THIRD DIVISION In order to guarantee payment for such funding, Dela Rosa-Ramos issued

postdated checks covering the principal amount plus interest as computed by

Tan on specified date. There were also times when she just paid in cash. 7
[G.R. No. 160260. October 24, 2012.] Relative to their said agreement, Dela Rosa-Ramos issued and delivered to Tan
the following Associated Bank checks 8 drawn against her current account and
payable to "cash," to wit:
WESTMONT BANK, formerly ASSOCIATED BANK now
UNITED OVERSEAS BANK PHILIPPINES, petitioner, vs.
MYRNA DELA ROSA-RAMOS, DOMINGO TAN and CHECK NO. CURRENT ACCT. DATE AMOUNT
WILLIAM CO, respondents. 467322 (Exh. A) 1008-08341-0 May 8, 1988 PhP200,00
510290 (Exh. C) 1008-08734-3 June 10, 1988 232,50
613307 (Exh. E) 1008-08734-3 June 14, 1988 200,00
613306 (Exh. D) 1008-08734-3 July 4, 1988 290,59
DECISION

According to Dela Rosa-Ramos, Check No. 467322 for P200,000.00 was a

MENDOZA, J p:
This is a Petition for Review under Rule 45 of the 1997 Rules of Civil procedure
seeking a partial review of the February 14, 2003 Decisions 1 and the October 2,
2003 Resolution 2 of the Court of Appeals (CA), in CA-G.R. CV No. 63983, which
modified the September 16, 1998 Decision of the Regional Trial Court, Branch 7,
Manila (RTC) in Civil Case No. 89-47926 entitled, Myrna Dela Rosa-Ramos v.
Westmont Bank, formerly Associated Bank, Domingo Tan, and William Go.
CaAcSE
The petition was filed on November 24, 2003 and received by this Court on
December 15, 2003. The case was given due course on February 6, 2008.
The Facts
From 1986, respondent Myrna Dela Rosa-Ramos (Dela Rosa-Ramos) maintained
a checking/current account with the United Overseas Bank Philippines 3 (Bank)
at the latter's Sto. Cristo Branch, Binondo, Manila. In her several transactions
with the Bank, Dela Rosa-Ramos got acquainted with its Signature Verifier,
respondent Domingo Tan (Tan). 4
In the course of their acquaintance, Tan offered Dela Rosa-Ramos a "special
arrangement" 5 wherein he would finance or place sufficient funds in her
checking/current account whenever there would be an overdraft or when the
amount of said checks would exceed the balance of her current account. It was
their arrangement to make sure that the checks she would issue would not be
dishonored. Tan offered the service for a fee of P50.00 a day for every
P40,000.00 he would finance. This financier-debtor relationship started in 1987
and lasted until 1998. 6
"stale" guarantee check. The check was originally dated August 28, 1987 but
was altered to make it appear that it was dated May 8, 1988. Tan then deposited
the check in the account of the other respondent, William Co (Co), despite the
obvious superimposed date. As a result, the amount of P200,000.00 or the value
indicated in the check was eventually charged against her checking account. 9
Check No. 510290 for P232,500.00, dated June 10, 1988, was issued in
payment of cigarettes that Dela Rosa-Ramos bought from Co. This check
allegedly "bounced" so she replaced it with her "good customer's check and
cash" and gave it to Tan. The latter, however, did not return the bounced check
to her. Instead, he "redeposited" it in Co's account. 10
Check No. 613307 for P200,000.00, was another guarantee check that was
also "undated." Dela Rosa-Ramos claimed that it was Tan who placed the date
"June 14, 1988." For this check, an order to stop payment was issued because of
insufficient funds. Expectedly, the words "PAYMENT STOPPED" were stamped on
both sides of the check. This check was not returned to her either and, instead,
it was "redeposited" in Co's account. 11
Check Nos. 510290 and 613307 were both dishonored for insufficient funds.
When Dela Rosa-Ramos got the opportunity to confront Co regarding their
deposit of the two checks, the latter disclosed that her two checks were
deposited in his account to cover for his P432,500.00 cash which was taken by
Tan. Then, with a threat to expose her relationship with a married man, Tan and
Co were able to coerce her to replace the two above-mentioned checks with
Check No. 598648 12 in the amount of P432,500.00 which was equivalent to the
total amount of the two dishonored checks. 13
Check No. 613306 for P290,595.00, was also undated when delivered to Tan
who later placed the date, July 4, 1988. Dela Rosa-Ramos pointed out that as of
July 5, 1988, her checking account had P121,989.66 which was insufficient to
1
answer for the value of said check. A check of a certain Lee See Bin in the
amount of P170,000.00 was, however, deposited in her checking account. As a
result, Tan was able to encash Check No. 613306 and withdrew her
P121,989.66 balance. Later, Dela Rosa-Ramos found out that the Lee See Bin
Check was not funded because the Bank's bookkeeper demanded from her the
return of the deficiency. 14
Claiming that the four checks mentioned were deposited by Tan without her
consent, Dela Rosa-Ramos instituted a complaint 15 against Tan and the Bank
before the RTC seeking, among other things, to recover from the Bank the sum
of P754,689.66 representing the total amount charged or withdrawn from her
current account. Dela Rosa-Ramos subsequently amended her complaint to
include Co. 16
resolve the appeal of the Bank. On February 14, 2003, the CA rendered its
appealed decision, the dispositive portion of which reads:
WHEREFORE, premises considered, Decision dated
September 16, 1998 of the Regional Trial Court of Manila,
National Capital Region, Branch 7, in Civil Case No. 89-
17926, is hereby AFFIRMED with the MODIFICATION that:
(a) the defendants are liable only for the amount of
P521,989.00 covering Check Nos. 467322, 613307 and
P121,989.66 covered by Check No. 613306 and (b) deleting
the award for moral damages and attorney's fees.
SO ORDERED. 20

During the trial, Tan's partial direct testimony was ordered stricken off the
Still not satisfied, the Bank moved for partial reconsideration. On October 2,
records because he failed to complete it and make himself available for cross-
2003, the CA denied it for lack of merit. In the case of Co, he never appealed
examination. Later, it was found out that he had passed away. 17
the CA decision. Thus, only the Bank is now before this Court raising the
following issues:
On September 16, 1998, the RTC resolved the case in this wise:
I.
WHEREFORE, judgment is hereby rendered, sentencing
defendant Associated Bank now the Westmont Bank and
WITHOUT DELINEATING THE SOURCE OF THE
defendants DOMINGO TAN and WILLIAM CO, to pay the
RESPECTIVE OBLIGATIONS OF PETITIONER BANK,
plaintiff, jointly and severally: THIASE
RESPONDENT TAN AND RESPONDENT CO IN
RELATION TO RESPONDENT DELA ROSA-RAMOS, THE
1. The sum of P754,689.66, representing plaintiff's HONORABLE COURT OF APPEALS UTTERLY AND
lost deposit, plus interest thereon at the GRAVELY ERRED WHEN IT SWEEPINGLY AFFIRMED
legal rate of 12% per annum from the THE JUDGMENT OF THE HONORABLE TRIAL COURT
filing of the complaint, until fully paid; MAKING THEM JOINTLY AND SEVERALLY LIABLE FOR
THE JUDGMENT AWARD IN FAVOR OF RESPONDENT
DELA ROSA-RAMOS.
2. The sum of P1,000,000.00, as moral damages;

II.
3. The sum equivalent to 10% thereof, as
exemplary damages;
THE JUDGMENT AWARD AGAINST PETITIONER BANK
UNDER CHECK NO. 467322 (EXH. 'A') IS TOTALLY
4. The sum equivalent to 25% of the total amount
WITHOUT LEGAL BASIS AS THE SAME WAS MERELY
due, as and for attorney's fees; and
BASED ON SPECULATIVE ASSUMPTION OR PURE
SPECULATION. EAISDH
5. Costs.
III.
Defendant's counterclaims are hereby dismissed for lack of
merit.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED
IN FINDING THAT THE ACCOUNT OF RESPONDENT
SO ORDERED. 18 DELA ROSA-RAMOS WAS DEBITED WITH THE FACE
AMOUNT OF CHECK NO. 613307 (EXH. 'E') AS SUCH
Co and the Bank appealed their cases to the CA. As Co failed to file a brief within FINDING IS CONTRARY TO THE FINDING OF THE
the period prescribed, his appeal was dismissed. 19 The CA then proceeded to HONORABLE TRIAL COURT THAT THE SAID CHECK

2
 WAS DISHONORED TOGETHER WITH CHECK NO.
510290 (EXH. 'C') FOR THE REASON THAT BOTH
CHECKS WERE DRAWN AGAINST INSUFFICIENT
FUNDS.
IV.
NOTWITHSTANDING AND CLEARLY CONTRADICTING
ITS VERY FINDING THAT "AS TO CHECK NO. 613306
(EXH. 'D'), THIS COURT OPINES THAT NO MANIFEST
IRREGULARITY EXISTS," THE HONORABLE COURT OF
APPEALS GROSSLY ERRED WHEN IT ERRONEOUSLY
FOUND PETITIONER BANK LIABLE IN THE AMOUNT OF
P121,989.96 COVERED BY SAID CHECK.
V.
ASSUMING ARGUENDO THAT PETITIONER BANK IS
LIABLE TO ANSWER FOR THE ALLEGED DAMAGES
SUFFERED BY RESPONDENT DELA ROSA-RAMOS, THE
HONORABLE COURT OF APPEALS GROSSLY ERRED
WHEN IT FAILED TO PASS UPON PETITIONER BANK'S
CROSS-CLAIM AGAINST RESPONDENT TAN. 21
It must be remembered that public interest is intimately carved into the banking
industry because the primordial concern here is the trust and confidence of the
public. This fiduciary nature of every bank's relationship with its
clients/depositors impels it to exercise the highest degree of care, definitely
more than that of a reasonable man or a good father of a family. 22 It is,
therefore, required to treat the accounts and deposits of these individuals with
meticulous care. 23 The rationale behind this is well-expressed in Sandejas v.
Ignacio, 24
The banking system has become an indispensable institution
in the modern world and plays a vital role in the economic
life of every civilized society banks have attained a
ubiquitous presence among the people, who have come to
regard them with respect and even gratitude and most of
all, confidence, and it is for this reason, banks should guard
against injury attributable to negligence or bad faith on its
part. SACTIH
Considering that banks can only act through their officers and employees, the
fiduciary obligation laid down for these institutions necessarily extends to their
employees. Thus, banks must ensure that their employees observe the same
high level of integrity and performance for it is only through this that banks may
meet and comply with their own fiduciary duty. 25 It has been repeatedly held
that "a bank's liability as an obligor is not merely vicarious, but primary" 26
since they are expected to observe an equally high degree of diligence, not only
in the selection, but also in the supervision of its employees. Thus, even if it is
their employees who are negligent, the bank's responsibility to its client remains
paramount making its liability to the same to be a direct one.
Guided by the following standard, the Bank, given the fiduciary nature of its
relationship with Dela Rosa-Ramos, should have exerted every effort to
safeguard and protect her money which was deposited and entrusted with it. As
found by both the RTC and the CA, Ramos was defrauded and she lost her
money because of the negligence attributable to the Bank and its employees.
Indeed, it was the employees who directly dealt with Dela Rosa-Ramos, but the
Bank cannot distance itself from them. That they were the ones who gained at
the expense of Dela Rosa-Ramos will not excuse it of its fundamental
responsibility to her. As stated by the RTC,
The factual circumstances attending the repeated irregular
entries and transactions involving the current account of the
plaintiff-appellee is evidently due to, if not connivance, gross
negligence of other bank officers since the repeated assailed
transactions could not possibly be committed by defendant
Tan alone considering the fact that the processing of the
questioned checks would pass the hands of various bank
officers who positively identified their initials therein. Having
a number of employees commit mistake or gross negligence
at the same situation is so puzzling and obviates the
appellant bank's laxity in hiring and supervising its
employees. Hence, this Court is of the opinion that the
appellant bank should be held liable for the damages
suffered by the plaintiff-appellee in the case at bench. 27
That matter being settled, the next matter to be determined is the amount of
liability of the Bank.
As regards Cheek No. 467322, the Bank avers that Dela Rosa-Ramos'
acquiesced to the change of the date in the said check. It argues that her
continued acts of dealing and transacting with the Bank like subsequently
issuing checks despite her experience with this check only shows her
acquiescence which is tantamount to giving her consent. Obviously, the Bank
has not taken to heart its fiduciary responsibility to its clients. Rather than ask
and wonder why there were indeed subsequent transactions, the more
paramount issue is why the Bank through its several competent employees and
officers, did not stop, double check and ascertain the genuineness of the date of
the check which displayed an obvious alteration. This failure on the part of the
Bank makes it liable for that loss. As the RTC held: ADaECI
. . . defendant-bank is not faultless in the irregularities of its
signature-verifier. In the first place, it should have readily
rejected the obviously altered plaintiff's P200,000.00-check,
thus, avoid its unwarranted deposit in defendant-Co's
account and its corollary loss from plaintiff's deposit, had its
3
 other employees, even excepting TAN, performed their
duties efficiently and well. . . . 28
The glaring error did not escape the observation of the CA either. On matter, it
hastened to add:
A careful scrutiny of the evidence shows that indeed the
date of Check No. 467322 had been materially altered from
August 1987 to May 8, 1988 in accordance with Section 125
of the Negotiable Instruments Law. It is worthy to take note
of the fact that such alteration was not countersigned by the
drawer to make it a valid correction of its date as consented
by its drawer as the standard operating procedure of the
appellant bank in such situation as admitted by its Sto.
Cristo Branch manager, Mabini Z. Mil(l)an. . . . . 29
On Check No. 613307, the Bank argues that the CA erred in considering that
the said check was debited against the account of Dela Rosa-Ramos when the
fact was that it was dishonored for having been drawn against insufficient funds.
This means that the check was not charged against her account.
In this regard, the Court agrees with the Bank. Indeed, the admission made by
Dela Rosa-Ramos that she had to issue a replacement check for Check No.
613307 as well as for Check No. 510290 only proves that these checks were
never paid and charged or debited against her account. The replacement check
is, of course, a totally different matter and is not covered as an issue in this
case.
Lastly, with respect to Check No. 613306, the Court agrees with the CA when
it found:
Ramos to establish that Lee See Bin was fictitious and that the money which
purportedly came from him was merely simulated. She unfortunately failed to
discharge this burden. cEaDTA
Withal, the Bank should only be made to answer the value of Check No.
467322 in the amount of P200,000.00 plus the legal rate of interest. This must
be further tempered down for there is no denying that it was Dela Rosa-Ramos
who exposed herself to risk when she entered into that "special arrangement"
with Tan. While the Bank reneged on its responsibility to Dela Rosa-Ramos, she
is nevertheless equally guilty of contributory negligence. It has been held that
where the bank and a depositor are equally negligent, they should equally suffer
the loss. The two must both bear the consequences of their mistakes. 31 Thus,
the Bank should only pay 50% of the actual damages awarded while Dela Rosa-
Ramos should have to shoulder the remaining 50%.
Considering that Tan was primarily responsible for the damages caused to Dela
Rosa-Ramos, the Bank can seek compensation from his estate, subject to the
applicable laws and rules.
The reinstatement of deleted damages sought by Dela Rosa-Ramos in her
comment may not be entertained for she did not appeal the CA decision.
WHEREFORE, the petition for review is PARTIALLY GRANTED. The February
14, 2003 Decision and the October 2, 2003 Resolution of the Court of Appeals in
CA-G.R. CV No. 63983 are MODIFIED. Petitioner United Overseas Bank
Philippines (formerly Westmont Bank) is hereby ordered to pay respondent
Myrna Dela Rosa-Ramos the amount of P100,000.00, representing 50% of the
actual damages awarded plus legal interest.
SO ORDERED.

. . . that no manifest irregularity exist as shown from the ||| (Westmont Bank v. dela Rosa-Ramos, G.R. No. 160260, [October 24, 2012],
Statement of Accounts for the month of July 1988 that as of 698 PHIL 23-35)
July 4, 1988, the plaintiff-appellee had an outstanding
deposit of P121,989.66. It was also cleared therein that, on
July 5, 1988, P170,000.00, through the check of Lee See Bin
with the same UNITED OVERSEAS BANK-Sto. Cristo Branch,
was deposited on the account of the plaintiff-appellee and on
the very same day Check No. 613306 in the amount of
P290,595.00 was approved and processed and its equivalent
was debited from the account of the plaintiff-appellee since
the check is an 'on-us' check which is deposited to an
account of another with the same branch as that of the
drawer of the said check, and is considered as good as cash
if funded, hence, may be withdrawn on the very same day it
was deposited. 30

The Court has reviewed the findings of the RTC on the matter and agrees with
the CA that there was no irregularity. The burden of proof was on Dela Rosa-

