamount to an act of smuggling as the amount it had
imported (with full documentary support) was only (at that time) for 10,000 kilograms and not for
20,313 kilograms as stated in the bill of lading and could lay them vulnerable to legal sanctions for
violation of customs and tariff as well as Central Bank laws. [14] Petitioner further argues that the
demurrage was a consequence of the shippers mistake of shipping more than what was bought.The
discrepancy in the amount of waste paper it actually purchased, as reflected in the invoice vis--vis the
excess amount in the bill of lading, allegedly justifies its refusal to accept the shipment. [15]

Petitioner Bound by the Bill of Lading

We are not persuaded. Petitioner admits that it received the bill of lading immediately after the
arrival of the shipment[16] on July 8, 1982.[17] Having been afforded an opportunity to examine the said
document, petitioner did not immediately object to or dissent from any term or stipulation therein. It
was only six months later, on January 24, 1983, that petitioner sent a letter to private respondent
saying that it could not accept the shipment. Petitioners inaction for such a long period conveys the
clear inference that it accepted the terms and conditions of the bill of lading.Moreover, said letter
spoke only of petitioners inability to use the delivery permit, i.e. to pick up the cargo, due to the
shippers failure to comply with the terms and conditions of the letter of credit,for which reason the bill
of lading and other shipping documents were returned by the banks to the shipper. [18] The letter
merely proved petitioners refusal to pick up the cargo, not its rejection of the bill of lading.
Petitioners reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance
of the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by
private respondent to petitioner in November 1982, or four months after petitioner received the bill of
lading. If the notice has any legal significance at all, it is to highlight petitioners prolonged failure to
object to the bill of lading. Contrary to petitioners contention, the notice and the letter support not belie
the findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:

275
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of
the bill of lading from the shipper. Hence, the terms and conditions as well as the various
entries contained therein were brought to its knowledge. (Herein petitioner) accepted the
bill of lading without interposing any objection as to its contents. This raises the
presumption that (herein petitioner) agreed to the entries and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be
exact, before notifying (herein private respondent) of the wrong shipment. It was only on
January 24, 1983 that (herein petitioner) sent (herein private respondent) such a letter of
notification (Exh D for plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the
duration of those six months (herein private respondent never knew the reason for (herein
petitioners) refusal to discharge the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object
thereto, (herein petitioner) cannot now deny that it is bound by the terms in the bill of
lading. If it did not intend to be bound, (herein petitioner) would not have waited for six
months to lapse before finally bringing the matter to (herein private respondents
attention. The most logical reaction in such a case would be to immediately verify the
matter with the other parties involved. In this case, however, (herein petitioner)
unreasonably detained (herein private respondents) vessel to the latters prejudice. [19]
Petitioners attempt to evade its obligation to receive the shipment on the pretext that this may cause it
to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of violating said
laws, without a clear demonstration that taking delivery of the shipment has become legally
impossible,[20] cannot defeat the petitioners contractual obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first
time only in petitioners memorandum before this Court. Clearly, we cannot now entertain an issue
raised for the very first time on appeal, in deference to the well-settled doctrine that (a)n issue raised
for the first time on appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. [21]
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the
private respondents vessel constitutes a violation of the terms of the bill of lading. It should thus be
liable for demurrage to the former.
In The Apollon,
demurrage:

[22]

Justice Story made the following relevant comment on the nature of

In truth, demurrage is merely an allowance or compensation for the delay or detention of a

vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in
ordinary commercial voyages, a particular sum is deemed by the parties a fair
compensation for delays, is the very reason why it is, and ought to be, adopted as a
measure of compensation, in cases ex delicto. What fairer rule can be adopted than that
which founds itself upon mercantile usage as to indemnity, and fixes a recompense upon
the deliberate consideration of all the circumstances attending the usual earnings and

expenditures in common voyages? It appears to us that an allowance, by way of

demurrage, is the true measure of damages in all cases of mere detention, for that
allowance has reference to the ships expenses, wear and tear, and common employment.
[23]

Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the
filing of the complaint, private respondent made no demand for the sum of P67,340. Moreover, private
respondents loss and prevention manager, Loi Gillera, demanded P50,260, but its counsel, Sofronio
Larcia, subsequently asked for a different amount of P37,800.
Petitioners position is puerile. The amount of demurrage charges in the sum of P67,340 is a
factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on
this Court.[24] Besides such factual finding is supported by the extant evidence. [25] The apparent
discrepancy was a result of the variance of the dates when the two demands were made.Necessarily,
the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his letter dated
April 24, 1983,[26] private respondents counsel demanded payment of onlyP37,800, the additional
demurrage incurred by petitioner due to its continued refusal to receive delivery of the cargo
ballooned to P67,340 by November 22, 1983. The testimony of Counsel Sofronio Larcia as regards
said letter of April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the
port for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of
November 22, 1983 or more than a year after - almost a year after the shipment arrived at the
port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this amount. [27]
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale
between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter
of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions
stated therein. Few things are more clearly settled in law than that the three contracts which make up
the letter of credit arrangement are to be maintained in a state of perpetual separation. [28] A

276
transaction involving the purchase of goods may also require, apart from a letter of credit, a contract
of transportation specially when the seller and the buyer are not in the same locale or country, and the
goods purchased have to be transported to the latter.

annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.[31]

Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be
treated independently of the contract of sale between the seller and the buyer, and the contract for
the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between
the amount of the goods described in the commercial invoice in the contract of sale and the amount
allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as
embodied in the bill of lading. As the bank cannot be expected to look beyond the documents
presented to it by the seller pursuant to the letter of credit, [29] neither can the carrier be expected to go
beyond the representations of the shipper in the bill of lading and to verify their accuracy vis--vis the
commercial invoice and the letter of credit. Thus, the discrepancy between the amount of goods
indicated in the invoice and the amount in the bill of lading cannot negate petitioners obligation to
private respondent arising from the contract of transportation. Furthermore, private respondent, as
carrier, had no knowledge of the contents of the container. The contract of carriage was under the
arrangement known as Shippers Load And Count, and the shipper was solely responsible for the
loading of the container while the carrier was oblivious to the contents of the shipment. Petitioners
remedy in case of overshipment lies against the seller/shipper, not against the carrier.

The case before us involves an obligation not arising from a loan or forbearance of money; thus,
pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since
the bill of lading did not specify the amount of demurrage, and the sum claimed by private respondent
increased as the days went by, the total amount demanded cannot be deemed to have been
established with reasonable certainty until the trial court rendered its judgment. Indeed, (u)nliquidated
damages or claims, it is said, are those which are not or cannot be known until definitely ascertained,
assessed and determined by the courts after presentation of proof. [32] Consequently, the legal interest
rate is six percent, to be computed from September 28, 1990, the date of the trial courts
decision. And in accordance with Philippine Natonal Bank[33] and Eastern Shipping,[34] the rate of
twelve percent per annum shall be charged on the total then outstanding, from the time the judgment
becomes final and executory until its satisfaction.

Payment of Interest
Petitioner posits that it first knew of the demurrage claim of P67,340 only when it received, by
summons, private respondents complaint. Hence, interest may not be allowed to run from the date of
private respondents extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983
for P37,800, considering that, in both cases, there was no demand for interest. [30] We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per

Finally, the Court notes that the matter of attorneys fees was taken up only in the dispositive
portion of the trial courts decision. This falls short of the settled requirement that the text of the
decision should state the reason for the award of attorneys fees, for without such justification, its
award would be a conclusion without a premise, its basis being improperly left to speculation and
conjecture.[35]
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the
legal interest of six percent per annum shall be computed from September 28, 1990 until its full
payment before finality of judgment. The rate of interest shall be adjusted to twelve percent per
annum, computed from the time said judgment became final and executory until full satisfaction. The
award of attorneys fees is DELETED.
SO ORDERED.
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias
AURORA C. GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.

277
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendantsappellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and
severally, the value of the credit it extended to them in several letters of credit which the Bank opened
at the behest of the defendants appellants to finance their importation of dyestuffs from the United
States, which however turned out to be mere colored chalk upon arrival and inspection thereof at the
port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a
Philippine corporation through its co-defendants-appellants, Aurora Carcereny alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the
Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of
goods described in the covering L/C applications as "dyestuffs of various colors" from its American
supplier, the J.B. Distributing Company. All the applications of the corporation were approved, and the
corresponding Commercial L/C Agreements were executed pursuant to banking procedures. Under
these agreements, the aforementioned officers of the corporation bound themselves personally as
joint and solidary debtors with the corporation. Pursuant to banking regulations then in force, the
corporation delivered to the Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits
made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United States, with uniform instructions for them to notify
the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate
the latter's sight drafts up to the amounts mentioned the respectively, if accompanied, upon

presentation, by a full set of negotiable clean "on board" ocean bills of lading covering the
merchandise appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B.
Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts
covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of
lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as above
indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands
with them up to the full value of the drafts presented by the J.B. Distributing Company, plus
commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the
Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the
Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the
aggregate, to P90,000. Further payments were, however, subsequently discontinued by the
corporation when it became established, as a result of a chemical test conducted by the National
Science Development Board, that the goods that arrived in Manila were colored chalks instead of
dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank caused
them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the
filing of its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its codefendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with
interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from October
31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign correspondent
banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods
shipped under the covering L/Cs conformed with the item appearing therein, and, that the foregoing
banks having failed to perform this duty, no claim for recoupment against the defendants-appellants,
arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could
accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is nestled
hopelessly inside a salient where the valid contract between the parties and the internationally
accepted customs of the banking trade must prevail. 1

278
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the property from that expressed in
documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the
property referred to in the Credit," as well as "for any deviation from instructions, delay, default or
fraud by the shipper or anyone else in connection with the property the shippers or vendors and
ourselves [purchasers] or any of us." Having agreed to these terms, the appellants have, therefore,
no recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of loss to the
Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in
international business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank
introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial
Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to
which the Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in documents and not in
goods. Payment, negotiation or acceptance against documents in accordance with
the terms and conditions of a credit by a Bank authorized to do so binds the party
giving the authorization to take up the documents and reimburse the Bank making
the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles negating any duty on the part
of a bank to verify whether what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having been positively proven as a fact,
the appellants are bound by this established usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without
prejudice to the Bank, in proper proceedings in the court below in this same case proving and being
reimbursed additional expenses, if any, it has incurred by virtue of the continued storage of the goods
in question up to the time this decision becomes final and executory.

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.
Concepcion, C.J., is on leave.

# Footnotes.
1 The power of our courts to accept in evidence, international customas evidence of
general practice accepted as law, may be said to be derived from both Constitutional
as well as statutory sources. Section 3, Article II of the Constitution provides that "The
Philippines renounces war as an instrument of national policy and adopts the
generally accepted principles of international law of the Nation." Art. 9 of the New
Civil Code Provides that "No court or judge shall decline to render judgment by
reason of the silence, obscurity or insufficiency of the law," and Art. 12 of the same
Code provides that "A custom must be proved as fact, according to the rules of
evidence." The Code of Commerce, in its Article 2, likewise provides that "Acts of
commerce, whether those who execute them be merchants or not, should be
governed by the provisions contained init, in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by
those of the civil law." "Those acts contained in this Code and all others of analogous
character, shall be deemed acts of commerce." It must be noted that certain
principles governing the issuance, acceptance and payment of letters of credit are
specifically provided for in the Code of Commerce.
2 Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: "The
users of the Credit shall be deemed our agents and we assume all risks of their acts
or omissions. Neither you nor your correspondents shall be responsible: for the
existence, character, quality, quantity, condition, packing, value, or delivery of the
property purporting to be represented by documents; for any difference in character,
quality, quantity, condition, or value of the property from that expressed in documents;
... for partial or incomplete shipment, or failure or omission to ship any or all of the
property referred to in the Credit; ... for any deviation from instructions, delay, default
or fraud by the shipper or anyone else in connection with the property or the shipping
thereof; ... for any breach of contract between the shipper or vendors and ourselves
or any of
us; ... We are responsible to you for all obligations imposed upon you with respect to

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the Credit or the relative drafts, documents or property. In furtherance and extension
and not in limitation of the specific provisions hereinbefore set forth, we agree that
any action taken by you or by any correspondent of yours under or in connection with
the Credit or the relative drafts, documents or property, if taken in good faith, shall be
binding on us and shall not put you or your correspondent under any resulting liability
to us; and we make like agreement as to any inaction or omission, unless in breach
of good faith".
G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I,
p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and
that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and
certifying that
a. All terms and conditions of the purchase order have been complied with and that
all logs are fresh cut and quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEVEX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed
to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development
Company and one set to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June
29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986
ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz,
jointly and severally.

2. Tally sheets in quadruplicate.

The facts of the case are as follows:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000
cubic meters of lauan logs at $27.00 per cubic meter FOB.

Letter of Credit No. 46268 dated June 7, 1971

After inspecting the logs, Christiansen issued purchase order No. 76171.

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and
Han Mi Trade Development Company, Ltd., Seoul, Korea.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development,
Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs
have been approved prior to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).

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The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen.
Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao,
Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified
to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of
the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However,
Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite
several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the
private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to
bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank
ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log
exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be
considered final for purposes of negotiating documents. Any provision in any letter of credit
covering log exports requiring certification of buyer's agent or representative that said logs
have been approved for shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade
Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter,
for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other hand sold
the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved
futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance
against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to
afford complete relief should the court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK
be ordered to accept negotiation of the Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the
petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to
demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the
logs by having them loaded in his chartered vessel the "Zenlin Glory" and shipping them to
the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his
obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover
the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with
intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the
certification that would have enabled without question the plaintiff to negotiate the letter of
credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and deceit.
These accusations said defendant did not attempt to prove, as in fact he left the country
without even notifying his own lawyer. It was to the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate
the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said
letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security
Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall
be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed
the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx

xxx

xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable
under the principles and laws on both trust and estoppel. When the defendant BANK
accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it

281
in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be held liable for damages and
loss resulting to the plaintiff from its failure to perform that obligation.

All three foregoing sums shall be with interest thereon at 12% per annum from September 1,
1971, when the complaint was filed, until fully paid:

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating
BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and
conditions of the letter of credit and presents the same to the BANK together with the
documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter of credit and this
implied representation of the defendant BANK that the plaintiff delivered the logs to defendant
CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had
no business connections and CHRISTIANSEN had not offered any other Security for the
payment of the logs. Defendant BANK cannot now be allowed to deny its commitment and
liability under the letter of credit:

e) P30,000.00 as exemplary damages; and

A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a
condition precedent to negotiating the letter of credit, likewise in the Court's opinion acted in
bad faith, not only because of the clear declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with all the legal counsel available to it must
have known that the condition was void since it depended on the sole will of the debtor, the
defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay
the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is
actually made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with
the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

d) P70,000.00 as moral damages;

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the
judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's filing of
a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of
the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of
Appeals a petition forcertiorari and prohibition with preliminary injunction to enjoin the immediate
execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of
execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution
dated December 29, 1986, as well as his order dated January 14, 1987 denying the
petitioner's urgent motion to suspend the writ of execution against its properties are hereby
annulled and set aside insofar as they are sought to be enforced and implemented against
the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the
execution of the same decision against defendant Axel Christiansen did not appeal said
decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p.
44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a
resolution dated June 29, 1987 denied the motion for reconsideration.

282
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course.
In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court
dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was
the bank to negotiate the letter of credit issued by the Security Pacific National Bank of Los
Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of
credit. In fact, as such negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in
anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of
the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds support in the authority
cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the
opening bank's obligation will be performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making it also its own undertaking,
or commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only upon
negotiation of the letter of credit. This stance is untenable. Assurance, commitments or
guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with respect to a future transaction, that is,
negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of
notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of
the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was made by Feati Bank itself.
Feati Bank should have taken steps to secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the
statement "Since Villaluz" draft was not drawn strictly in compliance with the terms of the
letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of this
question on the merits. In that case, the question involved was jurisdiction or discretion, and
not judgment. The quoted pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank may not
be a party to the transaction between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen
and/or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a procedural means by which the relief sought
by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED
FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT
DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT
PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS
GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT
AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable under the
letter of credit despite non-compliance by the beneficiary with the terms thereof?
The petition is impressed with merit.

283
It is a settled rule in commercial transactions involving letters of credit that the documents tendered
must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary
(seller) must include all documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may
be, the money thus paid to the beneficiary Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are governed by the rule of
strict compliance. In the Philippines, the same holds true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on
the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with which
documents, and shipping documents must be followed as stated in the letter. There is no
discretion in the bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a faulty tender as
when the other documents may be considered immaterial or superfluous, this theory could lead to
dangerous precedents. Since a bank deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit are material or superfluous. The mere
fact that the document was specified therein readily means that the document is of vital importance to
the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the said rules in the governance of the
relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us.

Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes
the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or
documents presented thereunder, that the provisions for payment, acceptance or negotiation
contained in the credit will be duly fulfilled, provided that all the terms and conditions of the
credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the advising
bank) without engagement on the part of that bank, but when an issuing bank authorizes or
requests another bank to confirm its irrevocable credit and the latter does so, such
confirmation constitutes a definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on
their face to be in accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in
accordance with the terms and conditions of a credit by a bank authorized to do so, binds the
party giving the authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the
documents tendered to it are on their face in accordance with the terms and conditions of the
documentary credit. And since a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary credit justifies the refusal by
the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the documents tendered by the
beneficiary.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in
this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce
enunciates that in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by the usages and customs generally observed.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not
a notifying bank but a confirming bank, we find the same erroneous.

There being no specific provision which governs the legal complexities arising from transactions
involving letters of credit not only between the banks themselves but also between banks and seller
and/or buyer, the applicability of the U.C.P. is undeniable.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit.
In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the
respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private
respondent, has confirmed the letter.

The pertinent provisions of the U.C.P. (1962 Revision) are:

284
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a
confirmed credit. These types of letters have different meanings and the legal relations arising from
there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or viceversa.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What
was simply stated therein was the instruction that the petitioner forward the original letter of credit to
the beneficiary.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of
credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a correspondent bank
are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand,
is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the
seller but after negotiation, a contractual relationship will then prevail between the negotiating bank
and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, ExportImport Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol.
1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the
beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the
issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying
bank and not a confirming bank as ruled by the courts below.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship
is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It
follows therefore that when the petitioner refused to negotiate with the private respondent, the latter
has no cause of action against the petitioner for the enforcement of his rights under the letter.
(See Kronman and Co., Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the petitioner
confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed
the letter of credit. The only evidence in this case, and upon which the private respondent premised
his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in
anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it depends
principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot
be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of the
documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in
anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have
no basis to rule definitively that such "act" should be construed as an act of confirmation.

285
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory"
and the only way to satisfy this need was to borrow money from the petitioner which the latter
granted. From these circumstances, a logical conclusion that can be gathered is that the letter of
credit was merely to serve as a collateral.

doles out comes not from any particular fund that has been advanced by the issuing bank, rather it
gets the money from its own funds and then later seeks reimbursement from the issuing bank.

At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank
before negotiation has no contractual relationship with the seller.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the
petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create
estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only
obligation is to notify the private respondent of the existence of the letter of credit. How then can such
create estoppel when that is its only duty under the law?

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between
the seller and the negotiating bank, viz:

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor
of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual
duty toward the person for whose benefit the letter is written to discount or purchase any draft
drawn against the credit. No relationship of agent and principal, or of trustee and cestui,
between the receiving bank and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is
justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of
property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been conferred
upon the person for the benefit of another. In order therefore for the trust theory of the private
respondent to be sustained, the petitioner should have had in its possession a sum of money as
specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private
respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a
sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw
funds upon the letter of credit up to the designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in
advance the sum of money from the buyer or the issuing bank. On the contrary, when the
correspondent bank accepts the tender and pays the amount stated in the letter, the money that it

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the
buyer and the seller but also of the credit agreement between the issuing bank and the buyer.
(See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between
the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent
from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of services
(to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should
not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship with the
buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding
the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility from
the contract upon which it was opened. In the second place, the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral
and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
credit the bank undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v. American
National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to
that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to

286
notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has
been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no
contractual relationship.

him to be in accordance with the terms and conditions of his purchase order. Apparently,
Villaluz was in too much haste to ship his logs without taking all due precautions to assure
that all the terms and conditions of the letter of credit had been strictly complied with, so that
there would be no hitch in its negotiation. (Rollo, p. 8)

In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable
for its only engagement is to notify and/or transmit to the seller the letter of credit.

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS
ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil
Case No. 15121 is DISMISSED.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to
pay the amount under the letter. As we have previously explained, there was a failure on the part of
the private respondent to comply with the terms of the letter of credit.

SO ORDERED.

The failure by him to submit the certification was fatal to his case.1wphi1 The U.C.P. which is
incorporated in the letter of credit ordains that the bank may only pay the amount specified under the
letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with
the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it
is only concerned with the documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.

RELIANCE COMMODITIES, INC., petitioner,

vs.
DAEWOO INDUSTRIAL CO., LTD., respondent.

We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only those
who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system may
be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.

Lao, Veloso-Lao & Lao for private respondent.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval
required of the private respondent to submit under the letter of credit, has become insignificant.

On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance") and private respondent
Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract of sale under the terms of which the
latter undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price of
US$404,000.00. Pursuant to this contract, Daewoo shipped from Pohang, Republic of Korea, 2,000
metric tons of foundry pig iron on board the M/SAurelio III under Bill of Lading No. PIP-1 for carriage
to and delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in
Manila, the subject cargo was found to be short of 135.655 metric tons as only 1,864.345 metric tons
were discharged and delivered to Reliance.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the
petition before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition No.
4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there
was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of
credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the
Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of
credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank
memorandum was issued. In any event, it is difficult to see how such a condition could be
categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs,
could and should have done was to refuse to load the logs on the vessel "Zenlin Glory",
unless Christiansen first issued the required certification that the logs had been approved by

G.R. No. L-100831 December 17, 1993

Ongkiko & Dizon Law Offices for petitioner.

FELICIANO, J.:

On 2 May 1980, another contract was entered into between the same parties for the purchase of
another 2,000 metric tons of foundry pig iron. Daewoo acknowledged the short shipment of 135.655
metric tons under the 9 January 1980 contract and, to compensate Reliance therefor, bound itself to
reduce the price by US$1 to US$2 per metric ton of pig iron for succeeding orders. This undertaking

287
was made part of the 2 May 1980 contract. However, that contract was not consummated and was
later superseded by still another contract dated 31 July 1980.
The 31 July 1980 contract read as follows:
CONFIRMATION OF ORDER
SALES NOTE No. HSB-SN/S001-R
To Messrs: Reliance Commodities, Inc.
161, 9th Street, 10th Avenue
Caloocan City
Reference: HSB-PI/8019-R
Contracted through:
Order No.:
Commodity: Foundry Pig Iron
Spec.: JIS G 2202 Class 1-1C
Quantity: 2,000MT
Price: US $190.30/MT C&F Manila
Amount: US $380,600.00
Packing: Bare Loose
Shipment: August
Destination: Manila
Payment: By an irrevocable of sight letter of credit in favor of Daewoo Industrial Co.,
Ltd., 541 5th Street, namdaemunro, Jung-Gu, Seoul, Korea.
Remarks: Other terms and conditions as per attached sheet.
We confirm our sales as specified herein. Subject to the terms and conditions set
forth herein, this confirmation of order ("the Contract") constitutes a contract between
Daewoo Industrial Co. Ltd. ("Seller") and the addressee ("Buyer"). Other terms and
conditions of the Contract are on the back hereof. If you find anything herein not in
order, please let us know immediately, if necessary by telex, cable or telegram. Kindly
sign and return the duplicate after confirming the above.
Read and agreed to:
Name of addressee: Daewoo Industrial Co., Ltd.

By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU

Date: July 31, 1980 Date: July 31, 1980 1
The attached sheet referred to above set out the following:
Reliance Commodities, Inc.
Our Reference No. HSB-PI/SO19-R
1. Invoicing: Actual Weight
2. Chemical Composition (%):
Carbon: 3.30 min. (aiming 3.80 min.)
Silicon: 2.21-2.60 (aiming 2.60)
Manganese: 0.30-1.00
Phosphorous: 0.45 max. (aiming 0.25 max.)
Sulfur: 0.05 max.
3. Quantity Tolerance: +10 percent of total quantity should be allowed.
4. Unit Weight: 5 kgs. + 1 kg. (one notch)
5. Broken pieces of twenty (20%) percent should be allowed.
6. All disputes, controversies, or differences which may arise between the parties, out
of or in relation to or in connection with this contract, or for the breach thereof, shall
be finally settled by arbitration in Korea in accordance with the rules and regulations
of Korea commercial arbitration association or in the Philippines in accordance with
the Philippine arbitration rules.
7. Letter of credit should be opened on or before August 7, 1980.
8. Other terms and conditions, if necessary, are to be solved later by mutual
agreement.
9. Mill sheets and copies of non-negotiable documents to be sent to buyer by airmail
immediately after shipment.

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10. This Sales Note No. HSB-SN/S001R cancels Sales Note No. HSB-SN/8001
dated May 2, 1980. 2
On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed with the China Banking
Corporation, an application for a Letter of Credit (L/C) in favor of Daewoo covering the amount of
US$380,600.00. The application was endorsed to the Iron and Steel Authority (ISA) or approval but
the application was denied. Reliance was instead asked to submit purchase orders from end-users to
support its application for a Letter of Credit. However, Reliance was not able to raise purchase orders
for 2,000 metric tons. Reliance alleges that it was able to raise purchase orders for 1,900 metric
tons. 3 Daewoo, upon the other hand, contends that Reliance was only able to raise purchase orders
for 900 metric tons. 4 An examination of the exhibits 5 presented by Reliance in the trial court shows
that only purchase orders for 900 metric tons were stamped "Received" by the ISA. The other
purchase orders for 1,000 metric tons allegedly sent by prospective end users to Reliance were not
shown to have been duly sent and exhibited to the ISA. Whatever the exact amount of the purchase
orders was, Daewoo rejected the proposed L/C for the reason that the covered quantity fell short of
the contracted tonnage. Thus, Reliance withdrew the application for the L/C on 14 August 1980.
Subsequently, Daewoo leaned that the failure of Reliance to open the L/C as stipulated in the 31 July
1980 contract was due to the fact that as early as May 1980, Reliance has already exceeded its
foreign exchange allocation for 1980. Because of the failure of Reliance to comply with its
undertaking under the 31 July 1980 contract, Daewoo was compelled to sell the 2,000 metric tons to
another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur due to its
inability to ship the 2000 metric tons to Reliance under their contract.
On 3 September 1980, Reliance, through its counsel, wrote Daewoo requesting payment of the
amount of P226,370.48, representing the value of the short delivery of 135.655 metric tons of foundry
pig iron under the contract of 9 January 1980. Not being heeded, Reliance filed an action for
damages against Daewoo with the trial court. Daewoo responded, inter alia, with a counterclaim for
damages, contending that Reliance was guilty of breach of contract when it failed to open an L/C as
required in the 31 July 1980 contract.
After trial, the trial court ruled that:
(1) the 31 July 1980 contract did not extinguish Daewoo's obligation for short delivery
pursuant to the 9 January 1980 contract and must therefore pay Reliance
P226,370.48 representing the value of the short delivered goods plus interest and
attorney's fees; and

(2) Reliance is in turn liable for breach of contract for its failure to open a letter of
credit in favor of Daewoo pursuant to the 31 July 1980 contract and must therefore
pay the latter P331,920.97 as actual damages with legal interest plus attorney's fees.
Reliance appealed the second part of the trial court's judgment. Public respondent Court of Appeals
found no merit in the appeal and in affirming the decision of the trial court ruled that:
1) the trial court's finding that Reliance could not have opened the Letter of Credit in
favor of Daewoo because it had already exhausted its foreign exchange allocation at
the time of its application, was amply supported by evidence; and
2) the opening of a letter of credit is not such a future and uncertain event as to make
it a suspensive condition within the contemplation of law; but, only mode of payment
agreed upon by the parties, and a standard mode at that when one of the parties to
the transaction is a foreigner and the consideration is payable in foreign exchange.
In the present Petition for Review, Reliance assails the award of damages in favor of Daewoo.
Reliance contends a) that its failure to open a Letter of Credit was due to the failure of Daewoo to
accept the purchase orders for 1,900 metric tons instead of 2,000 metric tons; b) that the opening of
the Letter of Credit was a condition precedent to the effectivity of the contract between Reliance and
Daewoo; and c) that since such condition had not occurred, the contract never came into existence
and, therefore, Reliance should not have been held liable for damages.
The issue before us is whether or not the failure of an importer (Reliance) to open a letter of credit on
the date agreed upon makes him liable to the exporter (Daewoo) for damages.
In addressing this issue, it is useful to recall the nature of a Letter of Credit, and the mechanics
involved in applying for a Letter of Credit.
The nature of a letter of credit was extensively discussed in Bank of America, NT & SA v. Court of
Appeals, et al. 6by Vitug, J. in the following terms:
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying. To break
the impasse, the buyer may be required to contract a bank to issue a letter of credit in
favor of the seller so that, by virtue of the letter of credit, the issuing bank can

289
authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. The
buyer and seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.

(c) The third contract relationship is established between the issuing bank and the
beneficiary, in order to support the contract, under
(a) above, of the account party and the beneficiary to, inter alia, pay certain monies to
the latter.
Certain other parties may be added to the foregoing, but the above three are the indispensable ones.

Once the credit is established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of title. To get paid,
the seller executes a draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then
obtains possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the goods only after reimbursing
the bank. 7 (footnotes omitted)
A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389,
"Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial
banks sell foreign exchange to service payments for, e.g., commodity imports. The primary purpose of
the letter of credit is to substitute for and therefore support, the agreement of the buyer/importer to
pay money under a contract or other arrangement. 8 It creates in the seller/exporter a secure
expectation of payment.
A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct but
intertwined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C (the account party or
buyer or importer) and the party for whose benefit the L/C is issued (the beneficiary
or seller or exporter). In this contract, the account party, here Reliance, agrees,
among other things and subject to the terms and conditions of the contract, to pay
money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the account party and the issuing bank.
Under this contract, (sometimes called the "Application and Agreement" or the
"Reimbursement Agreement"), the account party among other things, applies to the
issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid
by that bank pursuant to the L/C.

The issue raised in the Petition at bar relates principally to the first component contractual relation
above: that between account party or importer Reliance and beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out in the 31 July 1980 contract quoted earlier
(and notsimply the summary inaccurately rendered by the trial court), the Court considers that under
that instrument, the opening of an L/C upon application of Reliance was not a condition precedent for
the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. We agree with the
Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect of the
subject matter of the contract (2000 metric tons of foundry pig iron with a specified chemical
composition), the price thereof (US $380,600.00), and other principal provisions, "they had a
perfected contract." 9 The failure of Reliance to open, the appropriate L/C did not prevent the birth of
that contract, and neither did such failure extinguish that contract. The opening of the L/C in favor of
Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a
condition of enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the
contract the foundry pig iron to Reliance. But the contract itself between Reliance and Daewoo
had already sprung into legal existence and was enforceable.
The L/C provided for in that contract was the mode or mechanism by which payment was to be
effected by Reliance of the price of the pig iron. In undertaking to accept or pay the drafts presented
to it by the beneficiary according to the tenor of an L/C, and only later on being reimbursed by the
account party, the issuing bank in effect extends a loan to the account party. This loan feature,
combined with the bank's undertaking to accept the beneficiary's drafts drawn on the bank,
constitutes the L/C as a mode of payment. 10 Logically, before the issuing bank open an L/C, it will
take steps to ensure that it would indeed be reimbursed when the time comes. Before an L/C can be
opened, specific legal requirements must be complied with.
The Central Bank of the Philippines has established the following requirements for opening a letter of
credit:
All L/C's must be opened on or before the date of shipment with maximum validity of
one (1) year. Likewise, only one L/C should be opened for each import transaction.

290
for purposes of opening an L/C, importers shall submit to the commercial bank the
following documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall contain information on the
specific quantity of the importation, unit cost and total cost, complete
description/specification of the commodity and the Philippine
Standard Commodity Classification statistical code;
c) permits/clearances from the appropriate government agencies,
whenever applicable;and
d) duly accomplished Import Entry Declaration (IED) form which shall
serve as basis for payment of advance duties as required under PD
1853. 11 (Emphasis supplied)
The need for permits or clearances from appropriate government agencies arises when regulated
commodities are to be imported. 12 Certain commodities are classified as "regulated commodities" for
purposes of their importation, "for reasons of public health and safety, national security, international
commitments, and development/rationalization of local industry." 13 The petitioner in the instant case
entered into a transaction to import foundry pig iron, a regulated commodity. In respect of the
importation of this particular commodity, the Iron and Steel Authority (ISA) is the government agency
designated to issue the permit or clearance. 14 Prior to the issuance of such permit or clearance, ISA
asks the buyer/importer to comply with particular requirements, such as to show the availability of
foreign exchange allocations. The issuance of an L/C becomes, among other things, an indication of
compliance by the buyer/importer with his own government's regulations relating to imports and to
payment thereof. 15
The records shows that the opening of the L/C in the instant case became very difficult because
Reliance had exhausted its dollar allocation. Reliance knew that it had already exceeded its dollar
allocation for the year 1980 when it entered into the 31 July 1980 transaction with Daewoo. 16 As a
rule, when the importer has exceeded its foreign exchange allocation, his application would be
denied. However, ISA could reconsider such application on a case to case basis. 17 Thus, in the
instant case, ISA required Reliance to support its application by submitting purchase orders from endusers for the same quantity the latter wished to import. As earlier noted, Reliance was able to present
purchase orders for only 900 metric tons of the subject pig iron. 18 For having exceeded its foreign
exchange allocation before it entered into the 31 July 1980 contract with Daewoo, petitioner Reliance

can hold only itself responsible. for having failed to secure end-users purchase orders equivalent to
2,000 metric tons, only Reliance should be held responsible.
Daewoo rejected Reliance's proposed reduced tonnage. It had the right to demand compliance with
the terms of the basic contract and had no duty to accept any unilateral modification of that contract.
Compliance with Philippine legal requirements was the duty of Reliance; it is not disputed that ISA's
requirements were legal and valid, and not arbitrary or capricious. Compliance with such
requirements, like keeping within one's dollar allocation and complying with the requirements of ISA,
were within the control of Reliance and not of Daewoo. The Court is compelled to agree with the
Court of Appeals that the non-opening of the L/C was due to the failure of Reliance to comply with its
duty under the contract.
We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a
breach of he contract between buyer and seller. Where the buyer fails to open a letter of credit as
stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to
open a commercial credit may, in appropriate cases, include the loss of profit which the seller would
reasonably have made had the transaction been carried out. 19
We hold, further, that the Court of Appeals committed no reversible error when it ruled that the
damages incurred by Daewoo were sufficiently proved with the testimony of Mr. Ricardo Fernandez
and "the various documentary evidence showing the loss suffered by the defendant when it was
compelled to sell the subject goods at a lower price." 20
WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for lack of merit
and the decision of the Court of Appeals dated 8 February 1991 is hereby AFFIRMED. Costs against
petitioner.
SO ORDERED.
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and
ALFONSO CO, petitioners, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

[G.R. NO. 117914. February 1, 2002]

291
MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO
the following resolution which was adopted unanimously by MICOs Board of Directors:

DECISION

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr. Mariano
A. Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of this Corporation to
apply for, negotiate and secure the approval of commercial loans and other banking facilities and
accommodations, such as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal
deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc. from the Philippine Bank of
Communications, 216 Juan Luna, Manila in such sums as they shall deem advantageous, the principal of all of
which shall not exceed the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency, plus
any interests that may be agreed upon with said Bank in such loans and other credit lines of the same kind and
such further terms and conditions as may, upon granting of said loans and other banking facilities, be imposed
by the Bank; and to make, execute, sign and deliver any contracts of mortgage, pledge or sale of one, some or
all of the properties of the Company, or any other agreements or documents of whatever nature or kind,
including the signing, indorsing, cashing, negotiation and execution of promissory notes, checks, money orders
or other negotiable instruments, which may be necessary and proper in connection with said loans and other
banking facilities, or with their amendments, renewals and extensions of payment of the whole or any part
thereof.[4]

DE LEON, JR., J:
Before us is the joint and consolidated petition for review of the Decision [1] dated June 15, 1994
of the Court of Appeals in CA-G.R. CV No. 27480 entitled, Philippine Bank of Communications
vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco
and Alfonso Co, which reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55
dismissing the complaint for a sum of money filed by private respondent Philippine Bank of
Communications against herein petitioners, Mico Metals Corporation (MICO, for brevity), Charles
Lee, Chua Siok Suy,[2] Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co.
[3]
The dispositive portion of the said Decision of the Court of Appeals, reads:
WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is
entered:
a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of
Five million four hundred fifty-one thousand six hundred sixty-three pesos and ninety
centavos (P5,451,663.90) representing defendants-appellees unpaid obligations arising
from ordinary loans granted by the plaintiff plus legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four
hundred sixty-one thousand six hundred pesos and sixty-six centavos (P46 1,600.66)
representing defendants-appellees unpaid obligations arising from their letters of credit
and trust receipt transactions with plaintiff PBCom plus legal interest until fully paid.
c) Ordering defendants-appellees jointly
of P50,000.00 as attorneys fees.

and

severally

to

pay PBCom the

sum

No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank
of Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of
Three Million Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of business as well
as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting loan/credit line of Three Million
Pesos (P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00)
from PBCom. Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of
which was made on May 21, 1982 under Promissory Note BNA No. 26218.[5]
Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom which
was likewise later on renewed, the last renewal of which was made on May 21, 1982 under
Promissory Note BNA No. 26219. [6] To complete MICOs availment of Three Million Pesos
(P3,000,000.00) discounting loan/credit line with PBCom, MICO availed of another loan
from PBCom in the sum of One Million Pesos (P1,000,000.00) on May 24, 1979. As in previous loans,
this was rolled over or renewed, the last renewal of which was made on May 25, 1982 under
Promissory Note BNA No. 26253.[7]
As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio,
executed on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated inPasig,
Metro Manila covered by Transfer Certificates of Title (TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco,
in their personal capacities executed a Surety Agreement [8] in favor of PBCom whereby the petitioners
jointly and severally, guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other
obligations of every kind and nature, for which MICO may be held accountable by PBCom. It was
provided, however, that the liability of the sureties shall not at any one time exceed the principal
amount of Three Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and expenses
including attorneys fees incurred by PBCom in connection therewith.

292
On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO,
wrote PBCom and applied for an additional loan in the sum of Four Million Pesos (P4,000,000.00).
The loan was intended for the expansion and modernization of the companys machineries. Upon
approval of the said application for loan, MICO availed of the additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory Note TA No. 094. [9]
As per agreement, the proceeds of all the loan availments were credited to MICOs current
checking account with PBCom. To induce the PBCom to increase the credit line of MICO, Charles
Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred
to as petitioners-sureties), executed another surety agreement [10] in favor of PBCom on July 28, 1980,
whereby they jointly and severally guaranteed the prompt payment on due dates or at maturity of
overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be held accountable by PBCom. It
was provided, however, that their liability shall not at any one time exceed the sum of Seven Million
Five Hundred Thousand Pesos (P7,500,000.00) including interest, costs, charges, expenses and
attorneys fees incurred by MICO in connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate
secretary, Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to
negotiate on behalf of MICO for loans and other credit availments from PBCom. Indicated in the
certification was the following resolution unanimously approved by the Board of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and
empowered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain other
credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in such
amount(s) and under such terms and conditions as he may determine, with full power and authority to execute,
sign and deliver such contracts, instruments and papers in connection therewith, including real estate and
chattel mortgages, pledges and assignments over the properties of the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for lesser or for greater
amount(s), the intention being that such credit facilities and all securities of whatever kind given as
collaterals therefor shall be a continuing security.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the authority
given hereunder, the same to continue in full force and effect until written notice of its revocation shall be
received by said Bank.[11]
On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum
of Three Hundred Forty-Eight Thousand Pesos (P348,000.00).[12] The corresponding irrevocable letter
of credit was approved and opened under LC No. L-16060.[13] Thereafter, the domestic letter of credit
was negotiated and accepted by MICO as evidenced by the corresponding bank draft issued for the
purpose.[14] After
the
supplier
of
the
merchandise
was
paid,
a
trust
receipt
upon MICOs own initiative, was executed in favor of PBCom.[15]
On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the
sum of Two Hundred Ninety Thousand Pesos (P290,000.00).[16] The corresponding irrevocable letter

of credit was issued on September 22, 1981 under LC No. L-16334.[17] After the beneficiary of the said
letter of credit was paid by PBCom for the price of the merchandise, the goods were delivered to
MICO which executed a corresponding trust receipt[18] in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of
Ta Jih Enterprises Co., Ltd.,[19] and thus, the corresponding letter of credit [20] was then issued
byPBCom with a cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said
beneficiary may draw funds from the account of PBCom in its correspondent banks New York Office.
[21]
PBCom also informed its corresponding bank in Taiwan, the Irving Trust Company, of the approved
letter of credit. The correspondent bank acknowledged PBComs advice through a confirmation
letter[22] and by debiting from PBComs account with the said correspondent bank the sum of Eleven
Thousand Nine Hundred Sixty US Dollars ($11 ,960.00). [23] As in past transactions, MICO executed in
favor of PBCom a corresponding trust receipt.[24]
On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of
One Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.[25] Upon approval, the
corresponding
letter
of
credit
denominated
as
LC
No.
62293 [26] was
issued
[27]
whereupon PBCom advised its correspondent bank and MICO of the same. Negotiation and proper
acceptance of the letter of credit were then made by MICO. Again, a corresponding trust
receipt[28] was executed by MICO in favor of PBCom.
In all the transactions involving foreign letters of credit, PBCom turned over to MICO the
necessary documents such as the bills of lading and commercial invoices to enable the latter to
withdraw the goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred
Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458. [29]
Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand
for payment.[30] For failure of petitioner MICO to pay the obligations incurred despite repeated
demands, private respondent PBCom extrajudicially foreclosed MICOs real estate mortgage and sold
the said mortgaged properties in a public auction sale held on November 23, 1982. Private
respondent PBCom which emerged as the highest bidder in the auction sale, applied the proceeds of
the purchase price at public auction of Three Million Pesos (P3,000,000.00) to the expenses of the
foreclosure, interest and charges and part of the principal of the loans, leaving an unpaid balance of
Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
(P5,441,663.90) exclusive of penalty and interest charges. Aside from the unpaid balance of Five
Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
(P5,441,663.90), MICO likewise had another standing obligation in the sum of Four Hundred SixtyOne Thousand Six Hundred Pesos and Six Centavos (P461,600.06) representing its trust receipts
liabilities to private respondent. PBCom then demanded the settlement of the aforesaid obligations
from herein petitioners-sureties who, however, refused to acknowledge their obligations
to PBCom under the surety agreements. Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment before the Regional Trial Court of Manila, which was raffled to Branch 55,
alleging that MICO was no longer in operation and had no properties to answer for its
obligations. PBCom further alleged that petitioner Charles Lee has disposed or concealed his

293
properties with intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of the
RTC failed to serve the summons on herein petitioners-sureties since they were all reportedly abroad
at the time. An alias summons was later issued but the sheriff was not able to serve the same to
petitioners Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly
in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed
by respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it
receive the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board
Resolution to sign for and in behalf of MICO; c) PBCom acted in bad faith in granting the alleged
loans and in releasing the proceeds thereof; d) petitioners were never advised of the alleged grant of
loans and the subsequent releases therefor, if any; e) since no loan was ever released to or received
by MICO, the corresponding real estate mortgage and the surety agreements signed concededly by
the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and dismissed the
complaint filed by PBCom. The trial court likewise declared the real estate mortgage and its
foreclosure null and void. In ruling for herein petitioners, the trial court said that PBCom failed to
adequately prove that the proceeds of the loans were ever delivered to MICO. The trial court pointed
out, among others, that while PBCom claimed that the proceeds of the Four Million Pesos
(P4,000,000.00) loan covered by promissory note TA 094 were deposited to the current account of
petitioner MICO, PBCom failed to produce the ledger account showing such deposit. The trial court
added that while PBCom may have loaned to MICO the other sums of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos (P290,000.00), no proof
has been adduced as to the existence of the goods covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed from PBCom to MICO, all the documents involved therein,
such as the promissory notes, real estate mortgage including the surety agreements were all void or
nonexistent for lack of cause or consideration. The trial court said that the lack of proof as regards the
existence of the merchandise covered by the letters of credit bolstered the claim of herein petitioners
that no purchases of the goods were really made and that the letters of credit transactions were
simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his financial
requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an
erroneous application and appreciation of the rules governing the burden of proof. Citing Section 24
of the Negotiable Instruments Law which provides that Every negotiable instrument is
deemed prima facie to have been issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for value, the Court of Appeals said
that while the subject promissory notes and letters of credit issued by the PBCom made no mention
of delivery of cash, it is presumed that said negotiable instruments were issued for valuable
consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court of Appeals[31]which
holds that "there is a presumption that an instrument sets out the true agreement of the parties
thereto and that it was executed for valuable consideration. The appellate court noted and found
that a notarized Certification was issued by MICOs corporate secretary, P.B. Barrera, that
Chua Siok Suy, was duly authorized by the Board of Directors of MICO to borrow money and obtain
credit facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals
but this was denied in a Resolution dated November 7, 1994 issued by its Former Second Division.
Petitioners-sureties then filed a petition for review on certiorari with this Court, docketed as G.R. No.
117913, assailing the decision of the Court of Appeals. MICO likewise filed a separate petition for
review on certiorari, docketed as G.R. No. 117914, with this Court assailing the same decision
rendered by the Court of Appeals. Upon motion filed by petitioners, the two (2) petitions were
consolidated on January 11, 1995.[32]
Petitioners contend that there was no proof that the proceeds of the loans or the goods under the
trust receipts were ever delivered to and received by MICO. But the record shows otherwise.
Petitioners-sureties further contend that assuming that there was delivery by PBCom of the proceeds
of the loans and the goods, the contracts were executed by an unauthorized person, more specifically
Chua Siok Suy who acted fraudulently and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds
of the loans and letters of credit transactions were ever delivered to MICO, and b) whether or not the
individual petitioners, as sureties, may be held liable under the two (2) Surety Agreements executed
on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence.[33] Preponderance of evidence means evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto. Petitioners contend that the alleged
promissory notes, trust receipts and surety agreements attached to the complaint filed by PBCom did
not ripen into valid and binding contracts inasmuch as there is no evidence of the delivery of money
or loan proceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under normal
banking practice, borrowers are required to accomplish promissory notes in blank even before the
grant of the loans applied for and such documents become valid written contracts only when the
loans are actually released to the borrower.
We are not convinced.