4

SECOND DIVISION
[G.R. No. 165339. August 23, 2010.]
EQUITABLE PCI BANK, petitioner, vs. ARCELITO B. TAN,
respondent.
DECISION
PERALTA, J p:
Before this Court is a petition for review on certiorari under Rule 45
of the Rules of Court seeking to set aside the Decision 1 and the Resolution
2 of the Court of Appeals (CA) in CA-G.R. CV No. 41928.
The antecedents are as follows:
Respondent Arcelito B. Tan maintained a current and savings
account with Philippine Commercial International Bank (PCIB), now
petitioner Equitable PCI Bank. 3 On May 13, 1992, respondent issued PCIB
Check No. 275100 postdated May 30, 1992 4 in the amount of P34,588.72
in favor of Sulpicio Lines, Inc. As of May 14, 1992, respondent's balance
with petitioner was P35,147.59. On May 14, 1992, Sulpicio Lines, Inc.
deposited the aforesaid check to its account with Solid Bank, Carbon
Branch, Cebu City. After clearing, the amount of the check was immediately
debited by petitioner from respondent's account thereby leaving him with a
balance of only P558.87.
Meanwhile, respondent issued three checks from May 9 to May 16,
1992, specifically, PCIB Check No. 275080 dated May 9, 1992, payable to
Agusan del Sur Electric Cooperative, Inc. (ASELCO) for the amount of
P6,427.68; PCIB Check No. 275097 dated May 10, 1992 payable to Agusan
del Norte Electric Cooperative, Inc., (ANECO) for the amount of P6,472.01;
and PCIB Check No. 314104 dated May 16, 1992 payable in cash for the
amount of P10,000.00. When presented for payment, PCIB Check Nos.
275080, 275097 and 314014 were dishonored for being drawn against
insufficient funds.
As a result of the dishonor of Check Nos. 275080 and 275097
which were payable to ASELCO and ANECO, respectively, the electric power
supply for the two mini-sawmills owned and operated by respondent,
located in Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City,
was cut off on June 1, 1992 and May 28, 1992, respectively, and it was
restored only on July 20 and August 24, 1992, respectively. ACSaHc
Due to the foregoing, respondent filed with the Regional Trial Court
(RTC) of Cebu City a complaint against petitioner, praying for payment of
losses consisting of unrealized income in the amount of P1,864,500.00. He
also prayed for payment of moral damages, exemplary damages, attorney's
fees and litigation expenses.
Respondent claimed that Check No. 275100 was a postdated check
in payment of Bills of Lading Nos. 15, 16 and 17, and that his account with
petitioner would have had sufficient funds to cover payment of the three
other checks were it not for the negligence of petitioner in immediately
debiting from his account Check No. 275100, in the amount of P34,588.72,
even as the said check was postdated to May 30, 1992. As a consequence of
petitioner's error, which brought about the dishonor of the two checks paid
to ASELCO and ANECO, the electric supply to his two mini-sawmills was cut
off, the business operations thereof were stopped, and purchase orders
were not duly served causing tremendous losses to him.
In its defense, petitioner denied that the questioned check was
postdated May 30, 1992 and claimed that it was a current check dated May
3, 1992. It alleged further that the disconnection of the electric supply to
respondent's sawmills was not due to the dishonor of the checks, but for
other reasons not attributable to the bank.
After trial, the RTC, in its Decision 5 dated June 21, 1993, ruled in
favor of petitioner and dismissed the complaint.
Aggrieved by the Decision, respondent filed a Notice of Appeal. 6
In its Decision dated May 31, 2004, the Court of Appeals reversed the
decision of the trial court and directed petitioner to pay respondent the sum
of P1,864,500.00 as actual damages, P50,000.00 by way of moral damages,
P50,000.00 as exemplary damages and attorney's fees in the amount of
P30,000.00. Petitioner filed a motion for reconsideration, which the CA
denied in a Resolution dated August 24, 2004.
Hence, the instant petition assigning the following errors:
I
5
 THE FOURTH DIVISION OF THE COURT OF APPEALS DEFIED
OFFICE ORDER NO. 82-04-CG BY HOLDING ON TO THIS
CASE AND DECIDING IT INSTEAD OF UNLOADING IT AND
HAVING IT RE-RAFFLED AMONG THE DIVISIONS IN CEBU
CITY.
II
THE COURT OF APPEALS ERRED IN REVERSING THE
FINDING OF THE REGIONAL TRIAL COURT THAT CHECK NO.
275100 WAS DATED MAY 3, 1992.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT'S WAY OF WRITING THE DATE ON CHECK NO.
275100 WAS THE PROXIMATE CAUSE OF THE DISHONOR OF
HIS THREE OTHER CHECKS. THIAaD
IV
THE COURT OF APPEALS ERRED IN AWARDING ACTUAL
DAMAGES, MORAL DAMAGES, EXEMPLARY DAMAGES AND
ATTORNEY'S FEES.
Anent the first issue, petitioner submits that the CA defied Office Order No. 82-
04-CG dated April 5, 2004 issued by then CA Presiding Justice Cancio C. Garcia
when it failed to unload CA-G.R. CV No. 41928 so that it may be re-raffled
among the Divisions in Cebu City.
Office Order No. 82-04-CG 7 provides:
xxx xxx xxx
In view of the reorganization of the different Divisions due to
the appointment of eighteen (18) new Justices to the
additional divisions in the cities of Cebu and Cagayan de
Oro, the raffle of civil, criminal and special cases submitted
for decision and falling within the jurisdiction of the
additional divisions shall commence on April 6, 2004.
The raffle of newly-filed cases and those for completion
likewise falling within the jurisdiction of the additional
divisions, shall start on April 12, 2004.
xxx xxx xxx
Petitioner alleged that since the aforementioned Office Order
directed the raffle of civil, criminal and special cases submitted for decision
and falling within the jurisdiction of the additional divisions on April 6, 2004,
CA-G.R. CV No. 41928 should have been unloaded by the CA's Fourth
Division and re-raffled to the CA's Division in Cebu City instead of deciding
the case on May 31, 2004.
Respondent argued that the CA's Fourth Division correctly acted in
taking cognizance of the case. The CA defended its jurisdiction by ruling
that cases already submitted for decision as of the effectivity of Republic Act
(R.A.) 8246 8 on February 1, 1997 were no longer included for re-raffle to
the newly-created Visayas and Mindanao Divisions of the CA, conformable to
Section 5 of the said statute.
Petitioner's argument is misplaced. Under Section 3 of R.A. 8246, it
is provided that:
Section 3. Section 10 of Batas Pambansa Blg. 129, as
amended, is hereby further amended to read as follows:
Sec. 10. Place of Holding Sessions. The Court of Appeals
shall have its permanent stations as follows: The first
seventeen (17) divisions shall be stationed in the City of
Manila for cases coming from the First to the Fifth Judicial
Regions; the Eighteenth, Nineteenth, and Twentieth
Divisions shall be in Cebu City for cases coming from the
Sixth, Seventh and Eighth Judicial Regions; the Twenty-first,
Twenty-second and Twenty-third Divisions shall be in
Cagayan de Oro City for cases coming from the Ninth, Tenth,
Eleventh, and Twelfth Judicial Regions. Whenever demanded
by public interest, or whenever justified by an increase in
case load, the Supreme Court, upon its own initiative or
upon recommendation of the Presiding Justice of the Court
of Appeals, may authorize any division of the Court to hold
sessions periodically, or for such periods and at such places
as the Supreme Court may determine, for the purpose of
hearing and deciding cases. Trials or hearings in the Court of
Appeals must be continuous and must be completed within
three (3) months unless extended by the Chief Justice of the
Supreme Court. SATDEI
Further, Section 5 of the same Act provides:
Upon the effectivity of this Act, all pending cases, except
those which have been submitted for resolution, shall
be referred to the proper division of the Court of Appeals. 9
Although CA-G.R. CV No. 41928 originated from Cebu City and is
thus referable to the CA's Divisions in Cebu City, the said case was already
submitted for decision as of July 25, 1994. 10 Hence, CA-G.R. CV No.
41928, which was already submitted for decision as of the effectivity of R.A.
6
 8246, i.e., February 1, 1997, can no longer be referred to the CA's Division
in Cebu City. Thus, the CA's Former Fourth Division correctly ruled that CA-
G.R. CV No. 41928 pending in its division was not among those cases that
had to be re-raffled to the newly-created CA Divisions in the Visayas Region.
Further, administrative issuances must not override, supplant or
modify the law, but must remain consistent with the law they intend to
carry out. 11 Thus, Office Order No. 82-04-CG cannot defeat the provisions
of R.A. 8246.
As to the second issue, petitioner maintains that the CA erred in
reversing the finding of the RTC that Check No. 275100 was dated May 3,
1992. Petitioner argued that in arriving at the conclusion that Check No.
275100 was postdated May 30, 1992, the CA just made a visual
examination of the check, unlike the RTC which verified the truth of
respondent's testimony relative to the issuance of Check No. 275100.
Respondent argued that the check was carefully examined by the CA which
correctly found that Check No. 275100 was postdated to May 30, 1992 and
not May 3, 1992.
The principle is well established that this Court is not a trier of
facts. Therefore, in an appeal by certiorari under Rule 45 of the Rules of
Court, only questions of law may be raised. The resolution of factual issues
is the function of the lower courts whose findings on these matters are
received with respect and are, as a rule, binding on this Court. However,
this rule is subject to certain exceptions. One of these is when the findings
of the appellate court are contrary to those of the trial court. 12 Due to the
divergence of the findings of the CA and the RTC, We shall re-examine the
facts and evidence presented before the lower courts.
The RTC ruled that:
xxx xxx xxx
The issue to be resolved in this case is whether or not the
date of PCIB Check No. 275100 is May 3, 1992 as contended
by the defendant, or May 30, 1992 as claimed by the
plaintiff. The date of the check is written as follows
5/3/0/92. From the manner by which the date of the check
is written, the Court cannot really make a pronouncement as
to whether the true date of the check is May 3 or May 30,
1992, without inquiring into the background facts leading to
the issuance of said check.
According to the plaintiff, the check was issued to Sulpicio
Lines in payment of bill of lading nos. 15, 16 and 17. An
examination of bill of lading no. 15, however, shows that the
same was issued, not in favor of plaintiff but in favor of Coca
Cola Bottlers Philippines, Inc. Bill of Lading No. 16 is issued
in favor of Suson Lumber and not to plaintiff. Likewise, Bill of
Lading No. 17 shows that it was issued to Jazz Cola and not
to plaintiff. Furthermore, the receipt for the payment of the
freight for the shipments reflected in these three bills of
lading shows that the freight was paid by Coca Cola Bottlers
Philippines, Inc. and not by plaintiff. EACIcH
Moreover, the said receipt shows that it was paid in cash and
not by check. From the foregoing, the evidence on record
does not support the claim of the plaintiff that Check No.
275100 was issued in payment of bills of lading nos. 15, 16
and 17.
Hence, the conclusion of the Court is that the date of the
check was May 3, 1992 and not May 30, 1992. 13
xxx xxx xxx
In fine, the RTC concluded that the check was dated May 3, 1992
and not May 30, 1992, because the same check was not issued to pay for
Bills of Lading Nos. 15, 16 and 17, as respondent claims. The trial court's
conclusion is preposterous and illogical. The purpose for the issuance of the
check has no logical connection with the date of the check. Besides, the trial
court need not look into the purpose for which the check was issued. A
reading of Check No. 275100 14 would readily show that it was dated May
30, 1992. As correctly observed by the CA:
On the first issue, we agree with appellant that appellee
Bank apparently erred in misappreciating the date of Check
No. 275100. We have carefully examined the check in
question (Exh. DDDD) and we are convinced that it was
indeed postdated to May 30, 1992 and not May 3, 1992 as
urged by appellee. The date written on the check clearly
appears as "5/30/1992" (Exh. DDDD-4). The first bar (/)
which separates the numbers "5" and "30" and the second
bar (/) which further separates the number "30" from the
year 1992 appear to have been done in heavy, well-defined
and bold strokes, clearly indicating the date of the check as
"5/30/1992" which obviously means May 30, 1992. On the
other hand, the alleged bar (/) which appellee points out as
allegedly separating the numbers "3" and "0," thereby
leading it to read the date as May 3, 1992, is not actually a
bar or a slant but appears to be more of an unintentional
marking or line done with a very light stroke. The presence
of the figure "0" after the number "3" is quite significant. In
fact, a close examination thereof would unerringly show that
the said number zero or "0" is connected to the preceding
number "3." In other words, the drawer of the check wrote
the figures "30" in one continuous stroke, thereby
contradicting appellee's theory that the number "3" is
separated from the figure "0" by a bar. Besides, appellee's
theory that the date of the check is May 3, 1992 is clearly
untenable considering the presence of the figure "0" after
7
 "3" and another bar before the year 1992. And if we were to
accept appellee's theory that what we find to be an
unintentional mark or line between the figures "3" and "0" is
a bar separating the two numbers, the date of the check
would then appear as "5/3/0/1992", which is simply absurd.
Hence, we cannot go along with appellee's theory which will
lead us to an absurd result. It is therefore our conclusion
that the check was postdated to May 30, 1992 and appellee
Bank or its personnel erred in debiting the amount of the
check from appellant's account even before the check's due
date. Undoubtedly, had not appellee bank prematurely
debited the amount of the check from appellant's account
before its due date, the two other checks (Exhs. LLLL and
GGGG) successively dated May 9, 1992 and May 16, 1992
which were paid by appellant to ASELCO and ANECO,
respectively, would not have been dishonored and the said
payees would not have disconnected their supply of electric
power to appellant's sawmills, and the latter would not have
suffered losses.
The law imposes on banks high standards in view of the fiduciary
nature of banking. Section 2 of R.A. 8791 15 decrees:
Declaration of Policy. The State recognizes the vital role
of banks in providing an environment conducive to the
sustained development of the national economy and the
fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking
and financial system that is globally competitive, dynamic
and responsive to the demands of a developing economy.
Although R.A. 8791 took effect only in the year 2000, the Court
had already imposed on banks the same high standard of diligence required
under R.A. 8791 at the time of the untimely debiting of respondent's
account by petitioner in May 1992. In Simex International (Manila), Inc. v.
Court of Appeals, 16 which was decided in 1990, the Court held that as a
business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their
relationship.
The diligence required of banks, therefore, is more than that of a
good father of a family. 17 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. 18 From the
foregoing, it is clear that petitioner bank did not exercise the degree of
diligence that it ought to have exercised in dealing with its client. TSacID
With respect to the third issue, petitioner submits that
respondent's way of writing the date on Check No. 275100 was the
proximate cause of the dishonor of his three other checks. Contrary to
petitioner's view, the Court finds that its negligence is the proximate cause
of respondent's loss.
Proximate cause is that cause which, in a natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury,
and without which the result would not have occurred. 19 The proximate
cause of the loss is not respondent's manner of writing the date of the
check, as it was very clear that he intended Check No. 275100 to be dated
May 30, 1992 and not May 3, 1992. The proximate cause is petitioner's own
negligence in debiting the account of the respondent prior to the date as
appearing in the check, which resulted in the subsequent dishonor of
several checks issued by the respondent and the disconnection by ASELCO
and ANECO of his electric supply.
The bank on which the check is drawn, known as the drawee bank,
is under strict liability to pay to the order of the payee in accordance with
the drawer's instructions as reflected on the face and by the terms of the
check. 20 Thus, payment made before the date specified by the drawer is
clearly against the drawee bank's duty to its client.
In its memorandum 21 filed before the RTC, petitioner submits that
respondent caused confusion on the true date of the check by writing the
date of the check as 5/3/0/92. If, indeed, petitioner was confused on
whether the check was dated May 3 or May 30 because of the "/" which
allegedly separated the number "3" from the "0," petitioner should have
required respondent drawer to countersign the said "/" in order to ascertain
the true intent of the drawer before honoring the check. As a matter of
practice, bank tellers would not receive nor honor such checks which they
believe to be unclear, without the counter-signature of its drawer. Petitioner
should have exercised the highest degree of diligence required of it by
ascertaining from the respondent the accuracy of the entries therein, in
order to settle the confusion, instead of proceeding to honor and receive the
check.
Further, petitioner's branch manager, Pedro D. Tradio, in a letter 22
addressed to ANECO, explained the circumstances surrounding the dishonor
of PCIB Check No. 275097. Thus:
June 11, 1992
ANECO
Agusan del Norte
Gentlemen:
8
 This refer (sic) to PCIB Check No. 275097 dated May 16,
1992 in the amount of P6,472.01 payable to your
goodselves issued by Mr. Arcelito B. Tan (MANWOOD
Industries) which was returned by PCIB Mandaue Branch for
insufficiency of funds.
Please be advised that the return of the aforesaid check was
a result of an earlier negotiation to PCIB-Mandaue Branch
through a deposit made on May 14, 1992 with SOLIDBANK
Carbon Branch, or through Central Bank clearing via
Philippine Clearing House Corporation facilities, of a
postdated check which ironically and without bad faith
passed undetected through several eyes from the payee of
the check down to the depository bank and finally the
drawee bank (PCIB) the aforesaid Check No. 275097 issued
to you would have been honored because it would have
been sufficiently funded at the time it was negotiated. It
should be emphasized, however, that Mr. Arcelito B. Tan was
in no way responsible for the dishonor of said PCIB Check
No. 275097. ATCEIc
We hope that the foregoing will sufficiently explain the
circumstances of the dishonor of PCIB Check No. 275097
and would clear the name and credit of Mr. Arcelito Tan from
any misimpressions which may have resulted from the
dishonor of said check.
Thank you.
xxx xxx xxx
Although petitioner failed to specify in the letter the other details of
this "postdated check," which passed undetected from the eyes of the payee
down to the petitioner drawee bank, the Court finds that petitioner was
evidently referring to no other than Check No. 275100 which was deposited
to Solidbank, and was postdated May 30, 1992. As correctly found by the
CA:
In the aforequoted letter of its Manager, appellee Bank
expressly acknowledged that Check No. 275097 (Exh.
GGGG) which appellant paid to ANECO "was sufficiently
funded at the time it was negotiated," but it was dishonored
as a "result of an earlier negotiation to PCIB-Mandaue
Branch through a deposit made on May 14, 1992 with
SOLIDBANK . . . of a postdated check which . . . passed
undetected." He further admitted that "Mr. Arcelito B. Tan
was in no way responsible for the dishonor of said PCIB
Check No. 275097." Needless to state, since appellee's
Manager has cleared appellant of any fault in the dishonor of
the ANECO check, it [necessarily] follows that responsibility
therefor or fault for the dishonor of the check should fall on
appellee bank. Appellee's attempt to extricate itself from its
inadvertence must therefore fail in the face of its Manager's
explicit acknowledgment of responsibility for the inadvertent
dishonor of the ANECO check. 23
Evidently, the bank's negligence was the result of lack of due care
required of its managers and employees in handling the accounts of its
clients. Petitioner was negligent in the selection and supervision of its
employees. In Citibank, N.A. v. Cabamongan, 24 the Court ruled:
. . . Banks handle daily transactions involving millions of
pesos. By the very nature of their works the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary
clerks and employees. Banks are expected to exercise the
highest degree of diligence in the selection and supervision
of their employees.
We now resolve the question on the award of actual, moral and
exemplary damages, as well as attorney's fees by the CA to the respondent.
The CA based the award of actual damages in the amount of
P1,864,500.00 on the purchase orders 25 submitted by respondent. The CA
ruled that:
. . . In the case at bar, appellant [respondent herein]
presented adequate evidence to prove losses consisting of
unrealized income that he sustained as a result of the
appellee Bank's gross negligence. Appellant identified certain
Purchase Orders from various customers which were not
met by reason of the disruption of the operation of his
sawmills when ANECO and ASELCO disconnected their
supply of electricity thereto. . . . CIAHaT
Actual or compensatory damages are those awarded in order to
compensate a party for an injury or loss he suffered. They arise out of a
sense of natural justice and are aimed at repairing the wrong done. Except
as provided by law or by stipulation, a party is entitled to an adequate
compensation only for such pecuniary loss as he has duly proven. 26 To
recover actual damages, not only must the amount of loss be capable of
proof; it must also be actually proven with a reasonable degree of certainty,
premised upon competent proof or the best evidence obtainable. 27
Respondent's claim for damages was based on purchase orders
from various customers which were allegedly not met due to the disruption
of the operation of his sawmills. However, aside from the purchase orders
and his testimony, respondent failed to present competent proof on the
specific amount of actual damages he suffered during the entire period his
power was cut off. No other evidence was provided by respondent to show
that the foregoing purchase orders were not met or were canceled by his
9
various customers. The Court cannot simply rely on speculation, conjecture
or guesswork in determining the amount of damages. 28
Moreover, an examination of the purchase orders and job orders
reveal that the orders were due for delivery prior to the period when the
power supply of respondent's two sawmills was cut off on June 1, 1992 to
July 20, 1992 and May 28, 1992 to August 24, 1992, respectively. Purchase
Order No. 9906 29 delivery date is May 4, 1992; Purchase Order No. 9269
30 delivery date is March 19, 1992; Purchase Order No. 147796 31 is due
for delivery on January 31, 1992; Purchase Order No. 76000 32 delivery
date is February and March 1992; and Job Order No. 1824, 33 dated March
18, 1992, has a 15 days duration of work. Clearly, the disconnection of his
electricity during the period May 28, 1992 to August 24, 1992 could not
possibly affect his sawmill operations and prior orders therefrom.
Given the dearth of respondent's evidence on the matter, the Court
resolves to delete the award of actual damages rendered by the CA in favor
of respondent for his unrealized income.
Nonetheless, in the absence of competent proof on the actual
damages suffered, respondent is entitled to temperate damages. Under
Article 2224 of the Civil Code of the Philippines, temperate or moderate
damages, which are more than nominal but less than compensatory
damages, may be recovered when the court finds that some pecuniary loss
has been suffered but its amount cannot, from the nature of the case, be
proved with certainty. 34 The allowance of temperate damages when actual
damages were not adequately proven is ultimately a rule drawn from equity,
the principle affording relief to those definitely injured who are unable to
prove how definite the injury. 35
It is apparent that respondent suffered pecuniary loss. The
negligence of petitioner triggered the disconnection of his electrical supply,
which temporarily halted his business operations and the consequent loss of
business opportunity. However, due to the insufficiency of evidence before
Us, We cannot place its amount with certainty. Article 2216 36 of the Civil
Code instructs that assessment of damages is left to the discretion of the
court according to the circumstances of each case. Under the
circumstances, the sum of P50,000.00 as temperate damages is reasonable.
Anent the award of moral damages, it is settled that moral
damages are meant to compensate the claimant for any physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injuries unjustly caused.
37 In Philippine National Bank v. Court of Appeals, 38 the Court 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 that case may not have been attended with malice and bad
faith, the banks' negligence caused respondent to suffer mental anguish,
serious anxiety, embarrassment and humiliation. In said case, We ruled that
respondent therein was entitled to recover reasonable moral damages.
CAaSED
In this case, the unexpected cutting off of respondent's electricity,
which resulted in the stoppage of his business operations, had caused him
to suffer humiliation, mental anguish and serious anxiety. The award of
P50,000.00 is reasonable, considering the reputation and social standing of
respondent. As found by the CA, as an accredited supplier, respondent had
been reposed with a certain degree of trust by various reputable and well-
established corporations.
On the award of exemplary damages, Article 2229 of the Civil Code
states:
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.
The law allows the grant of exemplary damages to set an example
for the public good. The banking system has become an indispensable
institution in the modern world and plays a vital role in the economic life of
every civilized society. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce,
banks have attained an ubiquitous presence among the people, who have
come to regard them with respect and even gratitude and most of all,
confidence. For this reason, banks should guard against injury attributable
to negligence or bad faith on its part. Without a doubt, it has been
repeatedly emphasized that since the banking business is impressed with
public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even
required of it. 39 Petitioner, having failed in this respect, the award of
exemplary damages in the amount of P50,000.00 is in order.
As to the award of attorney's fees, Article 2208 40 of the Civil Code
provides, among others, that attorney's fees may be recovered when
exemplary damages are awarded or when the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to incur expenses
to protect his interest. 41 Respondent has been forced to undergo
unnecessary trouble and expense to protect his interest. The Court affirms
the appellate court's award of attorney's fees in the amount of P30,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 41928,
dated May 31, 2004 and August 24, 2004, respectively, are AFFIRMED with
the following MODIFICATIONS:
1. The award of One Million Eight Hundred Sixty-Four Thousand
and Five Hundred Pesos (P1,864,500.00) as actual damages, in favor of
respondent Arcelito B. Tan, is DELETED; and
2. Petitioner Equitable PCI Bank is instead directed to pay
respondent the amount of Fifty Thousand Pesos (P50,000.00) as temperate
damages.
10
SO ORDERED.
||| (Equitable PCI Bank v. Tan, G.R. No. 165339, [August 23, 2010], 642 PHIL
657-679)
CARPIO-MORALES, J p: *
SECOND DIVISION
[G.R. No. 141835. February 4, 2009.]
CENTRAL BANK OF THE PHILIPPINES, petitioner, vs.
CITYTRUST BANKING CORPORATION, respondent.
DECISION
Pursuant to Republic Act No. 625, the old Central Bank Law,
respondent Citytrust Banking Corporation (Citytrust), formerly Feati Bank,
maintained a demand deposit account with petitioner Central Bank of the
Philippines, now Bangko Sentral ng Pilipinas. IDaEHS
As required, Citytrust furnished petitioner with the names and
corresponding signatures of five of its officers authorized to sign checks and
serve as drawers and indorsers for its account. And it provided petitioner
with the list and corresponding signatures of its roving tellers authorized to
withdraw, sign receipts and perform other transactions on its behalf.
Petitioner later issued security identification cards to the roving tellers one
of whom was "Rounceval Flores" (Flores).
On July 15, 1977, Flores presented for payment to petitioner's
Senior Teller Iluminada dela Cruz (Iluminada) two Citytrust checks of even
date, payable to Citytrust, one in the amount of P850,000 and the other in
the amount of P900,000, both of which were signed and indorsed by
Citytrust's authorized signatory-drawers.
After the checks were certified by petitioner's Accounting
Department, Iluminada verified them, prepared the cash transfer slip on
which she affixed her signature, stamped the checks with the notation
"Received Payment" and asked Flores to, as he did, sign on the space above
such notation. Instead of signing his name, however, Flores signed as
"Rosauro C. Cayabyab" a fact Iluminada failed to notice.
Iluminada thereupon sent the cash transfer slip and checks to
petitioner's Cash Department where an officer verified and compared the
drawers' signatures on the checks against their specimen signatures
provided by Citytrust, and finding the same in order, approved the cash
transfer slip and paid the corresponding amounts to Flores. Petitioner then
debited the amount of the checks totaling P1,750,000 from Citytrust's
demand deposit account.
More than a year and nine months later, Citytrust, by letter dated
April 23, 1979, alleging that the checks were already cancelled because
they were stolen, demanded petitioner to restore the amounts covered
thereby to its demand deposit account. Petitioner did not heed the demand,
however.
Citytrust later filed a complaint for estafa, with reservation on the
filing of a separate civil action, against Flores. Flores was convicted.
Citytrust thereafter filed before the Regional Trial Court (RTC) of
Manila a complaint for recovery of sum of money with damages against
petitioner which it alleged erred in encashing the checks and in charging the
proceeds thereof to its account, despite the lack of authority of "Rosauro C.
Cayabyab". jurcda
11
 By Decision 1 of November 13, 1991, Branch 32 of the RTC of
Manila found both Citytrust and petitioner negligent and accordingly held
them equally liable for the loss. Both parties appealed to the Court of
Appeals which, by Decision 2 dated July 16, 1999, affirmed the trial court's
decision, it holding that both parties contributed equally to the fraudulent
encashment of the checks, hence, they should equally share the loss in
consonance with Article 2179 3 vis a vis Article 1172 4 of the Civil Code.
In arriving at its Decision, the appellate court noted that while
"Citytrust failed to take adequate precautionary measures to prevent the
fraudulent encashment of its checks", petitioner was not entirely blame-free
in light of its failure to verify the signature of Citytrust's agent authorized to
receive payment.
Brushing aside petitioner's contention that it cannot be sued, the
appellate court held that petitioner's Charter specifically clothes it with the
power to sue and be sued.
Also brushing aside petitioner's assertion that Citytrust's
reservation of the filing of a separate civil action against Flores precluded
Citytrust from filing the civil action against it, the appellate court held that
the "action for the recovery of sum of money is separate and distinct and is
grounded on a separate cause of action from that of the criminal case for
estafa."
Hence, the present appeal, petitioner maintaining that Flores
having been an authorized roving teller, Citytrust is bound by his acts. Also
maintaining that it was not negligent in releasing the proceeds of the checks
to Flores, the failure of its teller to properly verify his signature
notwithstanding, petitioner contends that verification could be dispensed
with, Flores having been known to be an authorized roving teller of Citytrust
who had had numerous transactions with it (petitioner) on its (Citytrust's)
behalf for five years prior to the questioned transaction.
Attributing negligence solely to Citytrust, petitioner harps on
Citytrust's allowing Flores to steal the checks and failing to timely cancel
them; allowing Flores to wear the issued identification card issued by it
(petitioner); failing to report Flores' absence from work on the day of the
incident; and failing to explain the circumstances surrounding the supposed
theft and cancellation of the checks.
Drawing attention to Citytrust's considerable delay in demanding
the restoration of the proceeds of the checks, petitioners argue that,
assuming arguendo that its teller was negligent, Citytrust's negligence,
which preceded that committed by the teller, was the proximate cause of
the loss or fraud.
The petition is bereft of merit.
Petitioner's teller Iluminada did not verify Flores' signature on the
flimsy excuse that Flores had had previous transactions with it for a number
of years. That circumstance did not excuse the teller from focusing attention
to or at least glancing at Flores as he was signing, and to satisfy herself that
the signature he had just affixed matched that of his specimen signature.
Had she done that, she would have readily been put on notice that Flores
was affixing, not his but a fictitious signature.
Given that petitioner is the government body mandated to
supervise and regulate banking and other financial institutions, this Court's
ruling in Consolidated Bank and Trust Corporation v. Court of Appeals 5
illumines: CaSAcH
The contract between the bank and its depositor is governed
by the provisions of the Civil Code on simple loan. Article
1980 of the Civil Code expressly provides that ". . . savings .
. . deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan."
There is a debtor-creditor relationship between the bank and
its depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the
contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the
fiduciary nature of banking. Section 2 of Republic Act No.
8791 ("RA 8791"), which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature of
banking that requires high standards of integrity and
performance." This new provision in the general banking
law, introduced in 2000, is a statutory affirmation of
Supreme Court decisions, starting with the 1990 case of
Simex International v. Court of Appeals, holding that "the
bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the
fiduciary nature of their relationship."
This fiduciary relationship means that the bank's
obligation to observe "high standards of integrity and
performance" is deemed written into every deposit
agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father
of a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed
by law or contract, and absent such stipulation then the
diligence of a good father of a family. Section 2 of RA 8791
prescribes the statutory diligence required from banks
that banks must observe "high standards of integrity and
performance" in servicing their depositors. Although RA
8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C.
Diaz's savings account, jurisprudence at the time of
the withdrawal already imposed on banks the same
12
 high standard of diligence required under RA No.
8791. (Emphasis supplied)
Citytrust's failure to timely examine its account, cancel the checks
and notify petitioner of their alleged loss/theft should mitigate petitioner's
liability, in accordance with Article 2179 of the Civil Code which provides
that if the plaintiff's 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. For had Citytrust timely discovered the loss/theft and/or
subsequent encashment, their proceeds or part thereof could have been
recovered. cSICHD
In line with the ruling in Consolidated Bank, the Court deems it
proper to allocate the loss between petitioner and Citytrust on a 60-40 ratio.
WHEREFORE, the assailed Court of Appeals Decision of July 16,
1999 is hereby AFFIRMED with MODIFICATION, in that petitioner and
Citytrust should bear the loss on a 60-40 ratio.
SO ORDERED.
||| (Central Bank of the Phils. v. Citytrust Banking Corp., G.R. No. 141835,
[February 4, 2009], 597 PHIL 609-616)
FIRST DIVISION
[G.R. No. 108555. December 20, 1994.]
RAMON TAN, petitioner, vs. THE HONORABLE COURT OF
APPEALS and RIZAL COMMERCIAL BANKING
CORPORATION, respondents.
DECISION
KAPUNAN, J p:
This petition seeks to set aside the decision of the Court of Appeals
dated January 12, 1993 in CA-G.R. CV No. 31083, entitled Ramon Tan,
plaintiff-appellee, vs. Rizal Commercial Banking Corporation, defendant-
appellant, reversing the decision of the Regional Trial Court dated December
28, 1990 ordering respondent bank Rizal Commercial Banking Corporation
(RCBC), Binondo Branch, to pay petitioner damages and attorney's fees in
the amount of ONE MILLION THIRTY FIVE THOUSAND (P1,035,000.00)
PESOS. prcd
The following are the uncontroverted facts:
Petitioner Ramon Tan, a trader-businessman and community leader
in Puerto Princesa, had maintained since 1976 Current Account No.
109058068 with respondent bank's Binondo branch. On March 11, 1988, to
avoid carrying cash while enroute to Manila, he secured a Cashier's Check
No. L 406000126 from the Philippine Commercial Industrial Bank (PCIB),
Puerto Princesa branch, in the amount of Thirty Thousand (P30,000.00)
Pesos, payable to his order. He deposited the check in his account with
RCBC Binondo on March 15. On the same day, RCBC erroneously sent the
same cashier's check for clearing to the Central Bank which was returned
for having been "missent" or "misrouted."1 The next day, March 16, RCBC
debited the amount covered by the same cashier's check from the account
of the petitioner. Respondent bank at this time had not informed the
petitioner of its action which the latter claims he learned of only 42 days
after, specifically on March 16, when he received the bank's debit memo. 2
Relying on the common knowledge that a cashier's check was as good as
cash, that the usual banking practice that local checks are cleared within
three (3) working days and regional checks within seven (7) working days,
and the fact that the cashier's check was accepted, petitioner issued two (2)
personal checks both dated March 18. Check No. 040719 in the name of Go
Lac for Five Thousand Five Hundred (P5,5000.00) Pesos was presented on
April 25, 3 more than 30 days from petitioner's deposit date of the cashier's
check. Check No. 040718 in the name of MS Development Trading
Corporation for Six Thousand Fifty-Three Pesos and Seventy Centavos
(P6,053.70) was returned twice on March 24, nine (9) days from his
13
deposits date and again on April 26, twenty-two days after the day the
cashier's check was deposited for insufficiency of funds. 4
Petitioner, alleging to have suffered humiliation and loss of face in
the business sector due to the bounced checks, filed a complaint against
RCBC for damages in the Regional Trial Court of Palawan and Puerto
Princesa, Branch 47, docketed as Civil Case No. 2101. 5
During the trial, petitioner sought to prove:
First, that it was RCBC's responsibility to call his attention there
and then that he had erroneously filled the wrong deposit slip at the time he
deposited the cashier's check with the respondent bank's teller and it was
negligence on RCBC' part not to have done so; 6
Second, that RCBC had been remiss in the performance of its
obligation to the petitioner when it "missent" the cashier's check to the
Central Bank knowing, as it should, that the source of the check, PCIB,
Puerto Princesa Branch, is not included in the areas required to be cleared
by the Central Bank, a fact known to the banking world and surely to the
respondent bank; 7
Third, that RCBC upon knowing of its error in "missending" the
cashier's check to the Central Bank did not attempt to rectify its
"misclearing" error by clearing it seasonably with PCIB, Puerto Princesa,
thru its own RCBC Puerto Princesa Branch with whom it had direct radio
contact; 8
Fourth, that as an old client, with twelve (12) years of good
standing then, RCBC should have given him more consideration by exerting
greater diligence in clearing the check with PCIB, Puerto Princesa, to protect
its client's interest; 9
Fifth, that RCBC failed to inform petitioner promptly that the check
had not been cleared, despite its debiting without delay the amount covered
by the check from the account of the petitioner and hastily charging the
latter service fees immediately after the return of the "missent checks"; 10
and
Finally, that the bounced checks resulting from RCBC's
"misclearing" had put in doubt his credibility among his business peers and
sullied his reputation as a community leader which he had painstakingly
cultivated for years. His community standing as a business-socio-civic
leader was a source of pride for him in his old age of 70. He cited being
Chairman of Palawan Boy Scout Council, 2-term President of the Rotary
Club of Puerto Princesa, member of Palawan Chamber of Commerce and
Industry, member of the Monitoring Team of the Palawan Integrated Area
Development Project, member of Lion's Club, Philippine Rifle Pistol
Association and the Saturday Health Club to justify his claim for moral
damages. 11
In its defense, RCBC disowning any negligence, put the blame for
the "misrouting" on the petitioner for using the wrong check deposit slip. It
insisted that the misuse of a local check deposit slip, instead of a regional
check deposit slip, triggered the "misrouting" by RCBC of the cashier's check
to the Central Bank and it was petitioner's negligent "misuse" of a local
deposit slip which was the proximate cause of the "misrouting", thus he
should bear the consequence. 12
RCBC alleged that it complied strictly with accepted banking
practice when it debited the amount of P30,000.00 against petitioner's
account since under Resolution No. 2202 dated December 21, 1979 of the
Monetary Board, it is a matter of policy to prohibit the drawing against
uncollected deposits (DAUDS) except when the drawings are made against
uncollected deposits representing bank manager's/cashier's/treasurer's
checks, treasury warrants, postal money orders and duly funded "on us"
checks which may be permitted at the discretion of each bank. 13 Without
crediting the P30,000.00 deposit, petitioner's balance before and after was
Two Thousand Seven Hundred Ninety-Two Pesos and the (P2,792.88)
Eighty-Eight Centavos. 14 Thus, it dishonored the two (2) checks amounting
to P11,553.70 since they were drawn against insufficient funds. RCBC added
that petitioner had no bills purchase (BP) line which allows a depositor to
receive or draw from proceeds of a check without waiting it to be cleared.
Besides, RCBC maintained, had it forwarded the Cashier's Check to PCIB
Puerto Princesa, Palawan, it would take at least twenty (20) working days
for the cashier's check to be cleared and it would take the same length of
time to clear the two (2) personal checks of Tan. 15
RCBC further asseverated it was merely acting as petitioner's
collecting agent and it assumed no responsibility beyond care in selecting
correspondents under the theory that where a check is deposited with a
collecting bank the relationship created is that of agency and not creditor-
debtor, thus it cannot be liable. 16
Finally, respondent claimed that serious attempts were made to
contact petitioner through the telephone numbers in the signature specimen
card of petitioner but to no avail. 17 The Assistant Branch Accountant of
RCBC Binondo Branch testified that the first telephone number in the card
had been deleted from the phone company's list and that when RCBC tried
to contact petitioner's daughter Evelyn Tan-Banzon thru a certain telephone
number and when they asked for Evelyn Tan, they were told there was no
such person. 18
The trial court rendered a decision on December 28, 1990 in
petitioner's favor, the dispositive portion 19 of which reads:
WHEREFORE, premises considered, plaintiff having proven
the allegations of his verified complaint by preponderance of
evidence, the court hereby renders judgment ordering
defendant bank, Binondo Branch, Manila, to pay him
damages and attorney's fees in the total amount of
P1,035,000.00 Philippine Currency, broken down as follows:
P700,000.00 as moral damages, P200,000.00 as exemplary
damages; P135,000.00 which is 15% of the sum herein
awarded to plaintiff, as attorney's fees and to pay costs of
suit. LLjur
14
 For having failed to prove by any receipt or writing to
underpin it, plaintiff's claim for actual damage is denied for
lack of merit.
IT IS SO ORDERED.
RCBC appealed to the Court of Appeals contending that the trial
court erred in holding RCBC liable to petitioner on account of its alleged
negligence and in awarding petitioner moral and exemplary damages and
attorney's fees.
The Court of Appeals on January 12, 1993 rendered a decision 20
with the following decretal portion:
WHEREFORE, and upon all the foregoing, the decision of the
court below is REVERSED and this complaint is DISMISSED
without pronouncement as to cost.
The Court of Appeals' decision is based on the following findings:
21
What appeared to have caused the unfortunate incident was
that the plaintiff filled up the wrong deposit slip which led to
the sending of the check to the Central Bank when the
clearing should have been made elsewhere.
But the claim of the plaintiff that he was not advised that
the Cashier's check was missent does not seem to be
correct. The evidence indicated that the defendant bank thru
its personnel had called him up thru telephone in the
number (No. 60-45-23) which he gave in his specimen
signature card. But it came out, that said telephone number
was no longer active or was already deleted from the list of
telephone numbers.
There was an instruction on the part of the plaintiff for the
bank to contact his daughter, Mrs. Evelyn Tan Banzon and
according to the plaintiff, she too, was not contacted as per
his instruction. The evidence, however, indicated that Ms.
Evelyn Tan also could not be contacted at the number
supposed to pertain to her as appeared in the specimen
signature card. In other words while there was compliance
with the instructions given by the plaintiff but said
instructions were faulty. The plaintiff as a customer of the
bank is under obligation to inform the defendant of any
changes in the telephone numbers to be contacted in the
event of any exigency.
All in all, the facts indicate that the refusal of RCBC to credit
the amount of P30,000.00 to the plaintiff's current account
is consistent with the accepted banking practice. As the
defendant bank had claimed, under Resolution No. 2202
dated December 21, 1979 of the Monetary Board, it had
been emphatically declared as a matter of policy that no
drawings should be made against uncollected deposits
except when the drawings are made against uncollected
deposits representing bank manager's/cashier's/treasurer's
checks, treasury warrants, postal money orders, and duly
funded "on-us" checks as may be permitted at the discretion
of each bank.
It is clear that immediate payment without awaiting
clearance of a cashier's check is discretionary with the bank
to whom the check is presented and such being the case,
the refusal to allow it as in this case is not to be equated
with negligence in the basic perception that discretion is not
demandable as a right. In the instant case, prior to the
deposit of P30,000.00, the plaintiff's account appeared to be
only in the amount of P2,792.98. So the two (2) checks
issued by the plaintiff amounting to P11,553.70 had to be
dishonored since they were drawn against insufficient funds.
What the plaintiff should have done, before issuing the two
(2) checks, was to await the clearance of the Cashier's check
and his failure to do so is a fault not ascribable to the
defendant who appeared under the circumstance merely to
have followed the usual banking practice.
Petitioner now seeks to reverse the decision of the Court of Appeals
and affirm that of the lower court. He raises the following errors:
1. THE HONORABLE COURT OF APPEALS COMMITTED
GROSS AND MANIFEST ERROR IN CONCLUDING THAT THE
NEGLIGENCE WAS ASCRIBABLE TO HEREIN PETITIONER.
2. THE HONORABLE COURT OF APPEALS GRAVELY ABUSED
ITS DISCRETION IN FINDING THAT THE RESPONDENT BANK
HAD NOT BEEN REMISS IN THE PERFORMANCE OF ITS
OBLIGATIONS TO HEREIN PETITIONER. cdll
3. THE HONORABLE COURT OF APPEALS COMMITTED
GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF
DISCRETION IN REVERSING THE AWARD OF MORAL AND
EXEMPLARY DAMAGES TO THE PETITIONER.
4. THE HONORABLE COURT OF APPEALS COMMITTED
GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF
15
 DISCRETION IN NOT AWARDING ATTORNEY'S FEES TO
PETITIONER.
In a most recent case decided by this Court, City Trust Corporation
v. The Intermediate Appellate Court, 22 involving damages against City
Trust Banking Corporation, the depositor, instead of stating her correct
account number 29000823 inaccurately wrote 2900823. Because of this
error, six postdated checks amounting to P20,209.00 she issued were
dishonored for insufficiency of funds. The Regional Trial Court dismissed the
complaint for lack of merit. The Court of Appeals, however, found the appeal
meritorious and ordered the bank to pay nominal damages of P2,000.00,
temperate and moderate damages of P5,000.00 and attorney's fees of
P4,000.00. Upon review, this Court quoted with favor the disquisition of the
appellate court:
We cannot uphold the position of defendant. For, even if it
be true that there was error on the part of the plaintiff in
omitting a zero in her account number, yet, it is a fact that
her name, Emma E. Herrero, is clearly written on said
deposit slip (Exh. B). This is controlling in determining in
whose account the deposit is made or should be posted. This
is so because it is not likely to commit an error in one's
name that merely relying on numbers which are difficult to
remember, especially a number with eight (8) digits as the
account numbers of defendant's depositors. We view the use
of numbers as simply for the convenience of the bank but
was never intended to disregard the real name of its
depositors. The bank is engaged in business impressed with
public interests, and it is its duty to protect in return its
many clients and depositors who transact business with it. It
should not be a matter of the bank alone receiving deposits,
lending out money and collecting interests. It is also its
obligation to see to it that all funds invested with it are
properly accounted for and duly posted in its ledgers.
In the case before Us, we are not persuaded that defendant
bank was not free from blame for the fiasco. In the first
place, the teller should not have accepted plaintiff's deposit
without correcting the account number on the deposits slip
which, obviously, was erroneous because, as pointed out by
defendant, it contained only seven (7), digits instead of
eight (8). Second, the complete name of plaintiff depositor
appears in bold letters on the deposit slip (Exh. B). There
could be no mistaking in her name, and that the deposit was
made in her name, Emma E. Herrero. In fact, defendant's
teller should not have fed her deposit slip to the computer
knowing that her account number written thereon was
wrong as it contained only seven (7) digits. As it happened,
according to defendant, plaintiff's deposit had to be
consigned to the suspense accounts pending verification.
This, indeed, could have been avoided at the first instance
had the teller of defendant bank performed her duties
efficiently and well. For then she could have readily detected
that the account number in the name of Emma E. Herrero
was erroneous and would be rejected by the computer. That
is, or should be, part of the training and standard operating
procedure of the bank's employees. On the other hand, the
depositors are not concerned with banking procedure. That
is the responsibility of the bank and its employees.
Depositors are only concerned with the facility of depositing
their money, earning interest thereon, if any, and
withdrawing therefrom, particularly businessmen, like
plaintiff, who are supposed to be always on-the-go.
Plaintiff's account is a current account which should
immediately be posted. After all, it does not earn interest. At
least, the forbearance should be commensurated with
prompt, efficient and satisfactory service.
Bank clients are supposed to rely on the services extended
by the bank, including the assurance that their deposits will
be duly credited them as soon as they are made. For, any
delay in crediting their account can be embarrassing to them
as in the case of plaintiff.
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. (Emphasis supplied).
In the light of the above-cited case, the respondent bank cannot
exculpate itself from liability by claiming that its depositor "impliedly
instructed" the bank to clear his check with the Central Bank by filling a
local check deposit slip. Such posture is disingenuous, to say the least. First,
why would RCBC follow a patently erroneous act born of ignorance or
inattention or both. Second, bank transactions pass through a succession of
bank personnel whose duty is to check and countercheck transactions for
possible errors. In the instant case, the teller should not have accepted the
local deposit slip with the cashier's check that on its face was clearly a
regional check without calling the depositor's attention to the mistake at the
very moment this was presented to her. Neither should everyone else down
the line who processed the same check for clearing have allowed the check
to be sent to Central Bank. Depositors do not pretend to be past master of
banking technicalities, much more of clearing procedures. As soon as their
deposits are accepted by the bank teller, they wholly repose trust in the
bank personnel's mastery of banking, their and the bank's sworn profession
of diligence and meticulousness in giving irreproachable service. LLpr
We do not subscribe to RCBC's assertion that petitioner's use of the
wrong deposit slip was the proximate cause of the clearing fiasco and so,
petitioner must bear the consequence. In Pilipinas Bank, v. CA, 23 this
Court said:
16
 The bank is not expected to be infallible but, as correctly
observed by respondent Appellate Court, in this instance, it
must bear the blame for not discovering the mistake of its
teller despite the established procedure requiring the papers
and bank books to pass through a battery of bank personnel
whose duty it is to check and countercheck them for possible
errors. Apparently, the officials and employees tasked to do
that did not perform their duties with due care, . . .
So it is in the instance case, where the conclusion is inevitable that
respondent RCBC had been remiss in the performance of its duty and
obligation to its client, as well as to itself. We draw attention to the fact that
the two dishonored checks issued by petitioner, Check No. 040719 and
Check No. 040718 were presented for payment 24 more than 45 days from
the day the cashier's check was deposited. This gave RCBC more than
ample time to have cleared the cashier's check had it corrected its
"missending" the same upon return from Central Bank using the correct slip
this time so it can be cleared properly. Instead, RCBC promptly debited the
amount of P30,000.00 against petitioner's account and left it at that.
We observe, likewise, that RCBC inquired about an Evelyn Tan but
no Evelyn Tan-Banzon as specifically instructed in the same signature card.
(Emphasis supplied) 25
RCBC insists that immediate payment without awaiting clearance of
a cashier's check is discretionary with the bank to whom the check is
presented and such being the case, its refusal to immediately pay the
cashier's check in this case is not to be equated with negligence on its part.
We find this disturbing and unfortunate.
An ordinary check is not a mere undertaking to pay an amount of
money. There is an element of certainty or assurance that it will be paid
upon presentation that is why it is perceived as a convenient substitute for
currency in commercial and financial transactions. The basis of the
perception being confidence. Any practice that destroys that confidence will
impair the usefulness of the check as a currency substitute and create
havoc in trade circles and the banking community. 26
Now, what was presented for deposit in the instant cases was not
just an ordinary check but a cashier's check payable to the account of the
depositor himself. A cashier's check is a primary obligation of the issuing
bank and accepted in advance by its mere issuance. 27 By its very nature, a
cashier's check is the bank's order to pay drawn upon itself, committing in
effect its total resources, integrity and honor behind the check. A cashier's
check by its peculiar character and general use in the commercial world is
regarded substantially to be as good as the money which it represents. 28
In this case, therefore, PCIB by issuing the check created an unconditional
credit in favor of any collecting bank. LLphil
All these considered, petitioner's reliance on the layman's
perception that a cashier's check is as good as cash is not entirely
misplaced, as it is rooted in practice, tradition, and principle. We see no
reason thus why this so-called discretion was not exercised in favor of
petitioner, specially since PCIB and RCBC are members of the same clearing
house group relying on each other's solvency. RCBC could surely rely on the
solvency of PCIB when the latter issued its cashier's check.
On the third and fourth issue, RCBC contends that moral damages
cannot be recovered in an action for breach of contract since under Article
2219 of the New Civil Code, the instant case is not among those
enumerated. For an award of moral damages in a breach of contract, it is
imperative that the party acted in bad faith or fraudulently as provided for
in Art. 2220 of the Civil Code, to wit:
Art. 2220. Willful injury to property may be a legal ground
for awarding moral damages if the court should find that,
under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith.
In the absence of moral damages, RCBC argues, exemplary damages
cannot be awarded under Art. 2225 of the same Code which states:
Exemplary damages 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.
We hold that petitioner has the right to recover moral damages
even if the bank's negligence may not have been attended with malice and
bad faith. In American Express International, Inc. v. IAC, 29 we held:
While petitioner was not in bad faith, its negligence caused
the private respondent to suffer mental anguish, serious
anxiety, embarrassment and humiliation, for which he is
entitled to recover, reasonable moral damages (Art. 2217,
Civil Code).
In Zenith Insurance Corporation v. CA, 30 we also said that moral
damages are not meant to enrich a complainant at the expense of
defendant. It is only intended to alleviate the moral suffering he has
undergone. In the instant case, we find the award of P700,000.00 as moral
damages excessive and, accordingly, reduce it to one hundred thousand
(P100,000.00) pesos. We find the award of exemplary damages of
P200,000.00 unjustified in the absence of malice, bad faith or gross
negligence. 31 The award of reasonable attorney's fees is proper for the
petitioner was compelled to litigate to protect his interest. 32
IN VIEW WHEREOF, we REVERSE the decision of respondent Court
of Appeals and hereby order private respondent RCBC, Binondo Branch, to
pay petitioner the amount of one hundred thousand (P100,000.00) pesos as
moral damages and the sum of fifty thousand (P50,000.00) pesos as
attorney's fees, plus costs. LexLib
17
 SO ORDERED. reversed the Decision 2 of the Regional Trial Court of Manila, Branch 8, absolving
petitioner Consolidated. Bank and Trust Corporation, now known as Solidbank
||| (Tan v. Court of Appeals, G.R. No. 108555, [December 20, 1994])
Corporation ("Solidbank"), of any liability. The questioned resolution of the
appellate court denied the motion for reconsideration of Solidbank but modified
the decision by deleting the award of exemplary damages, attorney's fees,
expenses of litigation and cost of suit. caAICE