294
During the trial of an action, the party who has the burden of proof upon an issue may be aided
in establishing his claim or defense by the operation of a presumption, or, expressed differently, by
the probative value which the law attaches to a specific state of facts. A presumption may operate
against his adversary who has not introduced proof to rebut the presumption. The effect of a legal
presumption upon a burden of proof is to create the necessity of presenting evidence to meet the
legal presumption or the prima facie case created thereby, and which if no proof to the contrary is
presented and offered, will prevail. The burden of proof remains where it is, but by the presumption
the one who has that burden is relieved for the time being from introducing evidence in support of his
averment, because the presumption stands in the place of evidence unless rebutted.

7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center,
beneficiary of irrevocable Letter of Credit No. No. L-16060 and accepted by MICO
Metals corporation.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among
others, are satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract
and b) That a negotiable instrument was given or indorsed for sufficient consideration. As observed
by the Court of Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments
Law which provides that every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to have become a party
for value. Negotiable instruments which are meant to be substitutes for money, must conform to the
following requisites to be considered as such a) it must be in writing; b) it must be signed by the
maker or drawer; c) it must contain an unconditional promise or order to pay a sum certain in money;
d) it must be payable on demand or at a fixed or determinable future time; e) it must be payable to
order or bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise
indicated with reasonable certainty. Negotiable instruments include promissory notes, bills of
exchange and checks. Letters of credit and trust receipts are, however, not negotiable instruments.
But drafts issued in connection with letters of credit are negotiable instruments.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of
Perez Battery Center for account of MICO Metals Corp.

Private respondent PBCom presented the following documentary evidence to prove petitioners
credit availments and liabilities:

8) Letter
dated July
2,
1981 from Perez Battery Center addressed
to
private
respondent PBCom showing that proceeds of the irrevocable letter of credit No. L16060 was received by Mr. MoisesRosete, representative of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the
merchandise purchased under Letter of Credit No. 16060.

11) Draft
dated September
22,
1981 in
the
by Perez Battery Center and accepted by MICO.

sum

of P290,000.00 issued

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing
that the proceeds of credit no. L-16344 was received by Mr. Moises Rosete, a
representative of PerezBattery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO
of PBCom covering the merchandise under Letter of Credit No. L-16334.

in

favor

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00
issued by PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent
bank, Irving Trust Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in favor of PBCom showing
that possession of the merchandise covered by Irrevocable Letter of Credit no. 61873
was released byPBCom to MICO.

1) Promissory Note No. BNA 26218 dated May

of P1,000,000.00 executed by MICO in favor of PBCom.

21,

1982

in

the

sum

2) Promissory Note No. BNA 26219 dated May

of P1,000,000.00 executed by MICO in favor of PBCom.

21,

1982

in

the

sum

3) Promissory Note No. BNA 26253 dated May

of P1,000,000.00 executed by MICO in favor of PBCom.

25,

1982

in

the

sum

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing
that MICO requested for additional financial assistance in the sum of P4,000,000.00.

4) Promissory Note No. BNA 7458 dated May

of P377,000.00 executed by MICO in favor of PBCom.

21,

1982

in

the

sum

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and
Mariano Sio singly or jointly to act and sign for and in behalf of MICO relative to
the obtention of credit facilities fromPBCom.

5) Promissory Note No. TA 094 dated July 29, 1980 in the sum of P4,000.000.00 executed
by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July
of Perez Battery Center for account of Mico Metals Corp.

2,1981 issued

in

favor

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee, showing
that MICO sought credit line from PBCom in the form of loans, letters of credit and trust
receipt in the sum of P7,500,000.00.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor
of PBCom over MICO s real properties covered by TCT Nos. 11248 and 11250 located
in Pasig.

295
20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners
Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor
of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners
Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor
of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICO s corporate secretary,
Mr. P.B. Barrera, attesting to the adoption of a board resolution authorizing
Chua Siok Suy to sign, for and in behalf of MICO, all the necessary documents including
contracts, loan instruments and mortgages relative to the obtention of various credit
facilities from PBCom.
The above-cited documents presented have not merely created a prima facie case but have
actually proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of
respondent PBCom. While the presumption found under the Negotiable Instruments Law may not
necessarily be applicable to trust receipts and letters of credit, the presumption that the drafts drawn
in connection with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of
the Rules of Court there is also a presumption that sufficient consideration was given in a contract.
Hence, petitioners should have presented credible evidence to rebut that presumption as well as the
evidence presented by private respondent PBCom. The letters of credit show that the pertinent
materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in
connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for
the account of MICO. On the other hand, aside from their bare denials petitioners did not present
sufficient and competent evidence to rebut the evidence of private respondent PBCom. Petitioner
MICO did not proffer a single piece of evidence, apart from its bare denials, to support its allegation
that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued
allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-Laws [34] of Mico Metals Corporation (MICO)
to prove that only the president of MICO is authorized to borrow money, arrange letters of credit,
execute trust receipts, and promissory notes and consequently, that the loan transactions, letters of
credit, promissory notes and trust receipts, most of which were executed by Chua SiokSuy in
representation of MICO were not allegedly authorized and hence, are not binding upon MICO. A
perusal of the By-Laws of MICO, however, shows that the power to borrow money for the company
and issue mortgages, bonds, deeds of trust and negotiable instruments or securities, secured by
mortgages or pledges of property belonging to the company is not confined solely to the president of
the corporation. The Board of Directors of MICO can also borrow money, arrange letters of
credit, execute trust receipts and promissory notes on behalf of the corporation. [35]Significantly, this
power of the Board of Directors according to the by-laws of MICO, may be delegated to any of its
standing committee, officer or agent.[36] Hence, PBCom had every right to rely on the Certification
issued by MICO's corporate secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by its
Board of Directors to borrow money and obtain credit facilities in behalf of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to
private respondent PBCom purportedly to show that PBCom knew that Chua Siok Suyallegedly used
the credit and good names of the petitioner-sureties for his benefit, and that petitioner-sureties were
made to sign blank documents and were furnished copies of the same. The letter, however, is in fact
merely a reply of petitioners-sureties counsel to PBComs demand for payment of MICOs obligations,
and appears to be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court
which stated that there was no proof that the proceeds of the loans were ever delivered to MICO.
Although the private respondents witness, Mr. Gardiola, testified that the proceeds of the loans were
deposited in MICOs current account with PBCom, his testimony was allegedly not supported by any
bank record, note or memorandum. A careful scrutiny of the record including the transcript of
stenographic notes reveals, however, that although private respondent PBCom was willing to produce
the corresponding account ledger showing that the proceeds of the loans were credited
to MICOs current account with PBCom, MICO in fact vigorously objected to the presentation of said
document. That point is shown in the testimony of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J which as you have said previously (sic)
availed originally by defendant Mico Metals Corp. sometime in 1979, my question now
is, do you know what happened to the proceeds of the original availment?
A: Well, it was credited to the current account of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best evidence is the so-called
current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
The ledger or record of the current account of Mico Metals Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not be disclosed without
the consent of the person concerned. (sic)
ATTY. SANTOS:

296
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account of defendant Mico Metals Corp. is the
subject matter of this case.
xxx xxx xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the secrecy of the bank deposit.
(sic)
xxx xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory
notes were credited to the accounts of Mico Metals Corporation, now do you know
what kind of current account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of defendant Mico Metals
Corporation and it cannot disclosed without the authority of the depositor. (sic) [37]
That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is
bolstered by the fact that more than a year later, specifically on July 14, 1980, MICO through its
president, petitioner-surety Charles Lee, requested for an additional loan of Four Million Pesos
(P4,000,000.00) from PBCom. The fact that MICO was requesting for an additional loan implied that it
has already availed of earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted payments to cover the
domestic and foreign letters of credit. Petitioners placed much reliance on the erroneous decision of
the trial court which stated that private respondent PBCom allegedly failed to prove that it actually
made payments under the letters of credit since the bank drafts presented as evidence show that
they were made in favor of the Bank of Taiwan and First Commercial Bank.
Petitioners allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to
bank transactions. Historically, the letter of credit was developed to facilitate the sale of goods
between, distant and unfamiliar buyers and sellers. It was an arrangement under which a bank,
whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts
drawn on it by the seller, provided that certain documents are presented such as bills of lading
accompanied the corresponding drafts. Expansion in the use of letters of credit was a natural
development in commercial banking. [38] Parties to a commercial letter of credit include (a) the buyer or
the importer, (b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the
buyers bank which actually issues the letter of credit, (d) the notifying bank which is the
correspondent bank of the opening bank through which it advises the beneficiary of the letter of
credit, (e) negotiating bank which is usually any bank in the city of the beneficiary. The services of the
notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary through
cable, (f) the paying bank which buys or discounts the drafts contemplated by the letter of credit, if
such draft is to be drawn on the opening bank or on another designated bank not in the city of the
beneficiary. As a rule, whenever the facilities of the opening bank are used, the beneficiary is
supposed to present his drafts to the notifying bank for negotiation and (g) the confirming bank which,
upon the request of the beneficiary, confirms the letter of credit issued by the opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to bank transactions,
involve more than just one bank. Consequently, there is nothing unusual in the fact that the drafts
presented in evidence by respondent bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. ofTaiwan,
supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the Bank of
Taiwan then presented the bank draft for reimbursement by PBComs correspondent bank in Taiwan,
the Irving Trust Company which explains the reason why on its face, the draft was made payable to
the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft toPBCom. The draft was
later transmitted to PBCom to support the latters claim for payment from MICO. MICO accepted the
draft upon presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal possession of the merchandise be
transferred to PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred
possession of the merchandise to PBCom by way of trust receipts, the same would be illegal
since PBCom, being a banking institution, is not authorized by law to engage in the business of
importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as collateral of the
merchandise imported or purchased. [39] A trust receipt, therefor, is a document of security pursuant to
which a bank acquires a security interest in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a
security for the loan. The transaction involves a loan feature represented by a letter of credit, and a
security feature which is in the covering trust receipt which secures an indebtedness.
Petitioners averments with regard to the second issue are no less incredulous. Petitioners
contend that the letters of credit, surety agreements and loan transactions did not ripen into valid and

297
binding contracts since no part of the proceeds of the loan transactions were delivered to MICO or to
any of the petitioners-sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of
the proceeds of the loans and that the latter made them sign the surety agreements in blank. Thus,
they maintain that they should not be held accountable for any liability that might arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO
Metals Corporation, who first requested for a discounting loan of Three Million Pesos (P3,000,000.00)
from PBCom as evidenced by his letter dated March 2, 1979.[40] On the same day, Charles Lee, as
President of MICO, requested for a Letter of Credit and Trust Receipt line in the sum of Three Million
Pesos (P3,000,000.00).[41] Still, on the same day, Charles Lee again as President of MICO, wrote
another letter to PBCOM requesting for a financing line in the sum of One Million Five Hundred
Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit for the opening
of MICOs foreign and local letters of credit with PBCom.[42] More than a year later, it was also Charles
Lee, again in his capacity as president of MICO, who asked for an additional loan in the sum of Four
Million Pesos (P4,000,000.00). The claim therefore of petitioners that it was Chua Siok Suy, in
connivance with the respondent PBCom, who applied for and obtained the loan transactions and
letters of credit strains credulity considering that even the Deed of the Real Estate Mortgage in favor
of PBCom was executed by petitioner-surety Mariano Sio in his capacity as general manager of
MICO[43] to secure the loan accommodations obtained by MICO from PBCom.

Petitioners-sureties allege that they were made to sign the surety agreements in blank by
Chua Siok Suy. Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed
booklets of checks, surety agreements and promissory notes in blank; that he signed the documents
in blank despite his misgivings since Chua Siok Suy assured him that the transaction can easily be
taken cared of since Chua Siok Suy personally knew the Chairman of the Board of PBCom; that he
was not receiving salary as treasurer of Mico Metals and since Chua Siok Suy had a direct hand in
the management of Malayan Sales Corporation, of which Yap is an employee, he (Yap) signed the
documents in blank as consideration for his continued employment in Malayan Sales Corporation.
Petitioner Antonio Co testified that he worked as office manager for MICO from 1978-1982. As office
manager, he was the one in charge of transacting business like purchasing, selling and paying the
salary of the employees. He was also in charge of the handling of documents pertaining to surety
agreements, trust receipts and promissory notes; [44] that when he first joined MICO Metals
Corporation, he was able to read the by-laws of the corporation and he came to know that only the
chairman and the president can borrow money in behalf of the corporation; that Chua Siok Suy once
called him up and told him to secure an invoice so that a credit line can be opened in the bank with a
local letter of credit; that when the invoice was secured, he (Co) brought it together with the
application for a credit line to Chua Siok Suy, and that he questioned the authority of
Chua Siok Suy pointing out that he (Co) is not empowered to sign the document inasmuch as only
the latter, as president, was authorized to do so. However, Chua Siok Suy allegedly just said that he
had already talked with the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said
that he needed the money to finance a project that he had with the Taipei government. Co also
testified that he knew of the application for domestic letter of credit in the sum of Three Hundred
Forty-Eight Thousand Pesos (P348,000.00); and that a certain Moises Rosete was authorized to
claim the check covering the Three Hundred Forty-Eight Thousand Pesos (P348,000.00)
from PBCom; and that after claiming the check Rosete brought it to Perez Battery Center
for indorsement after which the same was deposited to the personal account of Chua Siok Suy.[45]
We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of
Directors of MICO was so careless about the business affairs of MICO as well as about their own
personal reputation and money that they simply relied on the say so of Chua Siok Suy on matters
involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a
person takes ordinary care of his concerns. Hence, the natural presumption is that one does not sign
a document without first informing himself of its contents and consequences. Said presumption
acquires greater force in the case at bar where not only one but several documents were executed at
different times and at different places by the petitioner sureties and ChuaSiok Suy as president of
MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to
negotiate for loans in behalf of MICO from PBCom. Petitioners allegation, however, is belied by the
July 28, 1980 Certification issued by the corporate secretary of PBCom, Atty. P.B. Barrera,
that MICO's Board of Directors gave Chua Siok Suy full authority to negotiate for loans in behalf of
MICO with PBCom. In fact, the Certification even provided that Chua Siok Suys authority continues
until and unless PBCom is notified in writing of the withdrawal thereof by the said Board. Notably,
petitioners failed to contest the genuineness of the said Certification which is notarized and to show

298
any written proof of any alleged withdrawal of the said authority given by the Board of Directors to
Chua Siok Suy to negotiate for loans in behalf of MICO.

G.R. No. 74834 November 17, 1988

There was no need for PBCom to personally inform the petitioners-sureties individually about the
terms of the loans, letters of credit and other loan documents. The petitioners-sureties themselves
happen to comprise the Board of Directors of MICO, which gave full authority to Chua Siok Suy to
negotiate for loans in behalf of MICO. Notice to MICOs authorized representative, Chua Siok Suy,
was notice to MICO. The Certification issued by PBComs corporate secretary, Atty. P.B. Barrera,
indicated that Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf of MICO for loans from PBCom. Respondent PBCom therefore had the right to
rely on the said notarized Certification of MICOs Corporate Secretary.

INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL

BANK), petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE
CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the

surety agreements, we need only point out that the consideration for the sureties is the very
consideration for the principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic
Industries Corporation vs. Court of Appeals,[46] we ruled that the consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration moving to the principal alone
being sufficient. For a guarantor or surety is bound by the same consideration that makes the contract
effective between the parties thereto. It is not necessary that a guarantor or surety should receive any
part or benefit, if such there be, accruing to his principal.
Petitioners placed too much reliance on the rule in evidence that the burden of proof does not
shift whereas the burden of going forward with the evidence does pass from party to party. It is true
that said rule is not changed by the fact that the party having the burden of proof has introduced
evidence which established prima facie his assertion because such evidence does not shift the
burden of proof; it merely puts the adversary to the necessity of producing evidence to meet
the prima facie case. Where the defendant merely denies, either generally or otherwise, the
allegations of the plaintiffs pleadings, the burden of proof continues to rest on the plaintiff throughout
the trial and does not shift to the defendant until the plaintiffs evidence has been presented and duly
offered. The defendant has then no burden except to produce evidence sufficient to create a state of
equipoise between his proof and that of the plaintiff to defeat the latter, whereas the plaintiff has the
burden, as in the beginning, of establishing his case by a preponderance of evidence. [47] But where
the defendant has failed to present and marshall evidence sufficient to create a state of equipoise
between his proof and that of plaintiff, the prima facie case presented by the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented
sufficient documentary and testimonial evidence that proved by preponderance of evidence its subject
collection case against the defendants who are the petitioners herein. In view of all the foregoing, the
Court of Appeals committed no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled,
Philippine Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua SiokSuy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.

Balili, Parado, Cavada & Maamo for petitioner.

Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses Mendozas.
Francisco, Zulueta & Associates for respondent Philam Life.

MELENCIO-HERRERA, J.:
An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular Bank of Asia and
America (IBAA) [now the Philippine Commercial International Bank], from the judgment of the public
respondent, then the Intermediate Appellate Court, * in CA-G.R. CV No. 03224.
Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent spouses Ben S.
Mendoza and Juanita M. Mendoza (the Mendozas, for brevity), obtained two (2) loans from
respondent Philippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00
to finance the construction of their residential house at Mandaue City. The said loans, with a 14%
nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years from
March 1977 to March 1982.
To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby
letter of credit of a commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of
Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of
Philam Life for the total amount of P600,000.00. The first L/C for P500,000.00 was to expire on 1
October 1981 (Exhibit "7", IBAA) and the second for P100,000.00 on 1 January 1982 (Exhibit "8",
IBAA) These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the
same amount on the property of Respondent Spouses in favor of IBAA.
On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor of IBAA
promising to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May 1979. Again, on 3 June
1977, Respondent Spouses executed another Promissory Note (No. 564/77) binding themselves to
pay IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes authorized IBAA "to sell at
public or private sale such securities or things for the purpose of applying their proceeds to such

299
payments" of many particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits
"34" and "35"-IBAA, Annex "D" p. 131, Rollo)
The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam
Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded
payment of P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety of calling ill
the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5)
more amortizations.
On 7 September 1979, because the Mendozas defaulted on their amortization due on 1 September
1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both
loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the
payment of P274,779.56 from IBAA but the latter took the position that, as a melee guarantor of the
Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2)
standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an
overpayment arrived at as follows:

Limit of
Liability

P 600,000.00

Less:

Overpayment
by IBAA

( P 52,520.76)

On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs. was
extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone
and highest bidder (Exhibit "17-Mendoza"). The bid price of P775,000.00 by petitioner IBAA was
arrived at as follows:

Principal (unpaid
advances under
the 2

P
432,386.07

standby LCs) plus

interest & charges

Add:

a) Payment of
Mendozas

P 280, 293.11

b) Payment of
IBAA

372,227.65
652,520.76

a) Stipulated
Attorney's fees
(20%)

b) Principals
(clean loans) plus
accrued

P
86,477.20

300

interest under
P/Ns Nos. 562/77
and

564/77

IBAA

622,420.16

Overpayment by
IBAA

P 22,420.16

P
255,346.95
Thus, the Trial Court ruled:

c) Expenses of
foreclosure

TOTAL

P 72.20

P
775,000.42

On a date that does not appear of record, Philam Life filed suit against Respondent Spouses and
IBAA before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of
P274,779.56, the amount allegedly still owing under the loan. After trial, said Court rendered a
Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed
by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60, which had to be
deducted. With this deduction, the Trial Court arrived at the following computation:

Limit of Liability of
IBAA Less:

P 600,000.00

a) Payment by
Mendozas

P 280, 293.11

b) Payment by

P342,127.05 P

ACCORDINGLY, judgment is hereby rendered ordering:

(1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff
Philippine American Life Insurance Company the sum of P322,000.00 plus 2% per
month as penalty interest from September 12, 1979 until the whole amount is fully
paid, P10,000 as attorney's fees, and costs.
(2) Plaintiff Philippine American Life Insurance Company to refund the sum of
P22,420.16 to the defendant Insular Bank of Asia and America plus legal interest
from March 31, 1980 until the whole amount is fully paid; and
(3) Dismissal of the counterclaim and crossclaim filed by the defendants- spouses
against the plaintiff and the defendant IBAA, as well as the counterclaim filed by
defendant IBAA against the plaintiff. (pp. 28-29, Rollo)
In so deciding, the Trial Court took the position that IBAA, "as surety" was discharged of its liability to
the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam
Life.
Both Philam Life and Respondent Spouses appealed to respondent Appellate Court, which reversed
the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made
by the Mendozas. Accordingly, the Appellate Court decreed:
WHEREFORE, premises considered, judgment is hereby rendered ordering:
1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and
defendant-appellee IBAA to pay jointly and severally plaintiff-appellant Philamlife, the
sum of P222,000.00 plus 2% per month as penalty interest from September 12, 1979
until the whole amount is fully paid; plus P25,000.00, as attorney's fees, and costs;

301
however, defendant-appellee IBAA shall only be liable up to the amount of
P296,294.05;
2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from the PhilAmerican Life Insurance Co.; and
3. Dismissal of the counterclaim and cross-claim filed by the defendant- spouses
against the plaintiff and the defendant IBAA, as well as the counterclaim filed by
defendant IBAA against the plaintiff.
No special pronouncement as to costs in this instance. (p. 51, Rollo).
Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and the affirmance
instead of that of the Trial Court. We resolved to give due course. The issues addressed, as posited
by IBAA, are:
1. Whether or not the partial payments made by the principal obligors (respondent
MENDOZAS) would have the corresponding effect of reducing the liability of the
petitioner as guarantor or surety under the terms of the standby LCs in question.
2. Whether or not respondent Intermediate Appellate Court is correct in disregarding
a documentary evidence (O.R. No. 74323, Exhibit 28-IBAA) showing the amount paid
by petitioner and which was admitted as evidence without objection on the paint of
the counsel for the respondent Philam.
3. Whether or not the Intermediate Appellate Court is correct in passing sub-silencio
the following points raised by the petitioner in its Brief to sustain the decision of the
Trial Court on some other grounds.
a. Effective rate of interest imposed by respondent Philam exceeded the allowable
ceiling;
b. Respondent Philam has no right to call in at one time the two standby letters of
credit;
c. Respondent Philam failed to follow the condition in the two (2) standby letters of
credit:
which could have otherwise altered the result of the decision.
4. Whether or not the award of attorney's fees to respondent Philam is proper in so
far as petitioner is affected. (p. 15, Rollo)

The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam Life under the
two (2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the
Mendoza spouses separately maintain that IBAA's obligation under said two (2) L/Cs is original and
primary and is not reduced by the direct payments made by the Mendozas to Philam Life.
1. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties
that must govern.
Letters of credit and contracts for the issuance of such letters are subject to the same
rules of construction as are ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although usage and custom cannot
control express terms in letters of credit, they are to be construed with reference to all
the surrounding facts and circumstances, to the particular and often varying terms in
which they may be expressed, the circumstances and intention of the parties to them,
and the usages of the particular trade of business contemplated. (International
Banking Corp. vs. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F.
122; Old Colony Trust Co. vs. Lawyers' Title and Trust Co., CAA NY, 297 F. 152, cited
in Vol. 72, CJS sec. 178, pp. 387-388).<re||an1w>
The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:
This credit secures the payment of any obligation of the accountee to you under that
Loan Agreement hereto attached as Annex 'A' and made a part hereof, including
those pertaining to (a) surcharges on defaulted account; stallments, (b) increased
interest charges (in the event the law should authorize this increase), and (c)
liabilities connected with taxes stipulated to be for Accountee's and provided
however, that our maximum liabilities hereunder shall not exceed the amount of
P500,000.00 (Pl00.000.00 for the other LC).
Each drawing under this credit shall be available at any time after one (1) day from
due date of the obligations therein secured. Each drawing under this credit shall be
accomplished by your signed statement in duplicate that the amount drawn
represents payment due and unpaid by the accountee. (pp. 11-12, Decision, pp. 3839, Rollo). [Emphasis our ].
Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the
Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed
P600,000.00. But while they are a security arrangement, they are not converted thereby into
contracts of guaranty. That would make themultra vires rather than a letter of credit, which is within
the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect
an absolute undertaking to pay the money advanced or the amount for which credit is given on the
faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask,, 12 Mass.
154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory contracts.

302
Being separate and independent agreements, the payments made by the Mendozas cannot be added
in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas
directly to Philam Life are in compliance with their own prestation under the loan agreements. And
although these payments could result in the reduction of the actual amount which could ultimately be
collected from IBAA, the latter's separate undertaking under its L/Cs remains.

a) It is a matter of common knowledge in lending procedures that the nominal interest is different from
the effective rate of interest and that the discounting interest scheme as well as the principal
amortization scheme are practices commonly resorted to by lending institutions. If IBAA disagreed
with the computation scheme adopted by Philam Life, which could have been detected in the early
stages of the controversy, IBAA could have interposed its objections.

Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the
loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the
obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be
P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows:

b) The right to call in at one time the two standby L/Cs was specifically provided for in the Loan
Agreement, which was specifically made an integral part of the L/Cs Section 8 thereof read:

... In the summary of application of payments (Exhibit "KK") the plaintiff applied
Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests,
and P320,000.00 on the principal. The P58,000.00 which is covered by OR No.
74396 was also applied "against the total loan." Since plaintiff applied P378,000.00
against the total indebtedness of P600,000.00 there still remains an outstanding
balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed
penalty interest until the whole amount is fully paid. ... (Decision, Trial Court, p. 50,
Rollo)
The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the
L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied.
Letters of credit are strictly construed to the end that the rights of those directly parties to them may
be preserved and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246
Mass. 138, 152).<re||an1w> Like any other writing, it will be construed most strongly against the
writer and so as to be reasonable and consistent with honest intentions. On the whole, the
construction will be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S.
428, 212 App. Div. 25, affirming Id , 204 N.Y.S. 557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240
N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed
P296,294,05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have
been paid by IBAA to Philam Life).
2. The second issue as to whether or not documentary evidence was disregarded by the Appellate
Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as
found by the Trial Court), questions a finding of fact, which should be accorded not only respect but
even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its
jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts.
3. The third issue faults respondent Appellate Court with having passed
sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the
Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues
raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate
Court deemed it unnecessary to pass upon those points. Be that as it may, suffice it to state:

... 8. The Lender shall have the light to declare the entire balance of the loans and all
obligations of the borrower to the lender as immediately due and payable in case the
borrower fails for any reason to comply with any payment or other obligations of the
Lender. (p. 248, Rollo)
c) The omission by Philam Life to draw the required drafts on the standby L/Cs can be explained by
the fact that all the drafts were pre-prepared, pre-dated and
pre-accepted by the Mendozas. Philam Life, therefore, could not have complied to the letter with the
provision in the L/Cs that drawings therefrom were to be made by drafts for each due and unpaid
amortization. Besides, the accelaration of the entire balance of the loan was sufficient notice of
dishonor of the pre-drawn and pre-accepted drafts.
4. Coming now to the award of attorney's fees of P25,000.00, the same appears reasonable under
the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor
IBAA charged the Mendozas attorney's fees in the amount of P86,477.20, supra.
As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application
for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had
executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to
Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas
the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the
concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In
addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued
interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas,
therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the
Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute
and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes
executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the
purpose of applying their proceeds to ... payments" of their obligations to IBAA.
WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20 December 1985,
is hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay
Philippine American Life Insurance Company the sum of P222,000.00 plus 2% per month as penalty

303
interest from 12 September 1979 until the whole amount is fully paid, but in no case to exceed
P296,294.05, plus P25,000.00 as attorney's fees. No costs.
SO ORDERED.
Paras, Sarmiento and Regalado, JJ., concur.
Padilla, J., took no part.

PARAS, J.:
In these petition and supplemental petition for Certiorari, Prohibition and mandamus with Preliminary
Injunction, petitioner Philippine Virginia Tobacco Administration seeks to annul and set aside the
following Orders of respondent Judge of the Court of First Instance of Rizal, Branch IV (Quezon City)
in Civil Case No. Q-10351 and prays that the Writ of Preliminary Injunction (that may be) issued by
this Court enjoining enforcement of the aforesaid Orders be made permanent. (Petition, Rollo, pp. 19)
They are:

Footnotes

The Order of July 17, 1967:

* Penned by Justice Ramon B. Britanico and concurred in by Justices Porfirio V.
Sison, Abdulwahid A. Bidin and Marcelino R. Veloso.
1 "Section 74. No bank or banking institution shall enter directly or indirectly, into any
contract of guaranty or surety, or shall guarantee the interest or principal of any
obligation of any person, co-partnership, association, corporation or other entity. The
provisions of this section shall, however, not apply to the following:
(a) . . .
(e) letters of credit transaction, including standby arrangements: x x x"

G.R. No. L-27829 August 19, 1988

PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION, petitioner,
vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Branch IV
(Quezon City) and TIMOTEO A. SEVILLA, doing business under the name and style of
PHILIPPINE ASSOCIATED RESOURCES and PRUDENTIAL BANK AND TRUST
COMPANY, respondents.
Lorenzo F. Miravite for respondent Timoteo Sevilla.
Ferrer & Ranada Law Office for respondent Prudential Bank & Trust Co.

AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to
release and deliver to the herein plaintiff, Timoteo A. Sevilla, the amount of
P800,000.00 in its custody representing the marginal deposit of the Letters of Credit
which said bank has issued in favor of the defendant, upon filing by the plaintiff of a
bond in the um of P800,000.00, to answer for whatever damage that the defendant
PVTA and the Prudential Bank & Trust Company may suffer by reason of this order.
(Annex "A," Rollo, p. 12)
The Order of November 3,1967:
IN VIEW OF THE FOREGOING, the petition under consideration is granted, as
follows: (a) the defendant PVTA is hereby ordered to issue the corresponding
certificate of Authority to the plaintiff, allowing him to export the remaining balance of
his tobacco quota at the current world market price and to make the corresponding
import of American high-grade tobacco; (b) the defendant PVTA is hereby restrained
from issuing any Certificate of Authority to export or import to any persons and/or
entities while the right of the plaintiff to the balance of his quota remains valid,
effective and in force; and (c) defendant PVTA is hereby enjoined from opening public
bidding to sell its Virginia leaf tobacco during the effectivity of its contract with the
plaintiff.
xxx xxx xxx

304
In order to protect the defendant from whatever damage it may sustain by virtue of
this order, the plaintiff is hereby directed to file a bond in the sum of P20,000.00.
(Annex "K," Rollo, pp. 4-5)
The Order of March 16, 1968:
WHEREFORE, the motion for reconsideration of the defendant against the order of
November 3, 1967 is hereby DENIED. (Annex "M," Rollo, P. 196)
The facts of the case are as follows:
Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources
(PAR) together with two other entities, namely, the Nationwide Agro-Industrial Development Corp. and
the Consolidated Agro-Producers Inc. were awarded in a public bidding the right to import Virginia leaf
tobacco for blending purposes and exportation by them of PVTA and farmer's low-grade tobacco at a
rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported.
Subsequently, the other two entities assigned their rights to PVTA and respondent remained the only
private entity accorded the privilege.
The contract entered into between the petitioner and respondent Sevilla was for the importation of 85
million kilos of Virginia leaf tobacco and a counterpart exportation of 2.53 million kilos of PVTA and
5.1 million kilos of farmer's and/or PVTA at P3.00 a kilo. (Annex "A," p. 55 and Annex "B," Rollo, p. 59)
In accordance with their contract respondent Sevilla purchased from petitioner and actually exported
2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of
P3,713,908.91. Before respondent Sevilla could import the counterpart blending Virginia tobacco,
amounting to 525,560 kilos, Republic Act No. 4155 was passed and took effect on June 20, 1 964,
authorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and to dispose of
all its tobacco stock at the best price available.

Thus, on September 14, 1965 subject contract which was already amended on December 14, 1963
because of the prevailing export or world market price under which respondent will be exporting at a
loss, (Complaint, Rollo, p. 3) was further amended to grant respondent the privileges under aforesaid
law, subject to the following conditions: (1) that on the 2,101.470 kilos already purchased, and
exported, the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance of
P3,713,908.91 was to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported
Virginia blending tobacco and; (3) that respondent Sevilla would open an irrevocable letter of credit
No. 6232 with the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of said
balance, drawable upon the release from the Bureau of Customs of the imported Virginia blending
tobacco.
While respondent was trying to negotiate the reduction of the procurement cost of the 2,101.479 kilos
of PVTA tobacco already exported which attempt was denied by petitioner and also by the Office of
the President, petitioner prepared two drafts to be drawn against said letter of credit for amounts
which have already become due and demandable. Respondent then filed a complaint for damages
with preliminary injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an
answer with counterclaim, admitting the execution of the contract. It alleged however that respondent,
violated the terms thereof by causing the issuance of the preliminary injunction to prevent the former
from drawing from the letter of credit for amounts due and payable and thus caused petitioner
additional damage of 6% per annum.
A writ of preliminary injunction was issued by respondent judge enjoining petitioner from drawing
against the letter of credit. On motion of respondent, Sevilla, the lower court dismissed the complaint
on April 19, 1967 without prejudice and lifted the writ of preliminary injunction but petitioner's motion
for reconsideration was granted on June 5,1967 and the Order of April 19,1967 was set aside. On
July 1, 1967 Sevilla filed an urgent motion for reconsideration of the Order of June 5, 1967 praying
that the Order of dismissal be reinstated. But pending the resolution of respondent's motion and
without notice to the petitioner, respondent judge issued the assailed Order of July 17, 1967 directing
the Prudential Bank & Trust Co. to make the questioned release of funds from the Letter of Credit.
Before petitioner could file a motion for reconsideration of said order, respondent Sevilla was able to
secure the releaseof P300,000.00 and the rest of the amount. Hence this petition, followed by the
supplemental petition when respondent filed with the lower court an urgent ex-parte petition for the
issuance of preliminary mandatory and preventive injunction which was granted in the resolution of
respondent Judge on November 3, 1967, above quoted. On March 16, 1968, respondent Judge
denied petitioner's motion for reconsideration. (Supp. Petition, Rollo, pp. 128- 130)
Pursuant to the resolution of July 21, 1967, the Supreme Court required respondent to file an answer
to the petition within 10 days from notice thereof and upon petitioner's posting a bond of fifty thousand

305
pesos (P50,000.00), a writ of preliminary mandatory injunction was issued enjoining respondent
Judge from enforcing and implementing his Order of July 17,1967 and private respondents Sevilla
and Prudential Bank and Trust Co. from complying with and implementing said order. The writ further
provides that in the event that the said order had already been complied with and implemented, said
respondents are ordered to return and make available the amounts that might have been released
and taken delivery of by respondent Sevilla. (Rollo, pp. 16-17)
In its answer, respondent bank explained that when it received the Order of the Supreme Court to
stop the release of P800,000.00 it had already released the same in obedience to ailieged earlier
Order of the lower Court which was reiterated with ailieged admonition in a subsequent Order. (Annex
"C," Rollo, pp. 37-38) A Manifestation to that effect has already been filed c,irrency respondent bank
(Rollo, pp. 19-20) which was noted c,irrency this Court in the resolution of August 1, 1967, a copy of
which was sent to the Secretary of Justice. (Rollo, p. 30)
Before respondent Sevilla could file his answer, petitioner filed a motion to declare him and
respondent bank in contempt of court for having failed to comply with the resolution to this court of
July 21, 1967 to the effect that the assailed order has already been implemented but respondents
failed to return and make available the amounts that had been released and taken delivery of by
respondent Sevilla. (Rollo, pp. 100-102)
In his answer to the petition, respondent Sevilla claims that petitioner demanded from him a much
higher price for Grades D and E tobacco than from the other awardees; that petitioner violated its
contract by granting indiscriminately to numerous buyers the right to export and import tobacco while
his agreement is being implemented, thereby depriving respondent of his exclusive right to import the
Virginia leaf tobacco for blending purposes and that respondent Judge did not abuse his discretion in
ordering the release of the amount of P800,000.00 from the Letter of Credit, upon his posting a bond
for the same amount. He argued further that the granting of said preliminary injunction is within the
sound discretion of the court with or without notice to the adverse party when the facts and the law
are clear as in the instant case. He insists that petitioner caretaker.2 claim from him a price higher
than the other awardees and that petitioner has no more right to the sum in controversy as the latter
has already been overpaid when computed not at the price of tobacco provided in the contract which
is inequitable and therefore null and void but at the price fixed for the other awardees. (Answer of
Sevilla, Rollo, pp. 105-111)
In its Answer to the Motion for Contempt, respondent bank reiterates its allegations in the
Manifestation and Answer which it filed in this case. (Rollo, pp. 113-114)

In his answer, (Rollo, pp. 118-119) to petitioner's motion to declare him in contempt, respondent
Sevilla explains that when he received a copy of the Order of this Court, he had already disbursed the
whole amount withdrawn, to settle his huge obligations. Later he filed a supplemental answer in
compliance with the resolution of this Court of September 15, 1967 requiring him to state in detail the
amounts allegedly disbursed c,irrency him out of the withdrawn funds. (Rollo, pp. 121-123)
Pursuant to the resolution of the Supreme Court on April 25, 1968, a Writ of Preliminary Injunction
was issued upon posting of a surety bond in the amount of twenty thousand pesos (P20,000.00)
restraining respondent Judge from enforcing and implementing his orders of November 3, 1967 and
March 16, 1968 in Civil Case No. Q-10351 of the Court of First Instance of Rizal (Quezon City).
Respondent Sevilla filed an answer to the supplemental petition (Rollo, pp. 216-221) and so did
respondent bank (Rollo, p. 225). Thereafter, all the parties filed their respective memoranda (Memo
for Petitioners, Rollo, pp. 230-244 for Resp. Bank, pp. 246-247; and for Respondents, Rollo, pp. 252257). Petitioners filed a rejoinder (rollo, pp. 259-262) and respondent Sevilla filed an Amended Reply
Memorandum (Rollo, pp. 266274). Thereafter the case was submitted for decision:' in September,
1968 (Rollo, p. 264).
Petitioner has raised the following issues:
1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion when
he issued the Order of July 17, 1967, for the following reasons: (a) the letter of credit issued by
respondent bank is irrevocable; (b) said Order was issued without notice and (c) said order disturbed
the status quo of the parties and is tantamount to prejudicing the case on the merits. (Rollo, pp. 7-9)
2. Respondent Judge likewise acted without or in excess of jurisdiction or with grave abuse of
discretion when he issued the Order of November 3, 1967 which has exceeded the proper scope and
function of a Writ of Preliminary Injunction which is to preserve the status quo and caretaker.2
therefore assume without hearing on the merits, that the award granted to respondent is exclusive;
that the action is for specific performance a d that the contract is still in force; that the conditions of
the contract have already been complied with to entitle the party to the issuance of the corresponding
Certificate of Authority to import American high grade tobacco; that the contract is still existing; that
the parties have already agreed that the balance of the quota of respondent will be sold at current
world market price and that petitioner has been overpaid.
3. The alleged damages suffered and to be suffered by respondent Sevilla are not irreparable, thus
lacking in one essential prerequisite to be established before a Writ of Preliminary Injunction may be

306
issued. The alleged damages to be suffered are loss of expected profits which can be measured and
therefore reparable.
4. Petitioner will suffer greater damaaes than those alleged by respondent if the injunction is not
dissolved. Petitioner stands to lose warehousing storage and servicing fees amounting to
P4,704.236.00 yearly or P392,019.66 monthly, not to mention the loss of opportunity to take
advantage of any beneficial change in the price of tobacco.
5. The bond fixed by the lower court, in the amount of P20,000.00 is grossly inadequate, (Rollo, pp.
128-151)
The petition is impressed with merit.
In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of the letter of credit
issued by respondent Bank in favor of petitioner. An irrevocable letter of credit caretaker.2 during its
lifetime be cancelled or modified Without the express permission of the beneficiary (Miranda and
Garrovilla, Principles of Money Credit and Banking, Revised Edition, p. 291). Consequently, if the
finding agricul- the trial on the merits is that respondent Sevilla has ailieged unpaid balance due the
petitioner, such unpaid obligation would be unsecured.
In the issuance of the aforesaid Order, respondent Judge likewise violated: Section 4 of Rule 15 of
the Relatiom, Rules of Court which requires that notice of a motion be served by the applicant to all
parties concerned at least three days before the hearing thereof; Section 5 of the same Rule which
provides that the notice shall be directed to the parties concerned; and shall state the time and place
for the hearing of the motion; and Section 6 of the same Rule which requires proof of service of the
notice thereof, except when the Court is satisfied that the rights of the adverse party or parties are not
affected, (Sunga vs. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which does not meet
the requirements of Sections 4 and 5 of Rule 15 of the Relatiom, Rules of Court is considered a
worthless piece of paper which the Clerk has no right to receiver and the respondent court a quo he
has no authority to act thereon. (Vda. de A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarn-j-iento,
39 SCRA 552; and Sacdalan v. Bautista, 56 SCRA 175). The three-day notice required by law in the
filing of a motion is intended not for the movant's benefit but to avoid surprises upon the opposite
party and to give the latter time to study and meet the arguments of the motion. (J.M. Tuason and
Co., Inc. v. Magdangal, L-1 5539. 4 SCRA 84).
More specifically, Section 5 of Rule 58 requires notice to the defendant before a preliminary injunction
is granted unless it shall appear from facts shown bv affidavits or by the verified complaint that great
or irreparable injury would result to the applyin- before the matter can be heard on notice. Once the

application is filed with the Judge, the latter must cause ailieged Order to be served on the defendant,
requiring him to show cause at a given time and place why the injunction should not be granted. The
hearing is essential to the legality of the issuance of a preliminary injunction. It is ailieged abuse of
discretion on the part of the court to issue ailieged injunction without hearing the parties and receiving
evidence thereon (Associated Watchmen and Security Union, et al. v. United States Lines, et al., 101
Phil. 896).
In the issuance of the Order of November 3, 1967, with notice and hearing notwithstanding the
discretionary power of the trial court to Issue a preliminary mandatory injunction is not absolute as the
issuance of the writ is the exception rather than the rule. The party appropriate for it must show a
clear legal right the violation of which is so recent as to make its vindication an urgent one (Police
Commission v. Bello, 37 SCRA 230). It -is granted only on a showing that (a) the invasion of the right
is material and substantial; (b) the right of the complainant is clear and unmistakable; and (c) there is
ailieged urgent and permanent necessity for the writ to prevent serious decision ( Pelejo v. Court of
Appeals, 117 SCRA 665). In fact, it has always been said that it is improper to issue a writ of
preliminary mandatory injunction prior to the final hearing except in cases of extreme urgency, where
the right of petitioner to the writ is very clear; where considerations of relative inconvenience bear
strongly in complainant's favor; where there is a willful and unlawful invasion of plaintiffs right against
his protest and remonstrance the injury being a contributing one, and there the effect of the
mandatory injunctions is rather to re-establish and maintain a pre-existing continuing relation between
the parties, recently and arbitrarily interrupted c,irrency the defendant, than to establish a new relation
(Alvaro v. Zapata, 11 8 SCRA 722; Lemi v. Valencia, February 28, 1963, 7 SCRA 469; Com. of
Customs v. Cloribel, L-20266, January 31, 1967,19 SCRA 234.
In the case at bar there appears no urgency for the issuance of the writs of preliminary mandatory
injunctions in the Orders of July 17, 1967 and November 3, 1967; much less was there a clear legal
right of respondent Sevilla that has been violated by petitioner. Indeed, it was ailieged abuse of
discretion on the part of respondent Judge to order the dissolution of the letter of credit on the basis
of assumptions that cannot be established except by a hearing on the merits nor was there a showing
that R.A. 4155 applies retroactively to respondent in this case, modifying his importation / exportation
contract with petitioner. Furthermore, a writ of preliminary injunction's enjoining any withdrawal from
Letter of Credit 6232 would have been sufficient to protect the rights of respondent Sevilla should the
finding be that he has no more unpaid obligations to petitioner.
Similarly, there is merit in petitioner's contention that the question of exclusiveness of the award is
ailieged issue raised by the pleadings and therefore a matter of controversy, hence a preliminary
mandatory injunction directing petitioner to issue respondent Sevilla a certificate of authority to import

307
Virginia leaf tobacco and at the same time restraining petitioner from issuing a similar certificate of
authority to others is premature and improper.