The Facts

Solidbank is a domestic banking corporation organized and existing under

Philippine laws. Private respondent L.C. Diaz and Company, CPA's ("L.C. Diaz"),
is a professional partnership engaged in the practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank,
designated as Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya

("Macaraya"), filled up a savings (cash) deposit slip for P990 and a savings
(checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz,
Ismael Calapre ("Calapre"), to deposit the money with Solidbank. Macaraya also
gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips
and the passbook. The teller acknowledged receipt of the deposit by returning to
Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the
deposit slips with the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK
HEAD OFFICE." Since the transaction took time and Calapre had to make
FIRST DIVISION another deposit for L.C. Diaz with Allied Bank, he left the passbook with
Solidbank. Calapre then went to Allied Bank. When Calapre returned to
Solidbank to retrieve the passbook, Teller No. 6 informed him that "somebody
[G.R. No. 138569. September 11, 2003.]
got the passbook. 3 Calapre went back to L.C. Diaz and reported the incident to
Macaraya.
THE CONSOLIDATED BANK and TRUST CORPORATION,
petitioner, vs. COURT OF APPEALS and L.C. DIAZ and Macaraya immediately prepared a deposit slip in duplicate copies with a check of
COMPANY, CPA's, respondents. P200,000. Macaraya, together with Calapre, went to Solidbank and presented to
Teller No. 6 the deposit slip and check. The teller stamped the words
"DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on the
duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller
DECISION No. 6 told Macaraya that someone got the passbook but she could not
remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if
Calapre got the passbook, Teller No. 6 answered that someone shorter than
Calapre got the passbook. Calapre was then standing beside Macaraya.
CARPIO, J p:
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the
The Case deposit of a check for P90,000 drawn on Philippine Banking Corporation ("PBC").
This PBC check of L.C. Diaz was a check that it had "long closed." 4 PBC
subsequently dishonored the check because of insufficient funds and because
Before us is a petition for review of the Decision 1 of the Court of Appeals dated the signature in the check differed from PBC's specimen signature. Failing to get
27 October 1998 and its Resolution dated 11 May 1999. The assailed decision

18
back the passbook, Macaraya went back to her office and reported the matter to
the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer,
Luis C. Diaz ("Diaz"), called up Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account. 5 On the same day, Diaz
formally wrote Solidbank to make the same request. It was also on the same
day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14
August 1991, of P300,000 from its savings account. The withdrawal slip for the
P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely
Diaz and Rustico L. Murillo. The signatories, however, denied signing the
withdrawal slip. A certain Noel Tamayo received the P300,000. IaSCTE
In an Information 6 dated 5 September 1991, L.C. Diaz charged its messenger,
Emerano Ilagan ("Ilagan") and one Roscon Verdazola with Estafa through
Falsification of Commercial Document. The Regional Trial Court of Manila
dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on
4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the
return of its money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint 7 for Recovery of a Sum of
Money against Solidbank with the Regional Trial Court of Manila, Branch 8. After
trial, the trial court rendered on 28 December 1994 a decision absolving
Solidbank and dismissing the complaint.
L.C. Diaz then appealed 8 to the Court of Appeals. On 27 October 1998, the
Court of Appeals issued its Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion
for reconsideration of Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages and attorney's fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that "possession of this book shall raise
the presumption of ownership and any payment or payments made by the bank
upon the production of the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor personally." 9
At the time of the withdrawal, a certain Noel Tamayo was not only in possession
of the passbook, he also presented a withdrawal slip with the signatures of the
authorized signatories of L.C. Diaz. The specimen signatures of these persons
were in the signature cards. The teller stamped the withdrawal slip with the
words "Saving Teller No. 5." The teller then passed on the withdrawal slip to
Genere Manuel ("Manuel") for authentication. Manuel verified the signatures on
the withdrawal slip. The withdrawal slip was then given to another officer who
compared the signatures on the withdrawal slip with the specimen on the
signature cards. The trial court concluded that Solidbank acted with care and
observed the rules on savings account when it allowed the withdrawal of
P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to
prove that the signatures on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the National Bureau of
Investigation ("NBI") report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer
this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor must
keep the passbook "under lock and key." 10 When another person presents the
passbook for withdrawal prior to Solidbank's receipt of the notice of loss of the
passbook, that person is considered as the owner of the passbook. The trial
court ruled that the passbook presented during the questioned transaction was
"now out of the lock and key and presumptively ready for a business
transaction." 11
Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbank's act of allowing the withdrawal
of P300,000 was not the direct and proximate cause of the loss. The trial court
held that L.C. Diaz's negligence caused the unauthorized withdrawal. Three facts
establish L.C. Diaz's negligence: (1) the possession of the passbook by a person
other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal
receipt by an unauthorized person; and (3) the possession by an unauthorized
person of a PBC check "long closed" by L.C. Diaz, which check was deposited on
the day of the fraudulent withdrawal.
The trial court debunked L.C. Diaz's contention that Solidbank did not follow the
precautionary procedures observed by the two parties whenever L.C. Diaz
withdrew significant amounts from its account. L.C. Diaz claimed that a letter
must accompany withdrawals of more than P20,000. The letter must request
Solidbank to allow the withdrawal and convert the amount to a manager's check.
The bearer must also have a letter authorizing him to withdraw the same
amount. Another person driving a car must accompany the bearer so that he
would not walk from Solidbank to the office in making the withdrawal. The trial
court pointed out that L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate
letter of authorization or any communication with Solidbank that the money be
converted into a manager's check.
The trial court further justified the dismissal of the complaint by holding that the
case was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal
of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
19
 IN VIEW OF THE FOREGOING, judgment is hereby rendered
DISMISSING the complaint.
The Court further renders judgment in favor of defendant
bank pursuant to its counterclaim the amount of Thirty
Thousand Pesos (P30,000.00) as attorney's fees.
With costs against plaintiff.
SO ORDERED. 12
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbank's negligence was the proximate cause
of the unauthorized withdrawal of P300,000 from the savings account of L.C.
Diaz. The appellate court reached this conclusion after applying the provision of
the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay for
the damage done. Such fault or negligence, if there is no
pre-existing contractual relation between the parties, is
called a quasi-delict and is governed by the provisions of this
chapter.
The appellate court held that the three elements of a quasi-delict are
present in this case, namely: (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 damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the
withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor because
the money to be withdrawn was a significant amount. Had the teller called up
L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized.
The teller did not even verify the identity of the impostor who made the
withdrawal. Thus, the appellate court found Solidbank liable for its negligence in
the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its
deposits to its messenger and its messenger in leaving the passbook with the
teller, Solidbank could not escape liability because of the doctrine of "last clear
chance." Solidbank could have averted the injury suffered by L.C. Diaz had it
called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is
more than that of a good father of a family. The business and functions of banks
are affected with public interest. Banks are obligated to treat the accounts of
their depositors with meticulous care, always having in mind the fiduciary nature
of their relationship with their clients. The Court of Appeals found Solidbank
remiss in its duty, violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed
from is hereby REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank
and Trust Corporation. to pay plaintiff-
appellant the sum of Three Hundred
Thousand Pesos (P300,000.00), with
interest thereon at the rate of 12% per
annum from the date of filing of the
complaint until paid, the sum of
P20,000.00 as exemplary damages, and
P20,000.00 as attorney's fees and
expenses of litigation as well as the cost of
suit; and
2. Ordering the dismissal of defendant-appellee's
counterclaim in the amount of P30,000.00
as attorney's fees.
SO ORDERED. 13
Acting on the motion for reconsideration of Solidbank, the appellate court
affirmed its decision but modified the award of damages. The appellate
court deleted the award of exemplary damages and attorney's fees.
Invoking Article 2231 14 of the Civil Code, the appellate court ruled that
exemplary damages could be granted if the defendant acted with gross
negligence. Since Solidbank was guilty of simple negligence only, the award
of exemplary damages was not justified. Consequently, the award of
attorney's fees was also disallowed pursuant to Article 2208 of the Civil
Code. The expenses of litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated
October 27, 1998 is affirmed with modification by deleting
the award of exemplary damages and attorney's fees,
expenses of litigation and cost of suit.
20
 SO ORDERED. 15
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the Court of Appeals
on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER BANK SHOULD SUFFER THE LOSS
BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED
PRIVATE RESPONDENT BY TELEPHONE BEFORE IT
ALLOWED THE WITHDRAWAL OF P300,000.00 TO
RESPONDENT'S MESSENGER EMERANO ILAGAN,
SINCE THERE IS NO AGREEMENT BETWEEN THE
PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW,
WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE
ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF LAST CLEAR CHANCE AND IN
HOLDING THAT PETITIONER BANK'S TELLER HAD
THE LAST OPPORTUNITY TO WITHHOLD THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE
TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE
RESPONDENT'S PASSBOOK WAS DULY PRESENTED,
AND CONTRARIWISE RESPONDENT WAS
NEGLIGENT IN THE SELECTION AND SUPERVISION
OF ITS MESSENGER EMERANO ILAGAN, AND IN
THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT
THE INSTANT CASE IS A LAST DITCH EFFORT OF
PRIVATE RESPONDENT TO RECOVER ITS
P300,000.00 AFTER FAILING IN ITS EFFORTS TO
RECOVER THE SAME FROM ITS EMPLOYEE
EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE
DAMAGES AWARDED AGAINST PETITIONER UNDER
ARTICLE 2197 OF THE CIVIL CODE,
NOTWITHSTANDING ITS FINDING THAT
PETITIONER BANK'S NEGLIGENCE WAS ONLY
CONTRIBUTORY. 16
The Ruling of the Court
The petition is partly meritorious.
Solidbank's Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the application
of the law. The trial court pinned the liability on L.C. Diaz based on the
provisions of the rules on savings account, a recognition of the contractual
relationship between Solidbank and L.C. Diaz, the latter being a depositor of the
former. On the other hand, the Court of Appeals applied the law on quasi-delict
to determine who between the two parties was ultimately negligent. The law on
quasi-delict or culpa aquiliana is generally applicable when there is no pre-
existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or
culpa contractual.
The contract between the bank and its depositor is governed by the provisions of
the Civil Code on simple loan. 17 Article 1980 of the Civil Code expressly
provides that ". . . savings . . . deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan." There is
a debtor-creditor relationship between the bank and its depositor. The bank is
the debtor and the depositor is the creditor. The depositor lends the bank money
and the bank agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the contract that determines
the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 ("RA 8791"), 18 which took effect
on 13 June 2000, declares that the State recognizes the "fiduciary nature of
banking that requires high standards of integrity and performance." 19 This new
provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex
International v. Court of Appeals, 20 holding that "the bank is under obligation
to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. 21
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good father
of a family. Article 1172 of the Civil Code states that the degree of diligence
required of an obligor is that prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a family. 22 Section 2 of RA
8791 prescribes the statutory diligence required from banks that banks must
21
observe "high standards of integrity and performance" in servicing their
depositors. Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diaz's savings account,
jurisprudence 23 at the time of the withdrawal already imposed on banks the
same high standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert
the contract between the bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the bank to pay the depositor
is failure to pay a simple loan, and not a breach of trust. 24 The law simply
imposes on the bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to
earn money for themselves. The law allows banks to offer the lowest possible
interest rate to depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to the bank and
not to the depositors who are not cestui que trust of banks. If depositors are
cestui que trust of banks, then the interest spread or income belongs to the
depositors, a situation that Congress certainly did not intend in enacting Section
2 of RA 8791.
Solidbank's Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that "responsibility arising from
negligence in the performance of every kind of obligation is demandable." For
breach of the savings deposit agreement due to negligence, or culpa contractual,
the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the "transaction took time"
and he had to go to Allied Bank for another transaction. The passbook was still
in the hands of the employees of Solidbank for the processing of the deposit
when Calapre left Solidbank. Solidbank's rules on savings account require that
the "deposit book should be carefully guarded by the depositor and kept under
lock and key, if possible." When the passbook is in the possession of Solidbank's
tellers during withdrawals, the law imposes on Solidbank and its tellers an even
higher degree of diligence in safeguarding the passbook.
Likewise, Solidbank's tellers must exercise a high degree of diligence in insuring
that they return the passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the rules on savings
account provide that any person in possession of the passbook is presumptively
its owner. If the tellers give the passbook to the wrong person, they would be
clothing that person presumptive ownership of the passbook, facilitating
unauthorized withdrawals by that person. For failing to return the passbook to
Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6
presumptively failed to observe such high degree of diligence in safeguarding
the passbook, and in insuring its return to the party authorized to receive the
same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a
presumption that the defendant was at fault or negligent. The burden is on the
defendant to prove that he was not at fault or negligent. In contrast, in culpa
aquiliana the plaintiff has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the authorized
representative of L.C. Diaz. There is thus a presumption that Solidbank was at
fault and its teller was negligent in not returning the passbook to Calapre. The
burden was on Solidbank to prove that there was no negligence on its part or its
employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial
court Teller No. 6, the teller with whom Calapre left the passbook and who was
supposed to return the passbook to him. The record does not indicate that Teller
No. 6 verified the identity of the person who retrieved the passbook. Solidbank
also failed to adduce in evidence its standard procedure in verifying the identity
of the person retrieving the passbook, if there is such a procedure, and that
Teller No. 6 implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of
respondeat superior or command responsibility. The defense of exercising the
required diligence in the selection and supervision of employees is not a
complete defense in culpa contractual, unlike in culpa aquiliana. 25
The bank must not only exercise "high standards of integrity and performance,"
it must also insure that its employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary duty. Solidbank failed to
present the teller who had the duty to return to Calapre the passbook, and thus
failed to prove that this teller exercised the "high standards of integrity and
performance" required of Solidbank's employees. ETHCDS
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed that
L.C. Diaz's negligence in not securing its passbook under lock and key was the
proximate cause that allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the teller's negligence in processing
the withdrawal without first verifying with L.C. Diaz. We do not agree with either
court.
Proximate cause 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. 26 Proximate cause is determined by
22
the facts of each case upon mixed considerations of logic, common sense, policy
and precedent. 27
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor.
Solidbank was in possession of the passbook while it was processing the deposit.
After completion of the transaction, Solidbank had the contractual obligation to
return the passbook only to Calapre, the authorized representative of L.C. Diaz.
Solidbank failed to fulfill its contractual obligation because it gave the passbook
to another person.
Solidbank's failure to return the passbook to Calapre made possible the
withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbank's rules on savings account, mere possession of the
passbook raises the presumption of ownership. It was the negligent act of
Solidbank's Teller No. 6 that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of the impostor, the loss of
P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbank's negligence in not returning the
passbook to Calapre.
We do not subscribe to the appellate court's theory that the proximate cause of
the unauthorized withdrawal was the teller's failure to call up L.C. Diaz to verify
the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm
the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to
this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to
measures that the parties must observe whenever withdrawals of large amounts
are made does not direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients whenever their
representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to
verify the withdrawal. Prior to the withdrawal of P300,000, the impostor
deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The
impostor apparently deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of money. The appellate court
thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm
the withdrawal when no law requires this from banks and when the teller had no
reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal.
Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was
familiar with its teller so that there was no more need for the teller to verify the
withdrawal. Solidbank relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:
. . . Ilagan also had with him (before the withdrawal) a
forged check of PBC and indicated the amount of P90,000
which he deposited in favor of L.C. Diaz and Company. After
successfully withdrawing this large sum of money, accused
Ilagan gave alias Rey (Noel Tamayo) his share of the loot.
Ilagan then hired a taxicab in the amount of P1,000 to
transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money
but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his
guilt. 28 (Emphasis supplied.)
L.C. Diaz refutes Solidbank's contention by pointing out that the person who
withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate
courts stated that this Noel Tamayo presented the passbook with the withdrawal
slip.
We uphold the finding of the trial and appellate courts that a certain Noel
Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no
justifiable reason to reverse the factual finding of the trial court and the Court of
Appeals. The tellers who processed the deposit of the P90,000 check and the
withdrawal of the P300,000 were not presented during trial to substantiate
Solidbank's claim that Ilagan deposited the check and made the questioned
withdrawal. Moreover, the entry quoted by Solidbank does not categorically state
that Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but
the negligent act of one is appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence caused the loss, the one who
had the last clear opportunity to avoid the loss but failed to do so, is chargeable
with the loss. 29 Stated differently, the antecedent negligence of the plaintiff
does not preclude him from recovering damages caused by the supervening
negligence of the defendant, who had the last fair chance to prevent the
impending harm by the exercise of due diligence. 30
We do not apply the doctrine of last clear chance to the present case. Solidbank
is liable for breach of contract due to negligence in the performance of its
contractual obligation to L.C. Diaz. This is a case of culpa contractual, where
neither the contributory negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from liability. 31 Such
contributory negligence or last clear chance by the plaintiff merely serves to
reduce the recovery of damages by the plaintiff but does not exculpate the
defendant from his breach of contract. 32
Mitigated Damages
23
Under Article 1172, "liability (for culpa contractual) may be regulated by the
courts, according to the circumstances." This means that if the defendant
exercised the proper diligence in the selection and supervision of its employee,
or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory
negligence in allowing a withdrawal slip signed by its authorized signatories to
fall into the hands of an impostor. Thus, the liability of Solidbank should be
reduced. SECOND DIVISION

In Philippine Bank of Commerce v. Court of Appeals, 33 where the Court held [G.R. No. 60033. April 4, 1984.]
the depositor guilty of contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60 ratio. Applying the same ruling
to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and
awarded by the appellate court. Solidbank must pay he other 60% of the actual TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF
damages. MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY
FISCAL FELIZARDO N. LOTA and CLEMENT DAVID,
respondents.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with

MODIFICATION. Petitioner Solidbank Corporation shall pay private respondent DECISION
L.C. Diaz and Company, CPA's only 60% of the actual damages awarded by the
Court of Appeals. The remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPA's. Proportionate costs.

MAKASIAR, J p:
SO ORDERED.

This is a petition for prohibition and injunction with a prayer for the immediate
issuance of restraining order and/or writ of preliminary injunction filed by
petitioners on March 26, 1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the
same date, a temporary restraining order was duly issued ordering the
respondents, their officers, agents, representatives and/or person or persons
acting upon their (respondents') orders or in their place or stead to refrain from
proceeding with the preliminary investigation in Case No. 81-31938 of the Office
of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private
respondent Clement David filed a motion to lift restraining order which was
denied in the resolution of this Court dated May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-
31938, in which petitioners were charged by private respondent Clement David,
with estafa and violation of Central Bank Circular No. 364 and related
regulations regarding foreign exchange transactions principally, on the ground of
lack of jurisdiction in that the allegations of the charged, as well as the
testimony of private respondent's principal witness and the evidence through
said witness, showed that petitioners' obligation is civil in nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the
Solicitor General in its Comment dated June 28, 1982, as follows:
24
"On December 23, 1981, private respondent David filed I.S.
No. 81-31938 in the Office of the City Fiscal of Manila, which
case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).
"In I.S. No. 81-31938, David charged petitioners (together
with one Robert Marshall and the following directors of the
Nation Savings and Loan Association, Inc., namely Homero
Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr.,
Perfecto Maalac, Jaime V. Paz, Paulino B. Dionisio, and one
John Doe) with estafa and violation of Central Bank Circular
No. 364 and related Central Bank regulations on foreign
exchange transactions, allegedly committed as follows
(Petition, Annex 'A'):
"'From March 20, 1979 to March, 1981, David
invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on time deposits, P13,531.94 on
savings account deposits (jointly with his sister,
Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of
payment and US$50,000.00 under a receipt dated
June 8, 1980 (all jointly with Denise Kuhne), that
David was induced into making the aforestated
investments by Robert Marshall, an Australian
national who was allegedly a close associate of
petitioner Guingona Jr., then NSLA President,
petitioner Martin, then NSLA Executive Vice-
"Petitioner, Guingona, Jr., in his counter-affidavit (Petition,
President and petitioner Santos, then NSLA General
Annex 'C') stated the following:
Manager; that on March 21, 1981 NSLA was placed
under receivership by the Central Bank, so that
David filed claims therewith for his investments and
those of his sister; that on July 22, 1981 David
received a report from the Central Bank that only
P305,821.92 of those investments were entered in
the records of NSLA; that, therefore, the
respondents in I.S. No. 81-31938 misappropriated
the balance of the investments, at the same time
violating Central Bank Circular No. 364 and related
Central Bank regulations on foreign exchange
transactions; that after demands, petitioner
Guingona Jr. paid only P200,000.00, thereby
reducing the amounts misappropriated to
P959,078.14 and US$75,000.00.
"Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex 'B') in which they stated the following:
"'That Martin became President of NSLA in March
1978 (after the resignation of Guingona, Jr.) and
served as such until October 30, 1980, while
Santos was General Manager up to November
1980; that because NSLA was urgently in need of
funds and at David's insistence, his investments
were treated as special accounts with interests
above the legal rate, and recorded in separate
confidential documents only a portion of which were
to be reported because he did not want the
Australian government to tax his total earnings
(nor) to know his total investments; that all
transactions with David were recorded except the
sum of US$15,000.00 which was a personal loan of
Santos; that David's check for US$50,000.00 was
cleared through Guingona, Jr.'s dollar account
because NSLA did not have one, that a draft of
US$30,000.00 was placed in the name of one Paz
Roces because of a pending transaction with her;
that the Philippine Deposit Insurance Corporation
had already reimbursed David within the legal
limits; that majority of the stockholders of NSLA
had filed Special Proceedings No. 82-1695 in the
Court of First Instance to contest its (NSLA's)
closure; that after NSLA was placed under
receivership, Martin executed a promissory note in
David's favor and caused the transfer to him of a
nine and one half (9 1/2) carat diamond ring with a
net value of P510,000.00; and, that the liabilities of
NSLA to David were civil in nature.'
"'That he had no hand whatsoever in the
transactions between David and NSLA since he
(Guingona Jr.) had resigned as NSLA president in
March 1978, or prior to those transactions; that he
assumed a portion of the liabilities of NSLA to David
because of the latter's insistence that he placed his
investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June
17, 1981 (Petition, Annex "D") he (Guingona, Jr.)
bound himself to pay David the sums of
P668.307.01 and US$37,500.00 in stated
installments; that he (Guingona, Jr.) secured
payment of those amounts with second mortgages
over two (2) parcels of land under a deed of Second
Real Estate Mortgage (Petition, Annex" E") in which
it was provided that the mortgage over one (1)
parcel shall be cancelled upon payment of one half
of the obligation to David; that he (Guingona, Jr.)
paid P200,000.00 and tendered another
25
 P300,000.00 which David refused to accept, hence,
he (Guingona, Jr.) filed Civil Case No. Q-33865 in
the Court of First Instance of Rizal at Quezon City,
to effect the release of the mortgage over one (1)
of the two parcels of land conveyed to David under
second mortgages.'
"At the inception of the preliminary investigation before
respondent Lota, petitioners moved to dismiss the charges
against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself
novated. Fiscal Lota denied the motion to dismiss (Petition,
p. 8)
"But, after the presentation of David's principal witness,
petitioners filed the instant petition because: (a) the
production of the Promissory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly
showed that the transactions between David and NSLA were
simple loans, i.e., civil obligations on the part of NSLA which
were novated when Guingona, Jr. and Martin assumed them;
and (b) David's principal witness allegedly testified that the
duplicate originals of the aforesaid instruments of
indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not recorded
(Petition, pp. 8-9).
"Petitioners alleged that they did not exhaust available
administrative remedies because to do so would be futile
(Petition, p. 9)" [pp. 153-157, rec.]
As correctly pointed out by the Solicitor General, the sole issue for resolution is
whether public respondents acted without jurisdiction when they investigated
the charges (estafa and violation of CB Circular No. 364 and related regulations
regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in
nature and therefore, public respondents have no jurisdiction over the charge of
estafa. prLL
A casual perusal of the December 23, 1981 affidavit-complaint filed in the Office
of the City Fiscal of Manila by private respondent David against petitioners
Teofisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with
one Robert Marshall and the other directors of the Nation Savings and Loan
Association, will show that from March 20, 1979 to March, 1981, private
respondent David, together with his sister, Denise Kuhne, invested with the
Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits
covered by Bankers Acceptances and Certificates of Time Deposits and the sum
of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and
29-742, or a total of P1,159,078.14 (pp. 15-16, rec.). It appears further that
private respondent David, together with his sister, made investments in the
aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 21, 1981, petitioners Guingona and Martin, upon the
request of private respondent David, assumed the obligation of the bank to
private respondent David by executing on June 17, 1981 a joint promissory note
in favor of private respondent acknowledging an indebtedness of P1,336,614.02
and US$75,000.00 (p. 80, rec.). This promissory note was based on the
statement of account as of June 30, 1981 prepared by the private respondent
(p. 81, rec.). The amount of indebtedness assumed appears to be bigger than
the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to
divide the said indebtedness, and petitioner Guingona executed another
promissory note antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25,
rec.). The aforesaid promissory notes were executed as a result of deposits
made by Clement David and Denise Kuhne with the Nation Savings and Loan
Association.
Furthermore, the various pleadings and documents filed by private respondent
David before this Court indisputably show that he has indeed invested his money
on time and savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money
on time and savings deposits with the aforesaid bank, the contract that was
perfected was a contract of simple loan or mutuum and not a contract of
deposit. Thus, Article 1980 of the New Civil Code provides that:
"Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning simple loan."
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114, 119
[1975], We said:
"It should be noted that fixed, savings, and current deposits
of money in banks and similar institutions are not true
deposits. They are considered simple loans and, as such, are
not preferred credits (Art. 1980 Civil Code: In re Liquidation
of Mercantile Bank of China: Tan Tiong Tick vs. American
Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association, 65 Phil. 375; Fletcher American
26
 National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65 Phil. 429;
Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA 96, 102 [1980]) that: prLL
"Bank deposits are in the nature of irregular deposits. They
are really loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans
(Art. 1980, Civil Code; Gullas vs. Phil. National Bank, 62
Phil. 519). Current and savings deposits are loans to a bank
because it can use the same. The petitioner here in making
time deposits that earn interests with respondent Overseas
Bank of Manila was in reality a creditor of the respondent
Bank and not a depositor. The respondent Bank was in turn
a debtor of petitioner. Failure of the respondent Bank to
honor the time deposit is failure to pay its obligation as a
debtor and not a breach of trust arising from a depository's
failure to return the subject matter of the deposit"
(emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings
and Loan Association is that of creditor and debtor; consequently, the ownership
of the amount deposited was transmitted to the Bank upon the perfection of the
contract and it can make use of the amount deposited for its banking operations,
such as to pay interests on deposits and to pay withdrawals. While the Bank has
the obligation to return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the failure of the
Bank to return the amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. 1(b) of the Revised Penal
Code, but it will only give rise to civil liability over which the public respondents
have no jurisdiction.
WE have already laid down the rule that:
"In order that a person can be convicted under the above-
quoted provision, it must be proven that he has the
obligation to deliver or return the same money, goods or
personal property that he received. Petitioners had no such
obligation to return the same money, i.e., the bills or coins,
which they received from private respondents. This is so
because as clearly stated in criminal complaints, the related
civil complaints and the supporting sworn statements, the
sums of money that petitioners received were loans.
"The nature of simple loan is defined in Articles 1933 and
1953 of the Civil Code.
"'Art. 1933. By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same for
a certain time and return it, in which case the
contract is called a commodatum; or money or
other consumable thing, upon the condition that
the same amount of the same kind and quality
shall be paid in which case the contract is simply
called a loan or mutuum.
"'Commodatum is essentially gratuitous.
"'Simple loan may be gratuitous or with a
stipulation to pay interest.
"'In commodatum the bailor retains the ownership
of the thing loaned, while in simple loan, ownership
passes to the borrower.
"'Art. 1953. A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
quality.'
"It can be readily noted from the above quoted provisions
that in simple loan (mutuum), as contrasted to
commodatum, the borrower acquires ownership of the
money, goods or personal property borrowed. Being the
owner, the borrower can dispose of the thing borrowed
(Article 248, Civil Code) and his act will not be considered
misappropriation thereof" (Yam vs. Malik, 94 SCRA 30, 34
[1979]; emphasis supplied).
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of paragraph
1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal
liability was deemed avoided, because when the aforesaid bank was placed
under receivership by the Central Bank, petitioners Guingona and Martin
assumed the obligation of the bank to private respondent David, thereby
resulting in the novation of the original contractual obligation arising from
deposit into a contract of loan and converting the original trust relation between
the bank and private respondent David into an ordinary debtor-creditor relation
between the petitioners and private respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would merely be a failure
to pay the obligation as a debtor.
27
Moreover, while it is true that novation does not extinguish criminal liability, it
may however, prevent the rise of criminal liability as long as it occurs prior to
the filing of the criminal information in court. Thus, in Gonzales vs. Serrano ( 25
SCRA 64, 69 [1968]) We held that: LexLib
"As pointed out in People vs. Nery, novation prior to the
filing of the criminal information as in the case at bar
may convert the relation between the parties into an
ordinary creditor-debtor relation, and place the complainant
in estoppel to insist on the original transaction or 'cast doubt
on the true nature' thereof."
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578,
580-581 [1983]), this Court reiterated the ruling in People vs. Nery ( 10 SCRA
244 [1964]), declaring that:
"The novation theory may perhaps apply prior to the filing of
the criminal information in court by the state prosecutors
because up to that time the original trust relation may be
converted by the parties into an ordinary creditor-debtor
situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities
have taken cognizance of the crime and instituted action in
court, the offended party may no longer divest the
prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense
against the state, only the latter can renounce it (People vs.
Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76;
U.S. vs. Montaes, 8 Phil. 620).
"It may be observed in this regard that novation is not one
of the means recognized by the Penal Code whereby criminal
liability can be extinguished; hence, the role of novation
may only be to either prevent the rise of criminal liability or
to cast doubt on the true nature of the original basic
transaction, whether or not it was such that its breach would
not give rise to penal responsibility, as when money loaned
is made to appear as a deposit, or other similar disguise is
resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs.
Villareal, 27 Phil. 481)."
In the case at bar, there is no dispute that petitioners Guingona and Martin
executed a promissory note on June 17, 1981 assuming the obligation of the
bank to private respondent David; while the criminal complaint for estafa was
filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear
that novation occurred long before the filing of the criminal complaint with the
Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided
but there will still be a civil liability on the part of petitioners Guingona and
Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central
Bank Circular No. 364 and other related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the amount of
US$75,000.00 without authority from the Central Bank. They contend however,
that the US dollars intended by respondent David for deposit were all converted
into Philippine currency before acceptance and deposit into Nation Savings and
Loan Association. LLphil
Petitioners' contention is worthy of belief for the following reasons:
1. It appears from the records that when respondent David was about to make a
deposit of bank draft issued in his name in the amount of US$50,000.00 with
the Nation Savings and Loan Association, the same had to be cleared first and
converted into Philippine currency. Accordingly, the bank draft was endorsed by
respondent David to petitioner Guingona, who in turn deposited it to his dollar
account with the Security Bank and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and Loan Association in order
to clear the bank draft through his dollar account because the bank did not have
a dollar account. Immediately after the bank draft was cleared, petitioner
Guingona authorized Nation Savings and Loan Association to withdraw the same
in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine
pesos before they were accepted and deposited in Nation Savings and Loan
Association, because the bank is presumed to have followed the ordinary course
of the business which is to accept deposits in Philippine currency only, and that
the transaction was regular and fair, in the absence of a clear and convincing
evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of
Court).
3. Respondent David has not denied the aforesaid contention of herein
petitioners despite the fact that it was raised in petitioners' reply filed on May 7,
1982 to private respondent's comment and in the July 27, 1982 reply to public
respondents' comment and reiterated in petitioners' memorandum filed on
October 30, 1982, thereby adding more support to the conclusion that the
US$75,000.00 were really converted into Philippine currency before they were
accepted and deposited into Nation Savings and Loan Association. Considering
that this might adversely affect his case, respondent David should have
promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in
nature and that there is no clear showing that they engaged in foreign exchange
transactions, We hold that the public respondents acted without jurisdiction
when they investigated the charges against the petitioners. Consequently, public
respondents should be restrained from further proceeding with the criminal case
for to allow the case to continue, even if the petitioners could have appealed to
28
the Ministry of Justice, would work great injustice to petitioners and would the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the
render meaningless the proper administration of justice. petition for certiorari challenging the trial court's action
admitting an amended information was sustained despite
the availability of appeal at the proper time."
While as a rule, the prosecution in a criminal offense cannot be the subject of
prohibition and injunction, this court has recognized the resort to the
extraordinary writs of prohibition and injunction in extreme cases, thus: WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
"On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is
that 'ordinarily, criminal prosecution may not be blocked by SO ORDERED.
court prohibition or injunction.' Exceptions, however, are
allowed in the following instances:
||| (Guingona, Jr. v. City Fiscal of Manila, G.R. No. 60033, [April 4, 1984], 213
PHIL 516-529)
"'1. for the orderly administration of justice;

"'2. to prevent the use of the strong arm of the law

in an oppressive and vindictive manner;

"'3. to avoid multiplicity of actions;

"'4. to afford adequate protection to constitutional

rights;

"'5. in proper cases, because the statute relied

upon is unconstitutional or was held invalid'"
(Primicias vs. Municipality of Urdaneta, Pangasinan,
93 SCRA 462, 469-470 [1979]; citing Ramos vs.
Torres, 25 SCRA 557 [1968]; and Hernandez vs. THIRD DIVISION
Albano, 19 SCRA 95, 96 [1967]).
[G.R. No. 156940. December 14, 2004.]
Likewise, in Lopez vs. The City Judge, et al. (18 SCRA 616, 621-622 [1966]), We
held that: cdll
ASSOCIATED BANK (Now WESTMONT BANK),
petitioner, vs. VICENTE HENRY TAN, respondent.
"The writs of certiorari and prohibition, as extraordinary
legal remedies, are in the ultimate analysis, intended to
annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a
fair and orderly administration of justice. Thus, in Yu Kong DECISION
Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a
petition for certiorari and prohibition although the accused in
the case could have appealed in due time from the order
complained of, our action in the premises being based on PANGANIBAN, J p:
the public welfare and the advancement of public policy, In
Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a
While banks are granted by law the right to debit the value of a dishonored
petition to restrain the prosecution of certain chiropractors
check from a depositor's account, they must do so with the highest degree of
although, if convicted, they could have appealed. We gave
care, so as not to prejudice the depositor unduly.
due course to their petition for the orderly administration of
justice and to avoid possible oppression by the strong arm of