SO ORDERED,
G.R. No. L-10195 December 29, 1916

The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It
is the last actual peaceable uncontested status which precedes the pending controversy (Rodulfo v.
Alfonso, L-144, 76 Phil. 225), in the instant case, before the Case No. Q-10351 was filed in the Court
of First Instance of Rizal. Consequently, instead of operating to preserve the status quo until the
parties' rights can be fairly and fully investigated and determined (De los Reyes v. Elepano, et al., 93
Phil. 239), the Orders of July 17, 1966 and March 3, 1967 serve to disturb the status quo.
Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or
reasonable redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38 Phil. 585) or
where there is no standard c,irrency which their amount can be measured with reasonable accuracy,
that is, it is not susceptible of mathematical computation (SSC v. Bayona, et al., L-13555, May 30,
1962).
Any alleged damage suffered or might possibly be suffered by respondent Sevilla refers to expected
profits and claimed by him in this complaint as damages in the amount of FIVE Million Pesos
(P5,000,000.00), a damage that can be measured, susceptible of mathematical computation, not
irreparable, nor do they necessitate the issuance of the Order of November 3, 1967.
Conversely, there is truth in petitioner's claim that it will suffer greater damage than that suffered by
respondent Sevilla if the Order of November 3, 1967 is not annulled. Petitioner's stock if not made
available to other parties will require warehouse storage and servicing fees in the amount of
P4,704,236.00 yearly or more than P9,000.000.00 in two years time.
Parenthetically, the alleged insufficiency of a bond fixed by the Court is not by itself ailieged adequate
reason for the annulment of the three assailed Orders. The filing of ailieged insufficient or defective
bond does not dissolve absolutely and unconditionally ailieged injunction. The remedy in a proper
case is to order party to file a sufficient bond (Municipality of La Trinidad v. CFI of Baguio - Benguet,
Br. I, 123 SCRA 81). However, in the instant case this remedy is not sufficient to cure the defects
already adverted to.
PREMISES CONSIDERED, the petition is given due course and the assailed Orders of July 17, 1967
and November 3, 1967 and March 16, 1968 are ANNULLED and SET ASIDE; and the preliminary
injunctions issued c,irrency this Court should continue until the termination of Case No. Q-10351 on
the merits.

YU CON, plaintiff-appellee,
vs.
GLICERIO IPIL, NARCISO LAURON, and JUSTO SOLAMO, defendants-appellants.
Felix Sevilla y Macam for appellants.
Juan Singson and Dionisio Jakosalem for appellee.

ARAULLO, J.:
The purpose of the action brought in these proceedings is to enable the plaintiff to recover from the
defendants jointly and severally the sum of P450, which had been delivered by the plaintiff to the first
and third of the above-named defendants, master and supercargo, respectively, of
a banca named Maria belonging to the second defendant, to be carried, together with various
merchandise belonging to the plaintiff, from the port of Cebu to the town of Catmon of the Province of
Cebu. By virtue of the contract executed between the said second defendant and the plaintiff, the
money and merchandise were to be transported by the said craft between the points above-named in
consideration of the payment of a certain sum for each voyage. The money disappeared from said
craft during the night of October 18, 1911, while it was anchored in the port of Cebu and ready to sail
for its destination, Catmon, and was not afterwards found. The plaintiff based his action on the charge
that the disappearance of said sum was due to the abandonment, negligence, or voluntary breach, on
the part of the defendants, of the duty they had in respect to the safe-keeping of the aforementioned
sum.
The defendants, besides denying the allegations of the complaint, pleaded in special defense that the
plaintiff, at his own expense and under his exclusive responsibility, chartered the said banca, the
property of the defendant Lauron, for the fixed period of three days, at the price of P10 per diem, and
that, through the misfortune, negligence, or abandonment of the plaintiff himself, the loss complained
of occurred, while said banca was at anchor in the port of Cebu, and was caused by theft committed
by unknown thieves. They further alleged that said defendant Lauron, the owner of the banca merely
placed this craft at the disposal of the plaintiff for the price and period agreed upon, and did not go
with the banca on its voyage from Catmon to Cebu. As a counterclaim, the defendants also asked
that the plaintiff be ordered to pay the freight agreed upon, which had not yet been paid, amounting to

308
P80, plus the sum of P70, as an indemnity for the losses and damages caused them by the
attachment of the banca, issued at the instance of the plaintiff upon filing his complaint. They also
prayed for the additional sum of P100, for the deterioration of the said banca, and also that of P200
for other deterioration suffered by the same since November, 1911, and which had not bee paid for.
Finally, the defendants asked to be absolved from the complaint.
Before commencing the hearing of this case, the defendants made a verbal motion asking that the
plaintiff be declared in default, with respect to the counterclaim filed by them in their answer. On the
same date, the plaintiff presented his answer to said counter claim, denying each and all of the
allegations thereof and of the defendants' special defense. The aforementioned motion was overruled
by the court, and the defendants excepted.
At the termination of the trial, the court, in view of the evidence adduced, held that there was no room
to doubt that the sole cause of the disappearance of the money from the said banca was the
negligence of the master and the supercargo, the defendants Ipil and Solamo, respectively, and that
the defendant Narciso Lauron was responsible for that negligence, as owner of the banca, pursuant
to articles 589, 587, and 618 of the Code of Commerce, the plaintiff therefore being entitled to recover
the amount lost. Judgment was rendered on April 20, 1914, in favor of the plaintiff and against the
defendants jointly and severally for the sum of P450, with interest thereon at the rage of 6 per cent
per annum from the date of filing of the complaint, October 24, 1911, with costs. The plaintiff was
absolved from the defendant's counterclaim. From this judgment the defendants excepted and at the
same time moved for a new trial. Their motion was denied, to which ruling they also excepted, and,
through the proper bill of exceptions, entered and appeal to this Supreme Court. In their brief they
allege that the trial court erred:
1. In applying articles 586, 587, and 618 of the Code of Commerce in favor of the plaintiff;
2. In overruling the motion for default presented by the defendants and in sentencing the
defendants jointly and severally to pay the plaintiff the amount mentioned in the judgment;
and
3. In absolving the plaintiff from the defendant's counterclaim.
The evidence shows that the plaintiff Yu Con, a merchant and a resident of the town of San Nicolas,
of the city of Cebu, engaged in the sale of cloth and domestic articles and having a share in a shop,
or small store, situated in the town of Catmon, of said province, had several times chartered from the
defendant Narciso Lauron, a bancanamed Maria belonging to the latter, of which Glicerio Ipil was
master and Justo Solamo, supercargo, for the transportation of certain merchandise and some

money to and from the said town and the port of Cebu, that, on or about the 17th of October, 1911,
the plaintiff chartered the said banca from the defendant Lauron for the transportation of various
merchandise from the port of Cebu to Catmon, at the price of P45 for the round trip, which
merchandise was loaded on board the said craft which was then at anchor in front of one of the
graded fills of the wharf of said port; that in the afternoon of the following day, he delivered to the
other two defendants, Ipil, and Solamo, master and supercargo, respectively, of the aforenamed banca, the sum of P450, which was in a trunk belonging to the plaintiff and was taken charge
of by said two defendants, who received this money from the plaintiff, for the purpose of its delivery to
the latter's shop in Catmon for the purchase of corn in this town; that while the money was still in said
truck abroad the vessel, on the night of the said 18th of October, the time scheduled for the departure
of the Maria from the port of Cebu, said master and said supercargo transferred the P450 from the
plaintiff's trunk, where it was, to theirs, which was in a stateroom of the banca, from which stateroom
both the trunk and the money disappeared during that same night, and that the investigations, made
to ascertain their whereabouts, produced no result.
The facts are also admitted by the aforementioned master and supercargo, two of the defendants,
that they received from the plaintiff said P450, which sum was in the latter's own trunk which was
placed outside the stateroom of the banca, for the reason, as they said, that there was no room for it
inside the stateroom; that these defendants therefore transferred said money to their trunk, which was
inside the stateroom, and that this trunk and the P450 therein contained disappeared from the boat
during the night of that same day; that said sum had not been found or returned to the plaintiff; that
the plaintiff, being on the banca in the afternoon of that day, when his trunk containing the P450 was
carried aboard, and seeing that said two defendants, who had the key of the trunk, has removed said
sum to their trunk inside the stateroom, charged them to take special care of the money; that the
master Ipil assured the plaintiff that there was no danger of the money being lost; and that, final,
during the night in question, both the master and the supercargo and four cabin-boys were aboard
the banca.
It was likewise proven by the affidavits made by the master Ipil, the supercargo Solamo, and the
cabin-boys of said vessel, Juan Quiamco and Gabriel Basang, before the provincial fiscal of Cebu on
the day following the commission of the theft, which affidavits were presented at the trial as Exhibits
A, 3, 4, and 5, and by the testimony given at the trial by the defendants Ipil and Solamo, that both
said cabin-boys and the other two, Simeon Solamo, and said cabin-boys ad the other two, Simeon
Solamo, and Eulalio Quiamco, knew of the existence of the money in the trunk inside the stateroom
and witnessed its removal to said trunk from the plaintiff's; that the last two cabin- boys above-named,
in company with the master and the supercargo, conveyed the plaintiff's trunk, in which the money
was previously contained, from the plaintiff's shop to the banca; and that no person not belonging to
the vessel knew that the money was in the trunk inside said stateroom.

309
According to the testimony of the master Ipil himself he slept outside the stateroom that night, but a
cabin-boy named Gabriel slept inside. The latter, however, was not presented by the defendants to be
examined in regard to this point, nor does it appear that he testified in respect thereto in his affidavit,
Exhibit 5, before referred to, presented by the defendant's own counsel. The master Ipil and the
supercargo Solamo also testified that they left the cabin-boy Simeon Solamo on guard that night; but
this affirmation was not corroborated by Solamo at the trial, for he was not introduced as a witness,
and only his affidavit, Exhibit 2, taken before the fiscal of Cebu on the day following the commission of
the crime, was presented by the defendants. This affidavit, which should have been admitted and not
rejected, as was done by the court and excepted to by the defendants, shows that Simeon Solamo
stated that he was not designated to do guard duty that night, but that on the morning of the said 19th
of October, that is, the next day, all agreed that affiant should say that he was on guard, though it was
not true that he was.
Finally, said two defendants, the master and the supercargo, gave no satisfactory explanation in
regard to the disappearance of the trunk and the money therein contained, from the stateroom in
which the trunk was, nor as to who stole or might have stolen it. The master of the banca merely
testified that they, he and the supercargo, did to know who the robbers were, for, when the robbery
was committed, they were sound asleep, as they were tired, and that he believed that the guard
Simeon also fell asleep because he, too, was tired. The second defendant gave the same testimony.
Both of them testified that the small window of the stateroom had been broken, and the first of
them, i.e., the master, stated that all the window-blinds had been removed from the windows, as well
as part of the partition in which they were, and that the trunk in which the money was contained could
have been passed through said small window, because, as this witness himself had verified, the
Chinaman's trunk, which differed but a little from the one stolen, could be passed through the same
opening. The chief pilot of the harbor of Cebu, Placido Sepeda, who officially visited the
said banca, also stated that the small wooden window of the stateroom was broken, and that he
believed that in breaking it much noise must have been produced. However, no evidence whatever
was offered by counsel for the defendants to prove that it might have been possible to remove the
trunk from the stateroom through the opening made by the breaking of the small window, neither was
the size of the trunk proven, in relation to the Chinaman's to which the defendant master referred in
his testimony, so that it might be verified whether the statement made by the latter was true, viz., that
it might have been possible to remove from the stateroom through said opening the trunk in which the
P450 were contained, which sum, the same as the trunk, its container, had not been found, in spite of
the investigation made for the purpose. Furthermore, it was not proven, nor is there any
circumstantial evidence to show, that the robbery in question was committed by persons not
belonging to the craft.

It is therefore beyond all doubt that the loss or disappearance, on the night aforementioned, of the
P450, the property of the plaintiff, which, were in the possession of the defendants, the master and
the supercargo of thebanca Maria, occurred through the manifest fault and negligence of said
defendants, for, not only did they fail to take the necessary precautions in order that the stateroom
containing the trunk in which they kept the money should be properly guarded by members of the
crew and put in such condition that it would be impossible to steal the trunk from it or that persons not
belonging to the vessel might force an entrance into the stateroom from the outside, but also they did
not expressly station some person inside the stateroom for the guarding and safe-keeping of the
trunk, for it was not proven that the cabin-boy Gabriel slept there, as the master of the vessel, Ipil,
stated, nor that the other Cabin-boy, Simeon Solamo, was on guard that night, for the latter
contradicted the statements made by the two defendants on this point. On the contrary, it was proven
by the master's own statement that all the people of the vessel, including himself and the supercargo
Solamo, slept soundly that night; which fact cannot, in any manner, serve them as an excuse, nor can
it be accepted as an explanation of the statement that they were not aware of what was then occuring
on board, if the trunk was actually stolen by outsiders and removed through the small window of the
stateroom, a detail which also was not proven, but, on the contrary, increases their liability, because it
is very strange that none of them, who were six and were around or near the stateroom, should have
heard the noise which the robbers must have made in breaking its window. All of these
circumstances, together with that of its having been impossible to know who took the trunk and the
money and the failure to recover the one or the other make the conduct of the two defendants and of
the other members of the crew of banca, eminently supicious and prevent our holding that the
disappearance or loss of the money was due to a fortuitous event, to force majeure, or that it was an
occurrence which could not have been foreseen, or which, if foreseen, was inevitable.
It is unquestionable that the defendants Glicerio Ipil and Justo Solamo were the carriers of the said
P450 belonging to the plaintiff, and that they received this sum from the latter for the purpose of
delivering it to the store of the town of Catmon, to which it had been consigned. Under such
circumstances, said defendants were the depositaries of the money.lawphi1.net
Manresa, in his Commentaries on the Civil Code (Vol. 10, p. 773), in treating of the provisions of the
said code concerning transportation by sea and by land of both persons and things, says:
Liability of carriers. In order that a thing may be transported, it must be delivered to the
carrier, as the Code says. From the time it is delivered to the carrier or shipper until it is
received by the consignee, the carrier has it in his possession, as a necessary condition for
its transportation, and is obliged to preserve and guard it; wherefore it is but natural and
logical that he should be responsible for it.

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The Code discovers in the relation of all these elements the factors which go to make up the
conception of a trust, and, taking into account that the delivery of the thing on the part of the
shipper is unavoidable, if the transportation is to take place, esteem that, at least in certain
respects, such trusts are necessary.
The said two defendants being the depositaries of the sum in question, and they having failed to
exercise for its safe-keeping the diligence required by the nature of the obligation assumed by them
and by the circumstances of the time and the place, it is evident that, in pursuance of the provisions
of articles 1601 and 1602, in their relation to articles 1783 and 1784, and as prescribed in articles
1770, of the Civil Code, they are liable for its loss or misplacement and must restore it to the plaintiff,
together with the corresponding interest thereon as an indemnity for the losses and damages caused
him through the loss of the said sum.
With respect to the other defendant, Narciso Lauron, as he was the owner of the vessel in which the
loss or misplacement of the P450 occurred, of which vessel, as aforestated, Glicerio Ipil was master
and Justo Solamo, supercargo, both of whom were appointed to, or chosen for, the positions they
held, by the defendant himself, and, as the aforementioned sum was delivered to the said master, Ipil,
and the merchandise to be transported by means of said vessel from the port of Cebu to the town of
Catmon was laden by virtue of a contract executed by and between the plaintiff and the owner of the
vessel, Narciso Lauron, it behooves us to examine whether the latter, also, should be held to be
liable, as requested by the plaintiff in his complaint.
Said vessel was engaged in the transportation of merchandise by sea and made voyages to and from
the port of Cebu to Catmon, and had been equipped and victualed for this purpose by its owner,
Narciso Lauron, with whom, as aforesaid, the plaintiff contracted for the transportation of the
merchandise which was to be carried, on the date hereinabove mentioned, from the port of Cebu to
the town of Catmon.
For legal purposes, that is, for the determination of the nature and effect of the relations created
between the plaintiff, as owner of the merchandise laden on said craft and of the money that was
delivered to the master, Ipil, and the defendant Lauron, as owner of the craft, the latter was a vessel,
according to the meaning and construction given to the word vessel in the Mercantile Code, in
treating of maritime commerce, under Title 1,
Book 3.

The word vessel serves to designate every kind of craft by whatever particular or technical
name it may now be known or which nautical advancements may give it in the future.
(Commentaries on the Code of Commerce, in the General Review of Legislation and
Jurisprudence, founded by D. Jose Reus y Garcia, Vol., 2 p. 136.)
According to the Dictionary of Legislation and Jurisprudence by Escriche, a vessel is any kind of craft,
considering solely the hull.
Blanco, the commentator on mercantile law, in referring to the grammatical meaning of the word
"ship" and "vessels," says, in his work aforecited, that these terms designate every kind of craft, large
or small, whether belonging to the merchant marine or to the navy. And referring to their juridical
meaning, he adds: "This does not differ essentially from the grammatical meaning; the words "ship"
and "vessel" also designate every craft, large or small, so long as it be not an accessory of another,
such as the small boat of a vessel, of greater or less tonnage. This definition comprises both the craft
intended for ocean or for coastwise navigation, as well as the floating docks, mud lighters, dredges,
dumpscows or any other floating apparatus used in the service of an industry or in that of maritime
commerce. . . ." (Vol. 1, p. 389.)
According to the foregoing definitions, then, we should that the banca called Maria, chartered by the
plaintiff Yu Con from the defendant Narciso Lauron, was a "vessel", pursuant to the meaning this
word has in mercantile law, that is, in accordance with the provisions of the Code of Commerce in
force.
Glicerio Ipil, the master of the said banca Maria, must also be considered as its captain, in the legal
acceptation of this word.
The same Code of Commerce in force in these Islands compares, in its article 609, masters with
captains. It is to be noted that in the Code of Commerce of Spain the denomination of arraeces is not
included in said article as equivalent to that of masters, as it is in the Code of these Islands.
Commenting on said article, the aforementioned General Review of Legislation and Jurisprudence
says:
The name of captain or master is given, according to the kind of vessel, to the person in
charge of it.
The first denomination is applied to those who govern vessels that navigate the high seas or
ships of large dimensions and importance, although they be engaged in the coastwise trade.

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Masters are those who command smaller ships engaged exclusively in the coastwise trade.
For the purposes of maritime commerce, the words "captain" and "master" have the same
meaning; both being the chiefs or commanders of ships. (Vol. 2, p. 168.)
Article 587 of the Code of Commerce in force provides:
The agent shall be civilly liable for the indemnities in favor of third persons which arise from
the conduct of the captain in the care of the goods which the vessel carried; but he may
exempt himself therefrom by abandoning the vessel with all her equipments and the freight
he may have earned during the trip.
Article 618 of the same Code also prescribes:
The captain shall be civilly liable to the agent and the latter to the third persons who may
have made contracts with the former
1. For all the damages suffered by the vessel and its cargo by reason of want of skill or
negligence on his part, If a misdemeanor or crime has been committed he shall be liable in
accordance with the Penal Code.
2. For all the thefts committed by the crew, reserving his right of action against the guilty
parties.
The Code of Commerce previous to the one now in force, to wit, that of 1829, in its article 624,
provided that the agent or shipowner should not be liable for any excesses which, during the
navigation, might be committed by the captain and crew, and that, for the reason of such excesses, it
was only proper to bring action against the persons and property of those found guilty.
Estasen, in his work on the Institutes of Mercantile Law (Vol. 4, p. 280), makes the following remarks,
in referring to the exposition of reasons presented by the Code Commission which prepared and
presented for approval the Code of Commerce now in force, in which exposition of reasons were set
forth the fundamental differences between the provisions contained in both codes, with respect to the
subject-matter now under discussion. He says:

Another very important innovation introduced by the Code is that relative to the liability for
misdemeanors and crimes committed by the captain or by members of the crew. This is a
matter of the greatest importance on which a variety of opinions has been expressed by
different juris-consults.
The old code declares the captain civilly liable for all damage sustained by the vessel or its
cargo through lack of skill or care on his part, through violations of the law, or through
unlawful acts committed by the crew. As regards the agent or shipowners, it declares in
unmistakeable terms that he shall in no wise be liable for any excesses which, during the
navigation, may be committed by the captain and the crew.
Upon an examination, in the light of the principles of modern law, of the standing legal
doctrine on the non-liability of the shipowner for the unlawful acts, that is, the crimes or quasi
crimes, committed by the captain and the crew, it is observed that it cannot be maintained in
the absolute and categorical terms in which it is formulated.
It is well and good that the shipowner be not held criminally liable for such crimes or quasi
crimes; but the cannot be excused from liability for the damage and harm which, in
consequence of those acts, may be suffered by the third parties who contracted with the
captain, in his double capacity of agent and subordinate of the shipowner himself. In maritime
commerce, the shippers and passengers in making contracts with the captain do so through
the confidence they have in the shipowner who appointed him; they presume that the owner
made a most careful investigation before appointing him, and, above all, they themselves are
unable to make such an investigation, and even though they should do so, they could not
obtain complete security, inasmuch as the shipowner can, whenever he sees fir, appoint
another captain instead.
The shipowner is in the same case with respect to the members of the crew, for, though he
does not appoint directly, yet, expressly or tacitly, he contributes to their appointment.
On the other hand, if the shipowner derives profits from the results of the choice of the
captain and the crew, when the choice turns out successful, it is also just that he should suffer
the consequences of an unsuccessful appointment, by application of the rule of natural law
contained in the Partidas, viz., that he who enjoys the benefits derived from a thing must
likewise suffer the losses that ensue therefrom.
Moreover, the Penal Code contains a general principle that resolves the question under
consideration, for it declares that such persons as undertake and carry on any iondustry shall

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be civilly liable, in default of those who may be criminally liable, for the misdemeanors and
crimes committed by their subordinates in the discharge of their duties.
The Code of Commerce in force omits the declaration of non-liability contained in the old
code, and clearly makes the shipowner liable civilly for the loss suffered by those who
contracted with the captain, in consequence of the misdemeanors and crimes committed by
the latter or by the members of the crew.

G.R. No. 105387 November 11, 1993

JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under the name and
style "PHILIPPINE SJ INDUSTRIAL TRADING," respondents.
Hernandez, Velicaria, Vibar & Santiago for petitioner.

It is therefore evident that, in accordance with the provisions of the Code of Commerce in force, which
are applicable to the instance case, the defendant Narciso Lauron, as the proprietor and owner of the
craft of which Glicerio Ipil was the master and in which, through the fault and negligence of the latter
and of the supercago Justo Solamo, there occurred the loss, theft, or robbery of the P450 that
belonged to the plaintiff and were delivered to said master and supercargo, a theft which, on the other
hand, as shown by the evidence, does not appear to have been committed by a person not belonging
to the craft, should, for said loss or theft, be held civilly liable to the plaintiff, who executed with said
defendant Lauron the contract for the transportation of the merchandise and money aforementioned
between the port of Cebu and the town of Catmon, by means of the said craft.
Therefore, the trial court did not err in so holding in the judgement appealed from.
The plaintiff having filed his answer to the cross-complaint as soon as the defendant presented their
motion for] a declaration of the plaintiff's default in connection with said cross-complaint, and it being
optional with the court to make in such cases the declaration of default, as provided in section 129 of
the Code of Civil Procedure, the said court did not incur the second error assigned by the appellants
in their brief.
Lastly, as the banca Maria did not make the trip she should have made from the port of Cebu to the
town of Catmon, on the occasion in question, through cases chargeable, as has been seen, to the
captain and the supercargo of said banca, to wit, because of the loss, theft of robbery of the P450
belonging to the plaintiff, and as a contract was made for the transportation of the said sum and the
merchandise from one of said points to the other, for the round trip, and not through payment by the
plaintiff of the wages due the crew for each day, as alleged by the defendants, for the proofs
presented by the latter in regard to this point were insufficient, as the trial court so held, neither did
the latter incur error in overruling the cross-complaint formulated by the defendants in their answer
against the plaintiff.
Therefore, and for all the reasons above set forth, we affirm the judgment appealed from, with the
costs of this instance against the appellants. So ordered.

Ernesto M. Tomaneng for private respondent.

ROMERO, J.:
In this petition for review on certiorari, petitioner questions the reversal by the Court of Appeals 1 of
the trial court's ruling that a contract of sale had been perfected between petitioner and private
respondent over bus spare parts.
The facts as quoted from the decision of the Court of Appeals are as follows:
Sometime in 1981, defendant 2 established contact with plaintiff 3 through the
Philippine Consulate General in Hamburg, West Germany, because he wanted to
purchase MAN bus spare parts from Germany. Plaintiff communicated with its trading
partner. Johannes Schuback and Sohne Handelsgesellschaft m.b.n. & Co.
(Schuback Hamburg) regarding the spare parts defendant wanted to order.
On October 16, 1981, defendant submitted to plaintiff a list of the parts (Exhibit B) he
wanted to purchase with specific part numbers and description. Plaintiff referred the
list to Schuback Hamburg for quotations. Upon receipt of the quotations, plaintiff sent
to defendant a letter dated 25 November, 1981 (Exh. C) enclosing its offer on the
items listed by defendant.
On December 4, 1981, defendant informed plaintiff that he preferred genuine to
replacement parts, and requested that he be given 15% on all items (Exh. D).
On December 17, 1981, plaintiff submitted its formal offer (Exh. E) containing the
item number, quantity, part number, description, unit price and total to defendant. On

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December, 24, 1981, defendant informed plaintiff of his desire to avail of the prices of
the parts at that time and enclosed Purchase Order No. 0101 dated 14 December
1981 (Exh. F to F-4). Said Purchase Order contained the item number, part number
and description. Defendant promised to submit the quantity per unit he wanted to
order on December 28 or 29 (Exh. F).
On December 29, 1981, defendant personally submitted the quantities he wanted to
Mr. Dieter Reichert, General Manager of plaintiff, at the latter's residence (t.s.n., 13
December, 1984, p. 36). The quantities were written in ink by defendant in the same
Purchase Order previously submitted. At the bottom of said Purchase Order,
defendant wrote in ink above his signature: "NOTE: Above P.O. will include a 3%
discount. The above will serve as our initial P.O." (Exhs. G to G-3-a).
Plaintiff immediately ordered the items needed by defendant from Schuback
Hamburg to enable defendant to avail of the old prices. Schuback Hamburg in turn
ordered (Order No. 12204) the items from NDK, a supplier of MAN spare parts in
West Germany. On January 4, 1982, Schuback Hamburg sent plaintiff a proforma
invoice (Exhs. N-1 to N-3) to be used by defendant in applying for a letter of credit.
Said invoice required that the letter of credit be opened in favor of Schuback
Hamburg. Defendant acknowledged receipt of the invoice (t.s.n., 19 December 1984,
p. 40).
An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to plaintiff
which was forwarded to and received by defendant on February 3, 1981 (t.s.n., 13
Dec. 1984, p. 42).
On February 16, 1982, plaintiff reminded defendant to open the letter of credit to
avoid delay in shipment and payment of interest (Exh. J). Defendant replied,
mentioning, among others, the difficulty he was encountering in securing: the
required dollar allocations and applying for the letter of credit, procuring a loan and
looking for a partner-financier, and of finding ways 'to proceed with our orders" (Exh.
K).
In the meantime, Schuback Hamburg received invoices from, NDK for partial
deliveries on Order No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3). Schuback
Hamburg paid NDK. The latter confirmed receipt of payments made on February 16,
1984 (Exh.C-Deposition).

On October 18, 1982, Plaintiff again reminded defendant of his order and advised
that the case may be endorsed to its lawyers (Exh. L). Defendant replied that he did
not make any valid Purchase Order and that there was no definite contract between
him and plaintiff (Exh. M). Plaintiff sent a rejoinder explaining that there is a valid
Purchase Order and suggesting that defendant either proceed with the order and
open a letter of credit or cancel the order and pay the cancellation fee of 30% of
F.O.B. value, or plaintiff will endorse the case to its lawyers (Exh. N).
Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff enclosing
therewith Debit Note (Exh. O) charging plaintiff 30% cancellation fee, storage and
interest charges in the total amount of DM 51,917.81. Said amount was deducted
from plaintiff's account with Schuback Hamburg (Direct Interrogatories, 07 October,
1985).
Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983 and
June 9, 1983 were to no avail (Exhs R and S).
Consequently, petitioner filed a complaint for recovery of actual or compensatory damages, unearned
profits, interest, attorney's fees and costs against private respondent.
In its decision dated June 13, 1988, the trial court 4 ruled in favor of petitioner by ordering private
respondent to pay petitioner, among others, actual compensatory damages in the amount of DM
51,917.81, unearned profits in the amount of DM 14,061.07, or their peso equivalent.
Thereafter, private respondent elevated his case before the Court of Appeals. On February 18, 1992,
the appellate court reversed the decision of the trial court and dismissed the complaint of petitioner. It
ruled that there was no perfection of contract since there was no meeting of the minds as to the price
between the last week of December 1981 and the first week of January 1982.
The issue posed for resolution is whether or not a contract of sale has been perfected between the
parties.
We reverse the decision of the Court of Appeals and reinstate the decision of the trial court. It bears
emphasizing that a "contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. . . . " 5
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and
acceptance upon the thing and the cause which are to constitute the contract. The offer must be

314
certain and the acceptance absolute. A qualified acceptance constitutes a counter offer." The facts
presented to us indicate that consent on both sides has been manifested.
The offer by petitioner was manifested on December 17, 1981 when petitioner submitted its proposal
containing the item number, quantity, part number, description, the unit price and total to private
respondent. On December 24, 1981, private respondent informed petitioner of his desire to avail of
the prices of the parts at that time and simultaneously enclosed its Purchase Order No. 0l01 dated
December 14, 1981. At this stage, a meeting of the minds between vendor and vendee has occurred,
the object of the contract: being the spare parts and the consideration, the price stated in petitioner's
offer dated December 17, 1981 and accepted by the respondent on December 24,1981.
Although said purchase order did not contain the quantity he wanted to order, private respondent
made good, his promise to communicate the same on December 29, 1981. At this juncture, it should
be pointed out that private respondent was already in the process of executing the agreement
previously reached between the parties.
Below Exh. G-3, marked as Exhibit G-3-A, there appears this statement made by private respondent:
"Note. above P.O. will include a 3% discount. The above will serve as our initial P.O." This notation on
the purchase order was another indication of acceptance on the part of the vendee, for by requesting
a 3% discount, he implicitly accepted the price as first offered by the vendor. The immediate
acceptance by the vendee of the offer was impelled by the fact that on January 1, 1982, prices would
go up, as in fact, the petitioner informed him that there would be a 7% increase, effective January
1982. On the other hand, concurrence by the vendor with the said discount requested by the vendee
was manifested when petitioner immediately ordered the items needed by private respondent from
Schuback Hamburg which in turn ordered from NDK, a supplier of MAN spare parts in West
Germany.
When petitioner forwarded its purchase order to NDK, the price was still pegged at the old one. Thus,
the pronouncement of the Court Appeals that there as no confirmed price on or about the last week of
December 1981 and/or the first week of January 1982 was erroneous.

On the part of the buyer, the situation reveals that private respondent failed to open an irrevocable
letter of credit without recourse in favor of Johannes Schuback of Hamburg, Germany. This omission,
however. does not prevent the perfection of the contract between the parties, for the opening of the
letter of credit is not to be deemed a suspensive condition. The facts herein do not show that
petitioner reserved title to the goods until private respondent had opened a letter of credit. Petitioner,
in the course of its dealings with private respondent, did not incorporate any provision declaring their
contract of sale without effect until after the fulfillment of the act of opening a letter of credit.
The opening of a etter of credit in favor of a vendor is only a mode of payment. It is not among the
essential requirements of a contract of sale enumerated in Article 1305 and 1474 of the Civil Code,
the absence of any of which will prevent the perfection of the contract from taking place.
To adopt the Court of Appeals' ruling that the contract of sale was dependent on the opening of a
letter of credit would be untenable from a pragmatic point of view because private respondent would
not be able to avail of the old prices which were open to him only for a limited period of time. This
explains why private respondent immediately placed the order with petitioner which, in turn promptly
contacted its trading partner in Germany. As succinctly stated by petitioner, "it would have been
impossible for respondent to avail of the said old prices since the perfection of the contract would
arise much later, or after the end of the year 1981, or when he finally opens the letter of credit." 6
WHEREFORE, the petition is GRANTED and the decision of the trial court dated June 13, 1988 is
REINSTATED with modification.
SO ORDERED.
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. ALFA RTW MANUFACTURING
CORPORATION, BA FINANCE CORPORATION, NORTH AMERICAN GARMENTS
CORPORATION, JOHNNY TENG, RAMON LEE, ANTONIO LACDAO, RAMON LUY and
ALFA INTEGRATED TEXTILE MILLS, respondents.
DECISION

While we agree with the trial court's conclusion that indeed a perfection of contract was reached
between the parties, we differ as to the exact date when it occurred, for perfection took place, not on
December 29, 1981. Although the quantity to be ordered was made determinate only on December
29, 1981, quantity is immaterial in the perfection of a sales contract. What is of importance is the
meeting of the minds as to the object and cause, which from the facts disclosed, show that as of
December 24, 1981, these essential elements had already occurred.

SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari assailing the decision of the Court of Appeals in CA-G.R. C.V. No.
42293.

315
On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the Regional Trial Court of Makati,
Branch 145, Civil Case No. 2624 for a sum of money against Alfa RTW Manufacturing Corporation, Johnny
Teng, Ramon Lee, Antonio Lacdao, Ramon Luy and Alfa Integrated Textile Mills. Asserting a superior right
over the property involved in the suit, North Atlantic Garments Corporation filed a complaint in intervention.
BA Finance Corporation, claiming as mortgagee of the same property, filed an answer in intervention. After
hearing, the trial court rendered judgment on August 19, 1991, the dispositive portion[1] of which reads:
WHEREFORE, judgment is rendered in favor of plaintiff as follows:
1. Ordering all defendants to pay, jointly and severally, to plaintiff the amount of Eighteen Million
Nine Hundred Sixty-one Thousand Three Hundred Seventy-two Pesos and Forty-three Centavos
(P18,961,372.43), Philippine Currency, (inclusive of interest, service charges, litigation expenses
and attorneys fees), with interest thereon at the legal rate from February 15, 1988 until fully
paid. The proceeds from the sale of defendant Alfas ready to wear apparel, in the sum of
P73,133.70, should be deducted from the principal obligation of P18,961,372.43;
2. Declaring that the respective liens of intervenors BA Finance Corporation and North American
Garments Corporation over the properties attached by the sheriff are inferior to that of plaintiff.
3. Ordering defendants and intervenors to pay the proportionate costs.
"SO ORDERED.
On appeal, the Court of Appeals affirmed with modification[2] the RTC decision, thus:
WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED, with the modification
that instead of P18,961,372.43, all the defendants are hereby ordered to pay, jointly and severally to plaintiff the
amount of P3,060,406.25, Philippine Currency, inclusive of stipulated interest, service charges, litigation
expenses and attorneys fees, with interest thereon at the legal rate from February 15, 1988, until fully paid.
"All other disquisitions of the trial court are hereby AFFIRMED.
"SO ORDERED.
In this petition, RCBC questions the Court of Appeals decision insofar as it modified the RTC decision by
decreasing the award in its favor from P18,961.372.43 to P3,060,406.25. In assailing the Court of Appeals
decision, petitioner RCBC raises a question of law, that is, whether or not the Court of Appeals can deviate from
the provisions of the contract between the parties, which contract is the law between them.

The facts as summarized by the Court of Appeals are:

From the records of the case, it appears that defendant Alfa RTW Manufacturing Corporation (Alfa RTW), on
separate instances, had applied for and was granted by the plaintiff Rizal Commercial Banking Corporation
(RCBC) four Letters of Credit (RO-80/2487, RO-80/2789, RO-80/D-1795 and RO-81/D-1800 marked as
Exhibits A, D, G, and J, respectively) to facilitate its purchase of raw materials for its garments business. Upon
such letters of credit, corresponding bills of exchange (Exhibits B, E, H, and K) of various amounts were drawn,
and charged to the account of said defendants.
The defendant Alfa RTW, in turn, had executed four Trust Receipts (Exhibits C, F, I and L), stipulating that it
had received in trust for the plaintiff bank the goods and merchandise described therein, and which were
purchased with the drawings upon the letters of credit.
When the obligations upon the said commercial documents became due, the plaintiff demanded payment of the
defendants undertakings, citing two documents allegedly executed by the individual defendants Johnny Teng,
Ramon Lee, Antonio D. Lacdao and Ramon Uy and Alfa Integrated Textile Mills Inc. (Alfa ITM), labeled
Comprehensive Surety Agreements (Exhibits N and M) dated September 8, 1978 and October 10, 1979.
Under such Comprehensive Surety Agreements, it was essentially agreed that for and in consideration of any
existing indebtedness to plaintiff bank of defendant Alfa RTW and/or in order to induce the plaintiff bank at any
time thereafter to make loans or advances or increases thereof or to extend credit in any other manner to or for
the account of defendant, Alfa ITM and the signatory officers agreed to guarantee in joint and several capacity
the punctual payment at maturity to plaintiff bank of any and all such indebtedness and/or other obligations and
also any and all indebtedness of every kind which was then or may thereafter become due or owing to plaintiff
bank by the defendant Alfa RTW, together with any and all expenses of collection, etc., provided, however, that
the liability of individual defendants and defendant Alfa Integrated Textile Mills, Inc. thereunder shall not
exceed the sum of P4,000,000.00 and P7,500,000.00 and such interest as may accrue thereon and expenses as
may be incurred by plaintiff bank. (p. 4, Complaint)
Petitioner RCBC contends that the Court of Appeals erred in awarding to it the minimal sum of
P3,060,406.25 instead of P18,961,372.43 granted by the trial court.
The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of
Appeals via Rule 45 of the 1997 Rules of Civil Procedure, as amended, is limited to reviewing errors of
law. Findings of fact of the latter court are conclusive, except in a number of instances. In Siguan vs. Lim[3] this
Court enumerated those instances when the factual findings of the Court of Appeals are not deemed conclusive,
to wit: (1) when the conclusion is a finding grounded entirely on speculations, surmises or conjectures; (2) when
the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4)

316
when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary
to the admissions of both the appellant and appellee; (7) when the findings are contrary to those of the trial
court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the
respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.
In the case at bar, exception No. 6 is present. Here, the Court of Appeals made findings contrary to the
admissions of the parties. We refer to the terms and conditions agreed upon by petitioner RCBC and respondent
borrowers in the Trust Receipts[4] and the Comprehensive Surety Agreements.[5]
Significantly, the validity of those contracts is not being questioned. It follows that the very terms and
conditions of the same contracts become the law between the parties.
Herein lies the reversible error on the part of the Court of Appeals. When it ruled that only P3,060,406.25
should be awarded to petitioner RCBC, the Appellate Court disregarded the parties stipulations in their contracts
of loan, more specifically, those pertaining to the agreed (1) interest rates, (2) service charges and (3) penalties
in case of any breach thereof.[6] Indeed, the Court of Appeals failed to apply this time-honored doctrine:
That which is agreed to in a contract is the law between the parties. Thus, obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith.[7]
The Court cannot vary the terms and conditions therein stipulated unless such stipulation is contrary to law,
morals, good customs, public order or public policy.[8]
In relation to the determination and computation of interest payments, this Court, in Eastern Shipping
Lines, Inc. vs. Court of Appeals,[9] through Mr. Justice Jose C. Vitug, held:
The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of each
case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title
XVIII on Damages of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest, in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.. (Emphasis supplied).
The case now before us involves an obligation arising from a letter of credit-trust receipt
transaction. Under this arrangement, a bank extends to a borrower a loan covered by the letter of credit, with the
trust receipt as security of the loan. [10] A trust receipt is a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit except thru utilization, as collateral, of the
merchandise imported or purchased.[11]

317
In contracts contained in trust receipts, the contracting parties may establish agreements, terms and
conditions they may deem advisable, provided they are not contrary to law, morals or public order. [12] In the case
at bar, there are specific amounts of interest, service charges and penalties agreed upon by the parties. Pertinent
provisions in the four (4) trust receipts (TR. No. 1909, TR. No. 1932, TR. No. 1732, and TR No. 2065)[13]read:
All obligations of the undersigned under this Trust Receipt shall bear interest at the rate of sixteen per
centum (16%) per annum plus service charge of two per centum (2%) per annum from the date of the execution
of this Trust Receipt until paid. It is expressly agreed and understood that regardless of the maturity date hereof,
I/we hereby authorize the said Bank to correspondingly increase the interest of this Trust Receipt to the extent
allowed by law without notice to me/us whenever the Central Bank of the Philippines raises the interest on
borrowings of Banks or the interest provided for in the Usury Law, or whenever , in the sole judgment of the
holder of this Trust Receipt is warranted by the increase in money market rates or by similar events.
Without prejudice to the criminal action that may be brought by the Bank against the entrustee by reason of
default or breach of this Trust Receipt, I/we agree to pay a penalty and/or liquidated damages equivalent to
six per centum (6%) per annum of the amount due and unpaid.
In the event of the bringing of any action or suit by you or any default of the undersigned hereunder: I/we shall
on demand pay you reasonable attorneys and other fees and cost of collection, which shall in no case be less
than ten per centum (10%) of the value of the property and the amount involved by the action or suit.
If there are two or more signatories on this Trust Receipt, our obligations hereunder shall in all cases be joint
and several.
Applying the above-quoted rules of thumb in the computation of interest, as enunciated by this Court in
Eastern Shipping Lines, Inc.,[14] the principal amount of loans corresponding to each trust receipt must earn an
interest at the rate of sixteen percent (16%) per annum [15] with the stipulated service charge of two percent (2%)
per annum on the loan principal or the outstanding balance thereof, [16] from the date of execution until finality of
this Decision.[17] A penalty of six percent (6%) per annum of the amount due and unpaid must also be imposed
computed from the date of demand (in this case on March 9, 1982), [18] until finality of Judgment.[19] The interest
of 16% percent per annum, as long as unpaid, also earns interest, computed from the date of the filing of the
complaint (March 12, 1982) until finality of this Courts Decision. [20] From such date of finality, the total unpaid
amount (principal + interest + service charge + penalty + interest on the interest) computed shall earn interest of
12% per annum until satisfied.
The Court of Appeals awarded only the sum of P3,060,406.25 as it was the amount prayed for in the
complaint. The Appellate Court, however, failed to consider that the complaint was filed on March 12, 1982, or
just a year after the execution of the trust receipts. The computed interests then, the service charge, the penalty

and the attorneys fees corresponded only to one year. The interest on the interest could not have been computed
then since the finality of judgment could not yet be ascertained. Significantly, from the filing of the complaint
on March 12, 1982 up to the time the Appellate Courts decision was promulgated, on May 14, 1998, there had
been a lapse of sixteen years. The computed interest in 1982 would no longer be true in 1998. What the
Appellate Court should have done then was to compute the total amount due in accordance with the rules of
thumb laid down by this Court in Eastern Shipping Lines, Inc.,[21] the resulting formula of which is as follows:
TOTAL AMOUNT DUE = principal + interest + service charge + penalty + interest on interest
Interest = principal x 16 % per annum x no. of years from date of execution until finality of judgment
Service charge = principal x 2% per annum x no. of years from date of execution until finality of judgment
Penalty = principal x 6% per annum x no. of years from demand (March 9, 1982) until finality of judgment
Interest on interest = Interest computed as of the filing of the complaint (March 12, 1982) x 12% x no. of years
until finality of judgment
Attorneys fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid.
The total amount due corresponding to each of the four (4) contracts of loan may be easily determined by
the trial court through a simple mathematical computation based on the formula specified above. Mathematics is
an exact science, the application of which needs no further proof from the parties.
WHEREFORE, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is
MODIFIED in the sense that the award to petitioner RCBC of P3,060,406.25 is SET ASIDE and substituted
with an amount to be computed by the trial court, upon finality of this Decision, in accordance with the formula
indicated above.
SO ORDERED.
G.R. No. L-48336

September 21, 1942

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
FELIPE MAPOY and R. M. MAIPID, defendant-appellants.

318
Romualdo Constantino for appellants.
Ross, Selph, Carrascoso & Janda as private prosecutors.
Assistant Solicitor-General Enriquez and Solicitor Alikpala for appellee.
1. CRIMINAL LAW AND PROCEDURE; VIOLATION OF BULK SALES LAW (Act No. 3952); WHEN
PAYMENT OF INDEMNITY TO OFFENDED PARTY DOES NOT LIE. Defendants were charged
with violation of the Bulk Sales Law in that they mortgaged all of their stock of goods, etc., without any
notice to Daido Boeki Kaisha, Ltd., one of the offended parties, to which they were indebted in the
sum of P2,568.85. They pleaded guilty and its sentenced by the Court of First Instance of Manila to
pay a fine of P100, and the costs, and to indemnify Daido Boeki Kaisha, Ltd., jointly and severally in
the sum of P2,568.85, with subsidiary imprisonment in case of insolvency. Held: That it was error for
the trial court to consider said indebtedness as a liability arising from the crime charged, and to order
defendants to indemnify Daido Boeki Kaisha, Ltd., in the sum of P2,568.85, with subsidiary
imprisonment in case of insolvency.
2. ID; ID; ID; Inasmuch as under section 4 of the Bulk Sales Law, the mortgaged in question was
fraudulent and void, and there being no proof that the mortgaged goods have disappeared, the same
are still subject to attachment for the satisfaction of creditors' lawful claims against the defendants.
Daido Boeki Kaisha, Ltd., may still bring a separate civil action against defendants herein for the
collection of any indebtedness that may be due from defendants, and if the latter will not pay the
judgment in such civil case, the goods involved in the instant case may be seized and sold.
Therefore, the obligations of defendants to pay Daido Boeki Kaisha , Ltd., the sum of P2,568.85,
which was already existing when the mortgage was signed, was not the result of the violation of the
Bulk Sales Law, nor was it affected by said violation.

MENDOZA, J.:
This is a petition for review of the decision of the Court of Appeals, 1 in CA-G.R. CV No. 09514,
affirming with modification the decision of the Regional Trial Court in a case for specific performance
brought by petitioner.
Private respondent Kawasaki Kishen Kaisha, Ltd. (K-Line) is a foreign shipping company doing
business in the Philippines, its shipping agent being respondent the Smith, Bell & Co., Inc. It is a
member of the Far East Conference, the body which fixes rates by agreement of its membershipowners. The conference is registered with the U.S. Federal Maritime Commission. 2
On May 8, 1979, the Van Reekum Paper, Inc. entered into a contract of affreightment with the K-Line
for the shipment of 468 rolls of container board liners from Savannah, Georgia to Manila. The
shipment was consigned to herein petitioner La Suerte Cigar & Cigarette Factory. The contract of
affreightment was embodied in Bill of Lading No. 602 issued by the carrier to the shipper. The
expenses of loading and unloading were for the account of the consignee.
The shipment was packed in 12 container vans and loaded on board the carrier's vessel,
SS Verrazano Bridge. At Tokyo, Japan, the cargo was transhipped on two vessels of the K-Line. Ten
container vans were loaded on the SSFar East Friendship, while two were loaded on the
SS Hangang Glory.
Shortly thereafter, the consignee (herein petitioner) received from the shipper photocopies of the bill
of lading, consular invoice and packing list, as well as notice of the estimated time of arrival of the
cargo.

G.R. No. 110581 September 21, 1994

TELENGTAN BROTHERS & SONS, INC. (LA SUERTE CIGAR & CIGARETTE), petitioner,
vs.
THE COURT OF APPEALS, KAWASAKI KISHEN KAISHA, LTD. and SMITH, BELL & CO.,
INC., respondents.

On June 11, 1979, the SS Far East Friendship arrived at the port of Manila. Aside from the regular
advertisements in the shipping section of the Bulletin Today announcing the arrival of its vessels,
petitioner was notified in writing of the ship's arrival, together with information that container
demurrage at the rate of P4.00 per linear foot per day for the first 5 days and P8.00 per linear foot per
day after the 5th day would be charged unless the consignee took delivery of the cargo within ten
days.

Juan, Luces, Luna and Associates for petitioner.

Bito, Lozada, Ortega & Castillo for private respondents.

On June 21, 1979, the other vessel SS Hangang Glory, carrying petitioner's two other vans, arrived
and was discharged of its contents the next day. On the same day the shipping agent Smith, Bell &
Co. released the Delivery Permit for twelve (12) containers to the broker upon payment of freight
charges on the bill of lading.

319
The next day, June 22, 1979, the Island Brokerage Co. presented, in behalf of petitioner, the shipping
documents to the Customs Marine Division of the Bureau of Customs. But the latter refused to act on
them because the manifest of the SS Far East Friendship covered only 10 containers, whereas the
bill of lading covered 12 containers.
The broker, therefore, sent back the manifest to the shipping agent with the request that the manifest
be amended. Smith, Bell & Co. refused on the ground that an amendment, as requested, would
violate 1005 of the Tariff and Customs Code relating to unmanifested cargo. Later, however, it
agreed to add a footnote reading "Two container vans carried by the SS Hangang Glory to complete
the shipment of twelve containers under the bill of lading."
On June 29, 1979 the manifest was picked up from the office of respondent shipping agent by an
employee of the IBC and filed with the Bureau of Customs. The manifest was approved for release on
July 3, 1979. IBC wrote Smith, Bell & Co. to make of record that entry of the shipment had been
delayed by the error in the manifest.
On July 11, 1979, when the IBC tried to secure the release of the cargo, it was informed by private
respondents' collection agent, the CBCS Guaranteed Fast Collection Services, that the free time for
removing the containers from the container yard had expired on June 26, 1979, in the case of the
SS Far East Friendship, and on July 9, in the case of the SS Hangang Glory, 3 and that demurrage
charges had begun to run on June 27, 1979 with respect to the 10 containers on the SS Far East
Friendship and on July 10, 1979 with respect to the 2 containers shipped on board the SSHangang
Glory.

On July 19, 1979, petitioner paid additional charges in the amount of P20,160.00 for the period July
14-19, 1979 to secure the release of its cargo, but still petitioner was unable to get any cargo from the
remaining nine container vans. It was only the next day, July 20, 1979, that it was able to have two
more containers released from the container yard, bringing to five the total number of containers
whose contents had been delivered to it.
Subsequently, petitioner refused to pay any more demurrage charges on the ground that there was
agreement for their payment in the bill of lading and that the delay in the release of the cargo was not
due to its fault but to the breakdown of the equipment at the container yard. In all, petitioner had paid
demurrage charges from June 27 to July 19, 1979, in the total amount of P67,840.00, computed as
follows:
A. Container demurrage paid on July 13, 1979
1. Far East Friendship (Exh. H-1) June 27 July 13 (17 days)
1st 5 days @ P4/day/foot
5 days x P40 ft. x 10 ctrns. P 8,000.00
Next 12 days @ P8/day/foot
12 days x P8 x 40 ft. x 10 ctrns. P 38,400.00

P 46,400.00

On July 13, 1979, petitioner paid P47,680.00 representing the total demurrage charges on all the
containers, but it was not able to obtain its goods. On July 16, 1979 it was able to obtain the release
of two containers and on
July 17, 1979 of one more container. It was able to obtain only a partial release of the cargo because
of the breakdown of the arrastre's equipment at the container yard.
This matter was reported by IBC in letters of complaint sent to the Philippine Ports Authority. In
addition, on July 16, 1979, petitioner sent a letter dated July 12, 1979 (Exh. I) to Smith, Bell & Co.,
requesting reconsideration of the demurrage charges, on the ground that the delay in claiming the
goods was due to the alleged late arrival of the shipping documents, the delay caused by the
amendment of the manifest, and the fact that two of the containers arrived separately from the other
ten containers.

2. Hangang Glory (Exh. H) July 10 July 13 (4 days)

1st 4 days:
4 days x P4 x 40 ft. x 2 ctnrs. P 1,280.00

TOTAL PAID ON JULY 13 P 47,680.00

(Exh. H-2)
B. Container demurrage paid on July 19, 1979

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1. Far East Friendship

a. on 2 containers released July 16

OVERALL TOTAL P 67,840.00

3 days x P8 x 40 ft. x 2 ctnrs. P 1,920.00

=========

(Exh. L-2)
b. on 1 container released July 17
4 days x P8 x 40 ft. x 7 cntrs. P 1,280.00
(Exh. L-3)
c. remaining 7 containers as of July 19
6 days x P8 x 40 ft. x 7 cntrs. P 13,440.00
(Exh. L-1)
2. Hangang Glory
a. 5th day (July 14)
1 day x P4.00 x 40 ft. x 2 cntrs. P 320.00
b. July 15-19:
5 days x P8.00 x 40 ft. x 2 cntrs. P 3,200.00
(Exh. L)

TOTAL P 20,160.00
(Exh. L-4)

On July 20, 1979 petitioner wrote private respondent for a refund of the demurrage charges, but
private respondent replied on July 25, 1979 that, as member of the Far East Conference, it could not
modify the rules or authorize refunds of the stipulated tariffs.
Petitioner, therefore, filed this suit in the RTC for specific performance to compel private respondent
carrier, through it s shipping agent, the Smith, Bell & Co., to release 7 container vans consigned to it
free of charge and for a refund of P67,840.00 which it had paid, plus attorney's fees and other
expenses of litigation. Petitioner also asked for the issuance of a writ of preliminary injunction to
restrain private respondents from charging additional demurrage.
In their amended answer, private respondents claimed that collection of container charges was
authorized by 2, 23 and 29 of the bill of lading and that they were not free to waive these charges
because under the United States Shipping Act of 1916 it was unlawful for any common carrier
engaged in transportation involving the foreign commerce of the United States to charge or collect a
greater or lesser compensation that the rates and charges specified in its tariffs on file with the
Federal Maritime Commission.
Private respondents alleged that petitioner knew that the contract of carriage was subject to the Far
East Conference rules and that the publication of the notice of reimposition of container demurrage
charges published in the shipping section of the Bulletin Today and Businessday newspapers from
February 19 February 25, 1979 was binding upon petitioner. They contended further that the
collection of container demurrage was an international practice which is widely accepted in ports all
over the world and that it was in conformity with Republic Act No. 1407, otherwise known as the
Philippine Overseas Shipping Act of 1955.
Thereafter, a writ was issued after petitioner had posted a bond of P50,000.00 and the container vans
were released to the petitioner. On March 19, 1986, however, the RTC dismissed petitioner's
complaint. It cited the bill of lading which provided:
23. The ocean carrier shall have a lien on the goods, which shall survive delivery, for
all freight, dead freight, demurrage, damages, loss, charges, expenses and any other

321
sums whatsoever payable or chargeable to or for the account of the Merchant under
this bill of lading . . . .

Ordinary containers P4.00 per linear foot of the

container per day for the first five days; P8.00 per
linear foot of the container per day, thereafter.

It likewise invoked clause 29 of the bill of lading which provided:

29. . . .The terms of the ocean carrier's applicable tariff, including tariffs covering
intermodal transportation on file with the Federal Maritime Commission and the
Interstate Commission or any other regulatory body which governs a portion of the
carriage of goods, are incorporated herein.
Rule 21 of the Far East Conference Tariff No. 28-FMC No. 12 Rules and Regulations, referred to
above, provides:
(D) Free Time, Demurrage, and Equipment Detention at Ports in the Philippines.
Note: Philippine Customs Law prescribes all cargo discharged from vessels to be
given into custody of the Government Arrastre Contractor, appointed by Philippine
Customs who undertakes delivery to the consignee.
xxx xxx xxx
Demurrage charges on Containers with CY Cargo.
1. Free time will commence at 8:00 a.m. on the first working calendar day following
completion of discharge of the vessel. It shall expire at 12:00 p.m. (midnight) on the
tenth working calendar day, excluding Saturdays, Sundays and holidays.
Work stoppage at a terminal due to labor dispute or other force majeure as defined
by the conference preventing delivery of cargo or containers shall be excluded from
the calculation of the free time for the period of the work stoppage.
2. Demurrage charges are incurred before the container leaves the carrier's
designated CY, and shall be applicable on the container commencing the next
working calendar day following expiration of the allowable free time until the
consignee has taken delivery of the container or has fully striped the container of its
contents in the carrier's designated CY.

The RTC held that the bill of lading was the contract between the parties and, therefore, petitioner
was liable for demurrage charges. It rejected petitioner's claim of force majeure. It held:
This Court cannot also accord faith and credit on the plaintiff's claim that the delay in
the delivery of the containers was caused by the breaking down of the equipment of
the arrastre operator. Such claim was not supported with competent evidence. Let us
assume the fact that the arrastre operator's equipment broke down still plaintiff has to
pay the corresponding demurrage charges. The possibility that the equipment would
break down was not only foreseeable, but actually, foreseen, and was notcaso
fortuito. 4
The RTC, therefore, ordered:
WHEREFORE, finding the preponderance of evidence in favor of the defendants and
against the plaintiff, judgment is hereby rendered dismissing the complaint with costs
against it. Plaintiff is hereby ordered to pay defendants the sum of P36,480.00
representing demurrage charges for the detention of the seven (7) forty-footer
container vans from July 20 to August 7, 1979, with legal interest commencing on
August 7, 1979 until fully paid. And plaintiff has to pay the sum of P10,000.00, by way
of attorney's fees.
SO ORDERED.
On appeal, the case was affirmed with modification by the Court of Appeals as follows:
WHEREFORE, modified as indicated above deleting the award of attorney's fees, the
decision appealed from is hereby AFFIRMED in all other respects.
Costs against plaintiff-appellant.
SO ORDERED. 5
Hence, this petition for review in which it is contended:

Demurrage charges shall be assessed hereunder:

322
1 that no demurrage lies in the absence of any showing that the
vessels had been improperly detained or that loss or damage had
been incurred as a consequence of improper detention;
2 that respondent Court's finding that private respondent Smith Bell
had promptly and on the same day amended the defective manifest
is contrary to the evidence of record.
3 that respondent Court manifestly over-looked undisputed evidence
presented by petitioner showing that the breakdown in the facilities
and equipment of the arrastre operator further delayed petitioner's
withdrawal of the cargo. 6
Petitioner prays for a reversal of the decision of the Court of Appeals and the refund to it of the
demurrage charges paid by it, with interest, as well as to pay attorney's fees and expenses of
litigation.
Our decision will be presently explained, but in brief it is this: petitioner is liable for demurrage for
delay in removing its cargo from the containers but only for the period July 3 to 13, 1979 with respect
to ten containers and from July 10 to July 13, 1979, in respect of two other containers.
First. With respect to petitioner's liability for demurrage, petitioner's contention is that the bill of lading
does not provide for the payment of container demurrage, as Clause 23 of the bill of lading only says
"demurrage," i.e., damages for the detention of vessels, and here there is no detention of vessels.
Petitioner invokes the ruling inMagellan Manufacturing Marketing Corp. v. Court of Appeals 7, where
we defined "demurrage" as follows:
Demurrage, in its strict sense, is the compensation provided for in the contract of
affreightment for the detention of the vessel beyond the time agreed on for loading
and unloading. Essentially, demurrage is the claim for damages for failure to accept
delivery. In a broad sense, every improper detention of a vessel may be considered a
demurrage. Liability for demurrage, using the word in its strictly technical sense,
exists only when expressly stipulated in the contract. Using the term in [its broader
sense, damages in the] nature of demurrage are recoverable for a breach of the
implied obligation to load or unload the cargo with reasonable dispatch, but only by
the party to whom the duty is owed and only against one who is a party to the
shipping contract.

Whatever may be the merit of petitioner's contention as to the meaning of the word "demurrage" in
clause 23 of the bill of lading, the fact is that clause 29(a) also of the bill of lading, in relation to Rule
21 of the Far East Conference Tariff No. 28-FMC No. 12, as quoted above, specifically provides for
the payment by the consignee of demurrage for the detention of containers and other equipment after
the so-called "free time."
Now a bill of lading is both a receipt and a contract. As a contract, its terms and conditions are
conclusive on the parties, including the consignee. What we said in one case mutatis
mutandis applies to this case:
A bill of lading operates both as a receipt and a contract . . . As a contract, it names
the contracting parties which include the consignee, fixes the route, destination,
freight rate or charges, and stipulates the right and obligations assumed by the
parties . . . . By receiving the bill of lading, Davao Parts and Services, Inc. assented
to the terms of the consignment contained therein, and became bound thereby, so far
as the conditions named are reasonable in the eyes of the law. Since neither
appellant nor appellee alleges that any provision therein is contrary to law, morals,
good customs, public policy or public order and indeed we found none the
validity of the Bill of Lading must be sustained and the provisions therein properly
applies to resolve the conflict between the parties. 8
As the Court of Appeals pointed out in its appealed decision, the enforcement of the rules of the Far
East Conference and the Federal Maritime Commission is in accordance with Republic Act No. 1407,
1 of which declares that the Philippines, in common with other maritime nations, recognizes the
international character of shipping in foreign trade and existing international practices in maritime
transportation and that it is part of the national policy to cooperate with other friendly nations in the
maintenance and improvement of such practices.
Petitioner's argument that it is not bound by the bill of lading issued by K-Line because it is a contract
of adhesion, whose terms as set forth at the back are in small prints and are hardly readable, is
without merit. As we held inServando v. Philippine Steam Navigation: 9
While it may be true that petitioner had not signed the plane ticket (Exh. 12), he is
nevertheless bound by the provisions thereof. "Such provisions have been held to be
a part of the contract of carriage, and valid and binding upon the passenger
regardless of the latter's lack of knowledge or assent to the regulation". It is what is
known as a contract of "adhesion," in regards to which it has been said that contracts
of adhesion wherein one party imposes a ready made form of contract on the other,

323
as the plane ticket in the case at bar, are contracts not entirely prohibited. The one
who adheres to the contract is in reality free to reject it entirely; if he adheres, he
gives his consent. (Tolentino, Civil Code, Vol. IV, 1962 Ed., p. 462, citing Mr. Justice
JBL Reyes, Lawyer's Journal, Jan. 31, 1951, p. 49).
Second. With respect to the period of petitioner's liability, private respondent's position is that the "free
time" expired on June 26, 1979 and demurrage began to toll on June 27, 1979, with respect to 10
containers which were unloaded from the SS Far East Friendship, while with respect to the 2
containers which were unloaded from the SSHangang Glory, the free time expired on July 9, 1979
and demurrage began to run on July 10, 1979.
This contention is without merit. Petitioner cannot be held liable for demurrage starting June 27, 1979
on the 10 containers which arrived on the SS Far East Friendship because the delay in obtaining
release of the goods was not due to its fault. The evidence shows that because the manifest issued
by the respondent K-Line, through the Smith, Bell & Co., stated only 10 containers, whereas the bill of
lading also issued by the K-Line showed there were 12 containers, the Bureau of Customs refused to
give an entry permit to petitioner. For this reason, petitioner's broker, the IBC, had to see the
respondent's agent (Smith, Bell & Co.) on June 22, 1979 but the latter did not immediately do
something to correct the manifest. Smith, Bell & Co. was asked to "amend" the manifest, but it
refused to do so on the ground that this would violate the law. It was only on June 29, 1979 that it
thought of adding instead a footnote to indicate that two other container vans to account for a total
of 12 container vans consigned to petitioner had been loaded on the other vessel
SS Hangang Glory.
It is not true that the necessary correction was made on June 22, 1979, the same day the manifest
was presented to Smith, Bell & Co. There is nothing in the testimonies of witnesses of either party to
support the appellate court's finding that the footnote, explaining the apparent discrepancy between
the bill of lading and the manifest, was added on June 22, 1979 but that petitioner's representative did
not return to pick up the manifesst until June 29, 1979. To the contrary, it is more probable to believe
the petitioner's claim that the manifest was corrected only on June 29, 1979 (by which time the "free
time" had already expired), because Smith, Bell & Co. did not immediately know what to do as it
insisted it could not amend the manifest and only thought of adding a footnote on June 29, 1979 upon
the suggestion of the IBC.

Now June 29, 1979 was a Friday. Again it is probable the correct manifest was presented to the
Bureau of Customs only on Monday, July 2, 1979 and, therefore, it was only on July 3 that it was
approved. It was, therefore, only from this date (July 3, 1979) that petitioner could have claimed its
cargo and charged for any delay in removing its cargo from the containers. With respect to the other
two containers which arrived on the SS Hangang Glory, demurrage was properly considered to have
accrued on July 10, 1979 since the "free time" expired on July 9.
The period of delay, however, for all the 12 containers must be deemed to have stopped on July 13,
1979, because on this date petitioner paid P47,680.00. If it was not able to get its cargo from the
container vans, it was because of the breakdown of the shifter or cranes. This breakdown cannot be
blamed on petitioners since these were cranes of the arrastre service operator. It would be unjust to
charge demurrage after July 13, 1979 since the delay in emptying the containers was not due to the
fault of the petitioner.
Indeed, there is no reason why petitioner should not get its cargo after paying all demurrage charges
due on July 13, 1979. If it paid P20,180.00 more in demurrage charges after July 13, 1979 it was only
because respondents would not release the goods. Even then petitioner was able to obtain the
release of cargo from five container vans. Its trucks were unable to load anymore cargo and returned
to petitioner's premises empty.
In sum, we hold that petitioner can be held liable for demurrage only for the period July 3-13, 1979
and that in accordance with the stipulation in its bill of lading, it is liable for demurrage only in the
amount of P28,480.00 computed as follows;
A. 10 containers ex Far East Friendship (July 3-13, 1979)
1. 1st 5 days @ P4.00/day/foot
5 days x P4 x 40 ft. x 10 ctnrs. P 8,000
2. Next 6 days @ P8.00/day/foot
6 days x P8 x 40 ft. x 10 cntrs. P 19,200 P 27,200

B. 2 containers ex Hangang Glory (July 10-13, 1979)

324
1st 4 days @ P4.00/day/foot
4 days x P4 x 40 ft. x 10 cntrs. P 1,280

TOTAL DEMURRAGE DUE P 28,480

=======
LESS: TOTAL PAID (P 67,840)
OVERPAYMENT (P 39,360)
As shown above there is an overpayment of P39,360.00 which should be refunded to petitioner.
WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,
ORDERING the private respondents to pay to petitioner the sum of P39,360.00 by way of refund, with
legal interest.
SO ORDERED.
G.R. No. L-4080

September 21, 1953

JOSE P. MARTINEZ, as administrator of the Instate Estate of Pedro Rodriguez,

deceased, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK, defendant-appellee.
Delgado, Flores, & Macapagal for appellant.
Ramon B. de los Reyes and Angel G. Ilagan for appellee.
MONTEMAYOR, J.:
As of February 1942, the estate of Pedro Rodriguez was indebted to the defendant Philippine
National Bank in the amount of P22,128.44 which represented the balance of the crop loan obtained
by the estate upon its 1941-1942 sugar cane crop. Sometime in February 1942, Mrs. Amparo R.
Martinez, late administratrix of the estate upon request of the defendant bank through its Cebu
branch endorsed and delivered to the said bank two (2) quedans according to plaintiff-appellant

issued by the Bogo-Medellin Milling co. where the sugar was stored covering 2,198.11 piculs of sugar
belonging to the estate, although according to the defendant-appellee, only one quedan covering
1,071.04 piculs of sugar was endorsed and delivered. During the last Pacific war, sometime in 1943,
the sugar covered by the quedan or quedans was lost while in the warehouse of the Bogo-Medellin
Milling Co. In the year 1948, the indebtedness of the estate including interest was paid to the bank,
according to the appellant, upon the insistence of land pressure brought to bear by the bank.
Under the theory and claim the sometime in February 1942, when the invasion of the Province of
Cebu by the Japanese Armed Forces was imminent, the administratrix of the estate asked the bank
to release the sugar so that it could be sold at a god price which was about P25 per picul in order to
avoid its possible loss due to the invasion, but that the bank refused that request and as a result the
amount of P54,952.75 representing the value of said sugar was lost, the present action was brought
against the defendant bank to recover said amount. After trial, the Court of First Instance of Manila
dismissed the complaint on the ground that the transfer of the quedan or quedans representing the
sugar in the warehouse of the Bogo-Medellin Milling Co. to the bank did not transfer ownership of the
sugar, and consequently, the loss of said sugar should be borne by the plaintiff appellant.
administrator Jose R. Martinez is now appealing from that decision.
We agree with the trial court that at the time of the loss of the sugar during the war, sometime in 1943,
said sugar still belonged to the estate of Pedro Rodriguez. It had never been sold to the bank so as to
make the latter owner thereof. The transaction could not have been a sale, first, because one of the
essential elements of the contract of sale, namely, consideration was not present. If the sugar was
sold, what was the price? We do not know, for nothing was said about it. Second, the bank by its
charter is not authorized to engage in the business of buying and selling sugar. It only accepts sugar
as security for payment of its crop loans and later on pursuant to an understanding with the sugar
planters, it sell said sugar for them, or the planters find buyers and direct them to the bank. The sugar
was given only as a security for the payment of the crop loan. This is admitted by the appellant as
shown by the allegations in its complaint filed before the trial court and also in the brief for appellant
filed before us. According to law, the mortgagee or pledge cannot become the owner of or convert
and appropriate to himself the property mortgaged r pledged (Article 1859, old Civil Code; Article
2088, new Civil code). Said property continues t belong to the mortgagor or pledgor. The only remedy
given to the mortgagee or pledgee is to have said property sold at public auction and the proceeds of
the sale applied to the payment of the obligation secured by the mortgage or pledge.
The position and claim of plaintiff-appellant is rather inconsistent and confusing. First, he contends
that the endorsement and delivery of the quedan or quedans to the bank transferred the ownership of
the sugar to said bank so that as owner, the bank should suffer the loss of the sugar on the principle
that "a thing perishes for the owner". We take it that by endorsing the quedan, defendant was
supposed to have sold the sugar to the bank for the amount of the outstanding loan of P22,128.44
and the interest then occured. That would mean that plaintiff's account with the bank has been
entirely liquidated and their contractual relations ended, the bank suffering the loss of the amount of
the loan and interest But plaintiff-appellant in the next breath contends that had the bank released the
sugar in February 1942, plaintiff ]could have sold it for P54,952.75, from which the amount of the loan
and interest could have been deducted, the balance to have been retained by plaintiff, and that since

325
the loan has been entirely liquidated in 1948, then the whole expected sale price of P54,952.75
should now be paid by the bank to appellant. This second theory presupposes that despite the
indorsement of the quedan plaintiff still retained ownership of the sugar, a position that runs counter to
the first theory of transfer of ownership to the bank.
In the course of the discussion of this case among the members of the Tribunal, one or two them who
will dissent from the majority view sought to cure and remedy this apparent inconsistency in the claim
of appellant and sustain the theory that the endorsement of the quedan made the bank the owner of
the sugar resulting in the payment of the loan, so that now, the bank should return to appellant the
amount of the loan it improperly collected in 1948.
In support of the theory of transfer of ownership of the sugar to the bank by virtue of the endorsement
of the quedan, reference was made to the Warehouse Receipts Law, particularly section 41 thereof,
and several cases decided by this court are cited. In the first place, this claim is inconsistent with the
very theory of plaintiff appellant that the sugar far from being sold to the bank was merely given as
security for the payment of the crop loan. In the second place, the authorities cited have not directly
applicable. In those cases this court held that for purposes of facilitating commercial transaction, the
endorse of transferee of a warehouse receipt or quedan should be regarded as the owner of the
goods covered by it. In other words, as regards the endoser or transferor, even if he were the owner
of the goods, he may not take possession and dispose of the goods without the consent of the
endorse or transferee of the quedan or warehouse receipt; that in some cases the endorse of a
quedan may sell the goods and apply the proceeds of the sale to the payment of the debt; and as
regards third persons, the holder of a warehouse receipt or quedan is considered the owner of the
goods covered by it. To make clear the view of this court in said court in two of these cases cited
which are typical.
As to the first of action, we hold that in January, 1919, the bank became and remained the
owner of the five quedans Nos. 30, 35, 38, 41, and 42; that they were in form negotiable, and
that, as such owner, it was legally entitled to the possession and control of the property
therein described at the time the insolvency petition was filed and had a right to sell it
and apply the proceeds of the sale to its promissory notes, cured by the three quedans Nos.
33, 36, and 39, which the bank surrendered to the firm. (Philippine Trust Co. vs. National
Bank, 42 Phil., 413, 427).
... Section 58 provides that within the meaning of the Act "to "purchase" includes to take as
mortgagee or pledgee' and clear that, as to the legal title to the property covered by a
warehouse receipt, a pledgee is on the same footing as a vendee except that the former is
under the obligation of surrendering his title upon the payment of the debt secured. To hold
otherwise would defeat one of the principal purposes of the Act, i. e., to furnish a basis for
commercial credit. (Bank of the Philippine Islands vs. Herridge, 47 Phil. 57, 70).
It is obvious that where the transaction involved in the transfer of a warehouse receipt or quedan is
not a sale but pledge or security, the transferee or endorsee does not become the owner of the goods

but that he may only have the property sold then satisfy the obligation from the proceeds of the sale.
From all this, it is clear that at the time the sugar in question was lost sometime during the war, estate
of Pedro Rodriguez was still the owner thereof.
It is further contended in this appeal that the defendant appellee failed to excercise due care for the
preservation of the sugar, and that the loss was due to its negligence as a result of which the appellee
incurred the loss. In the first place, this question was not raised in the court below. Plaintiff's complaint
to make any allegation regarding negligence in the preservation of this sugar. In the second place, it
is a fact that the sugar was lost in the possession of the warehouse selected by the appellant to which
it had originally delivered and stored it, and for causes beyond the bank's control, namely, the war.
In connection with the claim that had the released the sugar sometime in February, 1942, when
requested by the plaintiff, said sugar could have been sold at the rate of P25 a picul or a total of
P54,952.75, the amount of the present claim, there is evidence to show that the request for release
was not made to the bank itself but directly to the official of the warehouse the Bogo Medellin Milling
Co. and that bank was not aware of any such request, but that therefore April 9, 1942, when the Cebu
branch of the defendant was closed, the bank through its officials offered the sugar for sale but that
there were no buyers, perhaps due to the unsettled and chaotic conditions that obtaining by reason of
the enemy occupation.
In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a
creditor only to secure the payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not
a sale covered by the quedans of warehouse receipts is lost without the fault or negligence of the
mortgagee or pledgee or quedan, then said goods are to be regarded as lost on account of the real
owner, mortgagor or pledgor.1wphl.nt
In view of the foregoing, the decision appealed from is hereby affirmed, with costs.
Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo, and Labrador, JJ., concur.

Separate Opinions
PARAS, C. J., dissenting:
The plaintiff seeks to recover from the defendant Philippine National Bank the sum of P54,952.75,
representing the value of 2,198.11 piculs of sugar covered by two quedans indorsed and delivered to

326
the bank by the administratix of the estate of the deceased Pedro Rodriguez to secure the
indebtedness of the latter in the amount of P22,128.44. It is alleged that when the two quedans were
indorsed and delivered to the defendant bank in or about January, 1942, the sugar was in deposit at
the Bogo-Medellin Sugar Co., Inc.; that said sugar was lost during the war; that the indebtedness of
P22,128.44 was liquidated in 1948 by the estate of the deceased Pedro Rodriguez and that,
notwithstanding demands, the defendant bank refused to credit the plaintiff with the value of the sugar
lost.
There is no question as to the existence of the sugar covered by the two quedans, or as to the
indorsement and delivery of said quedans to the defendant bank. The Court of First Instance of
Manila which decided against the plaintiff and held that the defendant bank is not liable for the loss of
the sugar in question, indeed stated that the only question that arises is whether the indorsement of
the warehouse receipts transferred the ownership f the sugar to the defendant bank; that if it did, the
bank should suffer the loss, but if it did not, the loss should be for the account of the estate of the
deceased Pedro Rodriguez. In dismissing the plaintiff's action, the trial court held that the
indorsement of the quedans to the defendant bank did not carry with it the transfer of ownership of
the sugar, as the indorsement and delivery were effected merely secure the payment of an
indebtedness, to facilitate the sale of the sugar, and to prevent the debtor from disposing of it without
the knowledge and consent of the defendant bank. The plaintiff has appealed.
The applicable legal provision is section 41 of Act No. 2137, otherwise as the Warehouse Receipts
Law, which reads as follows:
SEC. 41. Rights of person to whom a receipt has been negotiated. A person to whom a
negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had ability to
convey to a purchaser in good faith for value, and also such to the goods as the depositor or
person to whose order the goods were to be delivered by the terms of the receipt had or had
ability to convey to a purchaser in good faith for value, and
(b) The direct obligation of the warehouseman to hold possession of the goods for him
according to the terms of the receipt as fully as if the warehouseman had contracted directly
with him.
This provision plainly states that a person to whom a negotiable receipt (such as the sugar quedans
in question) has been negotiated title to the goods covered by the receipt, as well as the possession
of the goods through the warehouseman, as if the latter had contracted directly with the person to
whom the negotiable receipt has been duly negotiated. Consequently, the defendant bank to whom
the two quedans in question have been indorsed and delivered, thereby acquired the ownership of
the sugar covered by said quedans, with the logical result that the loss of the article should be borne
by the defendant bank. The fact that the quedans were indorsed and delivered as a security for the
payment of an indebtedness did not prevent the bank from acquiring ownership, since the only effect

of the transfer was that the debtor could reacquire said ownership upon payment of his obligation.
Section 41 of Act No. 2137 had already been construed by this court in the sense that ownership and
delivered merely as security. (Sy Cong Being vs. Hongkong & Shanghai Bank, 56 Phil., 498;
Philippine Trust co. vs. Philippine National Bank, 42 Phil., 438; Bank of the Philippine Islands vs.
Herridge, 47 Phil., 57; Roman vs. Asis Banking Corporation, 46 Phil., 405).
The relation of a pledgor of a warehouse receipt duly indorsed and delivered to the pledge, is
substantially right of repurchase. The vendor a retro actually transfers the ownership of the property
sold to the vendee, but the former may reacquire said ownership upon payment is lost before being
repurchased, the vendee naturally has to bear the loss, with the vendor having nothing to repurhase.
But if the loss should occur after the repurchase price has been paid but before the property sold a
retro is actually reconveyed, the vendee is bound to return to the vendor only the repurchase price
paid, and not the value of the property. In my opinion, therefore, the loss of the sugar should be for
the account of the defendant bank, which should return to the plaintiff P22,128.44, the amount of the
indebtedness of the estate of the deceased Pedro Rodriguez which had already been paid 1948,
without however being liable for the difference between P54,952.75 (actual value of the sugar) and
the amount of said payment.
The appealed judgment should therefore be reversed and the defendant bank sentenced to pay to
the plaintiff the sum of P22,128.44.1wphl.nt
Pablo, J., concurs.
WARNER, BARNES & CO., LTD., Plaintiffs-Appellees, v. RAMON
FLORES, Defendant-Appellant.
Hilado & Hilado for Plaintiff-Appellee.
Enrique F. Mario & Mariano D. Lachica, for Defendant-Appellant.
SYLLABUS
1. OBLIGATIONS AND CONTRACTS; CHATTEL MORTGAGE; QUEDANS DELIVERED TO
PLAINTIFF GIVEN AS SECURITY FOR LOAN; OWNERSHIP DID NOT PASS TO PLAINTIFF;
DEFENDANT BEARS THE LOSS; OBLIGATION NOT EXTINGUISHED. The mortgagee
does not become the owner of the property mortgaged (Art. 1839, old Civil Code; Art.
2088, new Civil Code), the ownership remaining with the mortgagor, and consequently,
under the maxim, res perit domino suo, the mortgagor-owner shall bear the loss of the
thing mortgage. Hence, in the instant case, defendants obligation had not been
extinguished.