29
 The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing
the January 27, 2003 Decision 2 of the Court of Appeals (CA) in CA-GR CV No.
56292. The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated
December 3, 1996, of the Regional Trial Court of
Cabanatuan City, Third Judicial Region, Branch 26, in Civil
Case No. 892-AF is hereby AFFIRMED. Costs against the
[petitioner]." 3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a
regular depositor-creditor of the Associated Bank
(hereinafter referred to as the BANK). Sometime in
September 1990, he deposited a postdated UCPB check with
the said BANK in the amount of P101,000.00 issued to him
by a certain Willy Cheng from Tarlac. The check was duly
entered in his bank record thereby making his balance in the
amount of P297,000.00, as of October 1, 1990, from his
original deposit of P196,000.00. Allegedly, upon advice and
instruction of the BANK that the P101,000.00 check was
already cleared and backed up by sufficient funds, TAN, on
the same date, withdrew the sum of P240,000.00, leaving a
balance of P57,793.45. A day after, TAN deposited the
amount of P50,000.00 making his existing balance in the
amount of P107,793.45, because he has issued several
checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners went back to
him alleging that the checks he issued bounced for
insufficiency of funds. Thereafter, TAN, thru his lawyer,
informed the BANK to take positive steps regarding the
matter for he has adequate and sufficient funds to pay the
amount of the subject checks. Nonetheless, the BANK did
not bother nor offer any apology regarding the incident.
Consequently, TAN, as plaintiff, filed a Complaint for
Damages on December 19, 1990, with the Regional Trial
Court of Cabanatuan City, Third Judicial Region, docketed as
Civil Case No. 892-AF, against the BANK, as defendant.
SDITAC
"In his [C]omplaint, [respondent] maintained that he ha[d]
sufficient funds to pay the subject checks and alleged that
his suppliers decreased in number for lack of trust. As he
has been in the business community for quite a time and
has established a good record of reputation and probity,
plaintiff claimed that he suffered embarrassment,
humiliation, besmirched reputation, mental anxieties and
sleepless nights because of the said unfortunate incident.
[Respondent] further averred that he continuously lost
profits in the amount of P250,000.00. [Respondent]
therefore prayed for exemplary damages and that
[petitioner] be ordered to pay him the sum of P1,000,000.00
by way of moral damages, P250,000.00 as lost profits,
P50,000.00 as attorney's fees plus 25% of the amount
claimed including P1,000.00 per court appearance.
2004cdasia
"Meanwhile, [petitioner] filed a Motion to Dismiss on
February 7, 1991, but the same was denied for lack of merit
in an Order dated March 7, 1991. Thereafter, [petitioner]
BANK on March 20, 1991 filed its Answer denying, among
others, the allegations of [respondent] and alleged that no
banking institution would give an assurance to any of its
client/depositor that the check deposited by him had already
been cleared and backed up by sufficient funds but it could
only presume that the same has been honored by the
drawee bank in view of the lapse of time that ordinarily
takes for a check to be cleared. For its part, [petitioner]
alleged that on October 2, 1990, it gave notice to the
[respondent] as to the return of his UCPB check deposit in
the amount of P101,000.00, hence, on even date,
30
 [respondent] deposited the amount of P50,000.00 to cover Ruling of the Court of Appeals
the returned check.
Affirming the trial court, the CA ruled that the bank should not have authorized
"By way of affirmative defense, [petitioner] averred that the withdrawal of the value of the deposited check prior to its clearing. Having
[respondent] had no cause of action against it and argued done so, contrary to its obligation to treat respondent's account with meticulous
that it has all the right to debit the account of the care, the bank violated its own policy. It thereby took upon itself the obligation
[respondent] by reason of the dishonor of the check to officially inform respondent of the status of his account before unilaterally
deposited by the [respondent] which was withdrawn by him debiting the amount of P101,000. Without such notice, it is estopped from
prior to its clearing. [Petitioner] further averred that it has blaming him for failing to fund his account.
no liability with respect to the clearing of deposited checks
as the clearing is being undertaken by the Central Bank and
The CA opined that, had the P101,000 not been debited, respondent would have
in accepting [the] check deposit, it merely obligates itself as
had sufficient funds for the postdated checks he had issued. Thus, the supposed
depositor's collecting agent subject to actual payment by the
accommodation accorded by petitioner to him is the proximate cause of his
drawee bank. [Petitioner] therefore prayed that
business woes and shame, for which it is liable for damages.
[respondent] be ordered to pay it the amount of
P1,000,000.00 by way of loss of goodwill, P7,000.00 as
acceptance fee plus P500.00 per appearance and by way of Because of the bank's negligence, the CA awarded respondent moral damages of
attorney's fees. P100,000. It also granted him exemplary damages of P75,000 and attorney's
fees of P25,000.
"Considering that Westmont Bank has taken over the
management of the affairs/properties of the BANK, Hence this Petition. 5
[respondent] on October 10, 1996, filed an Amended
Complaint reiterating substantially his allegations in the Issue
original complaint, except that the name of the previous
defendant ASSOCIATED BANK is now WESTMONT BANK.
In its Memorandum, petitioner raises the sole issue of "whether or not the
petitioner, which is acting as a collecting bank, has the right to debit the account
"Trial ensured and thereafter, the court rendered its Decision of its client for a check deposit which was dishonored by the drawee bank." 6
dated December 3, 1996 in favor of the [respondent] and
against the [petitioner], ordering the latter to pay the
[respondent] the sum of P100,000.00 by way of moral The Court's Ruling
damages, P75,000.00 as exemplary damages, P25,000.00
as attorney's fees, plus the costs of this suit. In making said The Petition has no merit. ESaITA
ruling, it was shown that [respondent] was not officially
informed about the debiting of the P101,000.00 [from] his
existing balance and that the BANK merely allowed the Sole Issue:
[respondent] to use the fund prior to clearing merely for Debit of Depositor's Account
accommodation because the BANK considered him as one of
its valued clients. The trial court ruled that the bank
Petitioner-bank contends that its rights and obligations under the present set of
manager was negligent in handling the particular checking
facts were misappreciated by the CA. It insists that its right to debit the amount
account of the [respondent] stating that such lapses caused
of the dishonored check from the account of respondent is clear and
all the inconveniences to the [respondent]. The trial court
unmistakable. Even assuming that it did not give him notice that the check had
also took into consideration that [respondent's] mother was
been dishonored, such right remains immediately enforceable.
originally maintaining with the . . . BANK [a] current account
as well as [a] time deposit, but [o]n one occasion, although
his mother made a deposit, the same was not credited in her In particular, petitioner argues that the check deposit slip accomplished by
favor but in the name of another." 4 respondent on September 17, 1990, expressly stipulated that the bank was
obligating itself merely as the depositor's collecting agent and until such time
as actual payment would be made to it it was reserving the right to charge
Petitioner appealed to the CA on the issues of whether it was within its rights, as
against the depositor's account any amount previously credited. Respondent was
collecting bank, to debit the account of its client for a dishonored check; and
allowed to withdraw the amount of the check prior to clearing, merely as an act
whether it had informed respondent about the dishonor prior to debiting his
of accommodation, it added.
account.
31
At the outset, we stress that the trial court's factual findings that were affirmed
by the CA are not subject to review by this Court. 7 As petitioner itself takes no
issue with those findings, we need only to determine the legal consequence,
based on the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment
of any withdrawals on the part of a depositor. 8 The right of a collecting bank to
debit a client's account for the value of a dishonored check that has previously
been credited has fairly been established by jurisprudence. To begin with, Article
1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that
of creditor and debtor. 9 Thus, legal compensation under Article 1278 10 of the
Civil Code may take place "when all the requisites mentioned in Article 1279 are
present," 11 as follows:
"(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor." 12
Nonetheless, the real issue here is not so much the right of petitioner to debit
respondent's account but, rather, the manner in which it exercised such right.
The Court has held that even while the right of setoff is conceded, separate is
the question of whether that remedy has properly been exercised. 13
The liability of petitioner in this case ultimately revolves around the issue of
whether it properly exercised its right of setoff. The determination thereof
hinges, in turn, on the bank's role and obligations, first, as respondent's
depositary bank; and second, as collecting agent for the check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori, 14 the Court has emphasized that the banking
business is impressed with public interest. "Consequently, the highest degree of
diligence is expected, and high standards of integrity and performance are even
required of it. By the nature of its functions, a bank is under obligation to treat
the accounts of its depositors with meticulous care." 15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court
of Appeals 16 has held that "the degree of diligence required of banks is more
than that of a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned." 17 Indeed, the banking
business is vested with the trust and confidence of the public; hence the
"appropriate standard of diligence must be very high, if not the highest, degree
of diligence." 18 The standard applies, regardless of whether the account
consists of only a few hundred pesos or of millions. 19
The fiduciary nature of banking, previously imposed by case law, 20 is now
enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section
2 of the law specifically says that the State recognizes the "fiduciary nature of
banking that requires high standards of integrity and performance."
Did petitioner treat respondent's account with the highest degree of care? From
all indications, it did not.
It is undisputed nay, even admitted that purportedly as an act of
accommodation to a valued client, petitioner allowed the withdrawal of the face
value of the deposited check prior to its clearing. That act certainly disregarded
the clearance requirement of the banking system. Such a practice is unusual,
because a check is not legal tender or money; 21 and its value can properly be
transferred to a depositor's account only after the check has been cleared by the
drawee bank. 22
Under ordinary banking practice, after receiving a check deposit, a bank either
immediately credit the amount to a depositor's account; or infuse value to that
account only after the drawee bank shall have paid such amount. 23 Before the
check shall have been cleared for deposit, the collecting bank can only "assume"
at its own risk as herein petitioner did that the check would be cleared and
paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner
should not have authorized the withdrawal by respondent of P240,000 on
October 1, 1990, as this amount was over and above his outstanding cleared
balance of P196,793.45. 24 Hence, the lower courts correctly appreciated the
evidence in his favor.
Obligation as
Collecting Agent
32
Indeed, the bank deposit slip expressed this reservation:
"In receiving items on deposit, this Bank obligates itself only
as the Depositor's Collecting agent, assuming no
responsibility beyond carefulness in selecting
correspondents, and until such time as actual payments
shall have come to its possession, this Bank reserves the
right to charge back to the Depositor's account any amounts
previously credited whether or not the deposited item is
returned. . . ." 25
However, this reservation is not enough to insulate the bank from any liability. In
the past, we have expressed doubt about the binding force of such conditions
unilaterally imposed by a bank without the consent of the depositor. 26 It is
indeed arguable that "in signing the deposit slip, the depositor does so only to
identify himself and not to agree to the conditions set forth at the back of the
deposit slip." 27
Further, by the express terms of the stipulation, petitioner took upon itself
certain obligations as respondent's agent, consonant with the well-settled rule
that the relationship between the payee or holder of a commercial paper and the
collecting bank is that of principal and agent. 28 Under Article 1909 29 of the
Civil Code, such bank could be held liable not only for fraud, but also for
negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment. 30 Due to the very nature of their business, banks are expected to
exercise the highest degree of diligence in the selection and supervision of their
employees. 31 Jurisprudence has established that the lack of diligence of a
servant is imputed to the negligence of the employer, when the negligent or
wrongful act of the former proximately results in an injury to a third person; 32
in this case, the depositor.
The manager of the bank's Cabanatuan branch, Consorcia Santiago,
categorically admitted that she and the employees under her control had
breached bank policies. They admittedly breached those policies when, without
clearance from the drawee bank in Baguio, they allowed respondent to withdraw
on October 1, 1990, the amount of the check deposited. Santiago testified that
respondent "was not officially informed about the debiting of the P101,000 from
his existing balance of P170,000 on October 2, 1990 . . . " 33
Being the branch manager, Santiago clearly acted within the scope of her
authority in authorizing the withdrawal and the subsequent debiting without
notice. Accordingly, what remains to be determined is whether her actions
proximately caused respondent's injury. Proximate cause is that which in a
natural and continuous sequence, unbroken by any efficient intervening cause
produces the injury, and without which the result would not have occurred. 34
Let us go back to the facts as they unfolded. It is undeniable that the bank's
premature authorization of the withdrawal by respondent on October 1, 1990,
triggered in rapid succession and in a natural sequence the debiting of his
account, the fall of his account balance to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds. The CA correctly noted thus:
". . . [T]he depositor . . . withdrew his money upon the
advice by [petitioner] that his money was already cleared.
Without such advice, [respondent] would not have
withdrawn the sum of P240,000.00. Therefore, it cannot be
denied that it was [petitioner's] fault which allowed
[respondent] to withdraw a huge sum which he believed was
already his. TaCEHA
"To emphasize, it is beyond cavil that [respondent] had
sufficient funds for the check. Had the P101,000.00 not
[been] debited, the subject checks would not have been
dishonored. Hence, we can say that [respondent's] injury
arose from the dishonor of his well-funded checks. . . ." 35
Aggravating matters, petitioner failed to show that it had immediately and duly
informed respondent of the debiting of his account. Nonetheless, it argues that
the giving of notice was discernible from his act of depositing P50,000 on
October 2, 1990, to augment his account and allow the debiting. This argument
deserves short shrift.
First, notice was proper and ought to be expected. By the bank manager's
account, respondent was considered a "valued client" whose checks had always
been sufficiently funded from 1987 to 1990, 36 until the October imbroglio.
Thus, he deserved nothing less than an official notice of the precarious condition
of his account.
Second, under the provisions of the Negotiable Instruments Law regarding the
liability of a general indorser 37 and the procedure for a notice of dishonor, 38 it
was incumbent on the bank to give proper notice to respondent. In Gullas v.
National Bank, 39 the Court emphasized:
". . . [A] general indorser of a negotiable instrument
engages that if the instrument the check in this case is
dishonored and the necessary proceedings for its dishonor
are duly taken, he will pay the amount thereof to the holder
(Sec. 66) It has been held by a long line of authorities that
notice of dishonor is necessary to charge an indorser and
that the right of action against him does not accrue until the
notice is given.
". . . The fact we believe is undeniable that prior to the
mailing of notice of dishonor, and without waiting for any
action by Gullas, the bank made use of the money standing
33
 in his account to make good for the treasury warrant. At this
point recall that Gullas was merely an indorser and had
issued checks in good faith. As to a depositor who has funds
sufficient to meet payment of a check drawn by him in favor
of a third party, it has been held that he has a right of
action against the bank for its refusal to pay such a check in
the absence of notice to him that the bank has applied the
funds so deposited in extinguishment of past due claims
held against him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203.) However this may be, as to an indorser the
situation is different, and notice should actually have been
given him in order that he might protect his interests." 40
Third, regarding the deposit of P50,000 made by respondent on October 2,
1990, we fully subscribe to the CA's observations that it was not unusual for a
well-reputed businessman like him, who "ordinarily takes note of the amount of
money he takes and releases," to immediately deposit money in his current
account to answer for the postdated checks he had issued. 41
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and
attorney's fees, we will no longer address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
||| (Associated Bank (now Westmont Bank) v. Tan, G.R. No. 156940,
[December 14, 2004], 487 PHIL 512-530)
SECOND DIVISION
[G.R. No. L-38427. March 12, 1975.]
CENTRAL BANK OF THE PHILIPPINES as Liquidator of
the FIDELITY SAVINGS BANK, petitioner, vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding
Judge of Branch XIII, Court of First Instance of
Manila, Spouses AUGUSTO and ADELAIDA PADILLA
and Spouses MARCELA and JOB ELIZES, respondents.
F.E. Evangelista & Agapito S. Fajardo for petitioner.
Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.
SYNOPSIS
Private respondents secured against Savings Bank, after the same had been
declared insolvent, final judgments for the recovery of the balance of their time
deposits. Payment of the same as preferred credits evidenced by final judgments
in accordance with Article 2244 (14) (b) of the Civil Code was directed by the
liquidation court. From this order, the Central Bank appealed by certiorari.
The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply
and the judgments obtained by the respondents against the involvent savings
bank do not enjoy preference.
Orders of the lower court reversed and set aside.
DECISION
AQUINO, J p:
This case involves the question of whether a final judgment for the payment of a
time deposit in a savings bank, which judgment was obtained after the bank was
declared insolvent, is a preferred claim against the bank. The question arises
under the following facts:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its
assets, forbade it to do business, and instructed the Central Bank Legal Counsel
to take appropriate legal actions (Resolution No. 350).
34
On December 9, 1969 the Board resolved to seek the court's assistance and
supervision in the liquidation of the bank. The resolution was implemented only
on January 25, 1972 when the Central Bank of the Philippines filed the
corresponding petition for assistance and supervision in the Court of First
Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and
Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against
the Fidelity Savings Bank for the recovery of the sum of P50,584 as the balance
of their time deposits (Civil Case No. 82520 assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity
Savings Bank was ordered to pay the Elizes spouses the sum of P50,584 plus
accumulated interest.
In another case, assigned to Branch XXX of the Court of First Instance of Manila,
the spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the
balance of their time deposits, plus interests, P70,000 as moral and exemplary
damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action
was filed on September 6, 1971).
the statements of the Superintendent to be true, shall
forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds
according to law.
"The Monetary Board shall thereupon determine within thirty
days whether the institution may be reorganized or
otherwise placed in such a condition so that it may be
permitted to resume business with safety to its creditors and
shall prescribe the conditions under which such resumption
of business shall take place. In such case the expenses and
fees in the administration of the institution shall be
determined by the Board and shall be paid to the Central
Bank out of the assets of such banking institution.
"At any time within ten days after the Monetary Board has
taken charge of the assets of any banking institution, such
institution may apply to the Court of First Instance for an
order requiring the Monetary Board to show cause why it
should not be enjoined from continuing such charge of its
assets, and the court may direct the Board to refrain from
further proceedings and to surrender charge of its assets.