327
2. ID.; ID.; RIGHT OF THE MORTGAGEE. Where a warehouse receipt or quedan is
transferred or endorsed to a creditor, only to secure the payment of a loan or debt, the
transferee or endorsee does not automatically become the owner of the goods covered
by said receipt or quedan but merely retains the right to keep them and with the
consent of the owner (mortgagor) to sell them so as to satisfy the obligation from the
proceeds of the sale. (Martinez v. Philippine National Bank, 93 Phil., 765.
DECISION
PAREDES, J.:
By stipulation of the parties, the following facts are admitted:
Defendant-appellant Ramon Flores, in November, 1940, purchased from plaintiffsappellees Warner, Barnes & Co., Ltd., P3,027.90 worth of fertilizer and agreed to pay it
on or before December 31, 1941, with 7% annual interest compounded quarterly. To
guarantee the payment of the obligation, including interest and expenses of drafting,
notarization and registration of the mortgage, the defendant mortgaged to the plaintiff
951 piculs of sugar of the crop year 1941-42. When the mortgaged crops were milled by
the Ma-ao Sugar Central in 1941-42, the defendants rented haciendas produced a total
of 1,954.02 piculs of sugar of which 47% was his share or 918.39 piculs. Out of
defendants share of 918.39 piculs, the plaintiffs received from the sugar central
"quedans" for 278 piculs. Neither the plaintiff nor the defendant was able to sell the said
278 piculs or the remaining 640.39 piculs that had no "quedans", because at that time
there were no sugar buyers due to lack of shipping facilities and to the eventual
involvement of the Philippines in World War II. All the defendants sugar and other sugar
stored in the warehouse of the Ma-ao Sugar Central, were burned, lost, destroyed or
looted during the Japanese occupation of the province of Negros Occidental. Because the
mortgaged sugar was not sold, the indebtedness of the defendant to the plaintiffs had a
debit balance of P3,098.72 on April 30, 1942, three weeks before the Japanese occupied
said province. On February 28, 1954, the fertilizer account of the defendant with the
plaintiffs, had a debit balance of P5,223.41, to which interest should be added at the
rate of P0.679.18 per day from March 1, 1954. Annex A of the complaint is the chattel
mortgage involved.
On April 3, 1954, the present complaint was filed. The lower court rendered judgment on
January 16, 1956. "condenando al demandado a pagar a la demandante la cantidad de
P5,223.41 con interes al tipo del P0.67918 diarios computados desde el dia 1 de Marzo

de 1954 hasta su completo pago, mas un 20% sobre todo el importe de esta sentencia
en concepto de honorarios de abogado y gastos de cobranza. Las costas se tasaran en
contra el demandado." On appeal to the Court of Appeals, said Tribunal certified the case
to Us for the questions raised by defendant-appellant are purely legal in nature. In
effect, the appellant submits that the court a quo erred: (1) In finding and declaring that
defendant shall bear and suffer the loss of the sugar in the warehouse of the Ma-ao
Sugar Central; (2) In sentencing and condemning the defendant to pay the plaintiffs the
amounts stated in the appealed judgment; and (3) In not declaring that from the sugar
produced from the defendants share, his monetary obligation with the plaintiffs has
been completely paid and settled.
Appellant claims that for all legal intents and purposes, the appellees were already paid
by him. He cited conditions Nos. 7, 8 and 10 of the chattel mortgage, Annex A, to
support his contention.
"7. El Deudor Hipotecario por la presente autoriza y ordena a la Ma-ao Central para que
durante la molienda de la cosecha arriba mencionada, despues que se haya convertido
en azucar, retenga de la participacion del mismo los 951 picos gravados con esta
hipoteca, y remita mensualmente a la Acreedora Hipotecaria en Iloilo, el quedan
correspondiente hasta que se hayan cubierto los 951 picos por la presente hipotecados,
extendiendose dicho quedan a nombre del Deudor Hipotecario o a su orden pero, con
una nota o memorandum en dicho quedan al sentido de que el azucar representado por
el mismo esta hipotecado a Warner, Barnes & Co., Ltd. por el total de su valor. Esta
autorizacion es firme e irrevocable sin el consentimiento por escrito de los Sres. Warner,
Barnes & Co., Ltd.
"8. Queda tambien estipulado que en caso de que el Deudor Hipotecario dejare de pagar
el importe del abono-garantizado por esta hipoteca dentro del plazo fijado en el parrafo
2 de esta escritura, la Acreedora Hipotecaria queda antorizada vender al azucar
hipotecado en cualquier tiempo que estime conveniente, por el precio corriente en el
mercado; reteniendo del producto de la venta el valor del abono arriba mencionado,
juntamente con sus intereses devengados asi como los gastos ocasionados por la venta
del referido azucar y entregando el sobrante, si hubiera al Deudor Hipotecario. Para
efectuar dicha venta el Deudor Hipotecario, autoriza por al presente a Warner, Barnes &
Co., Ltd., para endosar y firmar los quedanes correspondientes en su nombre y
representacion ratificando desde ahora dicho acto como si el hubiere ejecutado
personalmente.
10. "Y, por ultimo, queda asimismo convenido que en caso de que el Deudor Hipotecario
no pudiera moler sus plantaciones de caadulce por falta de gastos o cualquier otro
motivo, la Acreedora Hipotecaria tendra derecho, a opcion suya, a constituirse en la
Hacienda . . . y tomar completa posesion de la misma y de sus plantaciones de

328
caadulce, y de cuantos materiales, aperos de molienda, carabaos y obreros de sean
necesarios, y llevara a cabo los trabajos de molienda, cargando a cuenta del Deudor
Hipotecario todos los gastos reales y necessarios en que incurra con relacion a dichos
trabajos incluyendo la labor, supervisiones, materiales y demas gastos necesarios y
justos. Todos los gastos que por estos conceptos desembolsare la acreedora hipotecaria
devengaran interes al tipo de . . % annual, ademas de un 10% sobre el importe total de
los gastos por la supervision de dichos trabajos."cralaw virtua1aw library
In view of the above conditions, the appellant argues, thus: That plaintiffs have the first
lien on and the sugar produced by the defendant which lien on all the sugar produced by
the defendant which lien has preference over any and all other "gravamen" in the
existing sugar of the defendant; the defendant had no control or power to withdraw the
sugar from the Ma-ao Sugar Central; the plaintiff company had irrevocable power to sell
the sugar of the defendant; the said sugar or net participation of the defendant including
his properties, were under the exclusive control of the plaintiffs; the defendant produced
sugar for the plaintiffs and this is all that matters; there is no condition in Annex A that
of the sugar which were lost or destroyed, the defendant should bear the loss; and not
having assumed the risk, the defendant should not be responsible for those events
which could not be foreseen or which though foreseen were inevitable (Art. 1174, Civil
Code); the defendant, having performed his part of the obligation and not being guilty of
fraud, negligence or delay, is deemed to have completely paid and settled his obligation
(Arts. 1170 and 1262, Civil Code), and the plaintiffs not having protested either to the
defendant or to the central on its inability to sell or dispose the sugar because of the
approaching war, the obligation is deemed duly complied with (Art. 1235, Civil Code).
The fundamental error of the defendant, however, may be seen from the fact that he
was the owner of the sugar which was lost, at the time of the loss, hence the fitness of
the maxim: "Res Periit Domino Suo." The plaintiffs were mere mortgagees of defendants
sugar. Clause 8, of the Chattel Mortgage, heretofore quoted, did not transfer the
ownership of the defendants sugar to the plaintiffs. It merely authorized the plaintiffs to
sell said sugar in case the defendant failed to pay on the maturity date (December 31,
1941), and to retain from the proceeds of the sale the value of the fertilizer bought, with
the accrued interest and the expenses of the sale, and any surplus remaining after the
defendants obligation was paid, should be turned over to defendant. If the plaintiffs
were the owner of the sugar, there would be no need for the defendant to authorize the
former to sell it and the defendant would not have any right to the surplus over and
above his debt. This particular issue is no longer of first impression in this jurisdiction. In
the case of Martinez v. Philippine National Bank, G.R. No. L-4080, Sept. 21, 1958, it was
held:jgc:chanrobles.com.ph
". . . It (bank) only accepts sugar as security for the payment of its crop loans and later
on pursuant to an understanding with the sugar planter, it sells said sugar for them, or

the planters find buyers and direct them to the Bank. The sugar was given only as a
security for the payment of the crop loan. This is admitted by the appellant as shown by
the allegations in its complaint filed before the trial court and also in the brief for
appellant filed before us. According to law, the mortgagee or pledgee cannot become the
owner of or convert and appropriate to himself the property mortgaged or pledged (Art.
1839, old Civil Code; Art. 2088, new Civil Code). Said property continues to belong to
the mortgagor or pledgor. The only remedy given to the mortgagee or pledgee is to have
said property sold at public auction and the proceeds of the sale applied to the payment
of the obligation secured by the mortgage or pledge.
x

"In conclusion, we hold that where a warehouse receipt or quedan is transferred or

endorsed to a creditor only to secure the payment of a loan or debt, the transferee or
endorsee does not automatically become the owner of the goods covered by the
warehouse receipt or quedan but he merely retains the right to keep and with the
consent of the owner to sell them so as to satisfy the obligation from the proceeds of the
sale, this for the simple reason that the transaction involved is not a sale but only a
mortgage or pledge, and that if the property covered by the quedans or warehouse
receipts is lost without the fault or negligence of the mortgagee or pledgee or the
transferee or endorsee of the warehouse receipt or quedan, than said goods are to be
regarded as lost on account of the real owner, mortgagor or pledgor."cralaw virtua1aw
library
It is to be noted that the position of the herein plaintiffs is even more advantageous than
that of the bank, in the case just cited. In the Martinez case, the mortgagor endorsed
and delivered the "quedans" representing all the mortgaged sugar to the mortgagee,
whereas in the present case, only a part of the "quedans" were delivered to the
mortgagees and they were not even endorsed at that. In fact the "quedans" were issued
in the name of the mortgagor (Flores), or his order "pero con una nota o memorandum
al sentido de que el azucar representado por el mismo esta hipotecado a Warner, Barnes
& Co., Ltd. por el total de su valor." Of course, the defendant contends that the Martinez
case is not applicable to the case at bar; we are fully satisfied, however, that the
principles of law announced therein, govern the present case.
Judgment appealed from is affirmed. Costs against the defendant-appellant.
Bengzon, Actg. C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Barrera and Dizon, JJ., concur.

329
PHILIPPINE TRUST COMPANY, as assignee of Salvador Hermanos,
insolvent, Plaintiff-Appellant, v. PHILIPPINE NATIONAL BANK, DefendantAppellee.
Ross & Lawrence and Ewald E. Selph for Appellant.
Roman J. Lacson for Appellee.
SYLLABUS
1. INSOLVENT CANNOT MAKE PREFERENCE. Where a person files a petition in the
Court of First Instance to be adjudged insolvent under Act No. 1956 of the Philippine
Legislature, pending the final adjudication, the filing of the petition ipso facto takes away
from, and deprives the petitioner of the right to, do or commit any act of preference as
to creditors.
2. TITLE OF ASSIGNEE RELATES BACK. Where an insolvency petition is filed in the
proper court, and, in the ordinary course of business, the petitioner is adjudged
insolvent and an assignee is duly elected, the title of the assignee to the property of the
insolvent relates back and becomes vested as of the date the insolvency petition was
filed.
3. TITLE CARRIES POSSESSION. Where in January, 1919, a firm borrowed money
from a bank and executed its promissory notes and delivered to the bank negotiable
quedans as collateral to secure their payment, the indorsement and delivery of the
quedans and the pledging of the collateral ipso facto carries with it the title to the
property described in the quedans, together with the constructive possession of it, and
legally the owner and holder of the quedans becomes the owner of the property
described in the quedans, and is entitled to its possession.
4. OWNER OF NEGOTIABLE QUEDANS IS OWNER OF PROPERTY. Where quedans were
endorsed and delivered in January, 1919, to secure a preexisting debt, and the
insolvency petition was filed on April 21, 1919, the holder of such quedans is the owner
of the property therein described, as against the assignee or any creditor of the
insolvent.
5. STATEMENTS AND REPRESENTATIONS DO NOT CONVEY TITLE. Where on February
10, 1919, a firm received certain quedans under a promise to return them on or before
February 27th, to which was attached a certificate of the firm dated February 8, 1919,
that certain described property was in its bodegas which it promised would not be
removed without first consulting its creditor, construed together, such instruments do not
constitute a negotiable quedan, and are nothing more than a representation and a

promise and do not convey title to the property.

6. ASSIGNEE ENTITLED TO POSSESSION. Where it appears that on February 8, 1919,
on behalf of one of its creditors, a firm made a representation, and on February 10th,
made a certificate at to certain property, and filed its insolvency petition on April 21,
1919, and the property was left and remained in possession of the insolvent firm, and
was not delivered to the creditor until May 3, 1919, the assignee of the insolvent firm, as
against such creditor, is entitled to the possession of the property or its value.
7 DECLARED VALUE MAY BECOME MARKET VALUE. Where there is no evidence of the
actual market value of the property, but the parties themselves placed a declared value
on the property at the time of delivery, in the absence of other testimony, the declared
value will be considered and treated as the market value.
DECISION
JOHNS, J. :
The plaintiff and defendant are corporations organized under the laws of the Philippine
Islands and domiciled in the city of Manila.
Salvador Hermanos was a copartnership and during the month of January, 1919,
executed to the defendant eight promissory notes aggregating P156,000, payable on
demand, and each secured by a quedan, or warehouse receipt, issued by the firm of
Nieva, Ruiz & Company. Each note recites that it is payable on demand after date, for
value received, and that the firm has deposited "with the said bank as collateral security
for the payment of this note, or any note given in extension or renewal thereof, as well
as for the payment of any other liability or liabilities of the undersigned to the said bank,
due or to become due, whether now existing or hereafter arising, the following property
owned by the undersigned." The note then specifies the number of the quedan and the
amount of copra in piculs, and states that the quedan was issued by Nieva, Ruiz &
Company. The note for P8,000, dated January 18, 1919, was secured by warehouse
receipt No. 30; for P20,000, dated January 22, 1919, was secured by receipt No. 35; for
P20,000, dated January 24, 1919, was secured by receipt No. 38; for P20,000, dated
January 27, 1919, was secured by receipt No. 41; for P14,000, dated January 28, 1919,
was secured by receipt No. 42; for P18,000, dated January 21, 1919, was secured by
receipt No. 33; for P18,000, dated January 23, 1919, was secured by receipt No. 36;
and for P18,000, dated January 25, 1919, was secured by receipt No. 39, making a total
of 16,051.10 piculs of copra, covered by the warehouse receipts of the firm of Nieva,

330
Ruiz & Company issued to the firm of Salvador Hermanos, and by that firm pledged as
collateral to the defendant to secure the payment of the eight above-described notes.
Each of them further recites that "on the nonperformance of this promise, or upon the
non-payment of any of the liabilities above-mentioned, or upon the failure of the
undersigned forthwith, with or without notice, to furnish satisfactory additional securities
in case of decline, as aforesaid, then and in either such case, this note and all liabilities
of the undersigned, or any of them, shall forthwith become due and payable, without
demand or notice, and full power and authority are hereby given to said bank to sell,
assign transfer and deliver the whole of the said securities, or any part thereof, or any
substitutes therefor or any additions thereto, or any other securities or property given
unto or left in the possession of or hereafter given unto or left in the possession of the
said bank by the undersigned for safe keeping or otherwise, at any brokers board or at
public or private sale, at the option of said bank or of its president or secretary, without
either demand, advertise mentor notice of any kind, which are hereby expressly waived.
At any such sale, the said bank may itself purchase the whole or any part of the
property sold, free from any right of redemption on the part of the undersigned, which is
hereby waived and released." Stamped in red ink across the face of each quedan are the
words "Negotiable Warrant," and each of them was in the usual form of warehouse
receipts.
On February 10, 1919, the firm of Salvador Hermanos withdrew from the defendant
bank, by and with its consent, warehouse receipts Nos. 33, 36, and 39 above described,
which the bank was holding as collateral security for each of the three 18,000-peso
notes amounting to P54,000. The total amount of copra evidenced by the receipts
withdrawn was 6,024.55 piculs, the declared value of which, shown on the face of such
receipts, was P90,368.25. At the time of the withdrawal, the firm executed the following
writing:jgc:chanrobles.com.ph
"We received from the Philippine National Bank the warehouse receipts issued by
Messrs. Nieva, Ruiz & Company, the contents of which are as follow:chanrob1es virtual
1aw library
No. Date Sacks Piculs Declared
value
33 January 21/19 2,325 2,040.55 P30,608.25
36 January 23/19 2,175 1,992.00 29,880.00
39 January 25/19 2,335 1,992.00 29,880.00

_____ ______ ________

Total 6,835 6,024.55 90,368.25
"We promise to return to this bank the warehouse receipts above cited on or before the
27th instant. These warehouse receipts are guaranteed by the attached certificate of
existence of the effects of the 8th of February, 1919, issued by us.
"Manila, P. I., February 10, 1919.
"SALVADOR HERMANOS.
"Per (Sgd.) G. SALVADOR."cralaw virtua1aw library
to which was attached this writing:jgc:chanrobles.com.ph
"MANILA, P. I., February 8, 1919.
"We hereby certify that there exist the following articles in our bodegas as
follows:jgc:chanrobles.com.ph
"Soler Bodega.
100 tons kapok @ 200.00 P20,000.00
100 piculs hemp @ 60.00 6,000.00
20,000 sacks (empty) @ 0.30 6,000.00
1 lot gum copal 1,900.00
1 lot gum elemi 1,700.00
500,000 rattan @ 12.00 6,000.00
Aceites y grasas 800.00
9,000 sacks common salt @ 2.00 18,000.00
________
60,400.00

331
"Wise & Co. Gagalagin Bodega.
905 cas. Gs. in case @ 12.75 P11,538.75
77 cas. Gs. in drums
54 gals. 64.80 4,989.60
________
16,528.35
_________
P76,928.35
========
and promise that none of the above articles would be removed without consulting first
with the Philippine National Bank.
"SALVADOR HERMANOS.
"Per (Sgd.) G. SALVADOR."cralaw virtua1aw library
Neither writing was in any manner authenticated by a notary or by a competent public
official. The writing of February 10 is in form a receipt from the firm of Salvador
Hermanos to the Philippine National Bank of the quedans, or warehouse receipts, for the
copra therein described. The one of February 8 is, in legal effect, the certificate of
Salvador Hermanos "that there exist the following articles in our bodegas as follows:"
(Here follows the described property.) That is to say, that the firm certifies that the
property described is in the warehouse of the firm.

Section 2 provides that debtor who possesses sufficient property to cover the debts, be
it an individual, firm or corporation, and who is unable to meet them at maturity, "may
petition that he be declared in the state of suspension of payments by the court, or the
judge thereof in vacation."cralaw virtua1aw library
Section 3 enacts that upon the filing of the petition, the court shall make an order calling
a meeting of creditors specifying the time and place; that notice thereof shall be
published in a newspaper, and that "said order shall further contain an absolute
injunction forbidding the petitioning debtor from disposing in any manner of his property,
except in so far as concerns the ordinary operations of commerce or of industry in which
the petitioner is engaged, and, furthermore, from making any payments outside of the
necessary or legitimate expenses of his business or industry, so long as the proceedings
relative to the suspension of payments are pending, and said proceedings for the
purposes of this Act shall be considered to have been instituted from the date of the
filing of the petition."cralaw virtua1aw library
Section 14, chapter 3, provides that any person owing debts exceeding P1,000 may
apply to be discharged from his debts and liabilities by petition to the Court of First
Instance in which he has resided for six months preceding the filing of the petition.
Section 18 enacts that upon receiving and filing of the petition, schedule, and inventory,
the court, or the judge, shall make an order declaring the petitioner insolvent, and "shall
further forbid the payment to the debtor of any debts due to him and the delivery to the
debtor, or to any person for him, of any property belonging to him, and the transfer of
any property by him, and shall further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate."cralaw virtua1aw library
On April 21, 1919, Salvador Hermanos filed a petition of insolvency in the Court of First
Instance of the city of Manila. Article 5 of the petition recites:jgc:chanrobles.com.ph
"That the following property and merchandise are being pledged in favor of the
Philippine National Bank, as shown by a written document, on account of its credit which
amounts to P175,563.19, which are described as follows:chanrob1es virtual 1aw library

Act No. 1956 of the Philippine Legislature provides for the suspension of payments, the
relief of insolvent debtors, the protection of creditors, and the punishment of fraudulent
debtors. The Act provides:jgc:chanrobles.com.ph

81,904 kilos kapok @ 0.20 ko 16,380.80

"SECTION 1. This Act shall be known and may be cited as The Insolvency Law, and in
accordance with its provisions every insolvent debtor may be permitted to suspend
payments or be discharged from his debts and liabilities."cralaw virtua1aw library

93.94 piculs almaciga value 2,300.00

521,600 pieces rattan split 11.00 m 5,737.60

80 drums Union gasoline @ 53 gls. each

332
@ 1.485 gal 6,415.20
100 cases gasoline 14.00 cs 1,400.00
8 drums gasoline @ 54 gals. ea. 1.485 gl 641.52
10,000 piculs copra p. picul 14.50 145,000.00
35 bales cardboard value 1,451.52
___________
P179,326.64"
The testimony is undisputed and conclusive that about May 3, 1919, Gregorio Salvador,
a member of the firm of Salvador Hermanos, delivered certain goods, wares, and
merchandise to and in the warehouse of Nieva, Ruiz & Company, and requested that firm
to issue its receipt therefor to and in favor of the Philippine National Bank, and that,
pursuant to such request, that firm did issue eight quedans to the bank as
follows:chanrob1es virtual 1aw library
No. 161 for 32 bales of hemp;
No. 162 for 953 bundles of rattan;
No. 165 for 72 bundles of empty sacks;
No. 167 for 136 sacks of gum;
No. 168 for 1,461 bales of kapok;
No. 175 for 288 packages of Talcum Powder;
No. 176 for 35 packages of cardboard; and
No. 185 for 134 bundles of empty sacks.
On and between May 6, 1919 and August 7, 1919, acting under the terms and
provisions of its respective notes, the defendant bank sold all of the personal property
for which it held warehouse receipts, or which had been surrendered to it by the
Hermanos firm, save and except the property described in the three warehouse receipts,
which were released and surrendered to that firm on February 10, 1919.

Based upon its insolvency petition, and in the ordinary course of business, the firm of
Salvador Hermanos was adjudged insolvent, and on July 19, 1919, the Philippine Trust
Company was elected assignee of said firm and duly qualified. September 13, 1919, as
such assignee, it made a demand upon the bank for the surrender and delivery of the
property described in all of the above receipts, and, upon the banks refusal, commenced
this action to recover its value alleged to be P242,579.61, claiming that on April 21,
1919, the firm of Salvador Hermanos was the sole and exclusive owner of the property,
and that, as to the copra, about June 28, 1919, and after the filing of the insolvency
petition, the bank unlawfully seized and converted the copra to its own use, the value of
which was P192,260. For a second cause of action, the plaintiff alleges that, as such
assignee, it was the owner of the remaining personal property, and that, after the
insolvency petition was filed, the defendant unlawfully seized and converted such
property to its own use, and that it was of the value of P50,319.61.
For answer, the bank makes a general denial, as to each cause of action, of all of the
material allegations of the complaint This presents the question as to who is the owner
and entitled to possession of the property. There is but little, if any, dispute as to the
facts.
It is conceded that in January, 1919, the firm of Salvador Hermanos executed to the
Philippine National Bank the eight promissory notes above described, and that each note
was secured by the quedan, or warehouse receipt, of Nieva, Ruiz & Company, issued to
the firm of Salvador Hermanos for so many piculs of copra. that the notes are of the
same form, the only difference being the date and the amount of the note, and the
number of the quedan, or warehouse receipt, and the amount of copra in piculs. Each
warehouse receipt was duly numbered, dated and signed by Nieva, Ruiz & Company, and
recites "received from Salvador Hermanos the following packages of copra as specified
below, which are stored in warehouse No. 2, situated at_____________, subject to the
terms and conditions stated on the face and back hereof, to be delivered unto Salvador
Hermanos, or order," giving the number of the warehouse where located, and the
number of sacks, gross weight and the declared value; across the face of each receipt is
stamped in red ink the words "Negotiable Warrant." Among the conditions printed on the
back of the receipt is paragraph 4, as follows:jgc:chanrobles.com.ph
"4. This Company will deliver the packages noted hereon, on surrender to the Company
of this warrant endorsed by the party who shall be for the time registered in the books
of the Company as the owner of the packages described hereon; and the production by
the Company of this warrant shall at all times be conclusive proof that the Packages
hereon noted have been properly delivered by the Company and shall exempt the
Company from all responsibility in connection with the said packages or goods."cralaw
virtua1aw library

333
Also the following:jgc:chanrobles.com.ph
"Delivery is hereby authorized unto________________," opposite which some of the
receipts were signed by the firm of Salvador Hermanos, and others were not signed by
any one.
The fact remains that at the time the eight promissory notes were executed, a given
quedan, or warehouse receipt, was described and incorporated in the note as to its
number, when and by whom issued, and the property it represented, and each receipt
was then delivered by the firm to the defendant bank, all of which was during the month
of January, 1919. The bank never had the manual possession or the physical control of
any of this property until after the insolvency petition was filed, and it is for such reason
that the plaintiff claims that it was the property of the firm, and that the defendant
should account to the assignee.
Each quedan, or warehouse receipt, was specifically described in a given note, and was
made a part of it, and the note recites that, for any breach of its terms or conditions, the
bank has full power and authority "to sell, assign, transfer and deliver the whole of the
said security, or any part thereof, etc.," and that "at any such sale, the said bank may
itself purchase the whole or any part of the property sold, free from any right of
redemption on the part of the undersigned, which is hereby waived and released."cralaw
virtua1aw library
In addition, the quedan itself was delivered to and held by the bank, and the
warehouseman recognized the bank as the owner of the property. Legally speaking, the
owner of the quedans, or warehouse receipts, was the owner of the property described
in them, and the quedans were given as collateral to secure promissory notes, which, for
value received, were executed to the bank.
The execution of the notes, the physical possession of the negotiable quedan, or
warehouse receipt, and the recognition of ownership by the warehouseman, legally
carries with it both the title to, and the possession of, the property. In such a case, title
is not founded on a public instrument which should be authenticated by a notary or by a
competent public official. Legally speaking, the execution of the promissory notes and
the pledging of the quedans, or warehouse receipts, as collateral, and the describing of
them in the notes, and the manual delivery of the quedan, or warehouse receipt itself,
carries with it not only the title, but the legal possession of the property. In other words,
as to the property described in the quedans, or warehouse receipts, which were pledged,
as collateral, in January, 1919, to secure the eight respective promissory notes, both the
title and the possession of that property were delivered to and vested in the defendant
bank in January, 1919. Three of those quedans, or warehouse receipts, were returned to

the firm by the bank on February 10, 1919, but the bank still owned and held the notes,
which were secured but those warehouse receipts, and no part of the debt itself was
paid by or through the surrender of the receipts. For such reasons as to the first cause
of action, the plaintiff cannot recover, and, as to it, the judgment of the lower court
should be affirmed.
The second cause of action presents another and different question.
February 10, 1919, for some unexplained reason, the bank surrendered and returned to
Salvador Hermanos the three quedans, or warehouse receipts, Nos. 33, 36, and 39,
which the firm had pledged to it as collateral on January 21, 23, and 25, 1919, to secure
the payment of the three notes of P18,000 each, executed on those respective dates. In
its receipt for them, the firm promised to return the quedans to the bank "on or before
the 27th instant;" meaning January 27, 1919, and it was therein stated that such
warehouse receipts "are guaranteed by the attached certificate of existence of the
effects of the 8th of February, 1919, issued by us." The legal effect of this receipt is a
promise on the part of the firm to return the three quedans on or before January 27,
1919, and a statement that such receipts are guaranteed by the attached certificate of
the existence in the warehouse of the property described in the certificate. The
statement of February 8, recites "we hereby certify that there exist the following articles
in our bodegas." Then follows a description of the property. This is nothing but a
statement or representation to the effect that the firm has the property in its warehouse
Nothing more. After describing the property, the certificate then says: "And promise that
none of the above articles would be removed without consulting first with the Philippine
National Bank." There is no statement or representation of any kind showing when or
from whom the property was received, or how it was held, or who was the owner, or
when or to whom it would be delivered When analyzed, this writing is nothing more than
a certificate of the firm that the described property was then in its warehouse, and a
promise that none of the "articles would be removed without consulting first with the
Philippine National Bank." Such a writing would not transfer the title of the property to
the bank, or give it possession, either actual or constructive. It will be noted that both
the receipt of February 10 and the certificate and promise of February 8, are signed by
the firm of Salvador Hermanos, and that the certificate says that the property was then
in the firms warehouse, and that neither instrument was in any manner authenticated
by a notary or a competent public official, as provided by article 1216 of the Civil Code,
and that the property was in the warehouse of the firm.
Article 1863 of the Civil Code provides:jgc:chanrobles.com.ph
"In addition to the requisites mentioned in article 1857, it shall be necessary, in order to
constitute the contract of pledge, that the pledge be placed in the possession of the
creditor or of a third person appointed by common consent."cralaw virtua1aw library

334
But here, it appears from the certificate that the property was then in the possession of
the firm, who made the certificate, and that it was in the possession of that firm when
its insolvency petition was filed on April 21, 1919. It further appears that on May 3,
1919, Gregorio Salvador, a member of the firm, appeared at the offices of Nieva, Ruiz &
Company, and requested that firm to issue its warehouse receipts to the Philippine
National Bank for certain goods, which on that date he placed in the warehouse of that
company, and, in accord with his request, Nieva, Ruiz & Company did issue to and in
favor of the Philippine National Bank the following quedans, or warehouse
receipts:chanrob1es virtual 1aw library
No. 161 for 32 bales of hemp, in warehouse No. 2, of the declared value of P880;
No. 162 for 953 bundles of rattan, in warehouse No. 2, of the declared value of
P3,700.40;
No. 165 for empty sacks, in warehouse No. 2, of the declared value of P450;
No. 167 for 136 sacks of almaciga, in warehouse No. 1, of the declared value of P2,300;
No. 168 for 1,461 bales of kapok, in warehouse No. 1, of the declared value of
P14,571.48;
No. 175 for 288 packages of talcum powder, in warehouse No. 5, of the declared value of
P15,582.26;
No. 176 for 35 packages of cartulina, in warehouse No. 5, of the declared value of
P2,588.48; and
No. 185 for 134 bundles of empty sacks, in warehouse No. 2, of the declared value of
P670, making a total declared value of the property evidenced by such receipts of
P40,742.62.
In the second cause of action, the complaint alleges that the defendant took and
converted 88 drums of gasoline and 100 cases of gasoline; none of which is included in
the above receipts. Otherwise the property described in quedans Nos. 161 to 185,
inclusive, correspond and are identical with the property described in the second cause
of action.
The bank founds its right to claim the property described in the quedans Nos. 161 to
185, inclusive, upon the firms certificate of February 8, 1919, above quoted. By
comparison, it will be found that the property described in such quedans, or warehouse

receipts, does not correspond with the property described in the firms certificate of
February 8. In the certificate of February 8, there are aceites y grasas, or oil and grease,
valued at P800, and 9,000 sacks of common salt valued at P18,000 in the bodegas of
the firm, and 905 cases of gasoline valued at P11,538.75 and 77 cases of gasoline in
drums, 64 gallons, valued at P4,989.60, in the warehouse of Wise & Company, that are
not described in the quedans Nos. 161 to 185, inclusive It also appears that Talcum
Powder in receipt No. 175 of the value of P17,140, and cartulina in receipt No. 176 of
the value of P2,847 are not included in the property described in the certificate of
February 8, making a total value of the property described in those two receipts, and
which is not included in the certificate of February 8, of P19,987.
There is not any evidence of the actual market value of the property, but it does appear
that at the time quedans Nos. 161 to 185, inclusive, were issued, the bank itself placed
a declared value upon that property of P40,742.62. Those quedans do not include the
gasoline which the bank admits it sold on May 24, 1919, for P4,989.60, and the gasoline
which it sold on May 28, 1919, for the sum of P2,641.80, or P7,631.40 which it received
for gasoline. It is true that it appears from the sales report that the bank sold the
property described in quedans Nos. 161 to 185, inclusive, for much less money than the
valuation which it placed upon the property, but, in legal effect, when the quedans were
issued, the conversion of that property took place at the time they were issued to and
accepted by the bank, and it should be charged with the value of the property at the
time of its conversion, and in the absence of any testimony as to the market value, it
should be charged with the amount which it actually received from the sale of the
gasoline.
It will be noted that the promissory notes executed by the firm to the bank
recite:jgc:chanrobles.com.ph
"Full power and authority are hereby given to said bank to sell, assign, transfer and
deliver the whole of the said securities, or any part thereof, or any substitutes therefor
or any additions thereto, or any other securities or property given unto or left in the
possession of or hereafter given unto or left in the possession of the said Bank by the
undersigned."cralaw virtua1aw library
Hence, the power and authority of the bank to sell, assign, or transfer is confined to
property which was given unto or left in its possession.
As we have pointed out none of the property described in the certificate of February 8
was ever given unto or left in the possession of the bank.
The insolvency petition was filed April 21, 1919, and the plaintiff was duly elected and
qualified, as assignee, on July 19, 1919, and, as such, it represents both the creditors

335
and the firm. Although it was not appointed until July, 1919, yet when it did qualify its
right and title to all the property of the firm related back and became vested as of April
21, 1919, when the insolvency petition was filed, and from that time it alone had the
power and authority to act for and represent the firm. Under the terms and provisions of
Act No. 1956 of the Philippine Legislature, after it was filed, the power of the firm or any
member of it to deliver possession of the property to secure a preexisting debt was
suspended pending final adjudication. That is to say, if the debt was not legally secured
before the insolvency petition was filed, no member of the firm had any legal right to
secure it after the petition was filed, and any attempt to do so would be null and void.
As to the first cause of action, we hold that in January, 1919, the bank became and
remained the owner of the five quedans Nos. 30, 35, 38, 41, and 42; that they were in
form negotiable, and that, as such owner, it was legally entitled to the possession and
control of the property therein described at the time the insolvency petition was filed and
had a right to sell it and apply the proceeds of the sale to its promissory notes, including
the three notes of P18,000 each, which were formerly secured by the three quedans
Nos. 33, 36, and 39, which the bank surrendered to the firm. That is to say, the bank
had a legal right to apply the Proceeds from the property described in the five remaining
quedans to the payment of its eight promissory notes.
As to the second cause of action, the judgment of the lower court is reversed, and one
will be entered here in favor of the Philippine Trust Company, the plaintiff, and against
the Philippine National Bank, the defendant, for P40,742.62, the declared value of the
property described in quedans Nos. 161 to 185, inclusive, and for the further sum of
P7,631.40, the value of the gasoline sold in May, 1919, or a total of P48,374.02, with
interest thereon from September 22, 1919, at the rate of 6 per cent per annum, and for
the costs and disbursements in this and the lower court. So ordered.
Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.

G.R. Nos. L-21000, 21002-21004, and 21006

December 20, 1924

In the matter of the involuntary insolvency of Umberto de Poli. BANK OF THE

PHILIPPINE ISLANDS, ET AL., claimants-appellees, vs. J.R. HERRIDGE, assignee
of the insolvent estate of U. de Poli, BOWRING and CO., C.T. BOWRING and CO.,
LTD., and T.R. YANGCO, creditors-appellants.
Crossfield and O'Brien, J.A. Wolfson and Camus and Delgado for appellants.
Hartigan and Welch, Fisher and DeWitt and Gibbs and McDonough for appellees.

OSTRAND, J.:
The present appeals, all of which relate to the Insolvency of U. de Poli, have been
argued together and as the principal questions involved are the same in all of them, the
cases will be disposed of in one decision.chanroblesvirtualawlibrary chanrobles virtual
law library
The insolvent Umberto de Poli was for several years engaged on an extensive scale in
the exportation of Manila hemp, maguey and other products of the country. He was also
a licensed public warehouseman, though most of the goods stored in his warehouses
appear to have been merchandise purchased by him for exportation and deposited there
by he himself.chanroblesvirtualawlibrary chanrobles virtual law library
In order to finance his commercial operations De Poli established credits with some of
the leading banking institutions doing business in Manila at that time, among them the
Hongkong & Shanghai Banking Corporation, the Bank of the Philippine Islands, the Asia
Banking Corporation, the Chartered Bank of India, Australia and China, and the
American Foreign Banking Corporation. The methods by which he carried on his business
with the various banks was practically the same in each case and does not appear to
have differed from the ordinary and well known commercial practice in handling export
business by merchants requiring bank credits.chanroblesvirtualawlibrary chanrobles
virtual law library
De Poli opened a current account credit with the bank against which he drew his checks
in payment of the products bought by him for exportation. Upon the purchase, the
products were stored in one of his warehouses and warehouse receipts issued therefor
which were endorsed by him to the bank as security for the payment of his credit in the
account current. When the goods stored by the warehouse receipts were sold and
shipped, the warehouse receipt was exchanged for shipping papers, a draft was drawn in
favor of the bank and against the foreign purchaser, with bill of landing attached, and
the entire proceeds of the export sale were received by the bank and credited to the
current account of De Poli.chanroblesvirtualawlibrary chanrobles virtual law library
On December 8, 1920, De Poli was declared insolvent by the Court of First Instance of
Manila with liabilities to the amount of several million pesos over and above his assets.
An assignee was elected by the creditors and the election was confirmed by the court on
December 24, 1920. The assignee qualified on January 4, 1921, and on the same date
the clerk of the court assigned and delivered to him the property of the
estate.chanroblesvirtualawlibrary chanrobles virtual law library

336
Among the property taken over the assignee was the merchandise stored in the various
warehouses of the insolvent. This merchandise consisted principally of hemp, maguey
and tobacco. The various banks holding warehouse receipts issued by De Poli claim
ownership of this merchandise under their respective receipts, whereas the other
creditors of the insolvent maintain that the warehouse receipts are not negotiable, that
their endorsement to the present holders conveyed no title to the property, that they
cannot be regarded as pledges of the merchandise inasmuch as they are not public
documents and the possession of the merchandise was not delivered to the claimants
and that the claims of the holders of the receipts have no preference over those of the
ordinary unsecured creditors.chanroblesvirtualawlibrary chanrobles virtual law library
On July 20, 1921, the banks above-mentioned and who claim preference under the
warehouse receipts held by them, entered into the following stipulation:
It is stipulated by the between the undersigned counsel, for the Chartered Bank of India,
Australia & China, the Hongkong & Shanghai Banking Corporation, the Asia Banking
Corporation and the Bank of Philippine Islands that:chanrobles virtual law library
Whereas, the parties hereto are preferred creditors of the insolvent debtor U. de Poli, as
evidenced by the following quedans or warehouse receipts for hemp and maguey stored
in the warehouses of said debtor:

No.
No.
No.
No.
No.

57 issued May 22, 1920, 360 bales hemp.

93 issued July 8, 1920 bales hemp.
103 issued August 18, 1920, 544 bales hemp.
112 issued September 15, 1920, 250 bales hemp.
111 issued September 15, 1920, 2,007 bales maguey.
QUEDANS OR WAREHOUSE RECEIPTS OF THE BANK OF THE PHILIPPINE ISLANDS

No.
No.
No.
No.

147
148
149
150

issued
issued
issued
issued

November
November
November
November

13,
13,
13,
13,

1920,
1920,
1920,
1920,

393
241
116
217

bales
bales
bales
bales

hemp.
hemp.
hemp.
hemp.

And whereas much of the hemp and maguey covered by the above mentioned quedans
was either non-existent at the time of the issuance of said quedans or has since been
disposed of by the debtor and of what remains much of the same hemp and maguey
transferred by means of quedans to one of the parties hereto has also been transferred
by means of other quedans to one or more of the other parties hereto andchanrobles
virtual law library
Whereas, the hemp and maguey covered by said quedans is to a considerable extent
commingled.chanroblesvirtualawlibrary chanrobles virtual law library

QUEDANS OR WAREHOUSE RECEIPTS OF THE CHARTERED BANK

No. A-131
No. A-157
No. A-132
No. A-133
1920, and

for 3,808 bales hemp.

for 250 bales hemp.
for 1,878 bales maguey.
for 1,574 bales maguey. Nos. 131, 132 and 133 all bear date November 6,
No. 157, November 19, 1920.

QUEDANS OR WAREHOUSE RECEIPTS OF THE HONGKONG & SHANGHAI BANKING

CORPORATION

Now, therefore, it is hereby agreed subject to the rights of any other claimants hereto
and to the approval of this Honorable Court that all that remains of the hemp and
maguey covered by the warehouse receipts of the parties hereto or of any of them shall
be adjudicated to them proportionately by grades in accordance with the quedans held
by each as above set forth in accordance with the rule laid down in section 23 of the
Warehouse Receipts Law for the disposition of commingled fungible goods.
Manila, P.I., July 20, 1921.
GIBBS, MCDONOUGH & JOHNSON

No.
No.
No.
No.

130
134
135
137

for
for
for
for

490 bales hemp and 321 bales maguey.

1,970 bales hemp.
1,173 bales hemp.
237 bales hemp.

QUEDANS OR WAREHOUSE RECEIPTS OF THE ASIA BANKING CORPORATION

By A. D. GIBBS
Attorneys for the Chartered Bank
of India, Australia & China
FISHER & DEWITT

337
By C.A. DEWITT
Attorneys for the Hongkong & Shanghai
Banking Corporation
WOLFSON, WOLFSON & SCHWARZKOFF
Attorneys for the Asia Banking Corporation
HARTIGAN & WELCH
Attorneys for the Bank of the Philippine Islands
Claims for hemp and maguey covered by the respective warehouse receipts of the banks
mentioned in the foregoing stipulation were presented by each of said banks. Shortly
after the adjudication of the insolvency of the firm of Wise & Co., one of the unsecured
creditors of the insolvent on June 25, 1921, presented specific written objections to the
claims of the banks on the ground of the insufficiency of the warehouse receipts and also
to the stipulation above quoted on the ground that it was entered into for the purpose of
avoiding the necessity of identifying the property covered by each warehouse receipt.
Bowring & Co., C.T. Bowring Co., Ltd., and Teodoro R. Yangco, also unsecured creditors
of the insolvent, appeared in the case after the decision of the trial court was rendered
and joined with the assignee in his motion for a rehearing and in his appeal to this
court.chanroblesvirtualawlibrary chanrobles virtual law library
Upon hearing, the court below held that the receipts in question were valid negotiable
warehouse receipts and ordered the distribution of the hemp and maguey covered by
the receipts among the holders thereof proportionately by grades, in accordance with
the stipulation above quoted, and in a supplementary decision dated November 2, 1921,
the court adjudged the merchandise covered by warehouse receipts Nos. A-153 and A155 to the Asia Banking Corporation. From these decisions the assignee of the insolvent
estate, Bowring & Co., C.T. Bowring Co., Ltd., and Teodoro R. Yangco appealed to this
court.chanroblesvirtualawlibrary chanrobles virtual law library
The warehouse receipts are identical in form with the receipt involved in the case
ofRoman vs. Asia Banking Corporation (46 Phil., 705), and there held to be a valid
negotiable warehouse receipt which, by endorsement, passed the title to the
merchandise described therein to the Asia Banking Corporation. That decision is,
however, vigorously attacked by the appellants, counsel asserting, among other things,
that "there was not a single expression in that receipt, or in any of those now in
question, from which the court could or can say that the parties intended to make them
negotiable receipts. In fact, this is admitted in the decision by the statement "... and it

contains no other direct statement showing whether the goods received are to be
delivered to the bearer, to a specified person, or to a specified person or his order."
There is nothing whatever in these receipts from which the court can possibly say that
the parties intended to use the phrase "a la orden" instead of the phrase "por orden,"
and thus to make said receipts negotiable. On the contrary, it is very clear from the
circumstances under which they were issued, that they did not intend to do so. If there
was other language in said receipts, such as would show their intention in some way to
make said receipts negotiable, then there would be some reason for the construction
given by the court. In the absence of language showing such intention, the court, by
substituting the phrase "a la orden" for the phrase "por orden," is clearly making a new
contract between the parties which, as shown by the language used by them, they never
intended to enter into."chanrobles virtual law library
These very positive assertions have, as far as we can see, no foundation in fact and rest
mostly on misconceptions.chanroblesvirtualawlibrary chanrobles virtual law library
Section 2 of the Warehouse Receipts Act (No. 2137) prescribes the essential terms of
such receipts and reads as follows:
Warehouse receipts needed not be in any particular form, but every such receipt must
embody within its written or printed terms - chanrobles virtual law library
( a) The location of the warehouse where the goods are stored,chanrobles virtual law
library
( b) The date of issue of the receipt,chanrobles virtual law library
( c) The consecutive number of the receipt,chanrobles virtual law library
( d) A statement whether the goods received will be delivered to the bearer, to a
specified person, or to a specified person or his order,chanrobles virtual law library
( e) The rate of storage charges,chanrobles virtual law library
(f) A description of the goods or of the packages containing them,chanrobles virtual law
library
( g) The signature of the warehouseman, which may be made by his authorized
agent,chanrobles virtual law library

338
( h) If the receipt is issued for goods of which the warehouseman is owner, either solely
or jointly or in common with others, the fact of such ownership, andchanrobles virtual
law library

abaca
Sr. U. de Poli la cantidad de doscientos cincuenta fardos
abaca segun marcas detalladas al margen, y con arreglo
a las condiciones siguientes:chanrobles virtual law library

( i) A statement of the amount of advances made and of liabilities incurred for which the
warehouseman claims a lien. If the precise amount of such advances made or of such
liabilities incurred is, at the time of the issue of the receipt, unknown to the
warehouseman or to his agent who issues it, a statement of the fact that advances have
been made or liabilities incurred and the purpose thereof is
sufficient.chanroblesvirtualawlibrary chanrobles virtual law library

1. a Estan asegurados contra riesgo de incendios

exclusivamente, segun las condiciones de mis polizas;
quedando los demas por cuenta de los
depositantes.chanroblesvirtualawlibrary chanrobles
virtual law library

A warehouseman shall be liable to any person injured thereby, for all damage caused by
the omission from a negotiable receipt of any of the terms herein required.

2.

No se responde del peso, clase ni mal estado de la

mercancia
depositada.chanroblesvirtualawlibrary chanrobles virtual
law library

Section 7 of the Act reads:

A nonnegotiable receipt shall have plainly placed upon its face by the warehouseman
issuing it "nonnegotiable," or "not negotiable." In case of the warehouseman's failure so
to do, a holder of the receipt who purchased it for value supposing it to be negotiable,
may, at his option, treat such receipt as imposing upon the warehouseman the same
liabilities he would have incurred had the receipt been negotiable.
All of the receipts here in question are made out on printed blanks and are identical in
form and terms. As an example, we may take receipt No. A-112, which reads as follows:

3.

I certify that I am the sole

owner of the merchandise
herein described.
(Sgd.) "UMBERTO DE POLI

U. DE POLI
209 Estero de Binondo

El almacenaje sera de quince centimos fardo por

mes.