"If the Monetary Board shall determine that the banking

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch
institution cannot resume business with safety to its
XIII having cognizance of the liquidation proceeding), upon motions of the Elizes
creditors, it shall, by the Solicitor General, file a petition in
and Padilla spouses and over the opposition of the Central Bank, directed the
the Court of First Instance reciting the proceedings which
latter, as liquidator, to pay their time deposits as preferred credits, evidenced by
have been taken and praying the assistance and supervision
final judgments, within the meaning of article 2244(14)(b) of the Civil Code, if
of the court in the liquidation of the affairs of the same. The
there are enough funds in the liquidator's custody in excess of the credits more
Superintendent shall thereafter, upon order of the Monetary
preferred under section 30 of the Central Bank Law in relation to articles 2244
Board and under the supervision of the court and with all
and 2251 of the Civil Code.
convenient speed, convert the assets of the banking
institution to money.
From the said order, the Central Bank appealed to this Court by certiorari. It
contends that the final judgments secured by the Elizes and Padilla spouses do
"SEC. 30. Distribution of assets. In case of liquidation of a
not enjoy any preference because (a) they were rendered after the Fidelity
banking institution, after payment of the costs of the
Savings Bank was declared insolvent and (b) under the charter of the Central
proceedings, including reasonable expenses and fees of the
Bank and the General Banking Law, no final judgment can be validly obtained
Central Bank to be allowed by the court, the Central Bank
against an insolvent bank.
shall pay the debts of such institution, under the order of the
court, in accordance with their legal priority."
Republic Act No. 265 provides:
The General Banking Act, Republic Act No. 337, provides:
"SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the Superintendent or his examiners or
"SEC. 85. Any director or officer of any banking institution
agents into the condition of any banking institution, it shall
who receives or permits or causes to be received in said
be disclosed that the condition of the same is one of
bank any deposit, or who pays out or permits or causes to
insolvency, or that its continuance in business would involve
be paid out any funds of said bank, or who transfers or
probable loss to its depositors or creditors, it shall be the
permits or causes to be transferred any securities or
duty of the Superintendent forthwith, in writing, to inform
property of said bank, after said bank becomes insolvent,
the Monetary Board of the facts, and the Board, upon finding
shall be punished by fine of not less than one thousand nor
35
 more than ten thousand pesos and by imprisonment for not
less than two nor more than ten years."
The Civil Code provides:
"ART. 2237. Insolvency shall be governed by special laws
insofar as they are not inconsistent with this Code. (n)
"ART. 2244. With reference to other property, real and
personal, of the debtor, the following claims or credits shall
be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have
been the subject of litigation. These credits shall have
preference among themselves in the order of priority of the
dates of the instruments and of the judgments, respectively.
( 1924a)
"ART. 2251. Those credits which do not enjoy any
preference with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be
satisfied according to the following rules:
(1) In the order established in article 2244;(2) Common
credits referred to in article 2246 shall be paid pro rata
regardless of dates. (1929a)".
The trial court or, to be exact, the liquidation court noted that there is no
provision in the charter of the Central Bank and in the General Banking Law
(Republic Acts Nos. 265 and 337, respectively) which suspends or abates civil
actions against an insolvent bank pending in courts other than the liquidation
court. It reasoned out that, because such actions are not suspended, judgments
against insolvent banks could be considered as preferred credits under article
2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central
Bank Act, section 18 of the Insolvency Law provides that upon the issuance by
the court of an order declaring a person insolvent, "all civil proceedings against
the said insolvent shall be stayed".
The liquidation court directed the Central Bank to honor the writs of execution
issued by Branches I and XXX for the enforcement of the judgments obtained by
the Elizes and Padilla spouses. It suggested that, after satisfaction of the
judgments, the Central Bank, as liquidator, should include said judgments in the
list of preferred credits contained in the "Project of Distribution" "with the
notation 'already paid'".
On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the
Board becomes the trustee of its assets "for the equal benefit of all the creditors,
including the depositors". The Central Bank cites the ruling that "the assets of an
insolvent banking institution are held in trust for the equal benefit of all
creditors, and after its insolvency, one cannot obtain an advantage or a
preference over another by an attachment, execution or otherwise" (Rohr vs.
Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent
bank should file their actions with the liquidation court. In support of that view it
cites the provision that the Insolvency Law does not apply to banks (last
sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director or officer of a hank who
disburses, or allows disbursement, of the funds of the bank after it becomes
insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the
ruling that "a creditor of an insolvent state bank in the hands of a liquidator who
recovered a judgment against it is not entitled to a preference for (by) the mere
fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen,
207 N. Carolina 10, 175 S. E. 838, Braver, Liquidation of Financial Institutions, p.
922).
It should be noted that fixed, savings, and current deposits of money in banks
and similar institutions are not true deposits. They are considered simple loans
and, as such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation
of Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65
Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375;
Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery
vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that
when a bank is found to be insolvent, the Monetary Board shall forbid it to do
business and shall take charge of its assets. The Board in its Resolution No. 350
dated February 18, 1969 banned the Fidelity Savings Bank from doing business.
It took charge of the bank's assets. Evidently, one purpose in prohibiting the
insolvent bank from doing business is to prevent some depositors from having
an undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would
be rendered for the payment of their deposits and then such judgments would
be considered preferred credits under article 2244(14)(b) of the Civil Code.
36
We are of the opinion that such judgments cannot be considered preferred and
that article 2244(14)(b) does not apply to judgments for the payment of the
deposits in an insolvent savings bank which were obtained after the declaration
of insolvency.
A contrary rule or practice would be productive of injustice, mischief and
confusion. To recognize such judgments as entitled to priority would mean that
depositors in insolvent banks, after learning that the bank is insolvent as shown
by the fact that it can no longer pay withdrawals or that it has closed its doors or
has been enjoined by the Monetary Board from doing business, would rush to
the courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that
character. Some of the judgments would be default judgments. Depositors
armed with such judgments would pester the liquidation court with claims for
preference on the basis of article 2244(14)(b). Less alert depositors would be
prejudiced. That inequitable situation could not have been contemplated by the
framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the
instant case. It appears in that case that the Stanton Trust & Savings Bank of
Great Falls closed its doors to business on July 9, 1923. On November 7, 1924
the bank (then already under liquidation) issued to William Rohr a certificate
stating that he was entitled to claim from the bank $1,191.72 and that he was
entitled to dividends thereon. Later, Rohr sued the bank for the payment of his
claim. The bank demurred to the complaint. The trial court sustained the
demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the
Supreme Court of Montana said:
"The general principle of equity that the assets of an
insolvent are to be distributed ratably among general
creditors applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is merely a
general creditor, and, as such, is not entitled to any
preference or priority over other general creditors.
"The assets of a bank in process of liquidation are held in
trust for the equal benefit of all creditors. and one cannot be
permitted to obtain an advantage or preference over another
by an attachment, execution or otherwise. A disputed claim
of a creditor may be adjudicated, but those whose claims
are recognized and admitted may not successfully maintain
action thereon. So to permit would defeat the very purpose
of the liquidation of a bank whether being voluntarily
accomplished or through the intervention of a receiver.
xxx xxx xxx
"The available assets of such a bank are held in trust, and so
conserved that each depositor or other creditor shall receive
payment or dividend according to the amount of his debt,
and that none of equal class shall receive any advantage or
preference over another."
And with respect to a national bank under voluntary liquidation, the court noted
in the Rohr case that the assets of such a bank "become a trust fund, to be
administered for the benefit of all creditors pro rata, and, while the bank retains
its corporate existence, and may be sued, the effect of a judgment obtained
against it by a creditor is only to fix the amount of debt. He can acquire no lien
which will give him any preference or advantage over other general creditors."
(245 Pac. 249) **
Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the
category of preferred credits simply because the depositors, taking advantage of
the long interval between the declaration of insolvency and the filing of the
petition for judicial assistance and supervision, were able to secure judgments
for the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses
a priority over the other depositors whose deposits were likewise indisputably
due and owing from the insolvent bank but who did not want to incur litigation
expenses in securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations
since February 19, 1969, was forbidden to do business (and that ban would
include the payment of time deposits) implies that suits for the payment of such
deposits were prohibited. What was directly prohibited should not be
encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of
Paterson, 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains
the Bank Liquidation Rules and Regulations, it indicated in Step III the procedure
for processing the claims against the insolvent bank. In Step IV, the court
directed the Central Bank, as liquidator, to submit a Project of Distribution which
should include "a list of the preferred credits to be paid in full in the order of
priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil
Code (note that article 2244 was not mentioned). There is no cogent reason why
the Elizes and Padilla spouses should not adhere to the procedure outlined in the
said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25,
1974 are reversed and set aside. No costs.
SO ORDERED.
37
||| (Central Bank of the Philippines v. Morfe, G.R. No. L-38427, [March 12,
1975], 159 PHIL 727-737)
REPUBLIC ACT No. 1405
AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO,
DEPOSITS WITH ANY BANKING INSTITUTION AND PROVIDING
PENALTY THEREFOR.
Section 1. It is hereby declared to be the policy of the Government to
give encouragement to the people to deposit their money in banking
institutions and to discourage private hoarding so that the same may be
properly utilized by banks in authorized loans to assist in the economic
development of the country.
Section 2. 1 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 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.
Section 4. All Acts or parts of Acts, Special Charters, Executive Orders,
Rules and Regulations which are inconsistent with the provisions of this
Act are hereby repealed.
Section 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.
Section 6. This Act shall take effect upon its approval.
Approved: September 9, 1955
REPUBLIC ACT No. 6426
AN ACT INSTITUTING A FOREIGN CURRENCY DEPOSIT SYSTEM IN
THE PHILIPPINES, AND FOR OTHER PURPOSES.
Section 1. Title. This act shall be known as the "Foreign Currency
Deposit Act of the Philippines."
Section 2. Authority to deposit foreign currencies. Any person, natural
or juridical, may, in accordance with the provisions of this Act, deposit
with such Philippine banks in good standing, as may, upon application, be
designated by the Central Bank for the purpose, foreign currencies which
are acceptable as part of the international reserve, except those which
are required by the Central Bank to be surrendered in accordance with
the provisions of Republic Act Numbered two hundred sixty-five (Now
Rep. Act No. 7653).
Section 3. Authority of banks to accept foreign currency deposits. The
banks designated by the Central Bank under Section two hereof shall
have the authority:
(1) To accept deposits and to accept foreign currencies in trust
Provided, That numbered accounts for recording and servicing of
said deposits shall be allowed;
(2) To issue certificates to evidence such deposits;
(3) To discount said certificates;
(4) To accept said deposits as collateral for loans subject to such
rules and regulations as may be promulgated by the Central Bank
from time to time; and
(5) To pay interest in foreign currency on such deposits.
Section 4. Foreign currency cover requirements. Except as the
Monetary Board may otherwise prescribe or allow, the depository banks
shall maintain at all times a one hundred percent foreign currency cover
for their liabilities, of which cover at least fifteen percent shall be in the
form of foreign currency deposit with the Central Bank, and the balance
in the form of foreign currency loans or securities, which loans or
securities shall be of short term maturities and readily marketable. Such
foreign currency loans may include loans to domestic enterprises which
38
are export-oriented or registered with the Board of Investments, subject
to the limitations to be prescribed by the Monetary Board on such loans.
Except as the Monetary Board may otherwise prescribe or allow, the
foreign currency cover shall be in the same currency as that of the
corresponding foreign currency deposit liability. The Central Bank may
pay interest on the foreign currency deposit, and if requested shall
exchange the foreign currency notes and coins into foreign currency
instruments drawn on its depository banks. (As amended by PD No.
1453, June 11, 1978.)
Depository banks which, on account of networth, resources, past
performance, or other pertinent criteria, have been qualified by the
Monetary Board to function under an expanded foreign currency deposit
system, shall be exempt from the requirements in the preceding
paragraph of maintaining fifteen percent (15%) of the cover in the form
of foreign currency deposit with the Central Bank. Subject to prior Central
Bank approval when required by Central Bank regulations, said
depository banks may extend foreign currency loans to any domestic
enterprise, without the limitations prescribed in the preceding paragraph
regarding maturity and marketability, and such loans shall be eligible for
purposes of the 100% foreign currency cover prescribed in the preceding
paragraph. (As added by PD No. 1035.)
Section 5. Withdrawability and transferability of deposits. There shall
be no restriction on the withdrawal by the depositor of his deposit or on
the transferability of the same abroad except those arising from the
contract between the depositor and the bank.
Section 6. Tax exemption. All foreign currency deposits made under
this Act, as amended by PD No. 1035, as well as foreign currency
deposits authorized under PD No. 1034, including interest and all other
income or earnings of such deposits, are hereby exempted from any and
all taxes whatsoever irrespective of whether or not these deposits are
made by residents or nonresidents so long as the deposits are eligible or
allowed under aforementioned laws and, in the case of nonresidents,
irrespective of whether or not they are engaged in trade or business in
the Philippines. (As amended by PD No. 1246, prom. Nov. 21, 1977.)
Section 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
publications 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, rules and regulations at the time the deposit was
made shall govern.
Section 8. Secrecy of foreign currency deposits. All foreign currency
deposits authorized under this Act, as amended by PD No. 1035, as well
as foreign currency deposits authorized under PD 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 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.)
Section 9. Deposit insurance coverage. The deposits under this Act
shall be insured under the provisions of Republic Act No. 3591, as
amended (Philippine Deposit Insurance Corporation), as well as its
implementing rules and regulations: Provided, That insurance payment
shall be in the same currency in which the insured deposits are
denominated.
Section 10. Penal provisions. Any willful violation of this Act or any
regulation duly promulgated by the Monetary Board pursuant hereto shall
subject the offender upon conviction to an imprisonment of not less than
one year nor more than five years or a fine of not less than five thousand
pesos nor more than twenty-five thousand pesos, or both such fine and
imprisonment at the discretion of the court.
Section 11. Separability clause. The provisions of this Act are hereby
declared to be separable and in the event one or more of such provisions
are held unconstitutional, the validity of other provisions shall not be
affected thereby.
Section 12. Repealing clause. All acts, executive orders, rules and
regulations, or parts thereof, which are inconsistent with any provisions
of this Act are hereby repealed, amended or modified accordingly,
without prejudice, however, to deposits made thereunder.
Section 12-A. Amendatory enactments and regulations. In the event a
new enactment or regulation is issued decreasing the rights hereunder
granted, such new enactment or regulation shall not apply to foreign
currency deposits already made or existing at the time of issuance of
such new enactment or regulation, but such new enactment or regulation
shall apply only to foreign currency deposits made after its issuance. (As
added by PD No. 1246, prom. Nov. 21, 1977.)
Section 13. Effectivity. This Act shall take effect upon its approval.
Approved, April 4, 1974
39
Republic Act No. 9372 March 6, 2007
AN ACT TO SECURE THE STATE AND PROTECT OUR PEOPLE FROM
TERRORISM
Be it enacted by the Senate and the House of Representatives of the
Philippines in Congress assembled:
SECTION 1. Short Title. - This Act shall henceforth be known as the
"Human Security Act of 2007."
SEC. 2. Declaration of Policy. - It is declared a policy of the State to
protect life, liberty, and property from acts of terrorism, to condemn
terrorism as inimical and dangerous to the national security of the
country and to the welfare of the people, and to make terrorism a crime
against the Filipino people, against humanity, and against the law of
nations.
In the implementation of the policy stated above, the State shall uphold
the basic rights and fundamental liberties of the people as enshrined in
the Constitution.
The State recognizes that the fight against terrorism requires a
comprehensive approach, comprising political, economic, diplomatic,
military, and legal means duly taking into account the root causes of
terrorism without acknowledging these as justifications for terrorist
and/or criminal activities. Such measures shall include conflict
management and post-conflict peace-building, addressing the roots of
conflict by building state capacity and promoting equitable economic
development.
Nothing in this Act shall be interpreted as a curtailment, restriction or
diminution of constitutionally recognized powers of the executive branch
of the government. It is to be understood, however that the exercise of
the constitutionally recognized powers of the executive department of the
government shall not prejudice respect for human rights which shall be
absolute and protected at all times.
SEC. 3. Terrorism.- Any person who commits an act punishable under
any of the following provisions of the Revised Penal Code:
a. Article 122 (Piracy in General and Mutiny in the High Seas or in
the Philippine Waters);
b. Article 134 (Rebellion or Insurrection);
c. Article 134-a (Coup d' Etat), including acts committed by private
persons;
d. Article 248 (Murder);
e. Article 267 (Kidnapping and Serious Illegal Detention);
f. Article 324 (Crimes Involving Destruction), or under
1. Presidential Decree No. 1613 (The Law on Arson);
2. Republic Act No. 6969 (Toxic Substances and Hazardous
and Nuclear Waste Control Act of 1990);
3. Republic Act No. 5207, (Atomic Energy Regulatory and
Liability Act of 1968);
4. Republic Act No. 6235 (Anti-Hijacking Law);
5. Presidential Decree No. 532 (Anti-Piracy and Anti-
Highway Robbery Law of 1974); and,
6. Presidential Decree No. 1866, as amended (Decree
Codifying the Laws on Illegal and Unlawful Possession,
Manufacture, Dealing in, Acquisition or Disposition of
Firearms, Ammunitions or Explosives)
thereby sowing and creating a condition of widespread and extraordinary
fear and panic among the populace, in order to coerce the government to
give in to an unlawful demand shall be guilty of the crime of terrorism
and shall suffer the penalty of forty (40) years of imprisonment, without
the benefit of parole as provided for under Act No. 4103, otherwise
known as the Indeterminate Sentence Law, as amended.
SEC. 4. Conspiracy to Commit Terrorism. - Persons who conspire to
commit the crime of terrorism shall suffer the penalty of forty (40) years
of imprisonment.
There is conspiracy when two or more persons come to an agreement
concerning the commission of the crime of terrorism as defined in Section
3 hereof and decide to commit the same.
SEC. 5. Accomplice. - Any person who, not being a principal under
Article 17 of the Revised Penal Code or a conspirator as defined in
Section 4 hereof, cooperates in the execution of either the crime of
terrorism or conspiracy to commit terrorism by previous or simultaneous
40
acts shall suffer the penalty of from seventeen (17) years, four months
one day to twenty (20) years of imprisonment.
SEC. 6. Accessory. - Any person who, having knowledge of the
commission of the crime of terrorism or conspiracy to commit terrorism,
and without having participated therein, either as principal or accomplice
under Articles 17 and 18 of the Revised Penal Code, takes part
subsequent to its commission in any of the following manner: (a) by
profiting himself or assisting the offender to profit by the effects of the
crime; (b) by concealing or destroying the body of the crime, or the
effects, or instruments thereof, in order to prevent its discovery; (c) by
harboring, concealing, or assisting in the escape of the principal or
conspirator of the crime, shall suffer the penalty of ten (10) years and
one day to twelve (12) years of imprisonment.
Notwithstanding the above paragraph, the penalties prescribed for
accessories shall not be imposed upon those who are such with respect to
their spouses, ascendants, descendants, legitimate, natural, and adopted
brothers and sisters, or relatives by affinity within the same degrees, with
the single exception of accessories falling within the provisions of
subparagraph (a).
SEC. 7. Surveillance of Suspects and Interception and Recording
of Communications. -The provisions of Republic Act No. 4200 (Anti-
Wire Tapping Law) to the contrary notwithstanding, a police or law
enforcement official and the members of his team may, upon a written
order of the Court of Appeals, listen to, intercept and record, with the use
of any mode, form, kind or type of electronic or other surveillance
equipment or intercepting and tracking devices, or with the use of any
other suitable ways and means for that purpose, any communication,
message, conversation, discussion, or spoken or written words between
members of a judicially declared and outlawed terrorist organization,
association, or group of persons or of any person charged with or
suspected of the crime of terrorism or conspiracy to commit terrorism.
Provided, That surveillance, interception and recording of
communications between lawyers and clients, doctors and patients,
journalists and their sources and confidential business correspondence
shall not be authorized.
SEC. 8. Formal Application for Judicial Authorization. - The written
order of the authorizing division of the Court of Appeals to track down,
tap, listen to, intercept, and record communications, messages,
conversations, discussions, or spoken or written words of any person
suspected of the crime of terrorism or the crime of conspiracy to commit
terrorism shall only be granted by the authorizing division of the Court of
Appeals upon an ex parte written application of a police or of a law
enforcement official who has been duly authorized in writing by the Anti-
Terrorism Council created in Section 53 of this Act to file such ex parte
application, and upon examination under oath or affirmation of the
applicant and the witnesses he may produce to establish: (a) that there
is probable cause to believe based on personal knowledge of facts or
circumstances that the said crime of terrorism or conspiracy to commit
terrorism has been committed, or is being committed, or is about to be
committed; (b) that there is probable cause to believe based on personal
knowledge of facts or circumstances that evidence, which is essential to
the conviction of any charged or suspected person for, or to the solution
or prevention of, any such crimes, will be obtained; and, (c) that there is
no other effective means readily available for acquiring such evidence.
SEC. 9. Classification and Contents of the Order of the Court. - The
written order granted by the authorizing division of the Court of Appeals
as well as its order, if any, to extend or renew the same, the original
application of the applicant, including his application to extend or renew,
if any, and the written authorizations of the Anti-Terrorism Council shall
be deemed and are hereby declared as classified information: Provided,
That the person being surveilled or whose communications, letters,
papers, messages, conversations, discussions, spoken or written words
and effects have been monitored, listened to, bugged or recorded by law
enforcement authorities has the right to be informed of the acts done by
the law enforcement authorities in the premises or to challenge, if he or
she intends to do so, the legality of the interference before the Court of
Appeals which issued the written order. The written order of the
authorizing division of the Court of Appeals shall specify the following: (a)
the identity, such as name and address, if known, of the charged or
suspected person whose communications, messages, conversations,
discussions, or spoken or written words are to be tracked down, tapped,
listened to, intercepted, and recorded and, in the case of radio,
electronic, or telephonic (whether wireless or otherwise) communications,
messages, conversations, discussions, or spoken or written words, the
electronic transmission systems or the telephone numbers to be tracked
down, tapped, listened to, intercepted, and recorded and their locations
or if the person suspected of the crime of terrorism or conspiracy to
commit terrorism is not fully known, such person shall be subject to
continuous surveillance provided there is a reasonable ground to do so;
(b) the identity (name, address, and the police or law enforcement
organization) of the police or of the law enforcement official, including
the individual identity (names, addresses, and the police or law
enforcement organization) of the members of his team, judicially
authorized to track down, tap, listen to, intercept, and record the
communications, messages, conversations, discussions, or spoken or
written words; (c) the offense or offenses committed, or being
committed, or sought to be prevented; and, (d) the length of time within
which the authorization shall be used or carried out.
SEC. 10. Effective Period of Judicial Authorization. - Any
authorization granted by the authorizing division of the Court of Appeals,
pursuant to Section 9(d) of this Act, shall only be effective for the length
of time specified in the written order of the authorizing division of the
Court of Appeals, which shall not exceed a period of thirty (30) days from
41
the date of receipt of the written order of the authorizing division of the
Court of Appeals by the applicant police or law enforcement official.
The authorizing division of the Court of Appeals may extend or renew the
said authorization for another non-extendible period, which shall not
exceed thirty (30) days from the expiration of the original period:
Provided, That the authorizing division of the Court of Appeals is satisfied
that such extension or renewal is in the public interest: and Provided,
further, That the ex parte application for extension or renewal, which
must be filed by the original applicant, has been duly authorized in
writing by the Anti-Terrorism Council.
In case of death of the original applicant or in case he is physically
disabled to file the application for extension or renewal, the one next in
rank to the original applicant among the members of the team named in
the original written order of the authorizing division of the Court of
Appeals shall file the application for extension or renewal: Provided, That,
without prejudice to the liability of the police or law enforcement
personnel under Section 20 hereof, the applicant police or law
enforcement official shall have thirty (30) days after the termination of
the period granted by the Court of Appeals as provided in the preceding
paragraphs within which to file the appropriate case before the Public
Prosecutor's Office for any violation of this Act.
If no case is filed within the thirty (30)-day period, the applicant police or
law enforcement official shall immediately notify the person subject of the
surveillance, interception and recording of the termination of the said
surveillance, interception and recording. The penalty of ten (10) years
and one day to twelve (12) years of imprisonment shall be imposed upon
the applicant police or law enforcement official who fails to notify the
person subject of the surveillance, monitoring, interception and recording
as specified above.
SEC. 11. Custody of Intercepted and Recorded Communications. -
All tapes, discs, and recordings made pursuant to the authorization of the
authorizing division of the Court of Appeals, including all excerpts and
summaries thereof as well as all written notes or memoranda made in
connection therewith, shall, within forty-eight (48) hours after the
expiration of the period fixed in the written order of the authorizing
division of the Court of Appeals or within forty-eight (48) hours after the
expiration of any extension or renewal granted by the authorizing division
of the Court of Appeals, be deposited with the authorizing Division of the
Court of Appeals in a sealed envelope or sealed package, as the case may
be, and shall be accompanied by a joint affidavit of the applicant police or
law enforcement official and the members of his team.
In case of death of the applicant or in case he is physically disabled to
execute the required affidavit, the one next in rank to the applicant
among the members of the team named in the written order of the
authorizing division of the Court of Appeals shall execute with the
members of the team that required affidavit.
It shall be unlawful for any person, police officer or any custodian of the
tapes, discs and recording, and their excerpts and summaries, written
notes or memoranda to copy in whatever form, to remove, delete,
expunge, incinerate, shred or destroy in any manner the items
enumerated above in whole or in part under any pretext whatsoever.
Any person who removes, deletes, expunges, incinerates, shreds or
destroys the items enumerated above shall suffer a penalty of not less
than six years and one day to twelve (12) years of imprisonment.
SEC. 12. Contents of Joint Affidavit. - The joint affidavit of the police
or of the law enforcement official and the individual members of his team
shall state: (a) the number of tapes, discs, and recordings that have
been made, as well as the number of excerpts and summaries thereof
and the number of written notes and memoranda, if any, made in
connection therewith; (b) the dates and times covered by each of such
tapes, discs, and recordings; (c) the number of tapes, discs, and
recordings, as well as the number of excerpts and summaries thereof and
the number of written notes and memoranda made in connection
therewith that have been included in the deposit; and (d) the date of the
original written authorization granted by the Anti-Terrorism Council to the
applicant to file the ex parte application to conduct the tracking down,
tapping, intercepting, and recording, as well as the date of any extension
or renewal of the original written authority granted by the authorizing
division of the Court of Appeals.
The joint affidavit shall also certify under oath that no duplicates or
copies of the whole or any part of any of such tapes, discs, and
recordings, and that no duplicates or copies of the whole or any part of
any of such excerpts, summaries, written notes, and memoranda, have
been made, or, if made, that all such duplicates and copies are included
in the sealed envelope or sealed package, as the case may be, deposited
with the authorizing division of the Court of Appeals.
It shall be unlawful for any person, police or law enforcement official to
omit or exclude from the joint affidavit any item or portion thereof
mentioned in this Section.
Any person, police or law enforcement officer who violates any of the acts
prescribed in the preceding paragraph shall suffer the penalty of not less
than ten (10) years and one day to twelve (12) years of imprisonment.
SEC. 13. Disposition of Deposited Material. -The sealed envelope or
sealed package and the contents thereof, which are deposited with the
authorizing division of the Court of Appeals, shall be deemed and are
hereby declared classified information, and the sealed envelope or sealed
42
package shall not be opened and its contents (including the tapes, discs,
and recordings and all the excerpts and summaries thereof and the notes
and memoranda made in connection therewith) shall not be divulged,
revealed, read, replayed, or used as evidence unless authorized by
written order of the authorizing division of the Court of Appeals, which
written order shall be granted only upon a written application of the
Department of Justice filed before the authorizing division of the Court of
Appeals and only upon a showing that the Department of Justice has
been duly authorized in writing by the Anti-Terrorism Council to file the
application with proper written notice the person whose conversation,
communication, message discussion or spoken or written words have
been the subject of surveillance, monitoring, recording and interception
to open, reveal, divulge, and use the contents of the sealed envelope or
sealed package as evidence.
Any person, law enforcement official or judicial authority who violates his
duty to notify in writing the persons subject of the surveillance as defined
above shall suffer the penalty of six years and one day to eight years of
imprisonment.
SEC. 14. Application to Open Deposited Sealed Envelope or Sealed
Package. - The written application with notice to the party concerned to
open the deposited sealed envelope or sealed package shall clearly state
the purpose or reason: (a) for opening the sealed envelope or sealed
package; (b) for revealing or disclosing its classified contents; (c) for
replaying, divulging, and or reading any of the listened to, intercepted,
and recorded communications, messages, conversations, discussions, or
spoken or written words (including any of the excerpts and summaries
thereof and any of the notes or memoranda made in connection
therewith); [ and, (d) for using any of said listened to, intercepted, and
recorded communications, messages, conversations, discussions, or
spoken or written words (including any of the excerpts and summaries
thereof and any of the notes or memoranda made in connection
therewith) as evidence.
Any person, law enforcement official or judicial authority who violates his
duty to notify as defined above shall suffer the penalty of six years and
one day to eight years of imprisonment.
SEC. 15. Evidentiary Value of Deposited Materials. - Any listened to,
intercepted, and recorded communications, messages, conversations,
discussions, or spoken or written words, or any part or parts thereof, or
any information or fact contained therein, including their existence,
content, substance, purport, effect, or meaning, which have been
secured in violation of the pertinent provisions of this Act, shall absolutely
not be admissible and usable as evidence against anybody in any judicial,
quasi-judicial, legislative, or administrative investigation, inquiry,
proceeding, or hearing.
SEC. 16. Penalty for Unauthorized or Malicious Interceptions
and/or Recordings. - Any police or law enforcement personnel who, not
being authorized to do so by the authorizing division of the Court of
Appeals, tracks down, taps, listens to, intercepts, and records in
whatever manner or form any communication, message, conversation,
discussion, or spoken or written word of a person charged with or
suspected of the crime of terrorism or the crime of conspiracy to commit
terrorism shall be guilty of an offense and shall suffer the penalty of ten
(10) years and one day to twelve (12) years of imprisonment.
In addition to the liability attaching to the offender for the commission of
any other offense, the penalty of ten (10) years and one day to twelve
(12) years of imprisonment and the accessory penalty of perpetual
absolute disqualification from public office shall be imposed upon any
police or law enforcement personnel who maliciously obtained an
authority from the Court of Appeals to track down, tap, listen to,
intercept, and record in whatever manner or form any communication,
message, conversation, discussion, or spoken or written words of a
person charged with or suspected of the crime of terrorism or conspiracy
to commit terrorism: Provided, That notwithstanding Section 13 of this
Act, the party aggrieved by such authorization shall be allowed access to
the sealed envelope or sealed package and the contents thereof as
evidence for the prosecution of any police or law enforcement personnel
who maliciously procured said authorization.
SEC. 17. Proscription of Terrorist Organizations, Association, or
Group of Persons. - Any organization, association, or group of persons
organized for the purpose of engaging in terrorism, or which, although
not organized for that purpose, actually uses the acts to terrorize
mentioned in this Act or to sow and create a condition of widespread and
extraordinary fear and panic among the populace in order to coerce the
government to give in to an unlawful demand shall, upon application of
the Department of Justice before a competent Regional Trial Court, with
due notice and opportunity to be heard given to the organization,
association, or group of persons concerned, be declared as a terrorist and
outlawed organization, association, or group of persons by the said
Regional Trial Court.
SEC. 18. Period of Detention Without Judicial Warrant of Arrest. -
The provisions of Article 125 of the Revised Penal Code to the contrary
notwithstanding, any police or law enforcement personnel, who, having
been duly authorized in writing by the Anti-Terrorism Council has taken
custody of a person charged with or suspected of the crime of terrorism
or the crime of conspiracy to commit terrorism shall, without incurring
any criminal liability for delay in the delivery of detained persons to the
proper judicial authorities, deliver said charged or suspected person to
the proper judicial authority within a period of three days counted from
the moment the said charged or suspected person has been apprehended
or arrested, detained, and taken into custody by the said police, or law
enforcement personnel: Provided, That the arrest of those suspected of
the crime of terrorism or conspiracy to commit terrorism must result from
43
the surveillance under Section 7 and examination of bank deposits under
Section 27 of this Act.
The police or law enforcement personnel concerned shall, before
detaining the person suspected of the crime of terrorism, present him or
her before any judge at the latter's residence or office nearest the place
where the arrest took place at any time of the day or night. It shall be
the duty of the judge, among other things, to ascertain the identity of the
police or law enforcement personnel and the person or persons they have
arrested and presented before him or her, to inquire of them the reasons
why they have arrested the person and determine by questioning and
personal observation whether or not the suspect has been subjected to
any physical, moral or psychological torture by whom and why. The judge
shall then submit a written report of what he/she had observed when the
subject was brought before him to the proper court that has jurisdiction
over the case of the person thus arrested. The judge shall forthwith
submit his/her report within three calendar days from the time the
suspect was brought to his/her residence or office.
Immediately after taking custody of a person charged with or suspected
of the crime of terrorism or conspiracy to commit terrorism, the police or
law enforcement personnel shall notify in writing the judge of the court
nearest the place of apprehension or arrest: Provided ,That where the
arrest is made during Saturdays, Sundays, holidays or after office hours,
the written notice shall be served at the residence of the judge nearest
the place where the accused was arrested.
The penalty of ten (10) years and one day to twelve (12) years of
imprisonment shall be imposed upon the police or law enforcement
personnel who fails to notify and judge as Provided in the preceding
paragraph.
SEC. 19. Period of Detention in the Event of an Actual or
Imminent Terrorist Attack. - In the event of an actual or imminent
terrorist attack, suspects may not be detained for more than three days
without the written approval of a municipal, city, provincial or regional
official of a Human Rights Commission or judge of the municipal, regional
trial court, the Sandiganbayan or a justice of the Court of Appeals
nearest the place of the arrest. If the arrest is made during Saturdays,
Sundays, holidays or after office hours, the arresting police or law
enforcement personnel shall bring the person thus arrested to the
residence of any of the officials mentioned above that is nearest the place
where the accused was arrested. The approval in writing of any of the
said officials shall be secured by the police or law enforcement personnel
concerned within five days after the date of the detention of the persons
concerned: Provided, however, That within three days after the detention
the suspects, whose connection with the terror attack or threat is not
established, shall be released immediately.
SEC. 20. Penalty for Failure to Deliver Suspect to the Proper
Judicial Authority within Three Days. - The penalty of ten (10) years
and one day to twelve (12) years of imprisonment shall be imposed upon
any police or law enforcement personnel who has apprehended or
arrested, detained and taken custody of a person charged with or
suspected of the crime of terrorism or conspiracy to commit terrorism
and fails to deliver such charged or suspected person to the proper
judicial authority within the period of three days.
SEC. 21. Rights of a Person under Custodial Detention. - The
moment a person charged with or suspected of the crime of terrorism or
the crime of conspiracy to commit terrorism is apprehended or arrested
and detained, he shall forthwith be informed, by the arresting police or
law enforcement officers or by the police or law enforcement officers to
whose custody the person concerned is brought, of his or her right: (a) to
be informed of the nature and cause of his arrest, to remain silent and to
have competent and independent counsel preferably of his choice. If the
person cannot afford the services of counsel of his or her choice, the
police or law enforcement officers concerned shall immediately contact
the free legal assistance unit of the Integrated Bar of the Philippines
(IBP) or the Public Attorney's Office (PAO). It shall be the duty of the free
legal assistance unit of the IBP or the PAO thus contacted to immediately
visit the person(s) detained and provide him or her with legal assistance.
These rights cannot be waived except in writing and in the presence of
the counsel of choice; (b) informed of the cause or causes of his
detention in the presence of his legal counsel; (c) allowed to
communicate freely with his legal counsel and to confer with them at any
time without restriction; (d) allowed to communicate freely and privately
without restrictions with the members of his family or with his nearest
relatives and to be visited by them; and, (e) allowed freely to avail of the
service of a physician or physicians of choice.
SEC. 22. Penalty for Violation of the Rights of a Detainee. - Any
police or law enforcement personnel, or any personnel of the police or
other law enforcement custodial unit that violates any of the aforesaid
rights of a person charged with or suspected of the crime of terrorism or
the crime of conspiracy to commit terrorism shall be guilty of an offense
and shall suffer the penalty of ten (10) years and one day to twelve (12)
years of imprisonment.
Unless the police or law enforcement personnel who violated the rights of
a detainee or detainees as stated above is duly identified, the same
penalty shall be imposed on the police officer or hear or leader of the law
enforcement unit having custody of the detainee at the time the violation
was done.
SEC. 23. Requirement for an Official Custodial Logbook and its
Contents. - The police or other law enforcement custodial unit in whose
care and control the person charged with or suspected of the crime of
terrorism or the crime of conspiracy to commit terrorism has been placed
under custodial arrest and detention shall keep a securely and orderly
44
maintained official logbook, which is hereby declared as a public
document and opened to and made available for .the inspection and
scrutiny of the lawyer or lawyers of the person under custody or any
member of his or her family or relative by consanguinity or affinity within
the fourth civil degree or his or her physician at any time of the day or
night without any form of restriction. The logbook shall contain a clear
and concise record of: (a) the name, description, and address of the
detained person; (b) the date and exact time of his initial admission for
custodial arrest and detention; (c) the name and address of the physician
or physicians who examined him physically and medically; (d) the state
of his health and physical condition at the time of his initial admission for
custodial detention; (e) the date and time of each removal of the
detained person from his cell for interrogation or for any purpose; (f) the
date and time of his return to his cell; (g) the name and address of the
physician or physicians who physically and medically examined him after
each interrogation; (h) a summary of the physical and medical findings
on the detained person after each of such interrogation; (i) the names
and addresses of his family members and nearest relatives, if any and if
available; (j) the names and addresses of persons, who visit the detained
person; (k) the date and time of each of such visits; (1) the date and
time of each request of the detained person to communicate and confer
with his legal counsel or counsels; (m) the date and time of each visit,
and date and time of each departure of his legal counsel or counsels;
and, (n) all other important events bearing on and all relevant details
regarding the treatment of the detained person while under custodial
arrest and detention.
The said police or law enforcement custodial unit shall upon demand of
the aforementioned lawyer or lawyers or members of the family or
relatives within the fourth civil degree of consanguinity or affinity of the
person under custody or his or her physician issue a certified true copy of
the entries of the logbook relative to the concerned detained person
without delay or restriction or requiring any fees whatsoever including
documentary stamp tax, notarial fees, and the like. This certified true
copy may be attested by the person who has custody of the logbook or
who allowed the party concerned to scrutinize it at the time the demand
for the certified true copy is made.
The police or other law enforcement custodial unit who fails to comply
with the preceding paragraph to keep an official logbook shall suffer the
penalty of ten (10) years and one day to twelve (12) years of
imprisonment.
SEC. 24. No Torture or Coercion in Investigation and
Interrogation. - No threat, intimidation, or coercion, and no act which
will inflict any form of physical pain or torment, or mental, moral, or
psychological pressure, on the detained person, which shall vitiate his
freewill, shall be employed in his investigation and interrogation for the
crime of terrorism or the crime of conspiracy to commit terrorism;
otherwise, the evidence obtained from said detained person resulting
from such threat, intimidation, or coercion, or from such inflicted physical
pain or torment, or mental, moral, or psychological pressure, shall be, in
its entirety, absolutely not admissible and usable as evidence in any
judicial, quasi-judicial, legislative, or administrative investigation, inquiry,
proceeding, or hearing.
SEC. 25. Penalty for Threat, Intimidation, Coercion, or Torture in
the Investigation and Interrogation of a Detained Person. - Any
person or persons who use threat, intimidation, or coercion, or who inflict
physical pain or torment, or mental, moral, or psychological pressure,
which shall vitiate the free-will of a charged or suspected person under
investigation and interrogation for the crime of terrorism or the crime of
conspiracy to commit terrorism shall be guilty of an offense and shall
suffer the penalty of twelve (12) years and one day to twenty (20) years
of imprisonment.
When death or serious permanent disability of said detained person
occurs as a consequence of the use of such threat, intimidation, or
coercion, or as a consequence of the infliction on him of such physical
pain or torment, or as a consequence of the infliction on him of such
mental, moral, or psychological pressure, the penalty shall be twelve (12)
years and one day to twenty (20) years of imprisonment.
SEC. 26. Restriction on Travel. - In cases where evidence of guilt is
not strong, and the person charged with the crime of terrorism or
conspiracy to commit terrorism is entitled to bail and is granted the
same, the court, upon application by the prosecutor, shall limit the right
of travel of the accused to within the municipality or city where he resides
or where the case is pending, in the interest of national security and
public safety, consistent with Article III, Section 6 of the Constitution.
Travel outside of said municipality or city, without the authorization of the
court, shall be deemed a violation of the terms and conditions of his bail,
which shall then be forfeited as provided under the Rules of Court.
He/she may also be placed under house arrest by order of the court at
his or her usual place of residence.
While under house arrest, he or she may not use telephones, cellphones,
e-mails, computers, the internet or other means of communications with
people outside the residence until otherwise ordered by the court.
The restrictions abovementioned shall be terminated upon the acquittal
of the accused or of the dismissal of the case filed against him or earlier
upon the discretion of the court on motion of the prosecutor or of the
accused.
SEC. 27. Judicial Authorization Required to Examine Bank
Deposits, Accounts, and Records. - The provisions of Republic Act No.
1405 as amended, to the contrary notwithstanding, the justices of the
Court of Appeals designated as a special court to handle anti-terrorism
45
cases after satisfying themselves of the existence of probable cause in a
hearing called for that purpose that: (1) a person charged with or
suspected of the crime of terrorism or, conspiracy to commit terrorism,
(2) of a judicially declared and outlawed terrorist organization,
association, or group of persons; and (3) of a member of such judicially
declared and outlawed organization, association, or group of persons,
may authorize in writing any police or law enforcement officer and the
members of his/her team duly authorized in writing by the anti-terrorism
council to: (a) examine, or cause the examination of, the deposits,
placements, trust accounts, assets and records in a bank or financial
institution; and (b) gather or cause the gathering of any relevant
information about such deposits, placements, trust accounts, assets, and
records from a bank or financial institution. The bank or financial
institution concerned, shall not refuse to allow such examination or to
provide the desired information, when so, ordered by and served with the
written order of the Court of Appeals.
SEC. 28. Application to Examine Bank Deposits, Accounts, and
Records. - The written order of the Court of Appeals authorizing the
examination of bank deposits, placements, trust accounts, assets, and
records: (1) of a person charged with or suspected of the crime of
terrorism or conspiracy to commit terrorism; (2) of any judicially declared
and outlawed terrorist organization, association, or group of persons, or
(3) of any member of such organization, association, or group of persons
in a bank or financial institution, and the gathering of any relevant
information about the same from said bank or financial institution, shall
only be granted by the authorizing division of the Court of Appeals upon
an ex parte application to that effect of a police or of a law enforcement
official who has been duly authorized in writing to file such ex parte
application by the Anti-Terrorism Council created in Section 53 of this Act
to file such ex parte application, and upon examination under oath or
affirmation of the applicant and, the witnesses he may produce to
establish the facts that will justify the need and urgency of examining
and freezing the bank deposits, placements, trust accounts, assets, and
records: (1) of the person charged with or suspected of the crime of
terrorism or conspiracy to commit terrorism; (2) of a judicially declared
and outlawed terrorist organization, association or group of persons; or
(3) of any member of such organization, association, or group of persons.
SEC. 29. Classification and Contents of the Court Order
Authorizing the Examination of Bank Deposits, Accounts, and
Records. - The written order granted by the authorizing division of the
Court of Appeals as well as its order, if any, to extend or renew the same,
the original ex parte application of the applicant, including his ex parte
application to extend or renew, if any, and the written authorizations of
the Anti-Terrorism Council, shall be deemed and are hereby declared as
classified information: Provided, That the person whose bank deposits,
placements, trust accounts, assets, and records have been examined,
frozen, sequestered and seized by law enforcement authorities has the
right to be informed of the acts done by the law enforcement authorities
in the premises or to challenge, if he or she intends to do so, the legality
of the interference. The written order of the authorizing division of the
Court of Appeals designated to handle cases involving terrorism shall
specify: (a) the identify of the said: (1) person charged with or suspected
of the crime of terrorism or conspiracy to commit terrorism; (2) judicially
declared and outlawed terrorist organization, association, or group of
persons; and (3) member of such judicially declared and outlawed
organization, association, or group of persons, as the case may be.
whose deposits, placements, trust accounts, assets, and records are to
be examined or the information to be gathered; (b) the identity of the
bank or financial Institution where such deposits, placements, trust
accounts, assets, and records are held and maintained; (c) the identity of
the persons who will conduct the said examination and the gathering of
the desired information; and, (d) the length of time the authorization
shall be carried out.
SEC. 30. Effective Period of Court Authorization to Examine and
Obtain Information on Bank Deposits, Accounts, and Records. -
The authorization issued or granted by the authorizing division of the
Court of Appeals to examine or cause the examination of and to freeze
bank deposits, placements, trust accounts, assets, and records, or to
gather information about the same, shall be effective for the length of
time specified in the written order of the authorizing division of the Court
of Appeals, which shall not exceed a period of thirty (30) days from the
date of receipt of the written order of the authorizing division of the Court
of Appeals by the applicant police or law enforcement official.
The authorizing division of the Court of Appeals may extend or renew the
said authorization for another period, which shall not exceed thirty (30)
days renewable to another thirty (30) days from the expiration of the
original period: Provided, That the authorizing division of the Court of
Appeals is satisfied that such extension or renewal is in the public
interest: and, Provided, further, That the application for extension or
renewal, which must be filed by the original applicant, has been duly
authorized in writing by the Anti-Terrorism Council.
In case of death of the original applicant or in case he is physically
disabled to file the application for extension or renewal, the one next in
rank to the original applicant among the members of the ream named in
the original written order of the authorizing division of the Court of
Appeals shall file the application for extension or renewal: Provided, That,
without prejudice to the liability of the police or law enforcement
personnel under Section 19 hereof, the applicant police or law
enforcement official shall have thirty (30) days after the termination of
the period granted by the Court of Appeals as provided in the preceding
paragraphs within which to file the appropriate case before the Public
Prosecutor's Office for any violation of this Act.
If no case is filed within the thirty (30)-day period, the applicant police or
law enforcement official shall immediately notify in writing the person
subject of the bank examination and freezing of bank deposits,
placements, trust accounts, assets and records. The penalty of ten (10)
46
years and one day to twelve (12) years of imprisonment shall be imposed
upon the applicant police or law enforcement official who fails to notify in
writing the person subject of the bank examination and freezing of bank
deposits, placements, trust accounts, assets and records.
Any person, law enforcement official or judicial authority who violates his
duty to notify in writing as defined above shall suffer the penalty of six
years and one day to eight years of imprisonment.
SEC. 31. Custody of Bank Data and Information Obtained after
Examination of Deposits, Placements, Trust Accounts, Assets and
Records. - All information, data, excerpts, summaries, notes,
memoranda, working sheets, reports, and other documents obtained
from the examination of the bank deposits, placements, trust accounts,
assets and records of: (1) a person charged with or suspected of the
crime of terrorism or the crime of conspiracy to commit terrorism; (2) a
judicially declared and outlawed terrorist organization, association, or
group of persons; or (3) a member of any such organization, association,
or group of persons shall, within forty-eight (48) hours after the
expiration of the period fixed in the written order of the authorizing
division of the Court of Appeals or within forty-eight (48) hours after the
expiration of the extension or renewal granted by the authorizing division
of the Court of Appeals, be deposited with the authorizing division of the
Court of Appeals in a sealed envelope or sealed package, as the case may
be, and shall be accompanied by a joint affidavit of the applicant police or
law enforcement official and the persons who actually conducted the
examination of said bank deposits, placements, trust accounts, assets
and records.
SEC. 32. Contents of Joint Affidavit. - The joint affidavit shall state:
(a) the identifying marks, numbers, or symbols of the deposits,
placements, trust accounts, assets, and records examined; (b) the
identity and address of the bank or financial institution where such
deposits, placements, trust accounts, assets, and records are held and
maintained; (c) the number of bank deposits, placements, trust accounts,
assets, and records discovered, examined, and frozen; (d) the
outstanding balances of each of such deposits, placements, trust
accounts, assets; (e) all information, data, excerpts, summaries, notes,
memoranda, working sheets, reports, documents, records examined and
placed in the sealed envelope or sealed package deposited with the
authorizing division of the Court of Appeals; (f) the date of the original
written authorization granted by the Anti-Terrorism Council to the
applicant to file the ex parte Application to conduct the examination of
the said bank deposits, placements, trust accounts, assets and records,
as well as the date of any extension or renewal of the original written
authorization granted by the authorizing division of the Court of Appeals;
and (g) that the items Enumerated were all that were found in the bank
or financial institution examined at the time of the completion of the
examination.
The joint affidavit shall also certify under oath that no duplicates or
copies of the information, data, excerpts, summaries, notes, memoranda,
working sheets, reports, and documents acquired from the examination
of the bank deposits, placements, trust accounts, assets and records
have been made, or, if made, that all such duplicates and copies are
placed in the sealed envelope or sealed package deposited with the
authorizing division of the Court of Appeals.
It shall be unlawful for any person, police officer or custodian of the bank
data and information obtained after examination of deposits, placements,
trust accounts, assets and records to copy, to remove, delete, expunge,
incinerate, shred or destroy in any manner the items enumerated above
in whole or in part under any pretext whatsoever,
Any person who copies, removes, deletes, expunges, incinerates, shreds
or destroys the items enumerated above shall suffer a penalty of not less
than six years and one day to twelve (12) years of imprisonment.
SEC. 33. Disposition of Bank Materials. - The sealed envelope or
sealed package and the contents thereof, which are deposited with the
authorizing division of the Court of Appeals, shall be deemed and are
hereby declared classified information and the sealed envelope or sealed
package shall not be opened and its contents shall not be divulged,
revealed, read, or used as evidence unless authorized in a written order
of the authorizing division of the Court of Appeals, which written order
shall be granted only upon a written application of the Department of
Justice filed before the authorizing division of the Court of Appeals and
only upon a showing that the Department of Justice has been duly
authorized in writing by the Anti-Terrorism Council to file the application,
with notice in writing to the party concerned not later than three days
before the scheduled opening, to open, reveal, divulge, and use the
contents of the sealed envelope or sealed package as evidence.
Any person, law enforcement official or judicial authority who violates his
duty to notify in writing as defined above shall suffer the penalty of six
years and one day to eight years of imprisonment.
SEC. 34. Application to Open Deposited Bank Materials. - The
written application, with notice in writing to the party concerned not later
than three days of the scheduled opening, to open the sealed envelope or
sealed package shall clearly state the purpose and reason: (a) for
opening the sealed envelope or sealed package; (b) for revealing and
disclosing its classified contents; and, (c) for using the classified
information, data, excerpts, summaries, notes, memoranda, working
sheets, reports, and documents as evidence.
SEC. 35. Evidentiary Value of Deposited Bank Materials. - Any
information, data, excerpts, summaries, notes, memoranda, work sheets,
reports, or documents acquired from the examination of the bank
deposits, placements, trust accounts, assets and records of: (1) a person
47
charged or suspected of the crime of terrorism or the crime of conspiracy
to commit terrorism; (2) a judicially declared and outlawed terrorist
organization, association, or group of persons; or (3) a member of such
organization, association, or group of persons, which have been secured
in violation of the provisions of this Act, shall absolutely not be admissible
and usable as evidence against anybody in any judicial, quasi-judicial,
legislative, or administrative investigation, inquiry, proceeding, or
hearing.
SEC. 36. Penalty for Unauthorized or Malicious Examination of a
Bank or a Financial Institution. - Any person, police or law
enforcement personnel who examines the deposits, placements, trust
accounts, assets, or records in a bank or financial institution of: (1) a
person charged with or suspected of the crime of terrorism or the crime
of conspiracy to commit terrorism; (2) a judicially declared and outlawed
terrorist organization, association, or group of persons; or (3) a member
of such organization, association, or group of persons, without being
authorized to do so by the Court of Appeals, shall be guilty of an offense
and shall suffer the penalty of ten (10) years and one day to twelve (12)
years of imprisonment.
In addition to the liability attaching to the offender for the commission of
any other offense, the penalty of ten (10) years and one day to twelve
(12) years of imprisonment shall be imposed upon any police or law
enforcement personnel, who maliciously obtained an authority from the
Court of Appeals to examine the deposits, placements, trust accounts,
assets, or records in a bank or financial institution of: (1) a person
charged with or suspected of the crime of terrorism or conspiracy to
commit terrorism; (2) a judicially declared and outlawed terrorist
organization, association, or group of persons; or (3) a member of such
organization, association, or group of persons: Provided, That
notwithstanding Section 33 of this Act, the party aggrieved by such
authorization shall upon motion duly filed be allowed access to the sealed
envelope or sealed package and the contents thereof as evidence for the
prosecution of any police or law enforcement personnel who maliciously
procured said authorization.
SEC. 37. Penalty of Bank Officials and Employees Defying a Court
Authorization. - An employee, official, or a member of the board of
directors of a bank or financial institution, who refuses to allow the
examination of the deposits, placements, trust accounts, assets, and
records of: (1) a person charged with or suspected of the crime of
terrorism or the crime of conspiracy to commit terrorism; (2) a judicially
declared and outlawed organization, association, or group of persons; or
(3) a member of such judicially declared and outlawed organization,
association, or group of persons in said bank or financial institution, when
duly served with the written order of the authorizing division of the Court
of Appeals, shall be guilty of an offense and shall suffer the penalty of ten
(10) years and one day to twelve (12) years of imprisonment.
SEC. 38. Penalty for False or Untruthful Statement or
Misrepresentation of Material Fact in Joint Affidavits. - Any false or
untruthful statement or misrepresentation of material fact in the joint
affidavits required respectively in Section 12 and Section 32 of this Act
shall constitute a criminal offense and the affiants shall suffer individually
the penalty of ten (10) years and one day to twelve (12) years of
imprisonment.
SEC. 39. Seizure and Sequestration. - The deposits and their
outstanding balances, placements, trust accounts, assets, and records in
any bank or financial institution, moneys, businesses, transportation and
communication equipment, supplies and other implements, and property
of whatever kind and nature belonging: (1) to any person suspected of or
charged before a competent Regional Trial Court for the crime of
terrorism or the crime of conspiracy to commit terrorism; (2) to a
judicially declared and outlawed organization, association, or group of
persons; or (3) to a member of such organization, association, or group
of persons shall be seized, sequestered, and frozen in order to prevent
their use, transfer, or conveyance for purposes that are inimical to the
safety and security of the people or injurious to the interest of the State.
The accused or a person suspected of may withdraw such sums as may
be reasonably needed by the monthly needs of his family including the
services of his or her counsel and his or her family's medical needs upon
approval of the court. He or she may also use any of his property that is
under seizure or sequestration or frozen because of his/her indictment as
a terrorist upon permission of the court for any legitimate reason.
Any person who unjustifiably refuses to follow the order of the proper
division of the Court of Appeals to allow the person accused of the crime
of terrorism or of the crime of conspiracy to commit terrorism to
withdraw such sums from sequestered or frozen deposits, placements,
trust accounts, assets and records as may be necessary for the regular
sustenance of his/her family or to use any of his/her property that has
been seized, sequestered or frozen for legitimate purposes while his/her
case is pending shall suffer the penalty of ten (10) years and one day to
twelve (12) years of imprisonment.
SEC. 40. Nature of Seized. Sequestered and Frozen Bank
Deposits, Placements, Trust Accounts, Assets and Records. - The
seized, sequestered and frozen bank deposits, placements, trust
accounts, assets and records belonging to a person suspected of or
charged with the crime of terrorism or conspiracy to commit terrorism
shall be deemed as property held in trust by the bank or financial
institution for such person and the government during the pendency of
the investigation of the person suspected of or during the pendency of
the trial of the person charged with any of the said crimes, as the case
may be and their use or disposition while the case is pending shall be
subject to the approval of the court before which the case or cases are
pending.
48
SEC. 41. Disposition of the Seized, Sequestered and Frozen Bank
Deposits, Placements, Trust Accounts, Assets and Record. - If the
person suspected of or charged with the crime of terrorism or conspiracy
to commit terrorism is found, after his investigation, to be innocent by
the investigating body, or is acquitted, after his arraignment or his case is
dismissed before his arraignment by a competent court, the seizure,
sequestration and freezing of his bank deposits, placements, trust
accounts, assets and records shall forthwith be deemed lifted by the
investigating body or by the competent court, as the case may be, and
his bank deposits, placements, trust accounts, assets and records shall
be deemed released from such seizure, sequestration and freezing, and
shall be restored to him without any delay by the bank or financial
institution concerned without any further action on his part. The filing of
any appeal on motion for reconsideration shall not state the release of
said funds from seizure, sequestration and freezing.
If the person charged with the crime of terrorism or conspiracy to commit
terrorism is convicted by a final judgment of a competent trial court, his
seized, sequestered and frozen bank deposits, placements, trust
accounts, assets and records shall be automatically forfeited in favor of
the government.
Upon his or her acquittal or the dismissal of the charges against him or
her, the amount of Five hundred thousand pesos (P500.000.00) a day for
the period in which his properties, assets or funds were seized shall be
paid to him on the concept of liquidated damages. The amount shall be
taken from the appropriations of the police or law enforcement agency
that caused the filing of the enumerated charges against him/her.
SEC. 42. Penalty for Unjustified Refusal to Restore or Delay in
Restoring Seized, Sequestered and Frozen Bank Deposits,
Placements, Trust Accounts, Assets and Records. - Any person who
unjustifiably refuses to restore or delays the restoration of seized,
sequestered and frozen bank deposits, placements, trust accounts, assets
and records of a person suspected of or charged with the crime of
terrorism or conspiracy to commit terrorism after such suspected person
has been found innocent by the investigating body or after the case
against such charged person has been dismissed or after he is acquitted
by a competent court shall suffer the penalty of ten (10) years and one
day to twelve (12) years of imprisonment.
SEC. 43. Penalty for the Loss, Misuse, Diversion or Dissipation of
Seized, Sequestered and Frozen Bank Deposits, Placements, Trust
Accounts, Assets and Records. - Any person who is responsible for the
loss, misuse, diversion, or dissipation of the whole or any part of the
seized, sequestered and frozen bank deposits, placements, trust
accounts, assets and records of a person suspected of or charged with
the crime of terrorism or conspiracy to commit terrorism shall suffer the
penalty of ten (10) years and one day to twelve (12) years of
imprisonment.
SEC. 44. Infidelity in the Custody of Detained Persons. - Any public
officer who has direct custody of a detained person or under the
provisions of this Act and who by his deliberate act, misconduct, or
inexcusable negligence causes or allows the escape of such detained
person shall be guilty of an offense and shall suffer the penalty of: (a)
twelve (12) years and one day to twenty (20) years of imprisonment, if
the detained person has already been convicted and sentenced in a final
judgment of a competent court; and (b) six years and one day to twelve
(12) years of imprisonment, if the detained person has not been
convicted and sentenced in a final judgment of a competent court.
SEC. 45. Immunity and Protection of Government Witnesses. - The
provisions of Republic Act No. 6981 (Witness Protection, Security and
Benefits Act) to the contrary notwithstanding, the immunity of
government witnesses testifying under this Act shall be governed by
Sections 17 and 18 of Rule 119 of the Rules of Court: Provided, however,
That said witnesses shall be entitled to benefits granted to witnesses
under said Republic Act No.6981.
SEC. 46. Penalty for Unauthorized Revelation of Classified
Materials. - The penalty of ten (10) years and one day to twelve (12)
years of imprisonment shall be imposed upon any person, police or law
enforcement agent, judicial officer or civil servant who, not being
authorized by the Court of Appeals to do so, reveals in any manner or
form any classified information under this Act.
SEC. 47. Penalty for Furnishing False Evidence, Forged Document,
or Spurious Evidence. - The penalty of twelve (12) years and one day
to twenty (20) years of imprisonment shall be imposed upon any person
who knowingly furnishes false testimony, forged document or spurious
evidence in any investigation or hearing under this Act.
SEC. 48. Continuous Trial. - In cases of terrorism or conspiracy to
commit terrorism, the judge shall set the continuous trial on a daily basis
from Monday to Friday or other short-term trial calendar so as to ensure
speedy trial.
SEC. 49. Prosecution Under This Act Shall be a Bar to Another
Prosecution under the Revised Penal Code or any Special Penal
Laws. - When a person has been prosecuted under a provision of this
Act, upon a valid complaint or information or other formal charge
sufficient in form and substance to sustain a conviction and after the
accused had pleaded to the charge, the acquittal of the accused or the
dismissal of the case shall be a bar to another prosecution for any offense
or felony which is necessarily included in the offense charged under this
Act.
SEC. 50. Damages for Unproven Charge of Terrorism. - Upon
acquittal, any person who is accused of terrorism shall be entitled to the
payment of damages in the amount of Five hundred thousand pesos
49
(P500,000.00) for every day that he or she has been detained or
deprived of liberty or arrested without a warrant as a result of such an
accusation. The amount of damages shall be automatically charged
against the appropriations of the police agency or the Anti-Terrorism
Council that brought or sanctioned the filing of the charges against the
accused. It shall also be released within fifteen (15) days from the date
of the acquittal of the accused. The award of damages mentioned above
shall be without prejudice to the right of the acquitted accused to file
criminal or administrative charges against those responsible for charging
him with the case of terrorism.
Any officer, employee, personnel, or person who delays the release or
refuses to release the amounts awarded to the individual acquitted of the
crime of terrorism as directed in the paragraph immediately preceding
shall suffer the penalty of six months of imprisonment.
If the deductions are less than the amounts due to the detained persons,
the amount needed to complete the compensation shall be taken from
the current appropriations for intelligence, emergency, social or other
funds of the Office of the President.
In the event that the amount cannot be covered by the current budget of
the police or law enforcement agency concerned, the amount shall be
automatically included in the appropriations of the said agency for the
coming year.
SEC. 51. Duty to Record and Report the Name and Address of the
Informant. - The police or law enforcement officers to whom the name
or a suspect in the crime of terrorism was first revealed shall record the
real name and the specific address of the informant.
The police or law enforcement officials concerned shall report the
informant's name and address to their superior officer who shall transmit
the information to the Congressional Oversight Committee or to the
proper court within five days after the suspect was placed under arrest or
his properties were sequestered, seized or frozen.
The name and address of the informant shall be considered confidential
and shall not be unnecessarily revealed until after the proceedings
against the suspect shall have been terminated.
SEC. 52. Applicability of the Revised Penal Code. - The provisions of
Book I of the Revised Penal Code shall be applicable to this Act.
SEC. 53. Anti-Terrorism Council. - An Anti-Terrorism Council,
hereinafter referred to, for brevity, as the "Council," is hereby created.
The members of the Council are: (1) the Executive Secretary, who shall
be its Chairperson; (2) the Secretary of Justice, who shall be its Vice
Chairperson; and (3) the Secretary of Foreign Affairs; (4) the Secretary
of National Defense; (5) the Secretary of the Interior and Local
Government; (6) the Secretary of Finance; and (7) the National Security
Advisor, as its other members.
The Council shall implement this Act and assume the responsibility for
the proper and effective implementation of the anti-terrorism policy of
the country. The Council shall keep records of its proceedings and
decisions. All records of the Council shall be subject to such security
classifications as the Council may, in its judgment and discretion, decide
to adopt to safeguard the safety of the people, the security of the
Republic, and the welfare of the nation.
The National Intelligence Coordinating Agency shall be the Secretariat of
the Council. The Council shall define the powers, duties, and functions of
the National Intelligence Coordinating Agency as Secretariat of the
Council. The National Bureau of Investigation, the Bureau of Immigration,
the Office of Civil Defense, the Intelligence Service of the Armed Forces
of the Philippines, the Anti-Money Laundering Council, the Philippine
Center on Transnational Crime, and the Philippine National Police
intelligence and investigative elements shall serve as support agencies for
the Council.
The Council shall formulate and adopt comprehensive, adequate,
efficient, and effective anti-terrorism plans, programs, and counter-
measures to suppress and eradicate terrorism in the country and to
protect the people from acts of terrorism. Nothing herein shall be
interpreted to empower the Anti-Terrorism Council to exercise any judicial
or quasi-judicial power or authority.
SEC. 54. Functions of the Council. - In pursuit of its mandate in the
previous Section, the Council shall have the following functions with due
regard for the rights of the people as mandated by the Constitution and
pertinent laws:
1. Formulate and adopt plans, programs and counter-measures
against terrorists and acts of terrorism in the country;
2. Coordinate all national efforts to suppress and eradicate acts of
terrorism in the country and mobilize the entire nation against
terrorism prescribed in this Act;
3. Direct the speedy investigation and prosecution of all persons
accused or detained for the crime of terrorism or conspiracy to
commit terrorism and other offenses punishable under this Act, and
monitor the progress of their cases;
4. Establish and maintain comprehensive data-base information
system on terrorism, terrorist activities, and counter-terrorism
operations;
50
 5. Freeze the funds property, bank deposits, placements, trust
accounts, assets and records belonging to a person suspected of or
charged with the crime of terrorism or conspiracy to commit
terrorism, pursuant to Republic Act No. 9160, otherwise known as
the Anti-Money Laundering Act of 2001, as amended;
6. Grant monetary rewards and other incentives to informers who
give vital information leading to the apprehension, arrest, detention,
prosecution, and conviction of person or persons who are liable for
the crime of terrorism or conspiracy to commit terrorism;
7. Establish and maintain coordination with and the cooperation and
assistance of other nations in the struggle against international
terrorism; and
8. Request the Supreme Court to designate specific divisions of the
Court of Appeals and Regional Trial Courts in Manila, Cebu City and
Cagayan de Oro City, as the case may be, to handle all cases
involving the crime of terrorism or conspiracy to commit terrorism
and all matters incident to said crimes. The Secretary of Justice
shall assign a team of prosecutors from: (a) Luzon to handle
terrorism cases filed in the Regional Trial Court in Manila; (b) from
the Visayas to handle cases filed in Cebu City; and (c) from
Mindanao to handle cases filed in Cagayan de Oro City.
SEC. 55. Role of the Commission on Human Rights. - The
Commission on Human Rights shall give the highest priority to the
investigation and prosecution of violations of civil and political rights of
persons in relation to the implementation of this Act; and for this
purpose, the Commission shall have the concurrent jurisdiction to
prosecute public officials, law enforcers, and other persons who may have
violated the civil and political rights of persons suspected of, or detained
for the crime of terrorism or conspiracy to commit terrorism.
SEC. 56. Creation of a Grievance Committee. - There is hereby
created a Grievance Committee composed of the Ombudsman, as chair,
and the Solicitor General, and an undersecretary from the Department of
Justice (DOJ), as members, to receive and evaluate complaints against
the actuations of the police and law enforcement officials in the
implementation of this Act. The Committee shall hold office in Manila. The
Committee shall have three subcommittees that will be respectively
headed by the Deputy Ombudsmen in Luzon, the Visayas and Mindanao.
The subcommittees shall respectively hold office at the Offices of Deputy
Ombudsman. Three Assistant Solicitors General designated by the
Solicitor General, and the regional prosecutors of the DOJ assigned to the
regions where the Deputy Ombudsmen hold office shall be members
thereof. The three subcommittees shall assist the Grievance Committee
in receiving, investigating and evaluating complaints against the police
and other law enforcement officers in the implementation of this Act. If
the evidence warrants it, they may file the appropriate cases against the
erring police and law enforcement officers. Unless seasonably disowned
or denounced by the complainants, decisions or judgments in the said
cases shall preclude the filing of other cases based on the same cause or
causes of action as those that were filed with the Grievance Committee or
its branches.
SEC. 57. Ban on Extraordinary Rendition. - No person suspected or
convicted of the crime of terrorism shall be subjected to extraordinary
rendition to any country unless his or her testimony is needed for
terrorist related police investigations or judicial trials in the said country
and unless his or her human rights, including the right against torture,
and right to counsel, are officially assured by the requesting country and
transmitted accordingly and approved by the Department of Justice.
SEC. 58. Extra-Territorial Application of this Act. - Subject to the
provision of an existing treaty of which the Philippines is a signatory and
to any contrary provision of any law of preferential application, the
provisions of this Act shall apply: (1) to individual persons who commit
any of the crimes defined and punished in this Act within the terrestrial
domain, interior waters, maritime zone, and airspace of the Philippines;
(2) to individual persons who, although physically outside the territorial
limits of the Philippines, commit, conspire or plot to commit any of the
crimes defined and punished in this Act inside the territorial limits of the
Philippines; (3) to individual persons who, although physically outside the
territorial limits of the Philippines, commit any of the said crimes on
board Philippine ship or Philippine airship; (4) to individual persons who
commit any of said crimes within any embassy, consulate, or diplomatic
premises belonging to or occupied by the Philippine government in an
official capacity; (5) to individual persons who, although physically
outside the territorial limits of the Philippines, commit said crimes against
Philippine citizens or persons of Philippines descent, where their
citizenship or ethnicity was a factor in the commission of the crime; and
(6) to individual persons who, although physically outside the territorial
limits of the Philippines, commit said crimes directly against the Philippine
government.
SEC. 59. Joint Oversight Committee. - There is hereby created a Joint
Oversight Committee to oversee the implementation of this Act. The
Oversight Committee shall be composed of five members each from the
Senate and the House in addition to the Chairs of the Committees of
Public Order of both Houses who shall also Chair the Oversight
Committee in the order specified herein. The membership of the
Committee for every House shall at least have two opposition or minority
members. The Joint Oversight Committee shall have its own independent
counsel. The Chair of the Committee shall rotate every six months with
the Senate chairing it for the first six months and the House for the next
six months. In every case, the ranking opposition or minority member of
the Committee shall be the Vice Chair. Upon the expiration of one year
after this Act is approved by the President, the Committee shall review
the Act particularly the provision that authorize the surveillance of
suspects of or persons charged with the crime of terrorism. To that end,
51
the Committee shall summon the police and law enforcement officers and
the members of the Anti-Terrorism Council and require them to answer
questions from the members of Congress and to submit a written report
of the acts they have done in the implementation of the law including the
manner in which the persons suspected of or charged with the crime of
terrorism have been dealt with in their custody and from the date when
the movements of the latter were subjected to surveillance and his or her
correspondences, messages, conversations and the like were listened to
or subjected to monitoring, recording and tapping. Without prejudice to
its submitting other reports, the Committee shall render a semiannual
report to both Houses of Congress. The report may include where
necessary a recommendation to reassess the effects of globalization on
terrorist activities on the people, provide a sunset clause to or amend any
portion of the Act or to repeal the Act in its entirety. The courts dealing
with anti-terrorism cases shall submit to Congress and the President a
report every six months of the status of anti-terrorism cases that have
been filed with them starting from the date this Act is implemented.
SEC. 60. Separability Clause. - If for any reason any part or provision
of this Act is declared unconstitutional or invalid, the other parts or
provisions hereof which are not affected thereby shall remain and
continue to be in full force and effect.
SEC. 61. Repealing Clause. - All laws, decrees, executive orders, rules
or regulations or parts thereof, inconsistent with the provisions of this Act
are hereby repealed, amended, or modified accordingly.
SEC. 62. Special Effectivity Clause. - After the bill shall have been
signed into law by the President, the Act shall be published in three
newspapers of national circulation; three newspapers of local circulation,
one each in llocos Norte, Baguio City and Pampanga; three newspapers
of local circulation, one each in Cebu, lloilo and Tacloban; and three
newspapers of local circulation, one each in Cagayan de Oro, Davao and
General Santos city.
The title of the Act and its provisions defining the acts of terrorism that
are punished shall be aired everyday at primetime for seven days,
morning, noon and night over three national television and radio
networks; three radio and television networks, one each in Cebu,
Tacloban and lloilo; and in five radio and television networks, one each in
Lanao del Sur, Cagayan de Oro, Davao City, Cotabato City and
Zamboanga City. The publication in the newspapers of local circulation
and the announcements over local radio and television networks shall be
done in the dominant language of the community. After the publication
required above shall have been done, the Act shall take effect two
months after the elections are held in May 2007. Thereafter, the
provisions of this Act shall be automatically suspended one month before
and two months as after the holding of any election.
Approved,
AN ACT DEFINING THE CRIME OF MONEY LAUNDERING,
PROVIDING PENALTIES THEREFOR AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the
Philippines in Congress assembled:
SECTION 1. Short Title. This Act shall be known as the "Anti-Money
Laundering Act of 2001."
SEC. 2. Declaration of Policy. It is hereby declared the policy of the
State to protect and preserve the integrity and confidentiality of bank
accounts and to ensure that the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful activity. Consistent with
its foreign policy, the State shall extend cooperation in transnational
investigations and prosecutions of persons involved in money laundering
activities wherever committed.
SEC. 3. Definitions. For purposes of this Act, the following terms are
hereby defined as follows:
(a) "Covered institution" refers to:
(1) banks, non-banks, quasi-banks, trust entities, and all other
institutions and their subsidiaries and affiliates supervised or regulated by
the Bangko Sentral ng Pilipinas (BSP);
(2) insurance companies and all other institutions supervised or regulated
by the Insurance Commission; and
(3) (i) securities dealers, brokers, salesmen, investment houses and
other similar entities managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, pre-need companies and
other similar entities, (iii) foreign exchange corporations, money
changers, money payment, remittance, and transfer companies and other
similar entities, and (iv) other entities administering or otherwise dealing
in currency, commodities or financial derivatives based thereon, valuable
objects, cash substitutes and other similar monetary instruments or
property supervised or regulated by Securities and Exchange Commission
and Exchange Commission
(b) "Covered transaction" is a single, series, or combination of
transactions involving a total amount in excess of Four million Philippine
pesos (Php4,000,000.00) or an equivalent amount in foreign currency
based on the prevailing exchange rate within five (5) consecutive banking
days except those between a covered institution and a person who, at the
52
time of the transaction was a properly identified client and the amount is (2) Sections 3, 4, 5, 7, 8 and 9 of Article Two of Republic Act No. 6425,
commensurate with the business or financial capacity of the client; or as amended, otherwise known as the Dangerous Drugs Act of 1972;
those with an underlying legal or trade obligation, purpose, origin or
economic justification.
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as
amended; otherwise known as the Anti-Graft and Corrupt Practices Act;
It likewise refers to a single, series or combination or pattern of unusually
large and complex transactions in excess of Four million Philippine pesos
(4) Plunder under Republic Act No. 7080, as amended;
(Php4,000,000.00) especially cash deposits and investments having no
credible purpose or origin, underlying trade obligation or contract.
(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301
and 302 of the Revised Penal Code, as amended;
(c) "Monetary instrument" refers to:

(6) Jueteng and Masiao punished as illegal gambling under Presidential

(1) coins or currency of legal tender of the Philippines, or of any other
Decree No. 1602;
country;

(7) Piracy on the high seas under the Revised Penal Code, as amended
(2) drafts, checks and notes;
and Presidential Decree No. 532;

(3) securities or negotiable instruments, bonds, commercial papers,

(8) Qualified theft under Article 310 of the Revised Penal Code, as
deposit certificates, trust certificates, custodial receipts or deposit
amended;
substitute instruments, trading orders, transaction tickets and
confirmations of sale or investments and money market instruments; and
(9) Swindling under Article 315 of the Revised Penal Code, as amended;
(4) other similar instruments where title thereto passes to another by
endorsement, assignment or delivery. (10) Smuggling under Republic Act Nos. 455 and 1937;

(d) "Offender" refers to any person who commits a money laundering (11) Violations under Republic Act No. 8792, otherwise known as the
offense. Electronic Commerce Act of 2000;

(e) "Person" refers to any natural or juridical person.
(f) "Proceeds" refers to an amount derived or realized from an unlawful
activity.
(12) Hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised Penal Code,
as amended, including those perpetrated by terrorists against non-
combatant persons and similar targets;

(13) Fraudulent practices and other violations under Republic Act No.
(g) "Supervising Authority" refers to the appropriate supervisory or
8799, otherwise known as the Securities Regulation Code of 2000;
regulatory agency, department or office supervising or regulating the
covered institutions enumerated in Section 3(a).
(14) Felonies or offenses of a similar nature that are punishable under
the penal laws of other countries.
(h) "Transaction" refers to any act establishing any right or obligation or
giving rise to any contractual or legal relationship between the parties
thereto. It also includes any movement of funds by any means with a SEC. 4. Money Laundering Offense. Money laundering is a crime
covered institution. whereby the proceeds of an unlawful activity are transacted, thereby
making them appear to have originated from legitimate sources. It is
committed by the following:
(i) "Unlawful activity" refers to any act or omission or series or
combination thereof involving or having relation to the following:
(a) Any person knowing that any monetary instrument or property
represents, involves, or relates to, the proceeds of any unlawful activity,
(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise
transacts or attempts to transact said monetary instrument or property.
known as the Revised Penal Code, as amended;
53
(b) Any person knowing that any monetary instrument or property
involves the proceeds of any unlawful activity, performs or fails to
perform any act as a result of which he facilitates the offense of money
laundering referred to in paragraph (a) above.
(c) Any person knowing that any monetary instrument or property is
required under this Act to be disclosed and filed with the Anti-Money
Laundering Council (AMLC), fails to do so.
SEC. 5. Jurisdiction of Money Laundering Cases. The regional trial
courts shall have jurisdiction to try all cases on money laundering. Those
committed by public officers and private persons who are in conspiracy
with such public officers shall be under the jurisdiction of the
Sandiganbayan.
SEC. 6. Prosecution of Money Laundering.
(a) Any person may be charged with and convicted of both the offense of
money laundering and the unlawful activity as herein defined.
(b) Any proceeding relating to the unlawful activity shall be given
precedence over the prosecution of any offense or violation under this Act
without prejudice to the freezing and other remedies provided.
SEC. 7. Creation of Anti-Money Laundering Council (AMLC). The
Anti-Money Laundering Council is hereby created and shall be composed
of the Governor of the Bangko Sentral ng Pilipinas as chairman, the
Commissioner of the Insurance Commission and the Chairman of the
Securities and Exchange Commission as members. The AMLC shall act
unanimously in the discharge of its functions as defined hereunder:
(1) to require and receive covered transaction reports from covered
institutions;
(2) to issue orders addressed to the appropriate Supervising Authority or
the covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction report
or request for assistance from a foreign State, or believed by the Council,
on the basis of substantial evidence, to be, in whole or in part, wherever
located, representing, involving, or related to, directly or indirectly, in any
manner or by any means, the proceeds of an unlawful activity;
(3) to institute civil forfeiture proceedings and all other remedial
proceedings through the Office of the Solicitor General;
(4) to cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;
(5) to initiate investigations of covered transactions, money laundering
activities and other violations of this Act;
(6) to freeze any monetary instrument or property alleged to be proceeds
of any unlawful activity;
(7) to implement such measures as may be necessary and justified under
this Act to counteract money laundering;
(8) to receive and take action in respect of, any request from foreign
states for assistance in their own anti-money laundering operations
provided in this Act;
(9) to develop educational programs on the pernicious effects of money
laundering, the methods and techniques used in money laundering, the
viable means of preventing money laundering and the effective ways of
prosecuting and punishing offenders; and
(10) to enlist the assistance of any branch, department, bureau, office,
agency or instrumentality of the government, including government-
owned and -controlled corporations, in undertaking any and all anti-
money laundering operations, which may include the use of its personnel,
facilities and resources for the more resolute prevention, detection and
investigation of money laundering offenses and prosecution of offenders.
SEC. 8. Creation of a Secretariat. The AMLC is hereby authorized to
establish a secretariat to be headed by an Executive Director who shall
be appointed by the Council for a term of five (5) years. He must be a
member of the Philippine Bar, at least thirty-five (35) years of age and of
good moral character, unquestionable integrity and known probity. All
members of the Secretariat must have served for at least five (5) years
either in the Insurance Commission, the Securities and Exchange
Commission or the Bangko Sentral ng Pilipinas (BSP) and shall hold full-
time permanent positions within the BSP.
SEC. 9. Prevention of Money Laundering; Customer Identification
Requirements and Record Keeping.
(a) Customer Identification. - Covered institutions shall establish and
record the true identity of its clients based on official documents. They
shall maintain a system of verifying the true identity of their clients and,
in case of corporate clients, require a system of verifying their legal
existence and organizational structure, as well as the authority and
identification of all persons purporting to act on their behalf.The
provisions of existing laws to the contrary notwithstanding, anonymous
accounts, accounts under fictitious names, and all other similar accounts
shall be absolutely prohibited. Peso and foreign currency non-checking
numbered accounts shall be allowed. The BSP may conduct annual
54
testing solely limited to the determination of the existence and true explain why the freeze order should be lifted. The AMLC has seventy-two
identity of the owners of such accounts. (72) hours to dispose of the depositors explanation. If it fails to act
within seventy-two (72) hours from receipt of the depositors
explanation, the freeze order shall automatically be dissolved. The fifteen
(b) Record Keeping. - All records of all transactions of covered institutions
(15)-day freeze order of the AMLC may be extended upon order of the
shall be maintained and safely stored for five (5) years from the dates of
court, provided that the fifteen (15)-day period shall be tolled pending
transactions. With respect to closed accounts, the records on customer
the courts decision to extend the period.
identification, account files and business correspondence, shall be
preserved and safely stored for at least five (5) years from the dates
when they were closed. No court shall issue a temporary restraining order or writ of injunction
against any freeze order issued by the AMLC except the Court of Appeals
or the Supreme Court.
(c) Reporting of Covered Transactions. - Covered institutions shall report
to the AMLC all covered transactions within five (5) working days from
occurrence thereof, unless the Supervising Authority concerned SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding
prescribes a longer period not exceeding ten (10) working days. the provisions of Republic Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791, and other laws, the AMLC
may inquire into or examine any particular deposit or investment with
When reporting covered transactions to the AMLC, covered institutions
any banking institution or non-bank financial institution upon order of any
and their officers, employees, representatives, agents, advisors,
competent court in cases of violation of this Act when it has been
consultants or associates shall not be deemed to have violated Republic
established that there is probable cause that the deposits or investments
Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic
involved are in any way related to a money laundering offense: Provided,
Act No. 8791 and other similar laws, but are prohibited from
That this provision shall not apply to deposits and investments made
communicating, directly or indirectly, in any manner or by any means, to
prior to the effectivity of this Act.
any person the fact that a covered transaction report was made, the
contents thereof, or any other information in relation thereto. In case of
violation thereof, the concerned officer, employee, representative, agent, SEC. 12. Forfeiture Provisions.
advisor, consultant or associate of the covered institution, shall be
criminally liable. However, no administrative, criminal or civil
(a) Civil Forfeiture. - When there is a covered transaction report made,
proceedings, shall lie against any person for having made a covered
and the court has, in a petition filed for the purpose ordered seizure of
transaction report in the regular performance of his duties and in good
any monetary instrument or property, in whole or in part, directly or
faith, whether or not such reporting results in any criminal prosecution
indirectly, related to said report, the Revised Rules of Court on civil
under this Act or any other Philippine law.
forfeiture shall apply.