4. a El seguro sera de un octavo por ciento mensual por

el total. Tanto el almacenaje como el seguro se cobraran
por meses vencidos, y con arreglo a los dias devengados
siendo el minimo para los efectos del cobro 10 dias.
5. a No seran entregados dichos efectos ni parte de los
mismos sin la presentacion de este "quedan" para su
correspondiente deduccion.

BODEGAS

6. a El valor para el seguro de estas mercancias es

de pesos filipinos nueve mil quinientos solamentes.
QUEDAN No. A-112
Almacen Yangco ----chanrobles virtual law library

7. a Las operaciones de entrada y salida, seran de cuenta

de los depositantes, pudiendo hacerlos con sus
trabajadores, o pagando los que le sean facilitados, con
arreglo a los tipos que tengo convenido con los mios.

Por ------Marcas Bultos Clase de las

UDP
250 mercancias
Fardos

"Quedan depositados en estos almacenes por orden del

Valor del Seguro P9,500.

Manila, 15 de sept. de 1920.

339
V. B.
(Sgd.) UMBERTO DE POLI

El Encargado,
(Sgd.) I. MAGPANTAY

The receipt is not marked "nonnegotiable" or "not negotiable," and is endorsed "Umberto
de Poli."chanrobles virtual law library
As will be seen, the receipt is styled "Quedan" (warehouse receipt) and contains all the
requisites of a warehouse receipt as prescribed by section 2, supra, except that it does
not, in express terms, state whether the goods received are to be delivered to bearer, to
a specified person or to his order. The intention to make it a negotiable warehouse
receipt appears, nevertheless, quite clearly from the document itself: De Poli deposited
the goods in his own warehouse; the warehouse receipt states that he is the owner of
the goods deposited; there is no statement that the goods are to be delivered to the
bearer of the receipt or to a specified person and the presumption must therefore
necessarily be that the goods are in the warehouse subject to the orders of their owner
De Poli. As the owner of the goods he had, of course, full control over them while the
title remained in him; we certainly cannot assume that it was the intention to have the
goods in the warehouse subject to no one's orders. That the receipts were intended to
be negotiable is further shown by the fact that they were not marked "nonnegotiable"
and that they were transferred by the endorsement of the original holder, who was also
the warehouseman. In his dual capacity of warehouseman and the original holder of the
receipt, De Poli was the only party to the instrument at the time of its execution and the
interpretation he gave it at that time must therefore be considered controlling as to its
intent.chanroblesvirtualawlibrary chanrobles virtual law library
In these circumstances, it is hardly necessary to enter into any discussion of the
intended meaning of the phrase "por orden" occurring in the receipts, but for the
satisfaction of counsel, we shall briefly state some of our reasons for the interpretation
placed upon that phrase in the Felisa Roman case:chanrobles virtual law library
The rule is well-known that wherever possible writings must be so construed as to give
effect to their general intent and so as to avoid absurdities. Applying this rule, it is
difficult to see how the phrase in question can be given any other rational meaning than
that suggested in the case mentioned. It is true that the meaning would have been more
grammatically expressed by the word "a la orden"; the world "por preceding the word
"orden" is generally translated into the English language as "by" but "por" also means
"for" or "for the account of" ( see Velazquez Dictionary) and it is often used in the latter
sense. The grammatical error of using it in connection with "orden" in the present case is
one which might reasonably be expected from a person insufficiently acquainted with the
Spanish language.chanroblesvirtualawlibrary chanrobles virtual law library

If the receipt had been prepared in the English language and had stated that the goods
were deposited "for order" of U. de Poli, the expression would not have been in
accordance with good usage, but nevertheless in the light of the context and that
circumstances would be quite intelligible and no one would hesitate to regard "for order"
as the equivalent of "to the order." Why may not similar latitude be allowed in the
construction of a warehouse receipt in the Spanish language?chanrobles virtual law
library
If we were to give the phrase the meaning contended for by counsel, it would reveal no
rational purpose. To say that a warehouseman deposited his own goods with himself by
his own order seems superfluous and means nothing. The appellants' suggestion that
the receipt was issued by Ireneo Magpantay loses its force when it is considered that
Magpantay was De Poli's agent and that his words and acts within the scope of his
agency were, in legal effect, those of De Poli himself. De Poli was the warehouseman and
not Magpantay.chanroblesvirtualawlibrary chanrobles virtual law library
Counsel for the appellants also assail the dictum in our decision in the Felisa Roman case
that section 7 of the Warehouse Receipts Act "appears to give any warehouse receipt not
marked "nonnegotiable" or "not negotiable" practically the same effect as a receipt
which by its terms is negotiable provided the holder of such unmarked receipt acquired it
for value supposing it to be negotiable." The statement is, perhaps, too broad but it
certainly applies in the present case as against the appellants, all of whom are ordinary
unsecured creditors and none of them is in position to urge any preferential
rights.chanroblesvirtualawlibrary chanrobles virtual law library
As instruments of credit, warehouse receipts play a very important role in modern
commerce and the present day tendency of the courts is towards a liberal construction
of the law in favor of a bona fide holder of such receipts. Under the Uniform Warehouse
Receipts Act, the Supreme Court of New York in the case of Joseph vs. P. Viane, Inc.
( [1922], 194 N.Y. Supp., 235), held the following writing a valid warehouse receipt:
"Original. Lot No. 9. New York, November 19, 1918. P. Viane, Inc., Warehouse, 511 West
40th Street, New York City. For account of Alpha Litho. Co., 261 9th Avenue. Marks: Fox
Film Co. 557 Bdles 835- R. 41 x 54-116. Car Number: 561133. Paul Viane, Inc. E.A.
Thompson. P. Viane, Inc., Warehouse."
In the case of Manufacturers' Mercantile Co vs. Monarch Refrigerating Co.
( [1915], 266 III., 584), the Supreme Court of Illinois said:
The provisions of Uniform Warehouse Receipts Act, sec. 2 (Hurd's Rev. St. 1913, c. 114,
sec. 242), as to the contents of the receipt, are for the benefit of the holder and of

340
purchasers from him, and failure to observe these requirements does not render the
receipt void in the hands of the holder.
In the case of Hoffman vs. Schoyer ( [1892], 143 III., 598), the court held that the
failure to comply with Act III, April 25, 1871, which requires all warehouse receipts for
property stored in Class C to "distinctly state on their face the brands or distinguishing
marks upon such property," for which no consequences, penal or otherwise, are
imposed, does not render such receipts void as against an assignee for
value.chanroblesvirtualawlibrary chanrobles virtual law library
The appellants argue that the receipts were transferred merely as security for advances
or debts and that such transfer was of no effect without a chattel mortgage or a contract
of pledge under articles 1867 and 1863 of the Civil Code. This question was decided
adversely to the appellants' contention in the case of Roman vs. Asia Banking
Corporation, supra. The Warehouse Receipts Act is complete in itself and is not affected
by previous legislation in conflict with its provisions or incompatible with its spirit or
purpose. Section 58 provides that within the meaning of the Act "to "purchase" includes
to take as mortgagee or pledgee" and "purchaser" includes mortgagee and pledgee." It
therefore seems clear that, as to the legal title to the property covered by a warehouse
receipt, a pledgee is on the same footing as a vendee except that the former is under
the obligation of surrendering his title upon the payment of the debt secured. To hold
otherwise would defeat one of the principal purposes of the Act, i. e., to furnish a basis
for commercial credit.chanroblesvirtualawlibrary chanrobles virtual law library
The appellants also maintain that baled hemp cannot be regarded as fungible goods and
that the respective warehouse receipts are only good for the identical bales of hemp for
which they were issued. This would be true if the hemp were ungraded, but we can see
no reason why bales of the same government grade of hemp may not, in certain
circumstances, be regarded as fungible goods. Section 58 of the Warehouse Receipts Act
defines fungible goods as follows:
"Fungible goods" means goods of which any unit is, from its nature or by mercantile
custom, treated as the equivalent of any other unit.
In the present case the warehouse receipts show how many bales of each grade were
deposited; the Government grade of each bale was clearly and permanently marked
thereon and there can therefore be no confusion of one grade with another; it is not
disputed that the bales within the same grade were of equal value and were sold by the
assignee for the same price and upon the strength of the Government grading marks.
Moreover, it does not appear that any of the claimant creditors, except the appellees,
hold warehouse receipts for the goods here in question. Under these circumstances, we

do not think that the court below erred in treating the bales within each grade as
fungible goods under the definition given by the statute. It is true that sections 22 and
23 provide that the goods must be kept separated and that the warehouseman may not
commingle goods except when authorized by agreement or custom, but these provisions
are clearly intended for the benefit of the warehouseman. It would, indeed, be strange if
the warehouseman could escape his liability to the owners of the goods by the simple
process of commingling them without authorization. In the present case the holders of
the receipts have impliedly ratified the acts of the warehouseman through the pooling
agreement hereinbefore quoted.chanroblesvirtualawlibrary chanrobles virtual law library
The questions so far considered are common to all of the claims now before us, but each
claim has also its separate features which we shall now briefly discuss:
R.G. Nos. 21000 AND 21004
CLAIMS OF THE BANK OF THE PHILIPPINE ISLANDS AND THE GUARANTY TRUST
COMPANY OF NEW YORKchanrobles virtual law library
The claim of the Bank of the Philippine Islands is supported by four warehouse receipts,
No. 147 for 393 bales of hemp, No. 148 for 241 bales of hemp, No. 149 for 116 bales of
hemp and No. 150 for 217 bales of hemp. Subsequent to the pooling agreement these
warehouse receipts were signed, endorsed and delivered to the Guaranty Trust Company
of New York, which company, under a stipulation of October 18, 1921, was allowed to
intervene as a party claiming the goods covered by said receipts, and which claim forms
the subject matter of the appeal R.G. No. 21004. All of the warehouse receipts involved
in these appeals were issued on November 13, 1920, and endorsed over the Bank of the
Philippine Islands.chanroblesvirtualawlibrary chanrobles virtual law library
On November 16, 1920, De Poli executed and delivered to said bank a chattel mortgage
on the same property described in the receipts, in which chattel mortgage no mention
was made of the warehouse receipts. This mortgage was registered in the Office of the
Register of Deeds of Manila on November 18,
1920.chanroblesvirtualawlibrary chanrobles virtual law library
The appellants argue that the obligations created by the warehouse receipts were
extinguished by the chattel mortgage and that the validity of the claim must be
determined by the provisions of the Chattel Mortgage Law and not by those of the
Warehouse Receipts Act, or, in other words, that the chattel mortgage constituted a
novation of the contract between the parties.chanroblesvirtualawlibrary chanrobles
virtual law library

341
Novations are never presumed and must be clearly proven. There is no evidence
whatever in the record to show that a novation was intended. The chattel mortgage was
evidently taken as additional security for the funds advanced by the bank and the
transaction was probably brought about through a misconception of the relative values
of warehouse receipts and chattel mortgages. As the warehouse receipts transferred the
title to the goods to the bank, the chattel mortgage was both unnecessary and
inefficatious and may be properly disregarded.chanroblesvirtualawlibrary chanrobles
virtual law library
Under the seventh assignment of error the appellants argue that as De Poli was declared
insolvent by the Court of First Instance of Manila on December 8, 1920, only twenty-five
days after the warehouse receipts were issued, the latter constituted illegal preferences
under section 70 of the Insolvency Act. In our opinion the evidence shows clearly that
the receipts were issued in due and ordinary course of business for a valuable pecuniary
consideration in good faith and are not illegal preferences.
R.G. No. 21002
CLAIM OF THE HONGKONG & SHANGHAI BANKING CORPORATIONchanrobles virtual law
library
The warehouse receipts held by this claimant-appellee are numbered A-130 for 490
bales of hemp and 321 bales of maguey, No. A-134 for 1,970 bales of hemp, No. A-135
for 1,173 bales of hemp and No. A-137 for 237 bales of hemp, were issued by De Poli
and were endorsed and delivered to the bank on or about November 8, 1920. The
appellants maintain that the bank at the time of the delivery to it of the warehouse
receipts had reasonable cause to believe that De Poli was insolvent, and that the receipts
therefore constituted illegal preferences under the Insolvency Law and are null and void.
There is nothing in the record to support this
contention.chanroblesvirtualawlibrary chanrobles virtual law library
The other assignments of error relate to questions which we have already discussed and
determined adversely to the appellants.
R.G. No. 21003
CLAIM OF THE CHARTERED BANK OF INDIA, AUSTRALIA & CHINAchanrobles virtual law
library
This claimant holds warehouse receipts Nos. 131 for 3,808 bales of hemp, A-157 for 250
bales of hemp, A-132 for 1,878 bales of maguey and A-133 for 1,574 bales of maguey.

Nos. A-131, A-132 and A-133 bear the date of November 6, 1920, and A-157 is dated
November 19, 1920.chanroblesvirtualawlibrary chanrobles virtual law library
Under the fourth assignment of error, the appellants contend that the court erred in
permitting counsel for the claimant bank to retract a withdrawal of its claim under
warehouse receipt No. A-157. It appears from the evidence that during the examination
of the witness Fairnie, who was the local manager of the claimant bank, counsel for the
bank, after an answer made by Mr. Fairnie to one of his questions, withdrew the claim
under the warehouse receipt mentioned, being under the impression that Mr. Fairnie's
answer indicated that the bank had knowledge of De Poli's pending insolvency at the
time the receipt was delivered to the bank. Later on in the proceedings the court, on
motion of counsel, reinstated the claim. Counsel explains that by reason of Mr. Fairnie's
Scoth accent and rapid style of delivery, he misunderstood his answer and did not
discover his mistake until he read the transcript of the
testimony.chanroblesvirtualawlibrary chanrobles virtual law library
The allowance of the reinstatement of the claim rested in the sound discretion of the trial
court and there is nothing in the record to show that this discretion was abused in the
present instance.chanroblesvirtualawlibrary chanrobles virtual law library
Under the fifth assignment of error appellants argue that the manager of the claimant
bank was informed of De Poli's difficulties on November 19, 1920, when he received
warehouse receipt No. A-157 and had reasonable cause to believe that De Poli was
insolvent and that the transaction therefore constituted an illegal
preference.chanroblesvirtualawlibrary chanrobles virtual law library
Mr. Fairnie, who was the manager of the claimant bank at the time the receipt in the
question was delivered to the bank, testifies that he had no knowledge of the impending
insolvency and Mr. De Poli, testifying as a witness for the assignee-appellee, stated that
he furnished the bank no information as to his failing financial condition at any time prior
to the filing of the petition for his insolvency, but that on the contrary he advised the
bank that his financial condition was sound.chanroblesvirtualawlibrary chanrobles virtual
law library
The testimony of the same witnesses also shows that the bank advanced the sum of
P20,000 to De Poli at Cebu against the same hemp covered by warehouse receipt No. A157 as early as October, 1920, and that upon shipment thereof to Manila the bill of
lading, or shipping documents, were made out in favor of the Chartered Bank and
forwarded to it at Manila; that upon the arrival of the hemp at Manila, Mr. De Poli, by
giving a trust receipt to the bank for the bill of lading, obtained possession of the hemp
with the understanding that the warehouse receipt should be issued to the bank

342
therefor, and it was in compliance with that agreement previously made that the receipt
was issued on November 19, 1920. Upon the facts stated we cannot hold that the bank
was given an illegal preference by the endorsement to it of the warehouse receipt in
question. (Mitsui Bussan Kaisha vs. Hongkong & Shanghai Banking Corporation, 36 Phil.,
27.)
R.G. No. 21006
CLAIM OF THE ASIA BANKING CORPORATIONchanrobles virtual law library
Claimant holds warehouse receipts Nos. A-153, dated November 18, 1920, for 139 bales
of tobacco, A-154, dated November 18, 1920, for 211 bales of tobacco, A-155, dated
November 18, 1920, for 576 bales of tobacco, A-57, dated May 22, 1920, for 360 bales
of hemp, A-93, dated July 8, 1920, for 382 bales of hemp, A-103, dated August 18,
1920, for 544 bales of hemp, A-112, dated September 15, 1920, for 250 bales of hemp
and A-111, dated September 15, 1920, for 207 bales of
maguey.chanroblesvirtualawlibrary chanrobles virtual law library
The assignments of error in connection with this appeal are, with the exception of the
fourth, similar to those in the other cases and need not be further
discussed.chanroblesvirtualawlibrary chanrobles virtual law library
Under the fourth assignment, the appellants contend that warehouse receipts Nos. A153, A-154 and A-155 were illegal preferences on the assumption that the claimant bank
must have had reasonable reasons to believe that De Poli was insolvent on November
18, 1920, when the three receipts in question were received. In our opinion, the
practically undisputed evidence of the claimant bank sufficiently refutes this
contention.chanroblesvirtualawlibrary chanrobles virtual law library
For the reasons hereinbefore stated the judgments appealed from are hereby affirmed,
without costs. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library
G.R. No. 129918 July 9, 1998
PHILIPPINE NATIONAL BANK, petitioner,
vs.

HON. MARCELINO L. SAYO, JR., in his capacity as Presiding Judge of the Regional Trial Court
of Manila (Branch 45), NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO
and WILSON T. GO,respondents.

DAVIDE, JR., J.:

In this special civil action for certiorari, actually the third dispute between the same private parties to
have reached this Court, 1 petitioner asks us to annul the orders 2 of 15 April 1997 and 14 July 1997
issued in Civil Case No. 90-53023 by the Regional Trial Court, Manila, Branch 45. The first
order 3 granted private respondents' motion for execution to satisfy their warehouseman's lien against
petitioner, while the second order 4 denied, with finality, petitioner's motion for reconsideration of the
first order and urgent motion to lift garnishment, and private respondents' motion for partial
reconsideration.
The factual antecedents until the commencement of G.R. No. 119231 were summarized in our
decision therein, as follows:
In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar
Refinery issued on several dates, the following Warehouse Receipts (Quedans): (a)
March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy; (b) March
7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising (Rosa
Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St.
Therese Merchandising; (d) March 31, 1989, Receipt No. 18086, covering sugar
deposited by St. Therese Merchandising; and (e) April 1, 1989, Receipt No. 18087,
covering sugar deposited by RNS Merchandising. The receipts are substantially in
the form, and contains the terms, prescribed for negotiable warehouse receipts by
Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and
endorsed to Luis T. Ramos, and Receipts Nos. 18086, 18087 and 18062 were
negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then used the
quedans as security for two loan agreements one for P15.6 million and the other
for P23.5 million obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the Philippine National Bank.

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Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on
January 9, 1990. Consequently, on March 16, 1990, the Philippine National Bank
wrote to Noah's Ark Sugar Refinery demanding delivery of the sugar stocks covered
by the quedans endorsed to it by Zoleta and Ramos. Noah's Ark Sugar Refinery
refused to comply with the demand alleging ownership thereof, for which reason the
Philippine National Bank filed with the Regional Trial Court of Manila a verified
complaint for "Specific Performance with Damages and Application for Writ of
Attachment" against Noah's Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and
Wilson T. Go, the last three being identified as the sole proprietor, managing partner,
and Executive Vice President of Noah's Ark, respectively.
Respondent Judge Benito C. Se, Jr., [to] whose sala the case was raffled, denied the
Application for Preliminary Attachment. Reconsideration therefor was likewise denied.
Noah's Ark and its co-defendants filed an Answer with Counterclaim and Third-Party
Complaint in which they claimed that they [were] the owners of the subject quedans
and the sugar represented therein, averring as they did that:
9. * * * In an agreement dated April 1, 1989, defendants agreed to
sell to Rosa Ng Sy of RNS Merchandising and Teresita Ng of St.
Therese Merchandising the total volume of sugar indicated in the
quedans stored at Noah's Ark Sugar Refinery for a total
consideration of P63,000,000.00, * * * The corresponding payments
in the form of checks issued by the vendees in favor of defendants
were subsequently dishonored by the drawee banks by reason of
"payment stopped" and "drawn against insufficient funds," * * * Upon
proper notification to said vendees and plaintiff in due course,
defendants refused to deliver to vendees therein the quantity of
sugar covered by the subject quedans.
10. * * * Considering that the vendees and first endorsers of subject
quedans did not acquire ownership thereof, the subsequent
endorsers and plaintiff itself did not acquire a better right of
ownership than the original vendees/first endorsers.
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T.
Go and Wilson T. Go, doing business under the trade name and style Noah's Ark
Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that the latter be

ordered to deliver or return to them the quedans (previously endorsed to PNB and
the subject of the suit) and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of
avoidance, is essentially to the effect that the transaction between them, on the one
hand, and Jimmy T. Go, on the other, concerning the quedans and the sugar stocks
covered by them was merely a simulated one being part of the latter's complex
banking schemes and financial maneuvers, and thus, they are not answerable in
damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for Summary
Judgment in favor of the plaintiff as against the defendants for the reliefs prayed for in
the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the Motion for
Summary Judgment. Thereupon, the Philippine National Bank filed a Petition
for Certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 25938 on
December 13, 1997.
Pertinent portions of the decision of the Court of Appeals read:
In issuing the questioned Orders, the respondent Court ruled that
"questions of law should be resolved after and not before, the
questions of fact are properly litigated." A scrutiny of defendant's
affirmative defenses does not show material questions of fact as to
the alleged nonpayment of purchase price by the vendees/first
endorsers, and which nonpayment is not disputed by PNB as it does
not materially affect PNB's title to the sugar stocks as holder of the
negotiable quedans.
What is determinative of the propriety of summary judgment is not
the existence of conflicting claims from prior parties but whether from
an examination of the pleadings, depositions, admissions and
documents on file, the defenses as to the main issue do not tender
material questions of fact (see Garcia vs. Court of Appeals, 167
SCRA 815) or the issues thus tendered are in fact sham, fictitious,
contrived, set up in bad faith or so unsubstantial as not to constitute
genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA

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753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). [sic] The
questioned Orders themselves do not specify what material facts are
in issue. (See Sec. 4, Rule 34, Rules of Court).

in the latter's possession as holder for value and in due course; or

alternatively, to pay (said) plaintiff actual damages in the amount of
P39.1 million," with legal interest thereon from the filing of the
complaint until full payment; and

To require a trial notwithstanding pertinent allegations of the

pleadings and other facts appearing on the record, would constitute
a waste of time and an injustice to the PNB whose rights to relief to
which it is plainly entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to
have acted in grave abuse of discretion which justify holding null and
void and setting aside the Orders dated May 2 and July 4, 1990 of
respondent Court, and that a summary judgment be rendered
forthwith in favor of the PNB against Noah's Ark Sugar Refinery, et
al., as prayed for in petitioner's Motion for Summary Judgment.

(b) to pay plaintiff Philippine National Bank attorney's fees, litigation

expenses and judicial costs hereby fixed at the amount of One
Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.
SO ORDERED.
On September 29, 1993, private respondents moved for reconsideration of this
decision. A Supplemental/Second Motion for Reconsideration with leave of court was
filed by private respondents on November 8, 1993. We denied private respondent's
motion on January 10, 1994.

On December 13, 1991, the Court of Appeals nullified and set aside the orders of
May 2 and July 4, 1990 of the Regional Trial Court and ordered the trial court to
render summary judgment in favor of the PNB. On June 18, 1992, the trial court
rendered judgment dismissing plaintiffs complaint against private respondents for
lack of cause of action and likewise dismissed private respondent's counterclaim
against PNB and of the Third-Party Complaint and the Third-Party Defendant's
Counterclaim. On September 4, 1992, the trial court denied PNB's Motion for
Reconsideration.

Private respondents filed a Motion Seeking Clarification of the Decision, dated

September 1, 1993. We denied this motion in this manner:

On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme
Court, G.R. No. 107243, by way of a Petition for Review on Certiorari under Rule 45
of the Rules of Court. This Court rendered judgment on September 1, 1993, the
dispositive portion of which reads:

Private respondents thereupon filed before the trial court an Omnibus Motion seeking
among others the deferment of the proceedings until private respondents [were]
heard on their claim for warehouseman's lien. On the other hand, on August 22,
1994, the Philippine National Bank filed a Motion for the Issuance of a Writ of
Execution and an Opposition to the Omnibus Motion filed by private respondents.

WHEREFORE, the trial judge's decision in Civil Case No. 90-53023, dated June 18,
7992, is reversed and set aside and a new one rendered conformably with the final
and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, ordering
the private respondents Noah's Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go
and Wilson T. Go, jointly and severally:
(a) to deliver to the petitioner Philippine National Bank, "the sugar
stocks covered by the Warehouse Receipts/Quedans which are now

It bears stressing that the relief granted in this Court's decision of

September 1, 1993 is precisely that set out in the final and executory
decision of the Court of Appeals in CA-G.R. SP No. 25938, dated
December 13, 1991, which was affirmed in toto by this Court and
which became unalterable upon becoming final and executory.

The trial court granted private respondents' Omnibus Motion on December 20, 1994
and set reception of evidence on their claim for warehouseman's lien. The resolution
of the PNB's Motion for Execution was ordered deferred until the determination of
private respondents' claim.

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On February 21, 1995, private respondents' claim for lien was heard and evidence
was received in support thereof. The trial court thereafter gave both parties five (5)
days to file respective memoranda.
On February 28, 1995, the Philippines National bank filed a Manifestation with Urgent
Motion to Nullify Court Proceedings. In adjudication thereof, the trial court issued the
following order on March 1, 1995:
WHEREFORE, this court hereby finds that there exists in favor of the
defendants a valid warehouseman's lien under Section 27 of
Republic Act 2137 and accordingly, execution of the judgment is
hereby ordered stayed and/or precluded until the full amount of
defendants' lien on the sugar stocks covered by the five (5) quedans
subject of this action shall have been satisfied conformably with the
provisions of Section 31 of Republic Act 2137. 5
Unsatisfied with the trial court's order of 1 March 1995, herein petitioner filed with us G.R. No.
119231, contending:

III
RESPONDENT RTC'S ONLY JURISDICTION IS TO ISSUE THE WRIT TO
EXECUTE THE SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A
WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION DATED DECEMBER
20, 1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS
TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT
RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 9053023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT
DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL
RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
JUDGMENT IN FAVOR OF PNB.
In our decision of 18 April 1996 in G.R. No. 119231, we held against herein petitioner as to these
issues and concluded:
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to
the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected
only upon payment of the storage fees.

I
PNB'S RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND
EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS [sic]
DECISION IN CA-G.R. SP NO. 25938; AND, THE NOVEMBER 9, 1992 SUPREME
COURT DECISION IN G.R. NO. 107243. RESPONDENT RTC'S MINISTERIAL AND
MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT
THE DECRETAL PORTION OF SAID SUPREME COURT DECISION.
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE
RESPONDENTS' OMNIBUS MOTION. THE CLAIMS SET FORTH IN SAID
MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN ITS
MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS' "MOTION
FOR CLARIFICATION OF DECISION" IN G.R. NO. 107243; AND (2) ARE BARRED
FOREVER BY PRIVATE RESPONDENTS' FAILURE TO INTERPOSE THEM IN
THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992
DECISION IN CIVIL CASE NO. 90-52023.

Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law,
the warehouseman loses his lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a
warehouseman's lien is possessory in nature.
We, therefore, uphold and sustain the validity of the assailed orders of public
respondent, dated December 20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public
respondent in issuing the questioned orders which recognized the legitimate right of
Noah's Ark, after being declared as warehouseman, to recover storage fees before it
would release to the PNB sugar stocks covered by the five (5) Warehouse Receipts.
Our resolution, dated March 9, 1994, did not preclude private respondents'
unqualified right to establish its claim to recover storage fees which is recognized
under Republic Act No. 2137. Neither did the Court of Appeals' decision, dated
December 13, 1991, restrict such right.

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Our Resolution's reference to the decision by the Court of Appeals, dated December
13, 1991, in CA-G.R. SP No. 25938, was intended to guide the parties in the
subsequent disposition of the case to its final end. We certainly did not foreclose
private respondents' inherent right as warehouseman to collect storage fees and
preservation expenses as stipulated on the face of each of the Warehouse Receipts
and as provided for in the Warehouse Receipts Law (R.A. 2137). 6
Petitioner's motion to reconsider the decision in G.R. No. 119231 was denied.
After the decision in G.R. No. 119231 became final and executory, various incidents took place before
the trial court in Civil Case No. 90-53023. The petition in this case summarizes these as follows:

Accordingly, the computation of accrued storage fees and

preservation charges presented in evidence by the defendants, in
the amount of P734,341,595.06 as of January 31, 1995 for the
86,356.41, 50 kg. bags of sugar, being in order and with sufficient
basis, the same should be granted. This Court consequently rejects
PNB's claim of no sugar no lien, since it is undisputed that the
amount of the accrued storage fees is substantially in excess of the
alternative award of P39.1 Million in favor of PNB, including legal
interest and P150,000.00 in attorney's fees, which PNB is however
entitled to be credited . . . .
xxx xxx xxx

3.24 Pursuant to the abovementioned Supreme Court Decision, private respondents

filed a Motion for Execution of Defendants' Lien as Warehouseman dated 27
November 1996. A photocopy of said Motion for Execution is attached hereto as
Annex "I".
3.25 PNB opposed said Motion on the following grounds:
(a) The lien claimed by Noah's Ark in the
unbelievable amount of P734,341,595.06 is illusory;
and
(b) There is no legal basis for execution of
defendants' lien as warehouseman unless and until
PNB compels the delivery of the sugar stocks.
3.26 In their Reply to Opposition dated 18 January 1997, private respondents pointed
out that a lien existed in their favor, as held by the Supreme Court. In its Rejoinder
dated 7 February 1997, PNB countered private respondents' argument, pointing out
that the dispositive portion of the court a quo'sOrder dated 1 March 1995 failed to
state the amount for which execution may be granted and, thus, the same could not
be the subject of execution; and (b) private respondents should instead file a
separate action to prove the amount of its claim as warehouseman.
3.27 The court a quo, this time presided by herein public respondent, Hon. Marcelino
L. Sayo Jr., granted private respondents' Motion for Execution. In its questioned
Order dated 15 April 1997 (Annex "A"), the court a quo ruled in this wise:

WHEREFORE, premises considered and finding merit in the

defendants' motion for execution of their claim for lien as
warehouseman, the same is hereby GRANTED. Accordingly, let a
writ of execution issue for the amount of P662,548,611.50, in
accordance with the above disposition.
SO ORDERED. (Emphasis supplied.)
3.28 On 23 April 1997, PNB was immediately served with a Writ of Execution for the
amount of P662,548,611.50 in spite of the fact that it had not yet been served with
the Order of the court a quodated 15 April 1997. PNB thus filed an Urgent Motion
dated 23 April 1997 seeking the deferment of the enforcement of the Writ of
Execution. A photocopy of the Writ of Execution is attached hereto as Annex "J".
3.29 Nevertheless, the Sheriff levied on execution several properties of PNB. Firstly,
a Notice of Levy dated 24 April 1997 on a parcel of land with an area of Ninety-Nine
Thousand Nine Hundred Ninety-Nine (99,999) square meters, covered by Transfer
Certificate of Title No. 23205 in the name of PNB, was served upon the Register of
Deeds of Pasay City. Secondly, a Notice of Garnishment dated 23 April 1997 on fund
deposits of PNB was served upon the Bangko Sentral ng Pilipinas. Photocopies of
the Notice of Levy and the Notice of Garnishment are attached hereto as Annexes
"K" and "L" respectively.

347
3.30 On 28 April 1997, petitioner filed a Motion for Reconsideration with Urgent
Prayer for Quashal of Writ of Execution dated 15 April 1997. Petitioner's Motion was
based on the following grounds:
(1) Noah's Ark is not entitled to a warehouseman's
lien in the humongous amount of P734,341,595.06
because the same has been waived for not having
been raised earlier as either counterclaim or defense
against PNB;
(2) Assuming said lien has not been waived, the
same, not being registered, is already barred by
prescription and/or laches,
(3) Assuming further that said lien has not been
waived nor barred, still there was no complaint ever
filed in court to effectively commence this entirely
new cause of action;
(4) There is no evidence on record which would
support and sustain the claim of P734,341,595.06
which is excessive, oppressive and unconscionable;
(5) Said claim if executed would constitute unjust
enrichment to the serious prejudice of PNB and
indirectly the Philippine Government, who innocently
acquired the sugar quedans through assignment of
credit;

(6) In all respects, the decisions of both the Supreme

Court and of the former Presiding Judge of the trial
court do not contain a specific determination and/or
computation of warehouseman's lien, thus requiring
first and foremost a fair hearing of PNB's evidence,
to include the true and standard industry rates on
sugar storage fees, which if computed at such
standard rate of thirty centavos per kilogram per
month, shall result in the sum of about Three
Hundred Thousand Pesos only.
3.31 In its Motion for Reconsideration, petitioner prayed for the following reliefs:
1. PNB be allowed in the meantime to exercise its basic right to
present evidence in order to prove the above allegations especially
the true and reasonable storage fees which may be deducted from
PNB's judgment award of P39.1 Million, which storage fees if
computed correctly in accordance with standard sugar industry rates,
would amount to only P300 Thousand Pesos, without however
waiving or abandoning its (PNB's) legal positions/contentions herein
abovementioned.
2. The Order dated April 15, 1997 granting the Motion for Execution
by defendant Noah's Ark be set aside.
3. The execution proceedings already commenced by said sheriffs
be nullified at whatever stage of accomplishment.
A photocopy of petitioner's Motion for Reconsideration with Urgent Prayer for
Quashal of Writ of Execution is attached hereto and made integral part hereof as
Annex "M".
3.32 Private respondents filed an Opposition with Motion for Partial Reconsideration
dated 8 May 1997. Still discontented with the excessive and staggering amount
awarded to them by the court a quo, private respondents' Motion for Partial
Reconsideration sought additional and continuing storage fees over and above what
the court a quo had already unjustly awarded. A photocopy of private respondents'

348
Opposition with Motion for Partial Reconsideration dated 8 May 1997 is attached
hereto as Annex "N".
3.32.1 Private respondents prayed for the further amount of
P227,375,472.00 in storage fees from 1 February 1995 until 15 April
1997, the date of the questioned Order granting their Motion for
Execution.
3.32.2 In the same manner, private respondents prayed for a
continuing amount of P345,424.00 as daily storage fees after 15 April
1997 until the total amount of the storage fees is satisfied.
3.33 On 19 May 1997, PNB filed its Reply with Opposition (To Defendants'
Opposition with Partial Motion for Reconsideration), containing therein the following
motions: (i) Supplemental Motion for Reconsideration; (ii) Motion to Strike out the
Testimony of Noah's Ark's Accountant Last February 21, 1995; and (iii) Motion for the
Issuance of a Writ of Execution in favor of PNB. In support of its pleading, petitioner
raised the following:
(1) Private respondents failed to pay the appropriate
docket fees either for its principal claim or for its
additional claim, as said claims for warehouseman's
lien were not at all mentioned in their answer to
petitioner's Complaint;

Thus, private respondents' claims are mere paper

liens which cannot be the subject of execution;
(5) The attendant circumstances, particularly Judge
Se's Order of 1 March 1995 onwards, were tainted
with fraud and absence of due process, as PNB was
not given a fair opportunity to present its evidence
on the matter of the warehouseman's lien. Thus, all
orders prescinding thereform, including the
questioned Order dated 15 April 1997 must perforce
be set aside and the execution proceedings against
PNB be permanently stayed.
3.34 On 6 May 1997, petitioner also filed an Urgent Motion to Lift Garnishment of
PNB Funds with Bangko Sentral ng Pilipinas.
3.35 On 14 July 1997, respondent Judge issued the second Order (Annex "B"), the
questioned part of the dispositive portion of which states:
WHEREFORE, premises considered, the plaintiff Philippine National
Bank's subject "Motion for Reconsideration With Urgent Prayer for
Quashal of Writ of Execution" dated April 28, 1997 and undated
"Urgent Motion to Lift Garnishment of PNB Funds With Bangko
Sentral ng Pilipinas" filed on May 6, 1997, together with all its related
Motions are all DENIED with finality for lack of merit.

(2) The amount awarded by the court a quo was

grossly and manifestly unreasonable, excessive, and
oppressive;
(3) It is the dispositive portion of the decision which
shall be controlling in any execution proceeding. If
no specific award is stated in the dispositive portion,
a writ of execution supplying an amount not included
in the dispositive portion of the decision being
executed is null and void;
(4) Private respondents failed to prove the existence
of the sugar stocks in Noah's Ark's warehouses.

xxx xxx xxx

The Order of this Court dated April 15, 1997, the final Writ of
Execution likewise dated April 15, 1997 and the corresponding
Garnishment all stand firm.
SO ORDERED. 7
Aggrieved thereby, petitioners filed this petition, alleging as grounds therefor, the following:
A. THE COURT A QUO ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION WHEN IT ISSUED A WRIT OF

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EXECUTION IN FAVOR OF DEFENDANTS FOR THE AMOUNT OF
P734,341,595.06.
4.1 The court a quo had no authority to issue a writ of execution in favor of private
respondents as there was no final and executory judgment ripe for execution.
4.2 Public respondent judge patently exceeded the scope of his authority in making a
determination of the amount of storage fees due private respondents in a mere
interlocutory order resolving private respondents' Motion for Execution.
4.3 The manner in which the court a quo awarded storage fees in favor of private
respondents and ordered the execution of said award was arbitrary and capricious,
depriving petitioner of its inherent substantive and procedural rights.
B. EVEN ASSUMING ARGUENDO THAT THE COURT A QUO HAD AUTHORITY
TO GRANT PRIVATE RESPONDENTS' MOTION FOR EXECUTION, THE COURT A
QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN AWARDING THE HIGHLY
UNREASONABLE, UNCONSCIONABLE, AND EXCESSIVE AMOUNT OF
P734,341,595.06 IN FAVOR OF PRIVATE RESPONDENTS.
4.4 There is no basis for the court a quo's award of P734,341,595.06 representing
private respondents' alleged warehouseman's lien.
4.5 PNB has sufficient evidence to show that the astronomical amount claimed by
private respondents is very much in excess of the industry rate for storage fees and
preservation expenses.
C. PUBLIC RESPONDENT JUDGE'S GRAVE ABUSE OF DISCRETION BECOMES
MORE PATENT AFTER A CLOSE PERUSAL OF THE QUESTIONED ORDER
DATED 14 JULY 1997.
4.6. The court a quo resolved a significant and consequential matter entirely relying
on documents submitted by private respondents totally disregarding clearly contrary
evidence submitted by PNB.
4.7 The court a quo misquoted and misinterpreted the Supreme Court Decision dated
18 April 1997.

D. THE COURT A QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN NOT

HOLDING THAT PRIVATE RESPONDENTS HAVE LONG WAIVED THEIR RIGHT
TO CLAIM ANY WAREHOUSEMAN'S LIEN.
4.8 Private respondents raised the matter of their entitlement to a warehouseman's
lien for storage fees and preservation expenses for the first time only during the
execution proceedings of the Decision in favor of PNB.
4.9 Private respondents' claim for warehouseman's lien is in the nature of a
compulsory counterclaim which should have been included in private respondents'
answer to the Complaint. Private respondents failed to include said claim in their
answer either as a counterclaim or as an alternative defense to PNB's Complaint.
4.10 Private respondents' clam is likewise lost by virtue of a specific provision of the
Warehouse Receipts Law and barred by prescription and laches.
E. PUBLIC RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION
IN REFUSING TO LIFT THE ORDER OF GARNISHMENT OF THE FUNDS OF PNB
WITH THE BANGKO SENTRAL NG PILIPINAS.
4.11 Public respondent judge failed to consider PNB's arguments in support of its
Urgent motion to Lift Garnishment. 8
In arguing its cause, petitioner explained that this Court's decision in G.R. No. 119231 merely affirmed
the trial court's resolutions of 20 December 1994 and 1 March 1995. The earlier resolution set private
respondents' reception of evidence for hearing to prove their warehouseman's lien and, pending
determination thereof, deferred petitioner's motion for execution of the summary judgment rendered in
petitioner's favor in G.R. No. 107243. The subsequent resolution recognized the existence of a valid
warehouseman's lien without, however, specifying the amount, and required its full satisfaction by
petitioner prior to the execution of the judgment in G.R. No. 107243.
Under said circumstances, petitioner reiterated that neither this Court's decision nor the trial court's
resolutions specified any amount for the warehouseman's lien, either in the bodies or dispositive
portions thereof. Petitioner therefore questioned the propriety of the computation of the
warehouseman's lien in the assailed order of 15 April 1997.
Petitioner further characterized as highly irregular the trial court's final determination of such lien in a
mere interlocutory order without explanation, as such should or could have been done only by way of

350
a judgment on the merits. Petitioner likewise reasoned that a writ of execution was proper only to
implement a final and executory decision, which was not present in the instant case. Petitioner then
cited the cases of Edward v. Arce, where we ruled that the only portion of the decision which could be
the subject of execution was that decreed in the dispositive part, 9 and Ex-Bataan Veterans Security
Agency, Inc. v. National Labor Relations Commission, 10 where we held that a writ of execution should
conform to the dispositive portion to be executed, otherwise, execution becomes void if in excess of
and beyond the original judgment.
Petitioner likewise emphasized that the hearing of 21 February 1995 was marred by procedural
infirmities, narrating that the trial court proceeded with the hearing notwithstanding the urgent motion
for postponement of petitioner's counsel of record, who attended a previously scheduled hearing in
Pampanga. However, petitioner's lawyer-representative was sent to confirm the allegations in said
motion. To petitioner's dismay, instead of granting a postponement, the trial court allowed the
continuance of the hearing on the basis that there was "nothing sensitive about [the presentation of
private respondents' evidence]." 11 At the same hearing, the trial court admitted all the documentary
evidence offered by private respondents and ordered the filing of the parties' respective memoranda.
Hence, petitioner was virtually deprived of its right to cross-examine the witness, comment on or
object to the offer of evidence and present countervailing evidence. In fact, to date, petitioner's urgent
motion to nullify the court proceedings remains unresolved.
To stress its point, petitioner underscores the conflicting views of Judge Benito C. Se, Jr., who heard
and tried almost the entire proceedings, and his successor, Judge Marcelino L. Sayo, Jr., who issued
the assailed orders. In the resolution 12 of 1 March 1995, Judge Se found private respondents' claim
for warehouse lien in the amount of P734,341,595.06 unacceptable, thus:
In connection with [private respondents'] claim for payment of warehousing fees and
expenses, this Court cannot accept [private respondents'] pretense that they are
entitled to storage fees and preservation expenses in the amount of P734,341,595.06
as shown in their Exhibits "1" to "11". There would, however, appear to be legal basis
for their claim for fees and expenses covered during the period from the time of the
issuance of the five (5) quedans until demand for their delivery was made by
[petitioner] prior to the institution of the present action. [Petitioner] should not be
made to shoulder the warehousing fees and expenses after the demand was
made. . . . 13
Since it was deprived of a fair opportunity to present its evidence on the warehouseman's lien due
Noah's Ark, petitioner submitted the following documents: (1) an affidavit of petitioner's credit
investigator 14 and his report 15indicating that Noah's Ark only had 1,490, 50kg. bags, and not

86,356.41, 50kg. bags, of sugar in its warehouse; (2) Noah's Ark's reports 16 for 1990-94 showing that
it did not have sufficient sugar stock to cover the quantity specified in the subjectquedans, (3) Circular
Letter No. 18 (s. 1987-88) 17 of the Sugar Regulatory Administration requiring sugar mill companies to
submit reports at week's end to prevent the issuance of warehouse receipts not covered by actual
inventory; and (4) an affidavit of petitioner's assistant vice president 18 alleging that Noah's Ark's daily
storage fee of P4/bag exceeded the prevailing industry rate.
Petitioner, moreover, laid stress on the fact that in the questioned order of 14 July 1997, the trial court
relied solely on the Annual Synopsis of Production & Performance Date/Annual Compendium of
Performance by Philippine Sugar Refineries from 1989 to 1994, in disregard of Noah's Ark's certified
reports that it did not have sufficient sugar stock to cover the quantity specified in the
subject quedans. Between the two, petitioner urged, the latter should have been accorded greater
evidentiary weight.
Petitioner then argued that the trial court's second assailed order of 14 July 1997 misinterpreted our
decision in G.R. No. 119231 by ruling that the Refining Contract under which the subject sugar stock
was produced bound the parties. According to petitioner, the Refining Contract never existed, it
having been denied by Rosa Ng Sy; thus, the trial court could not have properly based its
computation of the warehouseman's lien on the Refining Contract. Petitioner maintained that a
separate trial was necessary to settle the issue of the warehouseman's lien due Noah's Ark, if at all
proper.
Petitioner further asserted that Noah's Ark could no longer recover its lien, having raised the issue for
the first time only during the execution proceedings of this Court's decision in G.R. No. 107243. As
said claim was a separate cause of action which should have been raised in private respondents'
answer with counterclaim to petitioner's complaint, private respondents' failure to raise said claim
should have been deemed a waiver thereof.
Petitioner likewise insisted that under Section 29 19 of the Warehouse Receipts Law, private
respondents were barred from claiming the warehouseman's lien due to their refusal to deliver the
goods upon petitioner's demand. Petitioner further raised that private respondents failed to timely
assert their claim within the five-year prescriptive period, citing Article 1149 20of the New Civil Code.
Finally, petitioner questioned the trial court's refusal to lift the garnishment order considering that the
levy on its real property, with an estimated market value of P6,000,000,000, was sufficient to satisfy
the judgment award; and contended that the garnishment was contrary to Section 103 21 of the
Bangko Sentral ng Pilipinas Law (Republic Act No. 7653).