When reporting covered transactions to the AMLC, covered institutions

(b) Claim on Forfeited Assets. - Where the court has issued an order of
and their officers, employees, representatives, agents, advisors,
forfeiture of the monetary instrument or property in a criminal
consultants or associates are prohibited from communicating, directly or
prosecution for any money laundering offense defined under Section 4 of
indirectly, in any manner or by any means, to any person, entity, the
this Act, the offender or any other person claiming an interest therein
media, the fact that a covered transaction report was made, the contents
may apply, by verified petition, for a declaration that the same
thereof, or any other information in relation thereto. Neither may such
legitimately belongs to him and for segregation or exclusion of the
reporting be published or aired in any manner or form by the mass
monetary instrument or property corresponding thereto. The verified
media, electronic mail, or other similar devices. In case of violation
petition shall be filed with the court which rendered the judgment of
thereof, the concerned officer, employee, representative, agent, advisor,
conviction and order of forfeiture, within fifteen (15) days from the date
consultant or associate of the covered institution, or media shall be held
of the order of forfeiture, in default of which the said order shall become
criminally liable.
final and executory. This provision shall apply in both civil and criminal
forfeiture.
SEC. 10. Authority to Freeze. Upon determination that probable
cause exists that any deposit or similar account is in any way related to
(c) Payment in Lieu of Forfeiture. - Where the court has issued an order
an unlawful activity, the AMLC may issue a freeze order, which shall be
of forfeiture of the monetary instrument or property subject of a money
effective immediately, on the account for a period not exceeding fifteen
laundering offense defined under Section 4, and said order cannot be
(15) days. Notice to the depositor that his account has been frozen shall
enforced because any particular monetary instrument or property cannot,
be issued simultaneously with the issuance of the freeze order. The
with due diligence, be located, or it has been substantially altered,
depositor shall have seventy-two (72) hours upon receipt of the notice to
destroyed, diminished in value or otherwise rendered worthless by any
55
act or omission, directly or indirectly, attributable to the offender, or it
has been concealed, removed, converted or otherwise transferred to
prevent the same from being found or to avoid forfeiture thereof, or it is
located outside the Philippines or has been placed or brought outside the
jurisdiction of the court, or it has been commingled with other monetary
instruments or property belonging to either the offender himself or a
third person or entity, thereby rendering the same difficult to identify or
be segregated for purposes of forfeiture, the court may, instead of
enforcing the order of forfeiture of the monetary instrument or property
or part thereof or interest therein, accordingly order the convicted
offender to pay an amount equal to the value of said monetary
instrument or property. This provision shall apply in both civil and
criminal forfeiture.
SEC. 13. Mutual Assistance among States.
(a) Request for Assistance from a Foreign State. - Where a foreign State
makes a request for assistance in the investigation or prosecution of a
money laundering offense, the AMLC may execute the request or refuse
to execute the same and inform the foreign State of any valid reason for
not executing the request or for delaying the execution thereof. The
principles of mutuality and reciprocity shall, for this purpose, be at all
times recognized.
(b) Powers of the AMLC to Act on a Request for Assistance from a Foreign
State. - The AMLC may execute a request for assistance from a foreign
State by: (1) tracking down, freezing, restraining and seizing assets
alleged to be proceeds of any unlawful activity under the procedures laid
down in this Act; (2) giving information needed by the foreign State
within the procedures laid down in this Act; and (3) applying for an order
of forfeiture of any monetary instrument or property in the court:
Provided, That the court shall not issue such an order unless the
application is accompanied by an authenticated copy of the order of a
court in the requesting State ordering the forfeiture of said monetary
instrument or property of a person who has been convicted of a money
laundering offense in the requesting State, and a certification or an
affidavit of a competent officer of the requesting State stating that the
conviction and the order of forfeiture are final and that no further appeal
lies in respect of either.
(c) Obtaining Assistance from Foreign States. - The AMLC may make a
request to any foreign State for assistance in (1) tracking down, freezing,
restraining and seizing assets alleged to be proceeds of any unlawful
activity; (2) obtaining information that it needs relating to any covered
transaction, money laundering offense or any other matter directly or
indirectly related thereto; (3) to the extent allowed by the law of the
foreign State, applying with the proper court therein for an order to enter
any premises belonging to or in the possession or control of, any or all of
the persons named in said request, and/or search any or all such persons
named therein and/or remove any document, material or object named
in said request: Provided, That the documents accompanying the request
in support of the application have been duly authenticated in accordance
with the applicable law or regulation of the foreign State; and (4)
applying for an order of forfeiture of any monetary instrument or
property in the proper court in the foreign State: Provided, That the
request is accompanied by an authenticated copy of the order of the
regional trial court ordering the forfeiture of said monetary instrument or
property of a convicted offender and an affidavit of the clerk of court
stating that the conviction and the order of forfeiture are final and that
no further appeal lies in respect of either.
(d) Limitations on Requests for Mutual Assistance. - The AMLC may
refuse to comply with any request for assistance where the action sought
by the request contravenes any provision of the Constitution or the
execution of a request is likely to prejudice the national interest of the
Philippines unless there is a treaty between the Philippines and the
requesting State relating to the provision of assistance in relation to
money laundering offenses.
(e) Requirements for Requests for Mutual Assistance from Foreign States.
- A request for mutual assistance from a foreign State must (1) confirm
that an investigation or prosecution is being conducted in respect of a
money launderer named therein or that he has been convicted of any
money laundering offense; (2) state the grounds on which any person is
being investigated or prosecuted for money laundering or the details of
his conviction; (3) give sufficient particulars as to the identity of said
person; (4) give particulars sufficient to identify any covered institution
believed to have any information, document, material or object which
may be of assistance to the investigation or prosecution; (5) ask from the
covered institution concerned any information, document, material or
object which may be of assistance to the investigation or prosecution; (6)
specify the manner in which and to whom said information, document,
material or object obtained pursuant to said request, is to be produced;
(7) give all the particulars necessary for the issuance by the court in the
requested State of the writs, orders or processes needed by the
requesting State; and (8) contain such other information as may assist in
the execution of the request.
(f) Authentication of Documents. - For purposes of this Section, a
document is authenticated if the same is signed or certified by a judge,
magistrate or equivalent officer in or of, the requesting State, and
authenticated by the oath or affirmation of a witness or sealed with an
official or public seal of a minister, secretary of State, or officer in or of,
the government of the requesting State, or of the person administering
the government or a department of the requesting territory, protectorate
or colony. The certificate of authentication may also be made by a
secretary of the embassy or legation, consul general, consul, vice consul,
consular agent or any officer in the foreign service of the Philippines
stationed in the foreign State in which the record is kept, and
authenticated by the seal of his office.
56
(g) Extradition. - The Philippines shall negotiate for the inclusion of
money laundering offenses as herein defined among extraditable offenses
in all future treaties.
SEC. 14. Penal Provisions.
(a) Penalties for the Crime of Money Laundering. The penalty of
imprisonment ranging from seven (7) to fourteen (14) years and a fine of
not less than Three million Philippine pesos (Php 3,000,000.00) but not
more than twice the value of the monetary instrument or property
involved in the offense, shall be imposed upon a person convicted under
Section 4(a) of this Act.
The penalty of imprisonment from four (4) to seven (7) years and a fine
of not less than One million five hundred thousand Philippine pesos
(Php1,500,000.00) but not more than Three million Philippine pesos
(Php3,000,000.00), shall be imposed upon a person convicted under
Section 4(b) of this Act.
The penalty of imprisonment from six (6) months to four (4) years or a
fine of not less than One hundred thousand Philippine pesos
(Php100,000.00) but not more than Five hundred thousand Philippine
pesos (Php500,000.00), or both, shall be imposed on a person convicted
under Section 4(c) of this Act.
(b) Penalties for Failure to Keep Records. The penalty of imprisonment
from six (6) months to one (1) year or a fine of not less than One
hundred thousand Philippine pesos (Php100,000.00) but not more than
Five hundred thousand Philippine pesos (Php500,000.00), or both, shall
be imposed on a person convicted under Section 9(b) of this Act.
(c) Malicious Reporting. Any person who, with malice, or in bad faith,
reports or files a completely unwarranted or false information relative to
money laundering transaction against any person shall be subject to a
penalty of six (6) months to four (4) years imprisonment and a fine of
not less than One hundred thousand Philippine pesos (Php100, 000.00)
but not more than Five hundred thousand Philippine pesos (Php500,
000.00), at the discretion of the court: Provided, That the offender is not
entitled to avail the benefits of the Probation Law.
If the offender is a corporation, association, partnership or any juridical
person, the penalty shall be imposed upon the responsible officers, as the
case may be, who participated in the commission of the crime or who
shall have knowingly permitted or failed to prevent its commission. If the
offender is a juridical person, the court may suspend or revoke its
license. If the offender is an alien, he shall, in addition to the penalties
herein prescribed, be deported without further proceedings after serving
the penalties herein prescribed. If the offender is a public official or
employee, he shall, in addition to the penalties prescribed herein, suffer
perpetual or temporary absolute disqualification from office, as the case
may be.
Any public official or employee who is called upon to testify and refuses
to do the same or purposely fails to testify shall suffer the same penalties
prescribed herein.
(d) Breach of Confidentiality. The punishment of imprisonment ranging
from three (3) to eight (8) years and a fine of not less than Five hundred
thousand Philippine pesos (Php500,000.00) but not more than One
million Philippine pesos (Php1,000,000.00), shall be imposed on a person
convicted for a violation under Section 9(c).
SEC. 15. System of Incentives and Rewards. A system of special
incentives and rewards is hereby established to be given to the
appropriate government agency and its personnel that led and initiated
an investigation, prosecution and conviction of persons involved in the
offense penalized in Section 4 of this Act.
SEC. 16. Prohibitions Against Political Harassment. This Act shall
not be used for political persecution or harassment or as an instrument to
hamper competition in trade and commerce.
No case for money laundering may be filed against and no assets shall be
frozen, attached or forfeited to the prejudice of a candidate for an
electoral office during an election period.
SEC. 17. Restitution. Restitution for any aggrieved party shall be
governed by the provisions of the New Civil Code.
SEC. 18. Implementing Rules and Regulations. Within thirty (30)
days from the effectivity of this Act, the Bangko Sentral ng Pilipinas, the
Insurance Commission and the Securities and Exchange Commission shall
promulgate the rules and regulations to implement effectively the
provisions of this Act. Said rules and regulations shall be submitted to the
Congressional Oversight Committee for approval.
Covered institutions shall formulate their respective money laundering
prevention programs in accordance with this Act including, but not limited
to, information dissemination on money laundering activities and its
prevention, detection and reporting, and the training of responsible
officers and personnel of covered institutions.
SEC. 19. Congressional Oversight Committee. There is hereby
created a Congressional Oversight Committee composed of seven (7)
members from the Senate and seven (7) members from the House of
Representatives. The members from the Senate shall be appointed by the
Senate President based on the proportional representation of the parties
57
or coalitions therein with at least two (2) Senators representing the
minority. The members from the House of Representatives shall be
appointed by the Speaker also based on proportional representation of
the parties or coalitions therein with at least two (2) members
representing the minority.
The Oversight Committee shall have the power to promulgate its own
rules, to oversee the implementation of this Act, and to review or revise
the implementing rules issued by the Anti-Money Laundering Council
within thirty (30) days from the promulgation of the said rules.
SEC. 20. Appropriations Clause. The AMLC shall be provided with an
initial appropriation of Twenty-five million Philippine pesos
(Php25,000,000.00) to be drawn from the national government.
Appropriations for the succeeding years shall be included in the General
Appropriations Act.
SEC. 21. Separability Clause. If any provision or section of this Act
or the application thereof to any person or circumstance is held to be
invalid, the other provisions or sections of this Act, and the application of
such provision or section to other persons or circumstances, shall not be
affected thereby.
SEC. 22. Repealing Clause. All laws, decrees, executive orders, rules
and regulations or parts thereof, including the relevant provisions of
Republic Act No. 1405, as amended; Republic Act No. 6426, as amended;
Republic Act No. 8791, as amended and other similar laws, as are
inconsistent with this Act, are hereby repealed, amended or modified
accordingly.
SEC. 23. Effectivity. This Act shall take effect fifteen (15) days after
its complete publication in the Official Gazette or in at least two (2)
national newspapers of general circulation.
The provisions of this Act shall not apply to deposits and investments
made prior to its effectivity.
REPUBLIC ACT NO. 10167 June 06, 2012
AN ACT TO FURTHER STRENGTHEN THE ANTI-MONEY
LAUNDERING LAW, AMENDING FOR THE PURPOSE SECTIONS 10
AND 11 OF REPUBLIC ACT NO. 9160, OTHERWISE KNOWN AS THE
ANTI-MONEY LAUNDERING ACT OF 2001, AS AMENDED, AND FOR
OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the
Philippines in Congress assembled:
Section 1. Section 10 of Republic Act No. 9160, as amended, is hereby
amended to read as follows:
"SEC. 10. Freezing of Monetary Instrument or Property. Upon verified
ex parte petition by the AMLC and after determination that probable
cause exists that any monetary instrument or property is in any way
related to an unlawful activity as defined in Section 3(i) hereof, the Court
of Appeals may issue a freeze order, which shall be effective immediately.
The freeze order shall be for a period of twenty (20) days unless
extended by the court. In any case, the court should act on the petition
to freeze within twenty-four (24) hours from filing of the petition. If the
application is filed a day before a nonworking day, the computation of the
twenty-four (24)-hour period shall exclude the nonworking days."
"A person whose account has been frozen may file a motion to lift the
freeze order and the court must resolve this motion before the expiration
of the twenty (20)-day original freeze order."
"No court shall issue a temporary restraining order or a writ of injunction
against any freeze order, except the Supreme Court."
Section 2. Section 11 of the same Act is hereby amended to read as
follows:
"SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the
provisions of Republic Act No. 1405, as amended; Republic Act No. 6426,
as amended; Republic Act No. 8791; and other laws, the AMLC may
inquire into or examine any particular deposit or investment, including
related accounts, with any banking institution or non-bank financial
institution upon order of any competent court based on an ex parte
application in cases of violations of this Act, when it has been established
that there is probable cause that the deposits or investments, including
related accounts involved, are related to an unlawful activity as defined in
Section 3(i) hereof or a money laundering offense under Section 4
hereof; except that no court order shall be required in cases involving
activities defined in Section 3(i)(1), (2), and (12) hereof, and felonies or
offenses of a nature similar to those mentioned in Section 3(i)(1), (2),
and (12), which are Punishable under the penal laws of other countries,
and terrorism and conspiracy to commit terrorism as defined and
penalized under Republic Act No. 9372."
"The Court of Appeals shall act on the application to inquire into or
examine any deposit or investment with any banking institution or non-
bank financial institution within twenty-four (24) hours from filing of the
application."
"To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may,
in the course of a periodic or special examination, check the compliance
58
of a Covered institution with the requirements of the AMLA and its
implementing rules and regulations."
"For purposes of this section, related accounts shall refer to accounts,
the funds and sources of which originated from and/or are materially
linked to the monetary instrument(s) or property(ies) subject of the
freeze order(s)."
"A court order ex parte must first be obtained before the AMLC can
inquire into these related Accounts: Provided, That the procedure for the
ex parte application of the ex parte court order for the principal account
shall be the same with that of the related accounts."
"The authority to inquire into or examine the main account and the
related accounts shall comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated
by reference."
Section 3. Separability Clause. If any provision of this Act or the
application thereof to any person or circumstance is held to be void, or
unconstitutional, any other provision not affected thereby shall remain in
full force and effect.
Section 4. Repealing Clause. All laws, decrees, executive orders, rules
and regulations or parts thereof as are inconsistent with this Act are
hereby repealed, amended or modified accordingly: Provided, That the
penal provisions shall not apply to acts done prior to the effectivity of the
AMLA on October 17, 2001 .
Section 5. Effectivity. This Act shall take effect fifteen (15) days after
its complete publication in the Official Gazette or in at least two (2)
national newspapers of general circulation.
[REPUBLIC ACT NO. 10168]
AN ACT DEFINING THE CRIME OF FINANCING OF TERRORISM,
PROVIDING PENALTIES THEREFOR AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the
Philippines in Congress assembled:
SECTION 1. Short Title. This Act shall be known as The Terrorism
Financing Prevention and Suppression Act of 2012.
SEC. 2. Declaration of Policy. It is the policy of the State to protect life,
liberty, and property from acts of terrorism and to condemn terrorism
and those who support and finance it and to recognize it as inimical and
dangerous to national security and the welfare of the people, and to
make the financing of terrorism a crime against the Filipino people,
against humanity, and against the law of nations.
The State, likewise, recognizes and adheres to international
commitments to combat the financing of terrorism, specifically to the
International Convention for the Suppression of the Financing of
Terrorism, as well as other binding terrorism-related resolutions of the
United Nations Security Council pursuant to Chapter 7 of the Charter of
the United Nations (UN).
Toward this end, the State shall reinforce its fight against terrorism by
criminalizing the financing of terrorism and related offenses, and by
preventing and suppressing the commission of said offenses through
freezing and forfeiture of properties or funds while protecting human
rights.
SEC. 3. Definition of Terms. As used in this Act:
(a) Anti-Money Laundering Council (AMLC) refers to the Council created
by virtue of Republic Act No. 9160, as amended, otherwise known as the
Anti-Money Laundering Act of 2001, as amended.
(b) Anti-Terrorism Council (ATC) refers to the Council created by, virtue
of Republic Act No. 9372, otherwise known as the Human Security Act of
2007.
(c) Covered institutions refer to or shall have the same meaning as
defined under the Anti-Money Laundering Act (AMLA), as amended.
(d) Dealing, with regard to property or funds refers to receipt,
acquisition, transacting, representing, concealing, disposing or
converting, transferring or moving, use as security of or providing
financial services.
(e) Designated persons refers to:
(1) any person or entity designated and/or identified as a terrorist, one
who finances terrorism, or a terrorist organization or group under the
applicable United Nations Security Council Resolution or by another
jurisdiction or supranational jurisdiction;
(2) any organization, association, or group of persons proscribed
pursuant to Section 17 of the Human Security Act of 2007; or
59
(3) any person, organization, association, or group of persons whose
funds or property, based on probable cause are subject to seizure and
sequestration under Section 39 of the Human Security Act of 2007.
(f) Forfeiture refers to a court order transferring in favor of the
government, after due process, ownership of property or funds
representing, involving, or relating to financing of terrorism as defined in
Section 4 or an offense under Sections 5, 6, 7, 8, or 9 of this Act.
(g) Freeze refers to the blocking or restraining of specific property or
funds from being transacted, converted, concealed, moved or disposed
without affecting the ownership thereof.
(h) Property or funds refer to financial assets, property of every kind,
whether tangible or intangible, movable or immovable, however acquired,
and legal documents or instruments in any form, including electronic or
digital, evidencing title to, or interest in, such funds or other assets,
including, but not limited to, bank credits, travellers cheques, bank
cheques, money orders, shares, securities, bonds, drafts, or letters of
credit, and any interest, dividends or other income on or value accruing
from or generated by such funds or other assets.
(i) Terrorist refers to any natural person who: (1) commits, or attempts,
or conspires to commit terrorist acts by any means, directly or indirectly,
unlawfully and willfully; (2) participates, as a principal or as an
accomplice, in terrorist acts; (3) organizes or directs others to commit
terrorist acts; or (4) contributes to the commission of terrorist acts by a
group of persons acting with a common purpose where the contribution is
made intentionally and with the aim of furthering the terrorist act or with
the knowledge of the intention of the group to commit a terrorist act.
(j) Terrorist acts refer to the following:
(1) Any act in violation of Section 3 or Section 4 of the Human Security
Act of 2007;
(2) Any other act intended to cause death or serious bodily injury to a
civilian, or to any other person not taking an active part in the hostilities
in a situation of armed conflict, when the purpose of such act, by its
nature or context, is to intimidate a population, or to compel a
government or an international organization to do or to abstain from
doing any act;
(3) Any act which constitutes an offense under this Act, that is within the
scope of any of the following treaties of which the Republic of the
Philippines is a State party:
(a) Convention for the Suppression of Unlawful Seizure of Aircraft, done
at The Hague on 16 December 1970;
(b) Convention for the Suppression of Unlawful Acts against the Safety of
Civil Aviation, done at Montreal on 23 September 1971;
(c) Convention on the Prevention and Punishment of Crimes against
Internationally Protected Persons, including Diplomatic Agents, adopted
by the General Assembly of the United Nations on 14 December 1973;
(d) International Convention against the Taking of Hostages, adopted by
the General Assembly of the United Nations on 17 December 1979;
(e) Convention on the Physical Protection of Nuclear Material, adopted at
Vienna on 3 March 1980;
(f) Protocol for the Suppression of Unlawful Acts of Violence at Airports
Serving International Civil Aviation, supplementary to the Convention for
the Suppression of Unlawful Acts against the Safety of Civil Aviation,
done at Montreal on 24 February 1988;
(g) Convention for the Suppression of Unlawful Acts against the Safety of
Maritime Navigation, done at Rome on 10 March 1988;
(h) Protocol for the Suppression of Unlawful Acts against the Safety of
Fixed Platforms located on the Continental Shelf, done at Rome on 10
March 1988; or
(i) International Convention for the Suppression of Terrorist Bombings,
adopted by the General Assembly of the United Nations on 15 December
1997.
(k) Terrorist organization, association or a group of persons refers to any
entity owned or controlled by any terrorist or group of terrorists that: (1)
commits, or attempts to commit, terrorist acts by any means, directly or
indirectly, unlawfully and willfully; (2) participates as an accomplice in
terrorist acts; (3) organizes or directs others to commit terrorist acts; or
(4) contributes to the commission of terrorist acts by a group of persons
acting with common purpose of furthering the terrorist act where the
contribution is made intentionally and with the aim of furthering the
terrorist act or with the knowledge of the intention of the group to
commit a terrorist act.
SEC. 4. Financing of Terrorism. Any person who, directly or indirectly,
willfully and without lawful excuse, possesses, provides, collects or uses
property or funds or makes available property, funds or financial service
or other related services, by any means, with the unlawful and willful
intention that they should be used or with the knowledge that they are to
60
be used, in full or in part: (a) to carry out or facilitate the commission of
any terrorist act; (b) by a terrorist organization, association or group; or
(c) by an individual terrorist, shall be guilty of the crime of financing of
terrorism and shall suffer the penalty of reclusion temporal in its
maximum period to reclusion perpetua and a fine of not less than Five
hundred thousand pesos (Php500,000.00) nor more than One million
pesos (Php1,000,000.00).
Any person who organizes or directs others to commit financing of
terrorism under the immediately preceding paragraph shall likewise be
guilty of an offense and shall suffer the same penalty as herein
prescribed.
For purposes of this Act, knowledge or intent may be established by
direct evidence or inferred from the attendant circumstances.
For an act to constitute a crime under this Act, it shall not be necessary
that the funds were actually used to carry out a crime referred to in
Section 3(j).
SEC. 5. Attempt or Conspiracy to Commit the Crimes of Financing of
Terrorism and Dealing with Property or Funds of Designated Persons.
Any attempt to commit any crime under Section 4 or Section 8 under this
Act shall be penalized by a penalty two degrees lower than that
prescribed for the commission of the same as provided under this Act.
Any conspiracy to commit any crime under Section 4 or Section 8 of this
Act shall be penalized by the same penalty prescribed for the commission
of such crime under the said sections.
There is conspiracy to commit the offenses punishable under Sections 4
and 8 of this Act when two (2) or more persons come to an agreement
concerning the commission of such offenses and decided to commit it.
SEC. 6. Accomplice. Any person who, not being a principal under Article
17 of the Revised Penal Code or a conspirator as defined in Section 5
hereof, cooperates in the execution of either the crime of financing of
terrorism or conspiracy to commit the crime of financing of terrorism by
previous or simultaneous acts shall suffer the penalty one degree lower
than that prescribed for the conspirator.
SEC. 7. Accessory. Any person who, having knowledge of the
commission of the crime of financing of terrorism but without having
participated therein as a principal, takes part subsequent to its
commission, by profiting from it or by assisting the principal or principals
to profit by the effects of the crime, or by concealing or destroying the
effects of the crime in order to prevent its discovery, or by harboring,
concealing or assisting in the escape of a principal of the crime shall be
guilty as an accessory to the crime of financing of terrorism and shall be
imposed a penalty two degrees lower than that prescribed for principals
in the crime of financing terrorism.
SEC. 8. Prohibition Against Dealing with Property or Funds of Designated
Persons. Any person who, not being an accomplice under Section 6 or
accessory under Section 7 in relation to any property or fund: (i) deals
directly or indirectly, in any way and by any means, with any property or
fund that he knows or has reasonable ground to believe is owned or
controlled by a designated person, organization, association or group of
persons, including funds derived or generated from property or funds
owned or controlled, directly or indirectly, by a designated person,
organization, association or group of persons; or (ii) makes available any
property or funds, or financial services or other related services to a
designated and/or identified person, organization, association, or group
of persons, shall suffer the penalty of reclusion temporal in its maximum
period to reclusion perpetua and a fine of not less than Five hundred
thousand pesos (Php500,000.00) nor more than One million pesos
(Php1,000,000.00).
SEC. 9. Offense by a Juridical Person, Corporate Body or Alien. If the
offender is a corporation, association, partnership or any juridical person,
the penalty shall be imposed upon the responsible officers, as the case
may be, who participated in, or allowed by their gross negligence, the
commission of the crime or who shall have knowingly permitted or failed
to prevent its commission. If the offender is a juridical person, the court
may suspend or revoke its license. If the offender is an alien, the alien
shall, in addition to the penalties herein prescribed, be deported without
further proceedings after serving the penalties herein prescribed.
SEC. 10. Authority to Investigate Financing of Terrorism. The AMLC,
either upon its own initiative or at the request of the ATC, is hereby
authorized to investigate: (a) any property or funds that are in any way
related to financing of terrorism or acts of terrorism; (b) property or
funds of any person or persons in relation to whom there is probable
cause to believe that such person or persons are committing or
attempting or conspiring to commit, or participating in or facilitating the
financing of terrorism or acts of terrorism as defined herein.
The AMLC may also enlist the assistance of any branch, department,
bureau, office, agency or instrumentality of the government, including
government-owned and -controlled corporations in undertaking measures
to counter the financing of terrorism, which may include the use of its
personnel, facilities and resources.
For purposes of this section and notwithstanding the provisions of
Republic Act No. 1405, otherwise known as the Law on Secrecy of Bank
Deposits, as amended; Republic Act No. 6426, otherwise known as the
Foreign Currency Deposit Act of the Philippines, as amended; Republic
Act No. 8791, otherwise known as The General Banking Law of 2000
and other laws, the AMLC is hereby authorized to inquire into or examine
61
deposits and investments with any banking institution or non-bank
financial institution and their subsidiaries and affiliates without a court
order.
SEC. 11. Authority to Freeze. The AMLC, either upon its own initiative
or at the request of the ATC, is hereby authorized to issue an ex parte
order to freeze without delay: (a) property or funds that are in any way
related to financing of terrorism or acts of terrorism; or (b) property or
funds of any person, group of persons, terrorist organization, or
association, in relation to whom there is probable cause to believe that
they are committing or attempting or conspiring to commit, or
participating in or facilitating the commission of financing of terrorism or
acts of terrorism as defined herein.
The freeze order shall be effective for a period not exceeding twenty (20)
days. Upon a petition filed by the AMLC before the expiration of the
period, the effectivity of the freeze order may be extended up to a period
not exceeding six (6) months upon order of the Court of Appeals:
Provided, That the twenty-day period shall be tolled upon filing of a
petition to extend the effectivity of the freeze order.
Notwithstanding the preceding paragraphs, the AMLC, consistent with the
Philippines international obligations, shall be authorized to issue a freeze
order with respect to property or funds of a designated organization,
association, group or any individual to comply with binding terrorism-
related Resolutions, including Resolution No. 1373, of the UN Security
Council pursuant to Article 41 of the Charter of the UN. Said freeze order
shall be effective until the basis for the issuance thereof shall have been
lifted. During the effectivity of the freeze order, an aggrieved party may,
within twenty (20) days from issuance, file with the Court of Appeals a
petition to determine the basis of the freeze order according to the
principle of effective judicial protection.
However, if the property or funds subject of the freeze order under the
immediately preceding paragraph are found to be in any way related to
financing of terrorism or acts of terrorism committed within the
jurisdiction of the Philippines, said property or funds shall be the subject
of civil forfeiture proceedings as hereinafter provided.
SEC. 12. Exceptions for Investigative Requirements. Notwithstanding
the immediately preceding provision, the AMLC may decide to defer the
issuance of a freeze order for as long as necessary for any specific
investigative/prosecutorial purposes.
SEC. 13. Humanitarian Exemptions. The person whose property or
funds have been frozen under the first paragraph of Section 11 may
withdraw such sums as the court determines to be reasonably needed for
monthly family needs and sustenance including the services of counsel
and the family medical needs of such person.
The person whose property or funds have been frozen under the third
paragraph of Section 11 may withdraw such sums as the AMLC
determines to be reasonably needed for monthly family needs including
the services of counsel and the family medical needs of such person.
SEC. 14. Appropriation and Use of Funds of Public Attorneys Office
(PAO). Any appropriation and use of funds of PAO to provide free legal
assistance or services to persons charged of the offenses defined and
penalized herein shall not be construed as a violation of this Act, thereby
exempting the PAO from any liability.
SEC. 15. Publication of Designation. The Department of Foreign Affairs
with respect to designation under Section 3 (e) (1) of this Act, and the
ATC with respect to designation under Section 3 (e) (2) and (3) and
Section 11 of this Act, shall publish a list of the designated persons to
which this Act or the Human Security Act applies. The concerned
agencies shall ensure that an electronic version of the document is made
available to the public on their respective website.
Each respective agency or authority shall ensure that information on
procedures established in rules and regulations issued pursuant to this
Act for delisting, unfreezing and exemptions for basic, necessary or
extraordinary expenses shall likewise be made available in their
respective website.
SEC. 16. Duty of the Covered Institutions and/or Relevant Government
Agencies Upon Receipt of the Freeze Order. Upon receipt of the notice
of a freeze order, the covered institutions and/or relevant government
agencies shall immediately preserve the subject property or funds in
accordance with the order of the AMLC and shall forthwith serve a copy of
the notice of the freeze order upon the owner or holder of the property or
funds. Any responsible officer or other person who fails to comply with a
freeze order shall suffer the penalty of imprisonment from six (6) months
to four (4) years and a fine of not less than One hundred thousand pesos
(Php100,000.00) nor more than Five hundred thousand pesos
(Php500,000.00), at the discretion of the court, without prejudice to the
administrative sanctions that the AMLC may impose on the erring covered
institution.
SEC. 17. Predicate Offense to Money Laundering. Financing of terrorism
under Section 4 and offenses punishable under Sections 5, 6, and 7 of
this Act shall be predicate offenses to money laundering as defined in
Republic Act No. 9160, otherwise known as the Anti-Money Laundering
Act of 2001, as amended, and subject to its suspicious transaction
reporting requirement.
SEC. 18. Civil Forfeiture. The procedure for the civil forfeiture of
property or funds found to be in any way related to financing of terrorism
under Section 4 and other offenses punishable under Sections 5, 6, and 7
of this Act shall be made in accordance with the AMLA, as amended, its
62
Revised Implementing Rules and Regulations and the Rules of Procedure
promulgated by the Supreme Court.
SEC. 19. Extra-Territorial Application of this Act. Subject to the
provision of an existing treaty, including the International Convention for
the Suppression of the Financing of Terrorism of which the Philippines is a
State Party, and to any contrary provision of any law of preferential
application, the criminal provisions of this Act shall apply: (a) to
individual persons who, although physically outside the territorial limits of
the Philippines, commit, conspire or plot to commit any of the crimes
defined and punished in this Act inside the territorial limits of the
Philippines; (b) to individual persons who, although physically outside the
territorial limits of the Philippines, commit any of the said crimes on
board Philippine ship or Philippine airship; (c) to individual persons who
commit any of said crimes within any embassy, consulate, or diplomatic
premises belonging to or occupied by the Philippine government in an
official capacity; (d) to individual persons who, although physically
outside the territorial limits of the Philippines, commit said crimes against
Philippine citizens or persons of Philippine descent, where their citizenship
or ethnicity was a factor in the commission of the crime; and (e) to
individual persons who, although physically outside the territorial limits of
the Philippines, commit said crimes directly against the Philippine
government.
The provisions of this Act shall likewise apply to a Filipino national who,
although outside the territorial jurisdiction of the Philippines, commit,
conspire or plot to commit any of the crimes defined and punished in this
Act.
In case of an alien whose extradition is requested pursuant to the
International Convention for the Suppression of the Financing of
Terrorism, and that alien is not extradited to the requesting State, the
Republic of the Philippines, without exception whatsoever and whether or
not the offense was committed in the Philippines, shall submit the case
without undue delay to the Department of Justice for the purpose of
prosecution in the same manner as if the act constituting the offense had
been committed in the Philippines, in which case, the courts of the
Philippines shall have jurisdiction over the offense.
SEC. 20. Extradition. The Philippines may, at its option, subject to the
principle of reciprocity, consider the International Convention for the
Suppression of the Financing of Terrorism as a legal basis for requesting
or granting extradition in respect of the offenses set forth under this Act.
SEC. 21. Applicability of the Revised Penal Code. The provisions of Book
I of the Revised Penal Code shall apply suppletorily to this Act.
SEC. 22. Implementing Rules and Regulations. Within thirty (30) days
from the effectivity of this Act, the AMLC, in coordination with relevant
government agencies, shall promulgate rules and regulations to
implement effectively the provisions of this Act.
The rules and regulations to be promulgated may include, but not limited
to, designation, delisting, notification of matters of interest of persons
affected by the Act, exceptions for basic, necessary and extraordinary
expenses, matters of evidence, definition of probable cause, inter-agency
coordination, publication of relevant information, administrative offenses
and penalties, procedures and forms, and other mechanisms for
implementation of the Act.
SEC. 23. Separability Clause. If, for any reason, any provision of this
Act is declared invalid or unconstitutional, the remaining provisions not
affected thereby shall continue to be in force and effect.
SEC. 24. Repealing Clause. All laws, decrees, executive orders,
proclamations, rules and regulations, and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act are hereby
repealed or modified accordingly
EN BANC
[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.
REGALA, J p:
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 am. 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:
63
 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:
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.
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 Anti-Graft 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 that 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 Anti-Graft 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 an 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 pp. 309-310. Cf. Iloilo Palay and Corn Planters Ass'n. v.
Feliciano, G.R. No. L-24022, March 3, 1965).
64
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."
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 No. 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; (2) 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 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 expresses the notion that a public office is
a public trust and any person who enters upon its discharge does so with the full
knowledge that his life, so far as relevant to his duty, is open to public scrutiny.
WHEREFORE, the decision appealed from is affirmed, without pronouncement as
to costs.
THIRD DIVISION
[G.R. No. 168644. February 16, 2010.]
BSB GROUP, INC., represented by its President, Mr.
RICARDO BANGAYAN, plaintiff-appellee, vs. SALLY GO
a.k.a. SALLY GO-BANGAYAN, accused-appellant.
DECISION
PERALTA, J p:
This is a Petition for Review under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No. 87600 1
dated April 20, 2005, which reversed and set aside the September 13, 2004
2 and November 5, 2004 3 Orders issued by the Regional Trial Court of
Manila, Branch 36 4 in Criminal Case No. 02-202158 for qualified theft. The
said orders, in turn, respectively denied the motion filed by herein
respondent Sally Go for the suppression of the testimonial and documentary
evidence relative to a Security Bank account, and denied reconsideration.
The basic antecedents are no longer disputed.
Petitioner, the BSB Group, Inc., is a duly organized domestic
corporation presided by its herein representative, Ricardo Bangayan
(Bangayan). Respondent Sally Go, alternatively referred to as Sally Sia Go
and Sally Go-Bangayan, is Bangayan's wife, who was employed in the
company as a cashier, and was engaged, among others, to receive and
account for the payments made by the various customers of the company.
In 2002, Bangayan filed with the Manila Prosecutor's Office a
complaint for estafa and/or qualified theft 5 against respondent, alleging
that several checks 6 representing the aggregate amount of P1,534,135.50
issued by the company's customers in payment of their obligation were,
instead of being turned over to the company's coffers, indorsed by
respondent who deposited the same to her personal banking account
maintained at Security Bank and Trust Company (Security Bank) in
Divisoria, Manila Branch. 7 Upon a finding that the evidence adduced was
uncontroverted, the assistant city prosecutor recommended the filing of the
Information for qualified theft against respondent. 8 IDCScA
Accordingly, respondent was charged before the Regional Trial
Court of Manila, Branch 36, in an Information, the inculpatory portion of
which reads:
That in or about or sometime during the period comprised
(sic) between January 1988 [and] October 1989, inclusive,
in the City of Manila, Philippines, the said accused did then
and there willfully, unlawfully and feloniously with intent [to]
gain and without the knowledge and consent of the owner
thereof, take, steal and carry away cash money in the total
amount of P1,534,135.50 belonging to BSB GROUP OF
COMPANIES represented by RICARDO BANGAYAN, to the
damage and prejudice of said owner in the aforesaid amount
of P1,534,135.50, Philippine currency.
That in the commission of the said offense, said accused
acted with grave abuse of confidence, being then employed
as cashier by said complainant at the time of the
commission of the said offense and as such she was
entrusted with the said amount of money.
65
 Contrary to law. 9
Respondent entered a negative plea when arraigned. 10 The trial
ensued. On the premise that respondent had allegedly encashed the subject
checks and deposited the corresponding amounts thereof to her personal
banking account, the prosecution moved for the issuance of subpoena
duces tecum/ad testificandum against the respective managers or records
custodians of Security Bank's Divisoria Branch, as well as of the Asian
Savings Bank (now Metropolitan Bank & Trust Co. [Metrobank]), in Jose
Abad Santos, Tondo, Manila Branch. 11 The trial court granted the motion
and issued the corresponding subpoena. 12
Respondent filed a motion to quash the subpoena dated November
4, 2003, addressed to Metrobank, noting to the court that in the complaint-
affidavit filed with the prosecutor, there was no mention made of the said
bank account, to which respondent, in addition to the Security Bank account
identified as Account No. 01-14-006, allegedly deposited the proceeds of
the supposed checks. Interestingly, while respondent characterized the
Metrobank account as irrelevant to the case, she, in the same motion,
nevertheless waived her objection to the irrelevancy of the Security Bank
account mentioned in the same complaint-affidavit, inasmuch as she was
admittedly willing to address the allegations with respect thereto. 13
cTADCH
Petitioner, opposing respondent's move, argued for the relevancy of
the Metrobank account on the ground that the complaint-affidavit showed
that there were two checks which respondent allegedly deposited in an
account with the said bank. 14 To this, respondent filed a supplemental
motion to quash, invoking the absolutely confidential nature of the
Metrobank account under the provisions of Republic Act (R.A.) No. 1405. 15
The trial court did not sustain respondent; hence, it denied the motion to
quash for lack of merit. 16
Meanwhile, the prosecution was able to present in court the
testimony of Elenita Marasigan (Marasigan), the representative of Security
Bank. In a nutshell, Marasigan's testimony sought to prove that between
1988 and 1989, respondent, while engaged as cashier at the BSB Group,
Inc., was able to run away with the checks issued to the company by its
customers, endorse the same, and credit the corresponding amounts to her
personal deposit account with Security Bank. In the course of the testimony,
the subject checks were presented to Marasigan for identification and
marking as the same checks received by respondent, endorsed, and then
deposited in her personal account with Security Bank. 17 But before the
testimony could be completed, respondent filed a Motion to Suppress, 18
seeking the exclusion of Marasigan's testimony and accompanying
documents thus far received, bearing on the subject Security Bank account.
This time respondent invokes, in addition to irrelevancy, the privilege of
confidentiality under R.A. No. 1405.
The trial court, nevertheless, denied the motion in its September
13, 2004 Order. 19 A motion for reconsideration was subsequently filed, but
it was also denied in the Order dated November 5, 2004. 20 These two
orders are the subject of the instant case.
Aggrieved, and believing that the trial court gravely abused its
discretion in acting the way it did, respondent elevated the matter to the
Court of Appeals via a petition for certiorari under Rule 65. Finding merit in
the petition, the Court of Appeals reversed and set aside the assailed orders
of the trial court in its April 20, 2005 Decision. 21 The decision reads:
WHEREFORE, the petition is hereby GRANTED. The assailed
orders dated September 13, 2004 and November 5, 2004
are REVERSED and SET ASIDE. The testimony of the SBTC
representative is ordered stricken from the records.
SO ORDERED. 22
With the denial of its motion for reconsideration, 23 petitioner is
now before the Court pleading the same issues as those raised before the
lower courts. DcaCSE
In this Petition 24 under Rule 45, petitioner averred in the main
that the Court of Appeals had seriously erred in reversing the assailed
orders of the trial court, and in effect striking out Marasigan's testimony
dealing with respondent's deposit account with Security Bank. 25 It
asserted that apart from the fact that the said evidence had a direct relation
to the subject matter of the case for qualified theft and, hence, brings the
case under one of the exceptions to the coverage of confidentiality under
R.A. 1405. 26 Petitioner believed that what constituted the subject matter in
litigation was to be determined by the allegations in the information and, in
this respect, it alluded to the assailed November 5, 2004 Order of the trial
court, which declared to be erroneous the limitation of the present inquiry
merely to what was contained in the information. 27
For her part, respondent claimed that the money represented by
the Security Bank account was neither relevant nor material to the case,
because nothing in the criminal information suggested that the money
therein deposited was the subject matter of the case. She invited particular
attention to that portion of the criminal Information which averred that she
has stolen and carried away cash money in the total amount of
P1,534,135.50. She advanced the notion that the term "cash money" stated
in the Information was not synonymous with the checks she was purported
to have stolen from petitioner and deposited in her personal banking
account. Thus, the checks which the prosecution had Marasigan identify, as
well as the testimony itself of Marasigan, should be suppressed by the trial
court at least for violating respondent's right to due process. 28 More in
point, respondent opined that admitting the testimony of Marasigan, as well
as the evidence pertaining to the Security Bank account, would violate the
secrecy rule under R.A. No. 1405. 29
In its reply, petitioner asserted the sufficiency of the allegations in
the criminal Information for qualified theft, as the same has sufficiently
alleged the elements of the offense charged. It posits that through
Marasigan's testimony, the Court would be able to establish that the checks
involved, copies of which were attached to the complaint-affidavit filed with
the prosecutor, had indeed been received by respondent as cashier, but
66
were, thereafter, deposited by the latter to her personal account with
Security Bank. Petitioner held that the checks represented the cash money
stolen by respondent and, hence, the subject matter in this case is not only
the cash amount represented by the checks supposedly stolen by
respondent, but also the checks themselves. 30
We derive from the conflicting advocacies of the parties that the
issue for resolution is whether the testimony of Marasigan and the
accompanying documents are irrelevant to the case, and whether they are
also violative of the absolutely confidential nature of bank deposits and,
hence, excluded by operation of R.A. No. 1405. The question of admissibility
of the evidence thus comes to the fore. And the Court, after deliberative
estimation, finds the subject evidence to be indeed inadmissible. caIDSH
Prefatorily, fundamental is the precept in all criminal prosecutions,
that the constitutive acts of the offense must be established with
unwavering exactitude and moral certainty because this is the critical and
only requisite to a finding of guilt. 31 Theft is present when a person, with
intent to gain but without violence against or intimidation of persons or
force upon things, takes the personal property of another without the
latter's consent. It is qualified when, among others, and as alleged in the
instant case, it is committed with abuse of confidence. 32 The prosecution
of this offense necessarily focuses on the existence of the following
elements: (a) there was taking of personal property belonging to another;
(b) the taking was done with intent to gain; (c) the taking was done without
the consent of the owner; (d) the taking was done without violence against
or intimidation of persons or force upon things; and (e) it was done with
abuse of confidence. 33 In turn, whether these elements concur in a way
that overcomes the presumption of guiltlessness, is a question that must
pass the test of relevancy and competency in accordance with Section 3 34
Rule 128 of the Rules of Court.
Thus, whether these pieces of evidence sought to be suppressed in
this case the testimony of Marasigan, as well as the checks purported to
have been stolen and deposited in respondent's Security Bank account
are relevant, is to be addressed by considering whether they have such
direct relation to the fact in issue as to induce belief in its existence or non-
existence; or whether they relate collaterally to a fact from which, by
process of logic, an inference may be made as to the existence or non-
existence of the fact in issue. 35
The fact in issue appears to be that respondent has taken away
cash in the amount of P1,534,135.50 from the coffers of petitioner. In
support of this allegation, petitioner seeks to establish the existence of the
elemental act of taking by adducing evidence that respondent, at several
times between 1988 and 1989, deposited some of its checks to her personal
account with Security Bank. Petitioner addresses the incongruence between
the allegation of theft of cash in the Information, on the one hand, and the
evidence that respondent had first stolen the checks and deposited the
same in her banking account, on the other hand, by impressing upon the
Court that there obtains no difference between cash and check for purposes
of prosecuting respondent for theft of cash. Petitioner is mistaken.
In theft, the act of unlawful taking connotes deprivation of personal
property of one by another with intent to gain, and it is immaterial that the
offender is able or unable to freely dispose of the property stolen because
the deprivation relative to the offended party has already ensued from such
act of execution. 36 The allegation of theft of money, hence, necessitates
that evidence presented must have a tendency to prove that the offender
has unlawfully taken money belonging to another. Interestingly, petitioner
has taken pains in attempting to draw a connection between the evidence
subject of the instant review, and the allegation of theft in the Information
by claiming that respondent had fraudulently deposited the checks in her
own name. But this line of argument works more prejudice than favor,
because it in effect, seeks to establish the commission, not of theft, but
rather of some other crime probably estafa. cCDAHE
Moreover, that there is no difference between cash and check is
true in other instances. In estafa by conversion, for instance, whether the
thing converted is cash or check, is immaterial in relation to the formal
allegation in an information for that offense; a check, after all, while not
regarded as legal tender, is normally accepted under commercial usage as a
substitute for cash, and the credit it represents in stated monetary value is
properly capable of appropriation. And it is in this respect that what the
offender does with the check subsequent to the act of unlawfully taking it
becomes material inasmuch as this offense is a continuing one. 37 In other
words, in pursuing a case for this offense, the prosecution may establish its
cause by the presentation of the checks involved. These checks would then
constitute the best evidence to establish their contents and to prove the
elemental act of conversion in support of the proposition that the offender
has indeed indorsed the same in his own name. 38
Theft, however, is not of such character. Thus, for our purposes, as
the Information in this case accuses respondent of having stolen cash, proof
tending to establish that respondent has actualized her criminal intent by
indorsing the checks and depositing the proceeds thereof in her personal
account, becomes not only irrelevant but also immaterial and, on that score,
inadmissible in evidence.
We now address the issue of whether the admission of Marasigan's
testimony on the particulars of respondent's account with Security Bank, as
well as of the corresponding evidence of the checks allegedly deposited in
said account, constitutes an unallowable inquiry under R.A. 1405.
It is conceded that while the fundamental law has not bothered
with the triviality of specifically addressing privacy rights relative to banking
accounts, there, nevertheless, exists in our jurisdiction a legitimate
expectation of privacy governing such accounts. The source of this right of
expectation is statutory, and it is found in R.A. No. 1405, 39 otherwise
known as the Bank Secrecy Act of 1955. 40
R.A. No. 1405 has two allied purposes. It hopes to discourage
private hoarding and at the same time encourage the people to deposit their
money in banking institutions, so that it may be utilized by way of
authorized loans and thereby assist in economic development. 41 Owing to
this piece of legislation, the confidentiality of bank deposits remains to be a
basic state policy in the Philippines. 42 Section 2 of the law institutionalized
67
this policy by characterizing as absolutely confidential in general all deposits
of whatever nature with banks and other financial institutions in the country.
It declares: CIAacS
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.
Subsequent statutory enactments 43 have expanded the list of
exceptions to this policy yet the secrecy of bank deposits still lies as the
general rule, falling as it does within the legally recognized zones of privacy.
44 There is, in fact, much disfavor to construing these primary and
supplemental exceptions in a manner that would authorize unbridled
discretion, whether governmental or otherwise, in utilizing these exceptions
as authority for unwarranted inquiry into bank accounts. It is then
perceivable that the present legal order is obliged to conserve the absolutely
confidential nature of bank deposits. 45
The measure of protection afforded by the law has been explained
in China Banking Corporation v. Ortega. 46 That case principally addressed
the issue of whether the prohibition against an examination of bank
deposits precludes garnishment in satisfaction of a judgment. Ruling on that
issue in the negative, the Court found guidance in the relevant portions of
the legislative deliberations on Senate Bill No. 351 and House Bill No. 3977,
which later became the Bank Secrecy Act, and it held that the absolute
confidentiality rule in R.A. No. 1405 actually aims at protection from
unwarranted inquiry or investigation if the purpose of such inquiry or
investigation is merely to determine the existence and nature, as well as the
amount of the deposit in any given bank account. Thus,
. . . 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 No. 1405, that it was
not the intention of the lawmakers to place banks deposits
beyond the reach of execution to satisfy a final, judgment.
Thus: TIHCcA
. . . Mr. Marcos:
Now, for purposes of the record, I should like the
Chairman of the Committee on Ways and
Means to clarify this further. Suppose an
individual has a tax case. He is being held
liable by the Bureau of Internal Revenue
[(BIR)] or, say, P1,000.00 worth of tax
liability, and because of this the deposit of
this individual [has been] attached by the
[BIR].
Mr. Ramos:
The attachment will only apply after the court has
pronounced sentence declaring the liability
of such person. But where the primary
aim is to determine whether he has a
bank deposit in order to bring about a
proper assessment by the [BIR], such
inquiry is not allowed by this
proposed law.
Mr. Marcos:
But under our rules of procedure and under the
Civil Code, the attachment or garnishment
of money deposited is allowed. Let us
assume for instance that there is a
preliminary attachment which is for
garnishment or for holding liable all
moneys deposited belonging to a certain
individual, but such attachment or
garnishment will bring out into the open
the value of such deposit. Is that
prohibited by . . . the law?
Mr. Ramos:
It is only prohibited to the extent that the
inquiry . . . is made only for the purpose of
satisfying a tax liability already declared
for the protection of the right in favor of
the government; but when the object is
merely to inquire whether he has a
deposit or not for purposes of
68
 taxation, then this is fully covered by
the law. . . .
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. . . . 47
In taking exclusion from the coverage of the confidentiality rule,
petitioner in the instant case posits that the account maintained by
respondent with Security Bank contains the proceeds of the checks that she
has fraudulently appropriated to herself and, thus, falls under one of the
exceptions in Section 2 of R.A. No. 1405 that the money kept in said
account is the subject matter in litigation. To highlight this thesis, petitioner
avers, citing Mathay v. Consolidated Bank and Trust Co., 48 that the subject
matter of the action refers to the physical facts; the things real or personal;
the money, lands, chattels and the like, in relation to which the suit is
prosecuted, which in the instant case should refer to the money deposited in
the Security Bank account. 49 On the surface, however, it seems that
petitioner's theory is valid to a point, yet a deeper treatment tends to show
that it has argued quite off-tangentially. This, because, while Mathay did
explain what the subject matter of an action is, it nevertheless did so only
to determine whether the class suit in that case was properly brought to the
Court. aAcHCT
What indeed constitutes the subject matter in litigation in relation
to Section 2 of R.A. No. 1405 has been pointedly and amply addressed in
Union Bank of the Philippines v. Court of Appeals, 50 in which the Court
noted that the inquiry into bank deposits allowable under R.A. No. 1405
must be premised on the fact that the money deposited in the account is
itself the subject of the action. 51 Given this perspective, we deduce that
the subject matter of the action in the case at bar is to be determined from
the indictment that charges respondent with the offense, and not from the
evidence sought by the prosecution to be admitted into the records. In the
criminal Information filed with the trial court, respondent, unqualifiedly and
in plain language, is charged with qualified theft by abusing petitioner's
trust and confidence and stealing cash in the amount of P1,534,135.50. The
said Information makes no factual allegation that in some material way
involves the checks subject of the testimonial and documentary evidence
sought to be suppressed. Neither do the allegations in said Information
make mention of the supposed bank account in which the funds represented
by the checks have allegedly been kept.
In other words, it can hardly be inferred from the indictment itself
that the Security Bank account is the ostensible subject of the prosecution's
inquiry. Without needlessly expanding the scope of what is plainly alleged in
the Information, the subject matter of the action in this case is the money
amounting to P1,534,135.50 alleged to have been stolen by respondent,
and not the money equivalent of the checks which are sought to be
admitted in evidence. Thus, it is that, which the prosecution is bound to
prove with its evidence, and no other.
It comes clear that the admission of testimonial and documentary
evidence relative to respondent's Security Bank account serves no other
purpose than to establish the existence of such account, its nature and the
amount kept in it. It constitutes an attempt by the prosecution at an
impermissible inquiry into a bank deposit account the privacy and
confidentiality of which is protected by law. On this score alone, the
objection posed by respondent in her motion to suppress should have
indeed put an end to the controversy at the very first instance it was raised
before the trial court.
In sum, we hold that the testimony of Marasigan on the particulars
of respondent's supposed bank account with Security Bank and the
documentary evidence represented by the checks adduced in support
thereof, are not only incompetent for being excluded by operation of R.A.
No. 1405. They are likewise irrelevant to the case, inasmuch as they do not
appear to have any logical and reasonable connection to the prosecution of
respondent for qualified theft. We find full merit in and affirm respondent's
objection to the evidence of the prosecution. The Court of Appeals was,
therefore, correct in reversing the assailed orders of the trial court. cEHSIC
A final note. In any given jurisdiction where the right of privacy
extends its scope to include an individual's financial privacy rights and
personal financial matters, there is an intermediate or heightened scrutiny
given by courts and legislators to laws infringing such rights. 52 Should
there be doubts in upholding the absolutely confidential nature of bank
deposits against affirming the authority to inquire into such accounts, then
such doubts must be resolved in favor of the former. This attitude persists
unless congress lifts its finger to reverse the general state policy respecting
the absolutely confidential nature of bank deposits. 53
WHEREFORE, the petition is DENIED. The Decision of the Court
of Appeals in CA-G.R. SP No. 87600 dated April 20, 2005, reversing the
September 13, 2004 and November 5, 2004 Orders of the Regional Trial
Court of Manila, Branch 36 in Criminal Case No. 02-202158, is AFFIRMED.
SO ORDERED.
||| (BSB Group, Inc. v. Go, G.R. No. 168644, [February 16, 2010], 626 PHIL
501-518)
SECOND DIVISION
[G.R. No. 174629. February 14, 2008.]
69
 REPUBLIC OF THE PHILIPPINES, Represented by THE
ANTI-MONEY LAUNDERING COUNCIL (AMLC),
petitioner, vs. HON. ANTONIO M. EUGENIO, JR., AS
PRESIDING JUDGE OF RTC, MANILA, BRANCH 34,
PANTALEON ALVAREZ and LILIA CHENG, respondents.
DECISION
TINGA, J p:
The present petition for certiorari and prohibition under Rule 65 assails the
orders and resolutions issued by two different courts in two different cases. The
courts and cases in question are the Regional Trial Court of Manila, Branch 24,
which heard SP Case No. 06-114200 1 and the Court of Appeals, Tenth Division,
which heared CA-G.R. SP No. 95198. 2 Both cases arose as part of the
aftermath of the ruling of this Court in Agan v. PIATCO 3 nullifying the
concession agreement awarded to the Philippine International Airport Terminal
Corporation (PIATCO) over the Ninoy Aquino International Airport
International Passenger Terminal 3 (NAIA 3) Project.
I.
Following the promulgation of Agan, a series of investigations concerning the
award of the NAIA 3 contracts to PIATCO were undertaken by the Ombudsman
and the Compliance and Investigation Staff (CIS) of petitioner Anti-Money
Laundering Council (AMLC). On 24 May 2005, the Office of the Solicitor General
(OSG) wrote the AMLC requesting the latter's assistance "in obtaining more
evidence to completely reveal the financial trail of corruption surrounding the
[NAIA 3] Project," and also noting that petitioner Republic of the Philippines was
presently defending itself in two international arbitration cases filed in relation to
the NAIA 3 Project. 4 The CIS conducted an intelligence database search on the
financial transactions of certain individuals involved in the award, including
respondent Pantaleon Alvarez (Alvarez) who had been the Chairman of the PBAC
Technical Committee, NAIA-IPT3 Project. 5 By this time, Alvarez had already
been charged by the Ombudsman with violation of Section 3 (j) of R.A. No.
3019. 6 The search revealed that Alvarez maintained eight (8) bank accounts
with six (6) different banks. 7
On 27 June 2005, the AMLC issued Resolution No. 75, Series of 2005, 8 whereby
the Council resolved to authorize the Executive Director of the AMLC "to sign and
verify an application to inquire into and/or examine the [deposits] or
investments of Pantaleon Alvarez, Wilfredo Trinidad, Alfredo Liongson, and
Cheng Yong, and their related web of accounts wherever these may be found, as
defined under Rule 10.4 of the Revised Implementing Rules and Regulations;"
and to authorize the AMLC Secretariat "to conduct an inquiry into subject
accounts once the Regional Trial Court grants the application to inquire into
and/or examine the bank accounts" of those four individuals. 9 The resolution
enumerated the particular bank accounts of Alvarez, Wilfredo Trinidad (Trinidad),
Alfredo Liongson (Liongson) and Cheng Yong which were to be the subject of the
inquiry. 10 The rationale for the said resolution was founded on the cited
findings of the CIS that amounts were transferred from a Hong Kong bank
account owned by Jetstream Pacific Ltd. Account to bank accounts in the
Philippines maintained by Liongson and Cheng Yong. 11 The Resolution also
noted that "[b]y awarding the contract to PIATCO despite its lack of financial
capacity, Pantaleon Alvarez caused undue injury to the government by giving
PIATCO unwarranted benefits, advantage, or preference in the discharge of his
official administrative functions through manifest partiality, evident bad faith, or
gross inexcusable negligence, in violation of Section 3 (e) of Republic Act No.
3019." 12
Under the authority granted by the Resolution, the AMLC filed an application to
inquire into or examine the deposits or investments of Alvarez, Trinidad,
Liongson and Cheng Yong before the RTC of Makati, Branch 138, presided by
Judge (now Court of Appeals Justice) Sixto Marella, Jr. The application was
docketed as AMLC No. 05-005. 13 The Makati RTC heard the testimony of the
Deputy Director of the AMLC, Richard David C. Funk II, and received the
documentary evidence of the AMLC. 14 Thereafter, on 4 July 2005, the Makati
RTC rendered an Order (Makati RTC bank inquiry order) granting the AMLC the
authority to inquire and examine the subject bank accounts of Alvarez, Trinidad,
Liongson and Cheng Yong, the trial court being satisfied that there existed
"[p]robable cause [to] believe that the deposits in various bank accounts, details
of which appear in paragraph 1 of the Application, are related to the offense of
violation of Anti-Graft and Corrupt Practices Act now the subject of criminal
prosecution before the Sandiganbayan as attested to by the Informations,
Exhibits C, D, E, F, and G." 15 Pursuant to the Makati RTC bank inquiry order,
the CIS proceeded to inquire and examine the deposits, investments and related
web accounts of the four. 16
Meanwhile, the Special Prosecutor of the Office of the Ombudsman, Dennis Villa-
Ignacio, wrote a letter dated 2 November 2005, requesting the AMLC to
investigate the accounts of Alvarez, PIATCO, and several other entities involved
in the nullified contract. The letter adverted to probable cause to believe that the
bank accounts "were used in the commission of unlawful activities that were
committed" in relation to the criminal cases then pending before the
Sandiganbayan. 17 Attached to the letter was a memorandum "on why the
investigation of the [accounts] is necessary in the prosecution of the above
criminal cases before the Sandiganbayan." 18
In response to the letter of the Special Prosecutor, the AMLC promulgated on 9
December 2005 Resolution No. 121 Series of 2005, 19 which authorized the
executive director of the AMLC to inquire into and examine the accounts named
in the letter, including one maintained by Alvarez with DBS Bank and two other
accounts in the name of Cheng Yong with Metrobank. The Resolution
characterized the memorandum attached to the Special Prosecutor's letter as
"extensively justif[ying] the existence of probable cause that the bank accounts
of the persons and entities mentioned in the letter are related to the unlawful
70
activity of violation of Sections 3 (g) and 3 (e) of Rep. Act No. 3019, as Reconsideration 33 of the omnibus order on 15 May 2006, but the motion was
amended." 20 denied by the Manila RTC in an Order 34 dated 5 July 2006.