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On 8 August 1997, we required respondents to comment on the petition and issued a temporary
restraining order enjoining the trial court form implementing its orders of 15 April and 14 July 1997.
In their comment, private respondents first sought the lifting of the temporary restraining order,
claiming that petitioner could no longer seek a stay of the execution of this Court's decision in G.R.
No. 119231 which had become final and executory; and the petition raised factual issues which had
long been resolved in the decision in G.R. No. 119231, thereby rendering the instant petition moot
and academic. They underscored that CA-G.R. No. SP No. 25938, G.R. No. 107243 and G.R. No.
119231 all sustained their claim for a warehouseman's lien, while the storage fees stipulated in the
Refining Contract had the approval of the Sugar Regulatory Authority. Likewise, under the Warehouse
Receipts Law, full payment of their lien was a pre-requisite to their obligation to release and deliver
the sugar stock to petitioner.
Anent the trial court's jurisdiction to determine the warehouseman's lien, private respondents
maintained that such had already been established. Accordingly, the resolution of 1 March 1995
declared that they were entitled to a warehouseman's lien, for which reason, the execution of the
judgment in favor of petitioner was stayed until the latter's full payment of the lien. This resolution was
then affirmed by this Court in our decision in G.R. No. 119231. Even assuming the trial court erred,
the error could only have been in the wisdom of its findings and not of jurisdiction, in which case, the
proper remedy of petitioner should have been an appeal and certiorari did not lie.
Private respondents also raised the issue of res judicata as a bar to the instant petition, i.e., the
March resolution was already final and unappealable, having been resolved in G.R. No. 119231, and
the orders assailed here were issued merely to implement said resolution.
Private respondents then debunked the claim that petitioner was denied due process. In that
February hearing, petitioner was represented by counsel who failed to object to the presentation and
offer of their evidence consisting of the five quedans, Refining Contracts with petitioner and
other quedan holders, and the computation resulting in the amount of P734,341,595.06, among other
documents. Private respondents even attached a copy of the transcript of stenographic notes 22 to
their comment. In refuting petitioner's argument that no writ of execution could issue in absence of a
specific amount in the dispositive portion of this Court's decision in G.R. No. 119231, private
respondents argued that any ambiguity in the decision could be resolved by referring to the entire
record of the case, 23 even after the decision had become final.
Private respondents next alleged that the award of P734,341,595.06 to satisfy their warehouseman's
lien was in accordance with the stipulations provided in the quedans and the corresponding Refining
Contracts, and that the validity of said documents had been recognized by this Court in our decision

in G.R. No. 119231. Private respondents then questioned petitioner's failure to oppose or rebut the
evidence they presented and bewailed its belated attempts to present contrary evidence through its
pleadings. Nonetheless, said evidence was even considered by the trial court when petitioner sought
a reconsideration of the first assailed order of 15 April 1997, thus further precluding any claim of
denial of due process.
Private respondents next pointed to the fact that they consistently claimed that they had not been
paid for storing the sugar stock, which prompted them to file criminal charges of estafa and violation
of Batas Pambansa (BP) Blg. 22 against Rosa Ng Sy and Teresita Ng. In fact, Sy was eventually
convicted of two counts of violation of BP Blg. 22. Private respondents, moreover, incurred, and
continue to incur, expenses for the storage and preservation of the sugar stock; and denied having
waived their warehouseman's lien, an issue already raised and rejected by this Court in G.R. No.
119231.
Private respondents further claimed that the garnishment order was proper, only that it was rendered
ineffective. In a letter 24 received by the sheriff from the Bangko Sentral ng Pilipinas, it was stated that
the garnishment could not be enforced since petitioner's deposits with the Bangko Sentral ng Pilipinas
consisted solely of legal reserves which were exempt from garnishment. Petitioner therefore suffered
no damage from said garnishment. Private respondents likewise deemed immaterial petitioner's
argument that the writ of execution issued against its real property in Pasay City was sufficient,
considering its prevailing market value of P6,000,000,000 was in excess of the warehouseman's lien;
and invoked Rule 39 of the 1997 Rules of Civil Procedure, which provided that the sheriff must levy
on all the property of the judgment debtor, excluding those exempt from execution, in the execution of
a money judgment.
Finally, private respondents accused petitioner of coming to court with unclean hands, specifically
citing its misrepresentation that the award of the warehouseman's lien would result in the collapse of
its business. This claim, private respondents asserted, was contradicted by petitioner's 1996 Audited
Financial Statement indicating that petitioner's assets amounted to billions of pesos, and its 1996
Annual Report to its stockholders where petitioner declared that the pending legal actions arising from
their normal course of business "will not materially affect the Group's financial position." 25
In reply, petitioner advocated that resort to the remedy of certiorari was proper since the assailed
orders were interlocutory, and not a final judgment or decision. Further, that it was virtually deprived of
its constitutional right to due process was a valid issue to raise in the instant petition; and not even
the doctrine of res judicata could bar this petition as the element of a final and executory judgment
was lacking. Petitioner likewise disputed the claim that the resolution of 1 March 1995 was final and
executory, otherwise private respondents would not have filed an opposition and motion for partial

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reconsideration 26 two years later. Petitioner also contended that the issues raised in this petition were
not resolved in G.R. No. 119231, as what was resolved there was private respondents' mere
entitlement to a warehouseman's lien, without specifying a corresponding amount. In the instant
petition, the issues pertained to the amount and enforceability of said lien based on the arbitrary
manner the amount was determined by the trial court.
Petitioner further argued that the refining contracts private respondents invoked could not bind the
former since it was not a party thereto. In fact, said contracts were not even attached to
the quedans when negotiated; and that their validity was repudiated by a supposed party thereto,
Rosa Ng Sy, who claimed that the contract was simulated, thus void pursuant to Article 1345 of the
New Civil Code. Should the refining contracts in turn be declared void, petitioner advocated that any
determination by the court of the existence and amount of the warehouseman's lien due should be
arrived at using the test of reasonableness. Petitioner likewise noted that the other refining
contracts 27 presented by private respondents to show similar storage fees were executed between
the years 1996 and 1997, several years after 1989. Thus, petitioner concluded, private respondents
could not claim that the more recent and increased rates where those which prevailed in 1989.
Finally, petitioner asserted that in the event that this Court should uphold the trial court's
determination of the amount of the warehouseman's lien, petitioner should be allowed to exercise its
option as a judgment obligor to specify which of its properties may be levied upon, citing Section 9(b),
Rule 39 of the 1997 Rules of Civil Procedure. Petitioner claimed to have been deprived of this option
when the trial court issued the garnishment and levy orders.
The petition was set for oral argument on 24 November 1997 where the parties addressed the
following issues we formulated for them to discuss:
(1) Is this special civil action the appropriate remedy?
(2) Has the trial court the authority to issue a writ of execution on Noah's Ark's claims
for storage fees considering that this Court in G.R. No. 119231 merely sustained the
trial court's order of 20 December 1994 granting the Noah's Ark Omnibus Motion and
setting the reception of evidence on its claims for storage fees, and of 1 March 1995
finding that there existed in favor of Noah's Ark a warehouseman's lien under Section
27 of R.A. No. 2137 and directing that the execution of the judgment in favor of PNB
be stayed and/or precluded until the full amount of Noah's Ark's lien is satisfied
conformably with Section 31 of R.A. No. 2137?

(3) Is [petitioner] liable for storage fees (a) from the issuance of the quedans in 1989
to Rosa Sy, St. Therese Merchandising and RNS Merchandising, up to their
assignment by endorsees Ramos and Zoleta to [petitioner] for their loan; or (b) after
[petitioner] has filed an action for specific performance and damages (Civil Case No.
90-53023) against Noah's Ark for the latter's failure to comply with [petitioner's]
demand for the delivery of the sugar?
(4) Did respondent Judge commit grave abuse of discretion as charged?

28

In our resolution of 24 November 1997, we summarized the positions of the parties on these issues,
thus:
Expectedly, counsel for petitioner submitted that certiorari under Rule 65 of the Rules
of Court is the proper remedy and not an ordinary appeal, contending, among others,
that the order of execution was not final. On the other hand, counsel for respondents
maintained that petitioner PNB disregarded the hierarchy of courts as it bypassed the
Court of Appeals when it filed the instant petition before this Court.
On the second issue, counsel for petitioner submitted that the trial court had no
authority to issue the writ of execution or if it had, it denied PNB due process when it
held PNB liable for the astronomical amount or P734,341,595.06 as warehouseman's
lien or storage fees. Counsel for respondent, on the other hand, contended that the
trial court's authority to issue the questioned writ of execution is derived from the
decision in G.R. No. 119231 which decision allegedly provided for ample or sufficient
parameters for the computation of the storage fees.
On the third issue, counsel for petitioner while presupposing that PNB may be held to
answer for storage fees, contended that the same should start from the time the
endorsees of the sugar quedans defaulted in their payments, i.e., 1990 because
before that, respondent Noah's Ark's claim was that it was the owner of the sugar
covered by the quedans. On the other hand, respondents' counsel pointed out that
PNB's liability should start from the issuance of the quedans in 1989.
The arguments on the fourth issue, hinge on the parties' arguments for or against the
first three issues. Counsel for petitioner stressed that the trial court indeed committed
a grave abuse of discretion, while respondents' counsel insisted that no grave abuse
of discretion was committed by the trial court. 29

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Private respondents likewise admitted that during the pendency of the case, they failed to avail of
their options as a warehouseman. Concretely, they could have enforced their lien through the
foreclosure of the goods or the filing of an ordinary civil action. Instead, they sought to execute this
Court's judgment in G.R. No. 119231. They eventually agreed that petitioner's liability for the
warehouseman's lien should be reckoned from the time it stepped into the shoes of the original
depositors. 30

we entertain direct resort to us in cases where special and important reasons or exceptional and
compelling circumstances justify the same. 34 These reasons and circumstances are present here.

In our resolution of 24 November 1997, we required the parties to simultaneously submit their
respective memoranda within 30 days or, in the alternative, a compromise agreement should a
settlement be achieved. Notwithstanding efforts exerted by the parties, no mutually acceptable
solution was reached.

The remedies available to a warehouseman, such as private respondents, to enforce his

warehouseman's lien are:

In their respective memoranda, the parties reiterated or otherwise buttressed the arguments raised in
their previous pleadings and during the oral arguments on 24 November 1997, especially on the
formulated issues.

B. Under the Special Circumstances in This Case, Private

Respondents May Enforce Their Warehouseman 's Lien
in Civil Case No. 90-53023.

(1) To refuse to deliver the goods until his lien is satisfied, pursuant to
Section 31 of the Warehouse Receipt Law;
(2) To sell the goods and apply the proceeds thereof to the value of
the lien pursuant to Sections 33 and 34 of the Warehouse Receipts
Law; and

The petition is meritorious.

We shall take up the formulated issues in seriatim.
A. This Special Civil Action is an Appropriate Remedy.
A careful perusal of the first assailed order shows that the trial court not only granted the motion for
execution, but also appreciated the evidence in the determination of the warehouseman's lien;
formulated its computation of the lien; and adopted an offsetting of the parties' claims. Ineluctably, the
order as in the nature of a final order for it left nothing else to be resolved thereafter. Hence,
petitioner's remedy was to appeal therefrom. 31 Nevertheless, petitioner was not precluded from
availing of the extraordinary remedy of certiorari under Rule 65 of the Rules of Court. It is well-settled
that the availability of an appeal does not foreclose recourse to the extraordinary remedies
of certiorari or prohibition where appeal is not adequate, or equally beneficial, speedy and sufficient. 32
Petitioner assailed the challenged orders as having been issued without or in excess of jurisdiction or
with grave abuse of discretion and alleged that it had no other plain, speedy and adequate remedy in
the ordinary course of law. As hereafter shown, these claims were not unfounded, thus the propriety
of this special civil action is beyond question.
This Court had original jurisdiction, concurrent with that of Regional Trial Courts and the Court of
Appeals, over petitions for certiorari, prohibition, mandamus, quo warranto and habeas curpus, 33 and

(3) By other means allowed by law to a creditor against his debtor,

for the collection from the depositor of all charges and advances
which the depositor expressly or impliedly contracted with the
warehouseman to pay under Section 32 of the Warehouse Receipt
Law; or such other remedies allowed by law for the enforcement of a
lien against personal property under Section 35 of said law. The third
remedy is sought judicially by suing for the unpaid charges. 35
Initially, private respondents availed of the first remedy. However, when petitioner moved to execute
the judgment in G.R. No. 107243 before the trial court, private respondents, in turn, moved to have
the warehouse charges and fees due them determined and thereafter sought to collect these from
petitioners. While the most appropriate remedy for private respondents was an action for collection, in
G.R. No. 119231, we already recognized their right to have such charges and fees determined in Civil
Case No. 90-53023. The import of our holding in G.R. No. 119231 was that private respondents were
likewise entitled to a judgment on their warehouse charges and fees, and the eventual satisfaction
thereof, thereby avoiding having to file another action to recover these charges and fees, which would
only have further delayed the resolution of the respective claims of the parties, and as a corollary
thereto, the indefinite deferment of the execution of the judgment in G.R. No. 107243. Thus we note
that petitioner, in fact, already acquiesced to the scheduled dates previously set for the hearing on
private respondents' warehouseman's charges.

354
However, as will be shown below, it would be premature to execute the order fixing the
warehouseman's charges and fees.
C. Petitioner is Liable for Storage Fees.
We confirmed petitioner's liability for storage fees in G.R. No. 119231. However, petitioner's status as
to thequedans must first be clearly defined and delineated to be able to determine the extent of its
liability.
Petitioner insisted, both in its petition and during the oral arguments on 24 November 1997, that it
was a merepledgee as the quedans were used to secure two loans it granted. 36 In our decision in
G.R. No. 107243, we upheld this contention of petitioner, thus;
Zoleta and Ramos then used the quedans as security for loans obtained by them
from the Philippine National Bank (PNB) as security for loans obtained by them in the
amounts of P23.5 million and P15.6 million, respectively. These quedans they
indoors to the bank. 37
As such, Martinez v. Philippine National Bank 38 becomes relevant:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or
endorsed to a creditor only to secure the payment of a loan or debt, the transferee or
endorsee does not automatically become the owner of the goods covered by the
warehouse receipt or quedan but he merely retains the right to keep and with the
consent of the owner to sell them so as to satisfy the obligation from the proceeds of
the sale, this for the simple reason that the transaction involved is not a sale but only
a mortgage or pledge, and that if the property covered by the quedans or warehouse
receipts is lost without the fault or negligence of the mortgagee or pledgee or the
transferee or endorsee of the warehouse receipt or quedan, then said goods are to
be regarded as lost on account of the real owner, mortgagor or pledgor.
The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to petitioner
was not to convey "title" to or ownership of the goods but to secure (by way of pledge) the loans
granted to Ramos and Zoleta by petitioner. The indorsement of the warehouse receipts (quedans), to
perfect the pledge, 39 merely constituted a symbolical or constructive delivery of the possession of the
thing thus encumbered. 40

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the
things given by way of pledge. 41 Any stipulation to the contrary, termed pactum commissorio, is null
and void. 42 The law requires foreclosure in order to allow a transfer of title of the good given by way
of security from its pledgor, 43 and before any such foreclosure, the pledgor, not the pledgee, is the
owner of the goods. In Philippine National Bank v. Atendido, 44 we said:
The delivery of the palay being merely by way of security, it follows that by the nature
of the transaction its ownership remains with the pledgor subject only to foreclosure
in case of non-fulfillment of the obligation. By this we mean that if the obligation is not
paid upon maturity the most that the pledgee can do is to sell the property and apply
the proceeds to the payment of the obligation and to return the balance, if any, to the
pledgor (Art. 1872, Old Civil Code [Art. 2112, New Civil Code]). This is the essence of
this contract, for, according to law, a pledgee cannot become the owner of, nor
appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code [Art.
2088, New Civil Code]). . . The fact that the warehouse receipt covering palay was
delivered, endorsed in blank, to the bank does not alter the situation, the purpose of
such endorsement being merely to transfer the juridical possession of the property to
the pledgees and to forestall any possible disposition thereof on the part of the
pledgor. This is true notwithstanding the provisions of the Warehouse Receipt Law.
The warehouseman, nevertheless, is entitled to the warehouseman's lien that attaches to the goods
invokable against anyone who claims a right of possession thereon.
The next issue to resolve is the duration of time the right of petitioner over the goods may be held
subject to the warehouseman's lien.
Sec. 8, 29 and 31 of the Warehouse Receipts Law now come to fore. They provide, as follows:
Sec. 8. Obligation of warehousemen to deliver. A warehouseman, in the absence
of some lawful excuse provided by this Act, is bound to deliver the goods upon a
demand made either by the holder of a receipt for the goods or by the depositor, if
such demand is accompanied with:
(a) An offer to satisfy warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable,
with such indorsements as would be necessary for
the negotiation of the receipt; and

355
(c) A readiness and willingness to sign, when the
goods are delivered, an acknowledgment that they
have been delivered, if such signature is requested
by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a
demand by the holder or depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a lawful excuse for such refusal.
Sec. 29. How the lien may be lost. A warehouseman loses his lien upon goods;
(a) By surrendering possession thereof, or.
(b) By refusing to deliver the goods when a demand
is made with which he is bound to comply under the
provisions of this Act.
Sec. 31. Warehouseman need not deliver until lien is satisfied. A warehouseman
having a lien valid against the person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.
Simply put, where a valid demand by the lawful holder of the quedans for the delivery of the goods is
refused by the warehouseman, despite the absence of a lawful excuse provided by the statute itself,
the warehouseman's lien is thereafter concomitantly lost. As to what the law deems a valid demand,
Section 8 enumerates what must accompany a demand; while as regards the reasons which a
warehouseman may invoke to legally refuse to effect delivery of the goods covered by the quedans,
these are:
(1) That the holder of the receipt does not satisfy the conditions prescribed in Section
8 of the Act. (See Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself on the goods, such title or right
being derived directly or indirectly from a transfer made by the depositor at the time
of or subsequent to the deposit for storage, or from the warehouseman's lien. (Sec.
16, Act No. 2137)
(3) That the warehouseman has legally set up the title or right of third persons as
lawful defense for non-delivery of the goods as follows:

(a) Where the warehouseman has been requested, by or on behalf

of the person lawfully entitled to a right of property of or possession
in the goods, not to make such delivery (Sec. 10, Act No. 2137), in
which case, the warehouseman may, either as a defense to an action
brought against him for nondelivery of the goods, or as an original
suit, whichever is appropriate, require all known claimants to
interplead (Sec. 17, Act No. 2137);
(b) Where the warehouseman had information that the delivery about
to be made was to one not lawfully entitled to the possession of the
goods (Sec. 14 Act No. 2137), in which case, the warehouseman
shall be excused from liability for refusing to deliver the goods, either
to the depositor or person claiming under him or to the adverse
claimant, until the warehouseman has had a reasonable time to
ascertain the validity of the adverse claims or to bring legal
proceedings to compel all claimants to interplead (Sec. 18, Act No.
2137); and
(c) Where the goods have already been lawfully sold to third persons
to satisfy a warehouseman's lien, or have been lawfully sold or
disposed of because of their perishable or hazardous nature. (Sec.
36, Act No. 2137).
(4) That the warehouseman having a lien valid against the person demanding the
goods refuses to deliver the goods to him until the lien is satisfied. (Sec. 31 Act No.
2137)
(5) That the failure was not due to any fault on the part of the warehouseman, as by
showing that, prior to demand for delivery and refusal, the goods were stolen or
destroyed by fire, flood, etc., without any negligence on his part, unless he has
contracted so as to be liable in such case, or that the goods have been taken by the
mistake of a third person without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-delivery. (67 C.J. 532) 45
Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain possession
of the goods complied with Section 8 of the law. The presumption, nevertheless, would be that the law
was complied with, rather than breached, by petitioner. Upon the other hand, it would appear that the
refusal of private respondents to deliver the goods was not anchored on a valid excuse, i.e., non-

356
satisfaction of the warehouseman's lien over the goods, but on an adverse claim of ownership.
Private respondents justified their refusal to deliver the goods, as stated in their Answer with
Counterclaim and Third-Party Complaint in Civil Case No. 90-53023, by claiming that they "are still
the legal owners of the subject quedans and the quantity of sugar represented therein." Under the
circumstances, this hardly qualified as a valid, legal excuse. The loss of the warehouseman's lien,
however, does not necessarily mean the extinguishment of the obligation to pay the warehousing fees
and charges which continues to be a personal liability of the owners, i.e., the pledgors, not the
pledgee, in this case. But even as to the owners-pledgors, the warehouseman fees and charges have
ceased to accrue from the date of the rejection by Noah's Ark to heed the lawful demand by petitioner
for the release of the goods.
The finality of our denial in G.R. No. 119231 of petitioner's petition to nullify the trial court's order of 01
March 1995 confirms the warehouseman's lien; however, such lien, nevertheless, should be confined
to the fees and charges as of the date in March 1990 when Noah's Ark refused to heed PNB's
demand for delivery of the sugar stocks and in no event beyond the value of the credit in favor of the
pledgee (since it is basic that, in foreclosures, the buyer does not assume the obligations of the
pledgor to his other creditors even while such buyer acquires title over the goods less any existing
preferred lien thereover). 46 The foreclosure of the thing pledged, it might incidentally be mentioned,
results in the full satisfaction of the loan liabilities to the pledgee of the pledgors. 47
D. Respondent Judge Committed Grave Abuse of Discretion.
We hold that the trial court deprived petitioner of due process in rendering the challenged order of 15
April 1996 without giving petitioner an opportunity to present its evidence. During the final hearing of
the case, private respondents commenced and concluded their presentation of evidence as to the
matter of the existence of and amount owing due to their warehouseman's lien. Their exhibits were
duly marked and offered and the trial court thereafter ruled, to wit:
Court: Order.
With the admission of Exhibits "1" to "11", inclusive of submarkings,
as part of the testimony of Benigno Bautista, the defendant [private
respondents] is given five (5) days from today to file its
memorandum. Likewise, plaintiff [petitioner] is given five (5) days,
from receipt of defendants' [private respondents'] memorandum, to
file its comment thereto. Thereafter the same shall be deemed
submitted for decision.

SO ORDERED. 48
Nowhere in the transcript of stenographic notes, however, does it show that petitioner was afforded
an opportunity to comment on, much less, object to, private respondents' offer of exhibits, or even
present its evidence on the matter in dispute. In fact, petitioner immediately moved to nullify the
proceedings conducted during that hearing, but its motion was ignored and never resolved by the trial
court. Moreover, it cannot be said that petitioner's filing of subsequent pleadings, where it attached its
affidavits and documents to contest the warehouseman's lien, was sufficient to fully satisfy the
requirements of due process. The subsequent pleadings were filed only to show that petitioner had
evidence to refute the claims of private respondents or that the latter were not entitled thereto, but
could not have adequately substituted for a full-blown opportunity to present its evidence, given the
exorbitant amounts involved. This, when coupled with the fact that the motion to postpone the hearing
filed by petitioner's counsel was not unreasonable, leads us to conclude that petitioner's right to fully
present its case was rendered nugatory. It is thus evident to us that there was undue and
unwarranted haste on the part of respondent court to rule in favor of private respondents. We do not
hesitate to say that any tilt of the scales of justice, no matter how slight, evokes suspicion and erodes
a litigant's faith and hope in seeking recourse before courts of law.
Likewise do we refuse to give credence to private respondents' allegation that the parties agreed that
petitioner's presentation of evidence would be submitted on the basis of affidavits, 49 without,
however, specifying any order or written agreement to that effect.
It is interesting to note that among the evidence petitioner wanted to present were reports obtained
from Noah's Ark, disclosing that the latter failed to maintain a sufficient inventory to satisfy the sugar
stock covered by the subject quedans. This was a serious allegation, and on that score alone, the trial
court should have allowed a hearing on the matter, especially in light of the magnitude of the claims
sought. If it turns out to be true that the stock of sugar Noah's Ark had in possession was below the
quantities specified in the quedans, then petitioner should not be made to pay for storage and
preservation expenses for non-existent goods.
It was likewise grave abuse of discretion on the part of respondent court to order immediate execution
of the 15 April 1997 order. We ruled earlier that said order was in the nature of a final order fixing the
amount of the warehouseman's charges and fees, and petitioner's net liability, after the set-off of the
money judgment in its favor in G.R. No. 107243. Section 1 of Rule 39 of the Rules of Court explicitly
provides that execution shall issue as a matter of right, on motion, upon a judgment or order that
disposes of the action or proceeding upon the expiration of the period to appeal therefrom if no
appeal has been duly perfected. Execution pending appeal is, however, allowed in Section 2 thereof,
but only on motion with due notice to the adverse party, more importantly, only "upon good reasons

357
shown in a special order." Here, there is no showing that a motion for execution pending appeal was
filed and that a special order was issued by respondent court. Verily, the immediate execution only
served to further strengthen our perception of undue and unwarranted haste on the part of
respondent court in resolving the issue of the warehouseman's lien in favor of private respondents.

3 Annex "A" of Petition; Rollo, 57-63.

4 Annex "B" of Petition; Rollo, 64-68.
5 Supra note 2 at 384-389.

In light of the above, we need not rule anymore on the fourth formulated issue.
6 Id., at 394-395.
WHEREFORE, the petition is GRANTED. The challenged orders of 15 April and 14 July 1997,
including the notices of levy and garnishment, of the Regional Trial Court of Manila, Branch 45, in
Civil Case No. 90-53023 are REVERSED and SET ASIDE, and said court is DIRECTED to conduct
further proceedings in said case:
(1) to allow petitioner to present its evidence on the matter of the
warehouseman's lien;
(2) to compute the petitioner's warehouseman's lien in light of the
foregoing observations; and
(3) to determine whether, for the relevant period, Noah's Ark
maintained a sufficient inventory to cover the volume of sugar
specified in the quedans.

7 Rollo, 22-27.
8 Rollo, 28-29.
9 98 Phil. 688, 692 [1956].
10 250 SCRA 418, 427 [1995].
11 TSN, 21 February 1995, 4.
12 Rollo, 88-92.
13 Resolution, p. 2; Rollo, 89.

Costs against private respondents.

14 Annex "O" of Petition; Rollo, 169-170.

SO ORDERED.

15 Annex "P" of Petition; Rollo, 171.

Bellosillo, Vitug, Panganiban and Quisumbing, JJ., concur.

16 Annexes "R" - "R-16"; Rollo, 174-190.

# Footnotes

17 Annex "Q" of Petition; Rollo, 172.

1 The first was G.R. No. 107243, 1 September 1993, entitled Philippine National
Bank v. Noah's Ark Sugar Refinery, Alberto Looyuko, Jimmy T. Go and Wilson T. Go,
226 SCRA 36 [1993]; while the second was G.R. No. 119231, 18 April 1996, entitled
Philippine National Bank v. Hon. Pres. Judge Benito C. Se, Jr., RTC, Branch 45,
Manila; Noah's Ark Sugar Refinery; Alberto T. Looyuko, Jimmy T. Go and Wilson T.
Go, 256 SCRA 380 [1996].
2 Per Judge Marcelino L. Sayo, Jr.

18 Annexes "S" and "T" of Petition; Rollo, 191, 192-195.

19 Sec. 29. How the lien may be lost. A warehouseman loses his lien upon goods:
(a) By surrendering possession thereof, or (b) By refusing to deliver the goods when
a demand is made with which he is bound to comply under the provisions of this Act.
20 Art. 1149. All other actions whose periods are not fixed in this Code or in other
laws must be brought within five years from the time the right of action accrues.

358
21 Sec. 103. Exemption from Attachment and Other Purposes. Deposits
maintained by banks with the Bangko Sentral as part of their reserve requirements
shall be exempt from attachment, garnishments, or any other order or process of any
court, government agency or any other administrative body issued to satisfy the claim
of a party other than the Government, or its political subdivisions or instrumentalities.

34 People v. Cuaresma, 172 SCRA 415, 423-424 [1989]; Defensor-Santiago v.

Vasquez, 217 SCRA 633, 651-652 [1993]; Manalo v. Gloria, 236 SCRA 130, 138-139
[1994].
35 See 3 TEODORICO C. MARTIN, COMMENTARIES AND JURISPRUDENCE ON
THE PHILIPPINE COMMERCIAL LAWS 581-587 (1989 ed.) (hereinafter 3 MARTIN).

22 Annex "11" of Comment; Rollo, 290-314.

36 Petition, 8; TSN, 24 November 1997, 26.
23 Citing Filinvest Credit Corp. v. Court of Appeals, 226 SCRA 257 [1993]; and
Republic v. de los Angeles, 41 SCRA 422 [1977].
24 Annex "21" of Comment; Rollo, 395-396.
25 Philippine National Bank, 1996 Annual Report, 19; Annex "1" of Comment; Rollo,
279.

37 226 SCRA 36, 39 [1993].

38 93 Phil. 765, 770-771 [1953]. See also Philippine National Bank v. Atendido, 94
Phil. 254, 258 [1954]; and Warner, Barnes, & Co. Ltd. v. Flores, 1 SCRA 881, 885886 [1961].
39 Art. 2095, New Civil Code.

26 Annex "N" of Petition; Rollo, 144-168.

27 Annexes "16" - "19" of Comment; Rollo, 377-393.
28 Rollo, 438-439.

40 First Camden National Bank & Trust Co, v. J.R. Watkins Co., D.C. Pa 36 F. Supp.
P. 416.
41 Lao v. Court of Appeals, G.R. No. 115307, 8 July 1997; Development Bank of the
Philippines v. Court of Appeals, G.R. No. 118342, 5 January 1998.

29 Rollo, 438-439.
42 Art. 2088, Civil Code.
30 TSN, 24 November 1997, 106-107.
43 Art. 2112, Civil Code.
31 See Meneses v. Court of Appeals, 237 SCRA 484, 492 [1994].
44 94 Phil. 254, 257-258 [1954].
32 Gavieres v. Falcis, 193 SCRA 649, 657-658 [1991] citing PNB v. Puno, 170 SCRA
229 [1989]; Echauz v. Court of Appeals, 199 SCRA 381, 386-387 [1991], citing Jaca
v. Davao Lumber Co., 113 SCRA 107 [1982]; Hualam Construction and Development
Corp. v. Court of Appeals, 214 SCRA 612, 628 [1992]; Ruiz v. Court of Appeals, 220
SCRA 490, 500 [1993]; Rodriguez v. Court of Appeals, 245 SCRA 150, 152 [1995].
33 Sec. 5 (1), Article VIII of the Constitution, in relation to Secs. 9(1) and 21(1) of B.P.
Blg. 129.

45 3 MARTIN, at 553-554.
46 The rules on concurrence and preference of credits under the Civil Code would be
inapplicable until there arises a judicial settlement of the property of an insolvent in
favor of all creditors.
47 Art. 2115, Civil Code provides: The sale of the things pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are equal to the amount
of the principal obligation, interest and expenses in a proper case. If the amount of

359
the sale is more than the said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor
be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.
(n)

APPEARANCES OF COUNSEL
Rolan A. Nieto for petitioner.
Madella & Cruz Law Offices for private respondents.

48 TSN, 21 February 1995, 25.

DECISION
49 TSN, 24 November 1997, 64.
HERMOSISIMA, JR., J.:
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE,
JR., RTC, BR. 45, MANILA; NOAHS ARK SUGAR REFINERY; ALBERTO T. LOOYUKO,
JIMMY T. GO and WILSON T. GO, respondents.
SYLLABUS
1. COMMERCIAL LAW; WAREHOUSE RECEIPTS LAW; THE UNCONDITIONAL PRESENTMENT
OF THE RECEIPTS FOR PAYMENT CARRIED WITH IT THE ADMISSIONS OF THE
EXISTENCE AND VALIDITY OF THE TERMS, CONDITIONS AND STIPULATIONS WRITTEN
ON THE FACE OF THE WAREHOUSE RECEIPTS, INCLUDING THE UNQUALIFIED
RECOGNITION OF THE PAYMENT OF WAREHOUSEMANS LIEN FOR STORAGE FEES
AND PRESERVATION EXPENSES; CASE AT BAR. - Petitioner is in estoppel in disclaiming
liability for the payment of storage fees due the private respondents as warehouseman while
claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional
presentment of the receipts by the petitioner for payment against private respondents on the
strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the
admission of the existence and validity of the terms, conditions and stipulations written on the
face of the Warehouse Receipts, including the unqualified recognition of the payment of
warehousemans lien for storage fees and preservation expenses. Petitioner may not now
retrieve the sugar stocks without paying the lien due private respondents as warehouseman.
2. ID.; ID.; ID.; WAREHOUSEMANS LIEN; POSSESSORY IN NATURE. - While the PNB is entitled
to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon
payment of the storage fees. Imperative is the right of the warehouseman to demand payment of
his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law,
the warehouseman loses his lien upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a warehousemans lien is possessory in nature.

The source of conflict herein is the question as to whether the Philippine National Bank should
pay storage fees for sugar stocks covered by five (5) Warehouse Receipts stored in the warehouse of
private respondents in the face of the Court of Appeals decision (affirmed by the Supreme Court)
declaring the Philippine National Bank as the owner of the said sugar stocks and ordering their
delivery to the said bank. From the same facts but on a different perspective, it can be said that the
issue is: Can the warehouseman enforce his warehousemans lien before delivering the sugar stocks
as ordered by the Court of Appeals or need he file a separate action to enforce payment of storage
fees?
The herein petition seeks to annul: (1) the Resolution of respondent Judge Benito C. Se, Jr. of
the Regional Trial Court of Manila, Branch 45, dated December 20, 1994, in Civil Case No. 90-53023,
authorizing reception of evidence to establish the claim of respondents Noahs Ark Sugar Refinery, et
al., for storage fees and preservation expenses over sugar stocks covered by five (5)Warehouse
Receipts which is in the nature of a warehousemans lien; and (2) the Resolution of the said
respondent Judge, dated March 1, 1995, declaring the validity of private respondents
warehousemans lien under Section 27 of Republic Act No 2137 and ordering that execution of the
Court of Appeals decision, dated December 13, 1991, be in effect held in abeyance until the full
amount of the warehousemans lien on the sugar stocks covered by five (5) quedans subject of the
action shall have been satisfied conformably with the provisions of Section 31 of Republic Act 2137.
Also prayed for by the petition is a Writ of Prohibition to require respondent RTC Judge to desist
from further proceeding with Civil Case No. 90-53023, except order the execution of the Supreme
Court judgment; and a Writ of Mandamus to compel respondent RTC Judge to issue a Writ of
Execution in accordance with the said executory Supreme Court decision.
THE FACTS

360
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery
issued on several dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt
No. 18062, covering sugar deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering
sugar deposited by RNS Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081,
covering sugar deposited by St. Therese Merchandising; (d)March 31, 1989, Receipt No. 18086,
covering sugar deposited by St. Therese Merchandising; and (e) April 1, 1989, Receipt No. 18087,
covering sugar deposited by RNS Merchandising. The receipts are substantially in the form, and
contains the terms, prescribed for negotiable warehouse receipts by Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to
Luis T. Ramos; and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to
Cresencia K. Zoleta. Ramos and Zoleta then used the quedans as security for two loan agreements one for P15.6 million and the other for P23.5 million - obtained by them from the Philippine National
Bank. The aforementioned quedans were endorsed by them to the Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9,
1990. Consequently, on March 16, 1990, the Philippine National Bank wrote to Noahs Ark Sugar
Refinery demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and
Ramos. Noahs Ark Sugar Refinery refused to comply with the demand alleging ownership thereof, for
which reason the Philippine National Bank filed with the Regional Trial Court of Manila a verified
complaint for Specific Performance with Damages and Application for Writ of Attachment against
Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being
identified as the sole proprietor, managing partner, and Executive Vice President of Noahs Ark,
respectively.
Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application
for Preliminary Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in
which they claimed that they are the owners of the subject quedans and the sugar represented
therein, averring as they did that:
9.*** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS Merchandising and
Teresita Ng of St. Therese Merchandising the total volume of sugar indicated in the quedans stored at
Noahs Ark Sugar Refinery for a total consideration of P63,000,000.00,

*** The corresponding payments in the form of checks issued by the vendees in favor of defendants were
subsequently dishonored by the drawee banks by reason of payment stopped and drawn against insufficient
funds,
*** Upon proper notification to said vendees and plaintiff in due course, defendants refused to deliver to
vendees therein the quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject quedans did not acquire ownership thereof,
the subsequent endorsers and plaintiff itself did not acquire a better right of ownership than the original
vendees/first endorsers. 1
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and
Wilson T. Go, doing business under the trade name and style Noahs Ark Sugar Refinery against Rosa
Ng Sy and Teresita Ng, praying that the latter be ordered to deliver or return to them the quedans
(previously endorsed to PNB and the subject of the suit) and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is
essentially to the effect that the transaction between them, on the one hand, and Jimmy T. Go, on the
other, concerning the quedans and the sugar stocks covered by them was merely a simulated one
being part of the latters complex banking schemes and financial maneuvers, and thus, they are not
answerable in damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in
favor of the plaintiff as against the defendants for the reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary
Judgment. Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of
Appeals, docketed as CA-G.R. SP. No. 25938 on December 13, 1991.
Pertinent portions of the decision of the Court of Appeals read:
In issuing the questioned Orders, the respondent Court ruled that questions of law should be resolved after and
not before, the questions of fact are properly litigated. A scrutiny of defendants affirmative defenses does not
show material questions of fact as to the alleged nonpayment of purchase price by the vendees/first endorsers,
and which nonpayment is not disputed by PNB as it does not materially affect PNBs title to the sugar stocks as
holder of the negotiable quedans.

361
What is determinative of the propriety of summary judgment is not the existence of conflicting claims from prior
parties but whether from an examination of the pleadings, depositions, admissions and documents on file, the
defenses as to the main issue do not tender material questions of fact (see Garcia vs. Court of Appeals, 167
SCRA 815) or the issues thus tendered are in fact sham, fictitious, contrived, set up in bad faith or so
unsubstantial as not to constitute genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA 753;
Mercado, et al. vs. Court of Appeals, 162 SCRA 75). The questioned Orders themselves do not specify what
material facts are in issue. (See Sec. 4, Rule 34, Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the
record, would constitute a waste of time and an injustice to the PNB whose rights to relief to which it is plainly
entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of discretion which
justify holding null and void and setting aside the Orders dated May 2 and July 4, 1990 of respondent Court,
and that a summary judgment be rendered forthwith in favor of the PNB against Noahs Ark Sugar Refinery, et
al., as prayed for in petitioners Motion for Summary Judgment.2
On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July
4, 1990 of the Regional Trial Court and ordered the trial court to render summary judgment in favor of
the PNB. On June 18, 1992, the trial court rendered judgment dismissing plaintiffs complaint against
private respondents for lack of cause of action and likewise dismissed private respondents
counterclaim against PNB and of the Third-Party Complaint and the Third-Party Defendants
Counterclaim. On September 4, 1992, the trial court denied PNBs Motion for Reconsideration.
On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R.
No. 107243, by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This
Court rendered judgment on September 1, 1993, the dispositive portion of which reads:
WHEREFORE, the trial judges decision in Civil Case No. 90-53023, dated June 18, 1992, is reversed and set
aside and a new one rendered conformably with the final and executory decision of the Court of Appeals in CAG.R SP. No. 25938, ordering the private respondents Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T.
Go and Wilson T. Go, jointly and severally:
(a) to deliver to the petitioner Philippine National Bank, the sugar stocks covered by the
Warehouse Receipts/ Quedans which are now in the latters possession as holder for
value and in due course; or alternatively, to pay (said) plaintiff actual damages in the
amount of P39.1 million, with legal interest thereon from the filing of the complaint until
full payment; and

(b) to pay plaintiff Philippine National Bank attorneys fees, litigation expenses and judicial
costs hereby fixed at the amount of One Hundred Fifty Thousand Pesos (P150,000.00)
as well as the costs.
SO ORDERED.3
On September 29, 1993, private respondents moved for reconsideration of this decision. A
Supplemental/Second Motion for Reconsideration with leave of court was filed by private respondents
on November 8, 1993. We denied private respondents motion on January 10, 1994. .
Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1,
1993. We denied this motion in this manner:
It bears stressing that the relief granted in this Courts decision of September 1, 1993 is precisely that set out in
the final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December 13, 1991,
which was affirmed in toto by this Court and which became unalterable upon becoming final and executory. 4
Private respondents thereupon filed before the trial court an Omnibus Motion seeking among
others the deferment of the proceedings until private respondents are heard on their claim for
warehousemans lien. On the other hand, on August 22, 1994, the Philippine National Bank filed a
Motion for the Issuance of a Writ of Execution and an Opposition to the Omnibus Motion filed by
private respondents.
The trial court granted private respondents Omnibus Motion on December 20, 1994 and set
reception of evidence on their claim for warehousemans lien. The resolution of the PNBs Motion for
Execution was ordered deferred until the determination of private respondents claim.
On February 21, 1995, private respondents claim for lien was heard and evidence was received
in support thereof. The trial court thereafter gave both parties five (5) days to file respective
memoranda.
On February 28, 1995, the Philippine National Bank filed a Manifestation with Urgent Motion to
Nullify Court Proceedings. In adjudication thereof, the trial court issued the following order onMarch 1,
1995:
WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid warehousemans lien
under Section 27 of Republic Act 2137 and accordingly, execution of the judgment is hereby ordered stayed
and/ or precluded until the full amount of defendants lien on the sugar stocks covered by the five (5) quedans

362
subject of this action shall have been satisfied conformably with the provisions of Section 31 of Republic Act
2137. 5

contention that the PNB could not compel them to deliver the stocks of sugar in their warehouse
covered by the endorsed quedans or pay the value of the said stocks of sugar.

Consequently, the Philippine National Bank filed the herein petition to seek the nullification of the
above-assailed orders of respondent judge.

Petitioners submission is on a technicality, that is, that private respondents have lost their right to
recover warehousemans lien on the sugar stocks covered by the five (5) Warehouse Receipts for the
reason that they failed to set up said claim in their Answer before the trial court and that private
respondents did not appeal from the decision in this regard, dated June 18, 1992. Petitioner
asseverates that the denial by this Court on March 9, 1994 of the motion seeking clarification of our
decision, dated September 1, 1993, has foreclosed private respondents right to enforce their
warehousemans lien for storage fees and preservation expenses under the Warehouse Receipts Act.

The PNB submits that:

I
PNBs RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND EXECUTORY
DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS DECISION IN CA-G.R. SP. NO. 25938;
AND, THE NOVEMBER 9, 1992 SUPREME COURT DECISION IN G.R NO. 107243. RESPONDENT RTCS
MINISTERIAL AND MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE
DECRETAL PORTION OF SAID SUPREME COURT DECISION
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS OMNIBUS
MOTION. THE CLAIMS SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE
SUPREME COURT IN ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS MOTION
FOR CLARIFICATION OF DECISION IN .G.R. NO. 107243; AND (2) ARE BARRED FOREVER BY PRIVATE
RESPONDENTS FAILURE TO INTERPOSE THEM IN THEIR ANSWER, AND FAILURE TO APPEAL FROM
THE JUNE 18, 1992 RTC DECISION IN CIVIL CASE NO. 90-52023
III
RESPONDENT RTCS ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE SUPREME
COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI TO ANNUL THE RTC
RESOLUTION DATED DECEMBER 20, 1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL
PROCEEDINGS TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT
RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 90-53023 AND
COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT DECISION IN G.R. NO. 107243;
AND (3) A WRIT OF MANDAMUS TO COMPEL RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE
THE SUPREME COURT JUDGMENT IN FAVOR OF PNB
The issues presented before us in this petition revolve around the legality of the questioned
orders of respondent judge, issued as they were after we had denied with finality private respondents

On the other hand, private respondents maintain that they could not have claimed the right to a
warehouseman s lien in their Answer to the complaint before the trial court as it would have been
inconsistent with their stand that they claim ownership of the stocks covered by the quedans since the
checks issued for payment thereof were dishonored. If they were still the owners, it would have been
absurd for them to ask payment for storage fees and preservation expenses. They further contend
that our resolution, dated March 9, 1994, denying their motion for clarification did not preclude their
right to claim their warehousemans lien under Sections 27 and 31 of Republic Act 2137, as our
resolution merely affirmed and adopted the earlier decision, dated December 13, 1991, of the Court of
Appeals (6th Division) in CA-G.R. SP. No. 25938 and did not make any finding on the matter of the
warehouseman s lien.
We find for private respondents on the foregoing issue and so the petition necessarily must fail.
We have carefully examined our resolution, dated March 9, 1994, which denied Noahs Arks
motion for clarification of our decision, dated September 1, 1993, wherein we affirmed in full and
adopted the Court of Appeals earlier decision, dated December 13, 1991, in CA-G.R. SP. No. 25938.
We are not persuaded by the petitioners argument that our said resolution carried with it the denial of
the warehousemans lien over the sugar stocks covered by the subject Warehouse Receipts. We have
simply resolved and upheld in our decision, dated September 1, 1993, the propriety of summary
judgment which was then assailed by private respondents. In effect, we ruled therein that, considering
the circumstances obtaining before the trial court, the issuance of the Warehouse Receipts not being
disputed by the private respondents, a summary judgment in favor of PNB was proper. We in effect
further affirmed the finding that Noahs Ark is a warehouseman which was obliged to deliver the sugar
stocks covered by the Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the
petitioner pursuant to the pertinent provisions of Republic Act 2137.

363
In disposing of the private respondents motion for clarification, we could not contemplate the
matter of warehousemans lien because the issue to be finally resolved then was the claim of private
respondents for retaining ownership of the stocks of sugar covered by the endorsed quedans. Stated
otherwise, there was no point in taking up the issue of warehousemans lien since the matter of
ownership was as yet being determined. Neither could storage fees be due then while no one has
been declared the owner of the sugar stocks in question.

After being declared not the owner, but the warehouseman, by the Court of Appeals
on December 13, 1991 in CA-G.R. SP. No. 25938, the decision having been affirmed by us
on December 1, 1993, private respondents cannot legally be deprived of their right to enforce their
claim for warehousemans lien, for reasonable storage fees and preservation expenses. Pursuant to
Section 31 which we quote hereunder, the goods under storage may not be delivered until said lien is
satisfied.

Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which
provides for respondent Noahs Arks right to impose and collect warehousemans lien:

SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid
against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the
quedans covering said sugar and thereafter, storage fees shall be charged in accordance with the Refining
Contract under which the refined sugar covered by this Quedan was produced. 6

Considering that petitioner does not deny the existence, validity and genuineness of the
Warehouse Receipts on which it anchors its claim for payment against private respondents, it cannot
disclaim liability for the payment of the storage fees stipulated therein. As contracts, the receipts must
be respected by authority of Article 1159 of the Civil Code, to wit:

It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees
are chargeable.
Petitioner anchors its claim against private respondents on the five (5) Warehouse Receipts
issued by the latter to third-party defendants Rosa Ng Sy of RNS Merchandising and Teresita Ng of
St. Therese Merchandising, which found their way to petitioner after they were negotiated to them by
Luis T. Ramos and Cresencia K. Zoleta for a loan of P39.1 Million. Accordingly, petitioner PNB is
legally bound to stand by the express terms and conditions on the face of the Warehouse Receipts as
to the payment of storage fees. Even in the absence of such a provision, law and equity dictate the
payment of the warehouseman s lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law
(R.A. 2137), to wit:
SECTION 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty,
a warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful
charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing coopering and other charges and expenses in relation to such goods;
also for all reasonable charges and expenses for notice, and advertisement of sale, and for sale of the goods
where default has been made in satisfying the warehousemans lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid
against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.
Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private
respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the
subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the
sugar stocks. The unconditional presentment of the receipts by the petitioner for payment against
private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137)
carried with it the admission of the existence and validity of the terms, conditions and stipulations
written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of
warehousemans lien for storage fees and preservation expenses. Petitioner may not now retrieve the
sugar stocks without paying the lien due private respondents as warehouseman.
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks
of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the
storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture,
because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses
his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where
the warehouseman surrenders the possession of the goods without requiring payment of his lien,
because a warehousemans lien is possessory in nature.

364
We, therefore, uphold and sustain the validity of the assailed orders of public respondent,
dated December 20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in
issuing the questioned orders which recognized the legitimate right of Noahs Ark, after being declared
as warehouseman, to recover storage fees before it would release to the PNB sugar stocks covered
by the five (5) Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude private
respondents unqualified right to establish its claim to recover storage fees which is recognized under
Republic Act No. 2137. Neither did the Court of Appeals decision, datedDecember 13, 1991, restrict
such right.
Our Resolutions reference to the decision by the Court of Appeals, dated December 13, 1991, in
CA-G.R. SP. No. 25938, was intended to guide the parties in the subsequent disposition of the case
to its final end. We certainly did not foreclose private respondents inherent right as warehouseman to
collect storage fees and preservation expenses as stipulated n the face of each of the Warehouse
Receipts and as provided for in the Warehouse Receipts Law (R.A. 2137).
WHEREFORE, the petition should be, as it is, hereby dismissed for lack of merit. The questioned
orders issued by public respondent judge are affirmed.
Costs against the petitioner.
SO ORDERED.
G.R. No. L-20085 August 8, 1975
PHILIPPINE TOBACCO FLUE CURING AND REDRYING CORPORATION, petitioner-appellee,
vs.
RIZALINO PABLO, Director of the Bureau of Commerce, respondent-appellant.
Manuel O. Chan for petitioner-appellee.
Office of the Solicitor General Edilberto Barot and Solicitor Camilo D. Quiason for respondentappellant.

CONCEPCION JR., J.:

Appeal from a decision of the Court of First Instance of Manila, certified to this Court by the Court of
Appeals, pursuant to paragraph 3 (5) of Section 17 of the Judiciary Act, as amended by Section 2 (5)
of Republic Act No. 2313, the amount involved being P24,905,579.63.
The record discloses that by Memorandum Agreement dated February 2, 1959, 1 the Philippine
Tobacco Flue Curing and Redrying Corporation, hereinafter referred to as the PTFCRC, a domestic
corporation engaged in flue curing and redrying of tobacco leaves, and the Agricultural Credit and
Cooperative Financing Administration, ACCFA for short, agreed that the PTFCRC "shall redry, pack
and keep in storage all Virginia leaf tobacco delivered by ACCFA to the CORPORATION'S redrying
and repacking plant, the same to be done according to standard procedure and usages of the trade,
including fumigation of stored tobacco to prevent damage by pests." ACCFA, in turn, agreed to pay
the PTFCRC eighteen (P0.18) Centavos per kilo for the redrying and packing of the tobacco and a
monthly warehousing fee of Two Pesos and Twenty Centavos (P2.20) per hogshead. To guarantee
the faithful performance of the agreement, and to answer for any damage that may be suffered by the
ACCFA while the tobacco is in the plant or warehouse of the corporation, the PTFCRC agreed to file
a bond in the amount of P200,000.00, which amount "may be increased at the option of the ACCFA
as the amount and value of the tobacco delivered to the plant or warehouse of the corporation
increases. This agreement shall be in effect for a period of three (3) years counting from March 1,
1959, and extendible from year to year thereafter, upon mutual agreement of the parties."
On February 26, 1960, the Director of Commerce, through the Bureau's Chief Commission Agent,
required the PTFCRC to file an additional bond in the amount of P11,033,334.00, later increased to
P12,566,667.22, pursuant to the provisions of the General Bonded Warehouse Act, since the
PTFCRC, upon investigation, had allegedly received for storage 50,000 hogsheads of Virginia leaf
tobacco: valued at P40,000,000 and their records show that the said corporation is only authorized to
receive for storage at any one time not more than P2,300,000.00 worth of tobacco, equivalent to
4,000 hogsheads. 2
In a letter dated March 12, 1960, the PTFCRC, through its legal counsel, informed the Director of
Commerce that the said corporation was not engaged in warehousing and storage and, therefore, not
subject to the provisions of the General Bonded Warehouse Act. 3 This contention was rejected by the
Director of Commerce and the PTFCRC appealed to the Secretary of Commerce and Industry. 4 On
May 12, 1960, the Secretary of Commerce and Industry sent a letter to the PTFCRC rejecting its
appeal and enjoining it to file the bond required by the Director of Commerce. 5
In the meantime, the PTFCRC and the ACCFA entered into a new Memorandum Agreement, 6 dated
May 19, 1960, by virtue of which the ACCFA agreed to deliver 75% of its tobacco to the premises of
the PTFCRC, for the latter to render and perform all the services required for the curing and treatment

365
of said tobacco until they are ready for the manufacture of cigarettes at the stipulated fee of P2.20 per
hogshead. As security for the faithful performance of the undertaking, the PTFCRC shall post and
maintain a surety bond in the amount of P700,000.00 in favor of the ACCFA. The Memorandum
Agreement entered into by and between the parties on February 2, 1959 7 was expressly declared
extinguished, terminated, voided, and superseded by this new Memorandum Agreement.
On June 1, 1960, the PTFCRC received a letter from the Director of Commerce requiring it to file an
additional bond of P24,905,579.63 within two (2) days from receipt thereof. 8 Whereupon, the
PTFCRC filed with the Court of First Instance of Manila, a petition for prohibition with a writ of
preliminary injunction, against the Director of Commerce, claiming that in requiring it to file an
additional bond, the Director of Commerce acted with grave abuse of discretion and in disregard of
the law and his jurisdiction, which act would work injustice and cause irreparable injury to the said
corporation.
After trial, judgment was rendered (a) declaring that the petitioner PTFCRC "is not engaged in the
business of warehousing within the meaning of the General Bonded Warehouse Law insofar as the
ACCFA tobacco covered by the contract of May 19, 1960 is concerned, and should not be obliged to
file the bond demanded by the respondent; (b) declaring the order of the Director of Commerce
requiring the petitioner to file a bond of P24,905,579.63 null and void; and (c) making the writ of
preliminary injunction permanent." Hence, this appeal.

In the case at bar, the ACCFA had insured its tobacco with the GSIS, 12 and the PTFCRC had been
required by the ACCFA to file a performance bond in the amount of P700,000.00, which amount may
be increased at the option of the ACCFA as the amount and value of the tobacco delivered to the
plant or warehouse of the petitioner-appellee increases, conditioned upon the faithful performance of
the agreement and to answer for any damage that may be suffered by the ACCFA while the tobacco
is in the plant or warehouse of the petitioner-appellee. It is therefore evident that the ACCFA is amply
protected. It would be unreasonable and oppressive to compel the petitioner-appellee to further put
up a bond and subject it to the unnecessary burden of the premium incident to such bond.
The ACCFA is now defunct and its functions have been taken over by the Agricultural Credit
Administration. This controversy involves the keeping of tobacco, harvested in 1959, for curing and
ageing by the petitioner-appellee, which was contracted more than fifteen (15) years ago. Witnesses
for the litigants testified that the ageing process takes from 18 to 24 months before the tobacco is sold
to the cigarette manufacturers. For sure, the commodity kept in the premises of the petitionerappellee for curing and ageing have already been withdrawn and disposed of by the ACCFA, in which
case the filing of an additional bond by the petitioner-appellee ceases to be controversial.
UPON THE FOREGOING, the appeal should be, as it is hereby, DISMISSED, without costs.
SO ORDERED.

The focal issue is whether or not the petitioner-appellee should Post an additional bond, as required
by the Director of Commerce, pursuant to the provisions of sections 4 and 5 of Act No. 3893, as
amended, otherwise known as the General Bonded Warehouse Act. 9

Makalintal, C.J., Barredo, Aquino and Martin, JJ., concur.

The petitioner-appellee claims that the contract entered into between the PTFCRC and the ACCFA is
one of services and, therefore, not within the purview of the General Bonded Warehouse Act. The
Director of Commerce, upon the other hand, maintains that the petitioner-appellee is a
warehouseman and should comply with the provisions of the General Warehouse Act by putting up an
additional bond.

Footnotes

As stated in Section 4 of the General Bonded Warehouse Act, the "bond shall be so conditioned as to
respond for the market value of the rice actually delivered and received at any time the
warehouseman is unable to return the rice 10 or to pay its value." The main intention of the lawmaker,
in requiring the millers to post the necessary bond, "is to give protection to the owner of the
commodity against possible abuses (and we might add negligence) of the person to whom the
physical control of his properties is delivered." 11

1 Exhibit 3.
2 Exhibit 1.
3 Annex C of the petition.
4 Annex E of the petition.
5 Paragraph 12 of the Petition.
6 Exhibit D.

366
7 Exhibit 3.

Rafael L. Arcega for petitioner-appellant.

Office of the Solicitor General for respondent-appellee.

8 Annex F of the petition.

MAKALINTAL, J.:
9 "Sec. 4. Any person applying for a license to engage in the business of receiving
rice for storage shall set forth in the application the place or places where the
business and the warehouse are to be established or located and the maximum
quantity of rice to be received. The application shall be accompanied by a cash bond
or bond secured by real estate or signed by a duly authorized bonding company, the
amount of which shall be fixed by the Director of Commerce and Industry at not less
than thirty-three and one-third per cent of the market value of the maximum quantity
of rice to be receive. Said bond shall be so conditioned as to respond for the market
value of the rice actually delivered and received at any time the warehouseman is
unable to return the rice or the pay its value. The bond shall be approved by the
Director of Commerce and Industry before a license shall issue, and it shall be the
duty of said Director, before issuing a license under this Act, to satisfy himself
concerning the sufficiency of such bond, and to determine whether the warehouse for
which such license is applied for is suitable for the proper storage of rice.
"Sec. 5. Whenever the Director of the Bureau of Commerce and Industry shall
determine that a bond approved by him, is, or for any cause, has become insufficient,
he may require an additional bond or bonds to be given by the warehouseman
concerned, conforming with the requirements of the preceding section and unless the
same be given within the time fixed by a written demand therefor the license of such
warehouseman may be suspended or revoked.
10 replaced by the term "commodity" by Republic Act No. 247.
11 Vda. de Limjuco vs. Director of Commerce, G.R. No. L-17640, Nov. 29, 1965; 15
SCRA 326.
12 p. 38, tsn, Session of July 9, 1960.
G.R. No. L-17640

November 29, 1965

VIRGINIA I. VDA. DE LIMJOCO, petitioner-appellant,

vs.
THE DIRECTOR OF COMMERCE, respondent-appellee.

This case, filed as a petition for declaratory relief in the Court of First Instance of Manila, involves the
interpretation of Section 2 of the General Bonded Warehousing Act (Act No. 3893 as amended by
Republic Act No. 247), specifically in relation to the rice milling business of petitioner-appellant.
Certain facts were stipulated in the Court below, and the following summarized statement in the
decision appealed from is accepted by both parties:
It appears that sometime prior to March 22, 1950, petitioner and her husband, the late
Bonifacio T. Limjoco, were the owners of a rice mill commonly called "kiskisan" and were
engaged in the business of milling palay belonging to their customers for the purpose of
removing its hull and converting it into rice. (p. 30, RA).
On July 31, 1952 Bonifacio T. Limjoco died, leaving the milling business in the hands of his
surviving spouse, the petitioner in this case. The petitioner continued in the business, which
prior to the death of her husband, was managed by the latter without, however, renewing the
license which according to Exhibit "A" expired on December 31, 1950. Since then and up to
the present, the petitioner refused to secure a license from the Bureau of Commerce claiming
that her business does not fall within the provisions of Act 3893 as amended by Republic Act
247.
From the testimony of the petitioner and from the stipulation of facts entered into by the
parties, as well as the exhibits presented by the petitioner, it appears that the petitioner owns
a rice mill of the semicono type. The facilities of the rice mill are open to the public in the
sense that anybody who wants his palay to be milled and converted into rice may deliver the
same to the rice mill paying P0.40 per cavan of palay for the services of the petitioner in
milling it. The mill itself is within a building which the petitioner calls a "camalig" about ten
meters long, eight meters wide and five meters high. The "camalig" is totally enclosed partly
by steelmatting, partly by wood and partly by galvanized iron sheets.
From the stipulation of facts as well as from the testimony of appellant the trial Court further found
that there were occasions when her customers brought more palay than could be milled in one day,
whereupon they would leave the same in the custody of appellant, piled inside the "camalig" to await
its turn to be milled; that sometimes the palay thus left in her possession amounted to as much as
100 cavans, and at other times as little as 10 cavans; that no charge was made by appellant for thus

367
keeping the palay, the arrangement being, in accordance with the customs of the place, a favor done
to the customers; and that, on the other hand, appellant was also benefited by such arrangement, for
unless she acceded thereto the customers might take their palay for milling to her competitors.
Section 2 of the law in question provides:
As used in this Act, the term "Warehouse" shall be deemed to mean every building, structure,
or other protected inclosure in which rice is kept for storage. The term "rice" shall be deemed
to mean either palay, in bundles, or in grains, or clean rice, or both. "Person" includes a
corporation or partnership or two or more persons having a joint or common interest;
"warehouseman" means a person engaged in the business of receiving rice for storage; and
"receipt" means any receipt issued by a warehouseman for rice delivered to him. For the
purpose of this Act, the business of receiving rice for storage shall include (1) any contract or
transaction wherein the warehouseman is obligated to return the very same rice delivered to
him or pay its value; (2) any contract or transaction wherein the rice delivered is to be milled
for and on account of the owner thereof; (3) any contract or transaction wherein the rice
delivered is commingled with rice delivered by or belonging to other persons, and the
warehouseman is obligated to return rice of the same kind or pay its value.
The Director of Commerce ruled that appellant's rice milling business falls under the law just quoted,
required her to secure the corresponding renewal license and started steps for her prosecution in
view of her refusal to do so. The move, it seems, was subsequently held in abeyance upon the filing
of the petition herein.
The trial court upheld the Director of Commerce and ruled that the law in question is applicable in this
case. Appellant submits, in substance, that the test to determine the applicability of Act No. 3893 as
amended is whether or not she is engaged in the business of receiving palay for storage; that the
clause in section 2 thereof which refers to "any contract or transaction wherein the rice, delivered is to
be milled for and on account of the owners" must be understood in relation to the subject matter of
the statute as expressed in its title, namely, "An Act to Regulate the Business of Receiving
Commodity for Storage"; and that since her business is the milling of palay, the delivery thereof to her
is merely incidental to such business and does not constitute storage within the meaning of the
statute.
Section 2, however, is too clear to permit of any exercise in construction or semantics. It does not
stop at the bare use of the word "storage," but expressly provides that any contract or transaction
wherein the palay delivered is to be milled for and on account of the owner shall be deemed included
in the business of receiving rice for storage for the purpose of the Act. In other words, it is enough that

the palay is delivered, even if only to have it milled. Delivery connotes transfer of physical possession
or custody; and it may indeed be seriously doubted if the concept of "storage" under the law would
cover a situation where one merely utilizes the services of the mill but keeps the palay under his
physical control all steps of the way. But in this case it is a fact that palay is delivered to appellant and
sometimes piled inside her "camalig" in appreciable quantities, to wait for its turn in the milling
process. This is precisely the situation covered by the statute.
We agree with His Honor, the trial Judge, when he said: "There is a reason for the inclusion of the
business of the petitioner within the operation of Act 3893 as amended by Republic Act 247. The main
intention of the lawmaker is to give protection to the owner of the commodity against possible abuses
(and we might add negligence) of the person to whom the physical control of his properties is
delivered."
This is not the first time this question has come before Us. It was raised in the case of People vs.
Versola, G.R. No. L-5707, March 27, 1958, where this Court, speaking through Mr. Justice Roberto
Concepcion, said:
At any rate, whenever a rice mill engaged in the business of hulling palay for others, is
housed in a "camarin" like that of appellant herein, the keeping of palay or rice therein follows
as a necessary consequence. This is true, even if the grains were received therein
exclusively for milling purposes. Hence, one way or the other, there is a form of storage, the
duration of which may vary, depending upon circumstances. In any event, the ricemill
operator is responsible for the palay or rice, while the same is in his possession, and public
policy or public interest demands that the rights of the owners of the commodity which is
our main staple be duly protected. Hence, the need of securing the license prescribed in
Act No. 3893, in order that the Director of Commerce could determine the conditions under
which the mill may be authorized to operate, conformably with the objectives of said
legislation, and the amount of the bond to be required for the protection of the people who
avail themselves of its services.
Appellant contends that the inclusion of the business of milling palay in Act No. 3893 infringes the
constitutional mandate that no law shall embrace more than one subject which shall be expressed in
the title thereof. We believe the subject matter of said Act as expressed in its title, namely, the
regulation of the business of receiving commodity for storage, is sufficiently broad to cover the
business of milling palay where the palay is delivered to the mill operator and kept in a construction
which serves the purpose of a warehouse, as in this case. Appellant says her "camalig" is neither
adequate nor suitable for storage. But the inadequacy of the construction insofar as the safety of the
palay is concerned is not a valid reason to remove it from the operation of the statute, for otherwise

368
the very fact of non-compliance with the legal requirements in this respect would be its own excuse
from the liabilities imposed.

SEC. 3. No person shall engage in the business of receiving rice for storage without first
securing a license therefor from the Director of the Bureau of Commerce and Industry. Said
license shall be annual and shall expire on the thirty-first day of December.

The decision appealed from is affirmed, with costs.

G.R. No. 1-5707

March 27, 1958

THE PEOPLE, OF THE PHILIPPINES, plaintiff-appellee,

vs.
DIONISIO VERSOLA, defendant-appellant.
Francisco Calderon for appellant.
Office of the Solicitor General Ambrosio Padilla and Solicitor Florencio Villamor for appellee.
CONCEPCION, J.:
This is an appeal, taken by defendant Dionisio Versola, from a decision of the Court of First Instance
of Cotabato, convicting him of operating a rice mill without a license therefor, in violation of section 3
of Act No. 3893, otherwise known as "The General Bonded Warehouse Act," and sentencing him to
pay a fine of P10.00, with subsidiary imprisonment in cue of insolvency, as well as the costs, and the
amount of the licensed required by law, for the year 1951, and, also, tap file the bond prescribed in
said Act.
Appellant is the owner and operator of a rice mill enclosed within a structure or "camarin", 6 by 8
meters, made of wooden posts and partition walls, with cogon roof, located in the barrio of Banawa,
municipality of Kabacan, province of Cotabato, Philippines. It is not disputed that in January, 1951,
and prior thereto, appellant accepted and milled palay in his aforementioned "camarin", and charged
therefor frorn P0.50 to P0.80 per cavan, without securing the license provided for in Act No. 3893,
from the Bureau of Commerce. What is more, he refused to obtain said license, although a
representative of said office had' urged him to secure one. Appellant maintains that his mill is not
subject to the provisions of said Act, upon the ground that the structure above mentioned is used for
milling only, not for the storage and deposit of palay or rice; that, sometimes, his customers bring
small quantities of palay, ranging from one petroleum can to a sack; and that the palay or rice
received in his "camarin" is not kept therein for over an hour.
Sections 3, 4 and 5 of Act No. 3893 read:

SEC. 4. Any person applying for a license to engage in the business of receiving rice for
storage shall set forth in the application the place or places where the business and the
warehouse are to be established or located and the maximum quantity of rice to be received.
The application shall be accompanied by a cash bond or bond secured by real estate or
signed by a duly authorized bonding company, the amount of which shall be fixed by the
Director of the Bureau of Commerce and Industry at not less than thirty-three and one-third
per cent of the market value of the maximum quantity of rice to be received. Said bond shall
be so conditioned as to respond for the market value of the rice actually delivered and
received at any time, the warehouseman is unable to return the rice or to pay its value. The
bond shall be approved by the Director of the Bureau of Commerce and Industry before a
license shall issue, and it shall be the duty of said Director, before issuing a license under this
Act, to satisfy himself concerning the sufficiency of such bond, and to determine whether the
warehouse for which such license is applied for is suitable for the proper storage of rice.
SEC. 5. Whenever the Director of the Bureau of Commerce and Industry shall determine that
a bond approved by him, is, or for any cause, has become insufficient, he may require an
additional bond or bonds to be given by the warehouseman concerned, conforming with the
requirements of the preceding section, and unless the same be given within the time fixed by
a written demand therefor the license of such warehouseman may be suspended or revoked.
At first blush, these provisions would seem to apply only to warehouses actually used for storage o
rice, not for milling exclusively. However, section 2 of said Act provides:
As used in this Act, the term "warehouse" shall be deemed to mean every building, structure,
or other protected inclosure in which rice is kept for storage. The term "rice" shall be deemed
to mean either palay, in bundles or in grains, of cleaned rice, or both. "Person" includes a
corporation or partnership or two or more persons having a joint or common interest;
"warehouseman" means a person engaged in the business of receiving rice for storage; and
"receipt" means any receipt issued by a warehouseman for rice delivered to him. For the
purpose of this Act, the business of receiving rice for storage shall include (1) any contract or
transaction wherein the warehouseman in obligated to return the "same rice delivered to him
or to pay its value; (2) any contract or transaction wherein the rice delivered is to be milled for
and on account of the owner thereof ; (3) any contract or transaction wherein the rice
delivered is commingled with rice delivered by or belonging to other persons, and the

369
warehouseman is obligated to return rice of the same kind or to pay its value." (Emphasis
ours)
It is admitted that appellant has been engaged in transactions pursuant to which the palay "delivered
is to be milled for and on account of the owner thereof". It is clear, therefore, that his business falls
under the second subdivision of the foregoing enumeration.
Appellant insists, however, that the provisions above quoted could have no possible application
where rice is delivered, not for storage, but for milling purposes, as, he claims, in his case. However,
we are inclined to hold otherwise. To begin with, the law explicitly applies to any mill enclosed in a
structure where palay is received mainly for milling. Secondly, in the ordinary course of business, this
purpose cannot be accomplished without keeping the palay for some time in the mill, and, hence,
without storing therein said commodity.
For obvious reasons, every region has its own harvest and milling seasons. When the same come,
the palay planted in each region are harvested at about the same time. As a consequence, the bulk of
said palay is likewise milled within the same period of time. When the rice mill is as that of
appellant herein one of the only two (2) existing within the perimeter of three (3) barrios, with
hundreds of families residing therein, it is bound to be heavily pressed by the demands of its
customers during the milling season. As a consequence, not all palay brought to the mill could always
be hulled immediately, much less removed therefrom within one hour. This is specially true when we
consider that no person could possibly live and support his family, if the field he cultivates produced
only from a petroleum can to a sack of palay yearly. Normally, therefore, each one of those availing
themselves of the services of said mill would have scores of cavanes of palay, the hulling of which
would require some time. When the commodity belonging to a given customer cannot be milled right
away, he is constrained, therefore, to leave it in the "camarin", for it would be inconvenient and
impractical for him to take the grains back to his place, not only because of the time consumed, the
trouble taken, and perhaps, the expenses incurred in bringing the cereals to the mill, but also,
because he would have to haul the palay once more to the mill, either the next day or at some other
time, without any assurance that others might not be ahead of him. In other words, it is generally
more advantageous for said customer to leave in the "camarin" the palay above referred to, for hulling
when its turn should come.
Upon the other hand, it is not to be expected that the owner or operator of the mill would refuse to
receive palay which, owing to pending work, could not be milled forthwith. In fact, appellant did not
testify that he rejected such palay. What is more, appellant had to increase the size of his "camarin",
from six (6) by six (6) meter as it was originally built to six (6) by eight (8) meters. This indicates
clearly that he had found it necessary to make more room for the storage of commodities therein.

At any rate, whenever a rice mill, engaged in the business of hulling palay for others, is housed in a"
camarin" like that of appellant herein, the keeping of palay or rice therein follows as a necessary
consequence. This is true, even if the grains were received therein exclusively for milling purposes.
Hence, one way or the other, there is a form of storage, the duration of which may vary, depending
upon circumstances. In any event, the rice mill operator is responsible for the palay or rice, while the
same is in his possession, and public policy or public interest demands that the rights of the owners
of commodity which is our main staple be duly protected. Hence, the need of securing the
license prescribed in Act No. 3893, in order that the Director of Commerce could determine the
conditions under which the mill may be authorized to operate, conformably with the objective of said
legislation, and the amount of the bond to be required for the protection of the people who avail
themselves of its services.
This appeal is, therefore, untenable. However, we agree with the Solicitor General that, under the
provisions of said Act, the lower court had no authority to order, in this criminal case, the payment by
appellant of the license for 1951, and the filing of the bond aforementioned. These are not part of the
penalty prescribed by law for the offense charged, apart from being within the administrative
jurisdiction of the Director of Commerce.
Wherefore, with the elimination of the order just mentioned, the decision appealed from is hereby
affirmed, in all other respects, with costs against defendant-appellant Dionisio Versola. It is so
ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A, Bautista Angelo, Reyes, J.B.L., Endencia and
Felix, J.J.,concur.
RAMON GONZALES, plaintiff-appellee,
vs.
GO TIONG and LUZON SURETY CO., INC., defendants-appellants.
Rustico V. Nazareno for appellee.
David, Abel and Ysip for appellant Go Tiong.
Tolentino, Garcia and D. R. Cruz for appellant Luzon Surety Co., Inc.
MONTEMAYOR, J.:
Defendants Go Tiong and Luzon Surety Co. are appealing from the decision of the Court of First
Instance of Manila, Judge Magno S. Gatmaitan presiding, the dispositive part of which reads as
follows:

370
In view whereof, judgment is rendered condemning defendant Go Tiong and Luzon Surety
Co., jointly and severally, to pay plaintiff the sum of P4,920 with legal interest from the date of
the filing of the complaint until fully paid; judgment is also rendered against Go Tiong to pay
the sum of P3,680 unto plaintiff, also with legal interest from the date of the filing of the
complaint until fully paid. Go Tiong is also condemned to pay the sum of P1,000 as attorney's
fees, plus costs.
The appeal was first taken to the Court of Appeals, the latter indorsing the case to us later under the
provisions of Section 17 (6) of Republic Act No. 296, on the ground that the issues raised were purely
questions of law.
Go Tiong owned a rice mill and warehouse, located at Mabini, Urdaneta, Pangasinan. On February 4,
1953, he obtained a license to engage in the business of a bonded warehouseman (Exhibit N). To
secure the performance of his obligations as such bonded warehouseman, the Luzon Surety Co.
executed Guaranty Bond No. 294 in the sum of P18,334 (Exhibit O), conditioned particularly on the
fulfillment by Go Tiong of his duty or obligation to deliver to the depositors in his storage warehouse,
the palay received by him for storage, at any time demand is made, or to pay the market value
thereof, in case he was unable to return the same. The bond was executed on January 26, 1953. Go
Tiong insured the warehouse and the palay deposited therein with the Alliance Surety and Insurance
Company.
But prior to the issuance of the license to Go Tiong to operate as bonded warehouseman, he had on
several occasions received palay for deposit from plaintiff Gonzales, totaling 368 sacks, for which he
issued receipts, Exhibits A, B, C, and D. After he was licensed as bonded warehouseman, Go Tiong
again received various deliveries of palay from plaintiff, totaling 492 sacks, for which he issued the
corresponding receipts, all the grand total of 860 sacks, valued at P8,600 at the rate of P10 per sack.
On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his deposits in the
amount of P8,600, but he was told to return after two days, which he did, but Go Tiong again told him
to come back. A few days later, the warehouse burned to the ground. Before the fire, Go Tiong had
been accepting deliveries of palay from other depositors and at the time of the fire, there were 5,847
sacks of palay in the warehouse, in excess of the 5,000 sacks authorized under his license. The
receipts issued by Go Tiong to the plaintiff were ordinary receipts, not the "warehouse receipts"
defined by the Warehouse Receipts Act (Act No. 2137).
After the burning of the warehouse, the depositors of palay, including plaintiff, filed their claims with
the Bureau of Commerce, and it would appear that with the proceeds of the insurance policy, the
Bureau of Commerce paid off some of the claim. Plaintiff's counsel later withdrew his claim with the

Bureau of Commerce, according to Go Tiong, because his claim was denied by the Bureau, but
according to the decision of the trial court, because nothing came from plaintiff's efforts to have his
claim paid. Thereafter, Gonzales filed the present action against Go Tiong and the Luzon Surety for
the sum of P8,600, the value of his palay, with legal interest, damages in the sum of P5,000 and
P1,500 as attorney's fees. Gonzales later renewed his claim with the Bureau of Commerce (Exhibit
S).
While the case was pending in court, Gonzales and Go Tiong entered into a contract of amicable
settlement to the effect that upon the settlement of all accounts due to him by Go Tiong, he,
Gonzales, would have all actions pending against Go Tiong dismissed. Inasmuch as Go Tiong failed
to settle the accounts, Gonzales prosecuted his court action..
For purposes of reference, we reproduce the assignment of errors of Go Tiong, as well as the
assignment of errors of the Luzon Surety, all reading thus:
I. The trial court erred in finding that plaintiff-appellee's claim is covered by the Bonded
Warehouse Law, Act 3893, as amended, and not by the Civil Code.
II. The trial court erred in not exempting defendant-appellant Go Tiong for the loss of the
palay deposited, pursuant to the provisions of the New Civil Code.".
xxx

xxx

xxx

I. The trial court erred in not declaring that the amicable settlement by and between plaintiffappellee and defendant Go Tiong constituted a material alteration of the surety bond of
appellant Luzon Surety which extinguished and discharged its liability.
II. The trial court erred in bolding that the receipts for the palay received by Go Tiong, though
not in the form of "quedans" or warehouse receipts are chargeable against the surety bond
filed under the provisions of the General Bonded Warehouse Act (Act No. 3893 as amended
by Republic Act No. 247) as a result of a loss.
III. The trial court erred in not holding that the plaintiff had renounced and abandoned his
rights under the Bonded Warehouse Act by the withdrawal of his claim from the Bureau of
Commerce and the execution of the "amicable settlement".

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IV. The trial court erred in not holding that the palay delivered to Go Tiong constitutes
gratuitous deposit which was extinguished upon the loss and destruction of the subject
matter.
V. The trial court erred in not declaring that the transaction between defendant Go Tiong and
plaintiff was more of a sale rather than a deposit.
VI. The trial court erred in declaring that the Luzon Surety Co., Inc., had not complied with its
undertaking despite the liquidation of all the claims by the Bureau of Commerce.

As the trial court well observed, as far as Go Tiong was concerned, the fact that the receipts issued
by him were not "quedans" is no valid ground for defense because he was the principal obligor.
Furthermore, as found by the trial court, Go Tiong had repeatedly promised plaintiff to issue to him
"quedans" and had assured him that he should not worry; and that Go Tiong was in the habit of
issuing ordinary receipts (not "quedans") to his depositors.
As to the contention that the deposits made by the plaintiff were free because he paid no fees
therefor, it would appear that Go Tiong induced plaintiff to deposit his palay in the warehouse free of
charge in order to promote his business and to attract other depositors, it being understood that
because of this accommodation, plaintiff would convince other palay owners to deposit with Go Tiong.

VII. The lower court erred in adjudging the herein surety liable under the terms of the Bond.
We shall discuss the assigned errors at the same time, considering the close relation between them,
although we do not propose to discuss and rule upon all of them. Both appellants urge that plaintiff's
claim is governed by the Civil Code and not by the Bonded Warehouse Act (Act No. 3893, as
amended by Republic Act No. 247), for the reason that, as already stated, what Go Tiong issued to
plaintiff were ordinary receipts, not the warehouse receipts contemplated by the Warehouse Receipts
Law, and because the deposits of palay of plaintiff were gratuitous.
Act No. 3893 as amended is a special law regulating the business of receiving commodities for
storage and defining the rights and obligations of a bonded warehouseman and those transacting
business with him. Consequently, any deposit made with him as a bonded warehouseman must
necessarily be governed by the provisions of Act No. 3893. The kind or nature of the receipts issued
by him for the deposits is not very material much less decisive. Though it is desirable that receipts
issued by a bonded warehouseman should conform to the provisions of the Warehouse Receipts
Law, said provisions in our opinion are not mandatory and indispensable in the sense that if they fell
short of the requirements of the Warehouse Receipts Act, then the commodities delivered for storage
become ordinary deposits and will not be governed by the provisions of the Bonded Warehouse Act.
Under Section 1 of the Warehouse Receipts Act, one would gather the impression that the issuance
of a warehouse receipt in the form provided by it is merely permissive and directory and not
obligatory:
SECTION 1. Persons who may issue receipts. Warehouse receipts may be issued by any
warehouseman.,

Appellants contend that the burning of the warehouse was a fortuitous event and not due to any fault
of Go Tiong and that consequently, he should not be held liable, appellants supporting the contention
with the ruling in the case of La Sociedad Dalisay vs. De los Reyes, 55 Phil. 452, reading as follows:
Inasmuch as the fire, according to the judgment appealed from, was neither intentional nor
due to the negligence of the appellant company or its officials; and it appearing from the
evidence that the then manager attempted to save the palay, the appellant company should
not be held responsible for damages resulting from said fire. . . . .
The trial court correctly disposed of this same contention, thus:
The defense that the palay was destroyed by fire neither does the Court consider to be good
for while the contract was in the nature of a deposit and the loss of the thing would exempt
the obligor in a contract of deposit to return the goods, this exemption from the responsibility
for the damages must be conditioned in his proof that the loss was by force majeure, and
without his fault. The Court does not see from the evidence that the proof is clear on the legal
exemption. On the contrary, the fact that he exceeded the limit of the authorized deposit must
have increased the risk and would militate against his defense of non-liability. For this reason,
the Court does not follow La Sociedad vs. De Los Santos, 55 Phil. 42 quoted by Go Tiong. (p.
3, Decision).
Considering the fact, as already stated, that prior to the burning of the warehouse, plaintiff demanded
the payment of the value of his palay from Go Tiong on two occasions but was put off without any
valid reason, under the circumstances, the better rule which we accept is the following:

and the Bonded Warebouse Act as amended permits the warehouseman to issue any receipt, thus:
. . . . "receipt" as any receipt issued by a warehouseman for commodity delivered to him.

. . . . This rule proceeds upon the theory that the facts surrounding the care of the property by
a bailee are peculiarly within his knowledge and power to prove, and that the enforcement of

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any other rule would impose great difficulties upon the bailors. ... It is illogical and
unreasonable to hold that the presumption of negligence in case of this kind is rebutted by the
bailee by simply proving that the property bailed was destroyed by an ordinary fire which
broke out on the bailee's own premises, without regard to the care exercised by the latter to
prevent the fire, or to save the property after the commencement of the fire. All the authorities
seem to agree that the rule that there shall be a presumption of negligence in bailment cases
like the present one, where there is default in delivery or accounting, for the goods is just a
necessary one. . . . (9 A.L.R. 566; see also Hanes vs. Shapiro, 84 S.E. 33; J. Russel Mfg.
Co. vs. New Haven, S.B. Co., 50 N.Y. 211; Beck vs. Wilkins-Ricks Co., 102 S.E. 313,
Fleishman vs. Southern R. Co., 56 S.E. 974).
Besides, as observed by the trial court, the defendant violated the terms of his license by accepting
for deposit palay in excess of the limit authorized by his license, which fact must have increased the
risk.
The Luzon Surety claims that the amicable settlement by and between Gonzales and Go Tiong
constituted a material alteration of its bond, thereby extinguishing and discharging its liability. It is
evident, however, that while there was an attempt to settle the case amicably, the settlement was
never consummated because Go Tiong failed to settle the accounts of Gonzales to the latter's
satisfaction. Consequently, said non-consummated compromise settlement does not discharge the
surety:
A compromise or settlement between the creditor or obligee and the principal, by which the
latter is discharged from liability, discharges the surety, . . . . But an unconsummated . . .
agreement to compromise, falling short of an effective settlement, will not discharge the
surety. (50 C. J. 185)
In relation to the failure of Go Tiong to issue the warehouse receipts contemplated by the Warehouse
Receipts Act, which failure, according to appellants, precluded plaintiff from suing on the bond,

reference may be made to Section 2 of Act No. 3893, defining receipt as any receipt issued by a
warehouseman for commodity delivered to him, showing that the law does not require as
indispensable that a warehouse receipt be issued. Furthermore, Section 7 of said law provides that
as long as the depositor is injured by a breach of any obligation of the warehouseman, which
obligation is secured by a bond, said depositor may sue on said bond. In other words, the surety
cannot avoid liability from the mere failure of the warehouseman to issue the prescribed receipt. In
the case of Andreson vs. Krueger, 212 N.W. 198, 199, it was held:
The surety company concedes that the bond which it gave contains the statutory conditions.
The statute . . . requires that the bond shall be conditioned upon the faithful performance
of the public local grain warehouseman of all the provisions of law relating to the storage of
grain by such warehouseman.
The surety company thereby made itself responsible for the performance by the
warehouseman of all the duties and obligations imposed upon him by the statute; and, if he
failed to perform any such duty to the loss or detriment of those who delivered grain for
storage, the surety company became liable therefor. Where the warehouseman receives
grain for storage and refuses to return or pay it, the fact that he failed to issue the receipt,
when the statute required him to issue on receiving it, is not available to the surety as a
defense against an action on the bond. The obligation of the surety covers the duty of the
warehouseman to issue the prescribed receipt, as well as the other duties imposed upon him
by the statute.
We deem it unnecessary to discuss and rule upon the other questions raised in the appeal.
In view of the foregoing, the appealed decision is hereby affirmed, with costs.