Following the December 2005 AMLC Resolution, the Republic, through the AMLC,
filed an application 21 before the Manila RTC to inquire into and/or examine
thirteen (13) accounts and two (2) related web of accounts alleged as having
been used to facilitate corruption in the NAIA 3 Project. Among said accounts
were the DBS Bank account of Alvarez and the Metrobank accounts of Cheng
Yong. The case was raffled to Manila RTC, Branch 24, presided by respondent
Judge Antonio Eugenio, Jr., and docketed as SP Case No. 06-114200.
On 11 July 2006, Alvarez filed an Urgent Motion and Manifestation 35 wherein
he manifested having received reliable information that the AMLC was about to
implement the Manila RTC bank inquiry order even though he was intending to
appeal from it. On the premise that only a final and executory judgment or order
could be executed or implemented, Alvarez sought that the AMLC be
immediately ordered to refrain from enforcing the Manila RTC bank inquiry order.

On 12 January 2006, the Manila RTC issued an Order (Manila RTC bank inquiry
order) granting theEx Parte Application expressing therein "[that] the allegations
On 12 July 2006, the Manila RTC, acting on Alvarez's latest motion, issued an
in said application to be impressed with merit, and in conformity with Section 11
Order 36 directing the AMLC "to refrain from enforcing the order dated January
of R.A. No. 9160, as amended, otherwise known as the Anti-Money Laundering
12, 2006 until the expiration of the period to appeal, without any appeal having
Act (AMLA) of 2001 and Rules 11.1 and 11.2 of the Revised Implementing Rules
been filed." On the same day, Alvarez filed a Notice of Appeal 37 with the Manila
and Regulations." 22 Authority was thus granted to the AMLC to inquire into the
RTC.
bank accounts listed therein.

On 24 July 2006, Alvarez filed an Urgent Ex Parte Motion for Clarification. 38

On 25 January 2006, Alvarez, through counsel, entered his appearance 23
Therein, he alleged having learned that the AMLC had began to inquire into the
before the Manila RTC in SP Case No. 06-114200 and filed an Urgent Motion to
bank accounts of the other persons mentioned in the application for bank inquiry
Stay Enforcement of Order of January 12, 2006. 24 Alvarez alleged that he
order filed by the Republic. 39 Considering that the Manila RTC bank inquiry
fortuitously learned of the bank inquiry order, which was issued following an ex
order was issued ex parte, without notice to those other persons, Alvarez prayed
parte application, and he argued that nothing in R.A. No. 9160 authorized the
that the AMLC be ordered to refrain from inquiring into any of the other bank
AMLC to seek the authority to inquire into bank accounts ex parte. 25 The day
deposits and alleged web of accounts enumerated in AMLC's application with the
after Alvarez filed his motion, 26 January 2006, the Manila RTC issued an Order
RTC; and that the AMLC be directed to refrain from using, disclosing or
26 staying the enforcement of its bank inquiry order and giving the Republic five
publishing in any proceeding or venue any information or document obtained in
(5) days to respond to Alvarez's motion.
violation of the 11 May 2006 RTC Order. 40

The Republic filed an Omnibus Motion for Reconsideration 27 of the 26 January

On 25 July 2006, or one day after Alvarez filed his motion, the Manila RTC issued
2006 Manila RTC Order and likewise sought to strike out Alvarez's motion that
an Order 41 wherein it clarified that "the Ex Parte Order of this Court dated
led to the issuance of said order. For his part, Alvarez filed a Reply and Motion to
January 12, 2006 can not be implemented against the deposits or accounts of
Dismiss 28 the application for bank inquiry order. On 2 May 2006, the Manila
any of the persons enumerated in the AMLC Application until the appeal of
RTC issued an Omnibus Order 29 granting the Republic's Motion for
movant Alvarez is finally resolved, otherwise, the appeal would be rendered
Reconsideration, denying Alvarez's motion to dismiss and reinstating "in full
moot and academic or even nugatory." 42 In addition, the AMLC was ordered
force and effect" the Order dated 12 January 2006. In the omnibus order, the
"not to disclose or publish any information or document found or obtained in
Manila RTC reiterated that the material allegations in the application for bank
[v]iolation of the May 11, 2006 Order of this Court." 43 The Manila RTC
inquiry order filed by the Republic stood as "the probable cause for the
reasoned that the other persons mentioned in AMLC's application were not
investigation and examination of the bank accounts and investments of the
served with the court's 12 January 2006 Order. This 25 July 2006 Manila RTC
respondents." 30
Order is the first of the four rulings being assailed through this petition.

Alvarez filed on 10 May 2006 an Urgent Motion 31 expressing his apprehension

In response, the Republic filed an Urgent Omnibus Motion for Reconsideration 44
that the AMLC would immediately enforce the omnibus order and would thereby
dated 27 July 2006, urging that it be allowed to immediately enforce the bank
render the motion for reconsideration he intended to file as moot and academic;
inquiry order against Alvarez and that Alvarez's notice of appeal be expunged
thus he sought that the Republic be refrained from enforcing the omnibus order
from the records since appeal from an order of inquiry is disallowed under the
in the meantime. Acting on this motion, the Manila RTC, on 11 May 2006, issued
Anti money Laundering Act (AMLA).
an Order 32 requiring the OSG to file a comment/opposition and reminding the
parties that judgments and orders become final and executory upon the
expiration of fifteen (15) days from receipt thereof, as it is the period within Meanwhile, respondent Lilia Cheng filed with the Court of Appeals a Petition for
which a motion for reconsideration could be filed. Alvarez filed his Motion for Certiorari, Prohibition and Mandamus with Application for TRO and/or Writ of

71
Preliminary Injunction 45 dated 10 July 2006, directed against the Republic of
the Philippines through the AMLC, Manila RTC Judge Eugenio, Jr. and Makati RTC
Judge Marella, Jr.. She identified herself as the wife of Cheng Yong 46 with
whom she jointly owns a conjugal bank account with Citibank that is covered by
the Makati RTC bank inquiry order, and two conjugal bank accounts with
Metrobank that are covered by the Manila RTC bank inquiry order. Lilia Cheng
imputed grave abuse of discretion on the part of the Makati and Manila RTCs in
granting AMLC's ex parte applications for a bank inquiry order, arguing among
others that the ex parte applications violated her constitutional right to due
process, that the bank inquiry order under the AMLA can only be granted in
connection with violations of the AMLA and that the AMLA can not apply to bank
accounts opened and transactions entered into prior to the effectivity of the
AMLA or to bank accounts located outside the Philippines. 47
On 1 August 2006, the Court of Appeals, acting on Lilia Cheng's petition, issued
a Temporary Restraining Order 48 enjoining the Manila and Makati trial courts
from implementing, enforcing or executing the respective bank inquiry orders
previously issued, and the AMLC from enforcing and implementing such orders.
On even date, the Manila RTC issued an Order 49 resolving to hold in abeyance
the resolution of the urgent omnibus motion for reconsideration then pending
before it until the resolution of Lilia Cheng's petition for certiorari with the Court
of Appeals. The Court of Appeals Resolution directing the issuance of the
temporary restraining order is the second of the four rulings assailed in the
present petition.
The third assailed ruling 50 was issued on 15 August 2006 by the Manila RTC,
acting on the Urgent Motion for Clarification 51 dated 14 August 2006 filed by
Alvarez. It appears that the 1 August 2006 Manila RTC Order had amended its
previous 25 July 2006 Order by deleting the last paragraph which stated that the
AMLC "should not disclose or publish any information or document found or
obtained in violation of the May 11, 2006 Order of this Court." 52 In this new
motion, Alvarez argued that the deletion of that paragraph would allow the AMLC
to implement the bank inquiry orders and publish whatever information it might
obtain thereupon even before the final orders of the Manila RTC could become
final and executory. 53 In the 15 August 2006 Order, the Manila RTC reiterated
that the bank inquiry order it had issued could not be implemented or enforced
by the AMLC or any of its representatives until the appeal therefrom was finally
resolved and that any enforcement thereof would be unauthorized. 54
The present Consolidated Petition 55 for certiorari and prohibition under Rule 65
was filed on 2 October 2006, assailing the two Orders of the Manila RTC dated
25 July and 15 August 2006 and the Temporary Restraining Order dated 1
August 2006 of the Court of Appeals. Through an Urgent Manifestation and
Motion 56 dated 9 October 2006, petitioner informed the Court that on 22
September 2006, the Court of Appeals hearing Lilia Cheng's petition had granted
a writ of preliminary injunction in her favor. 57 Thereafter, petitioner sought as
well the nullification of the 22 September 2006 Resolution of the Court of
Appeals, thereby constituting the fourth ruling assailed in the instant petition. 58
The Court had initially granted a Temporary Restraining Order 59 dated 6
October 2006 and later on a Supplemental Temporary Restraining Order 60
dated 13 October 2006 in petitioner's favor, enjoining the implementation of the
assailed rulings of the Manila RTC and the Court of Appeals. However, on
respondents' motion, the Court, through a Resolution 61 dated 11 December
2006, suspended the implementation of the restraining orders it had earlier
issued.
Oral arguments were held on 17 January 2007. The Court consolidated the
issues for argument as follows:
1.Did the RTC-Manila, in issuing the Orders dated 25 July
2006 and 15 August 2006 which deferred the
implementation of its Order dated 12 January 2006, and the
Court of Appeals, in issuing its Resolution dated 1 August
2006, which ordered the status quo in relation to the 1 July
2005 Order of the RTC-Makati and the 12 January 2006
Order of the RTC-Manila, both of which authorized the
examination of bank accounts under Section 11 of Rep. Act
No. 9160 (AMLA), commit grave abuse of discretion?
(a)Is an application for an order authorizing inquiry
into or examination of bank accounts or
investments under Section 11 of the AMLA ex-parte
in nature or one which requires notice and hearing?
(b)What legal procedures and standards should be
observed in the conduct of the proceedings for the
issuance of said order?
(c)Is such order susceptible to legal challenges and
judicial review?
2.Is it proper for this Court at this time and in this case to
inquire into and pass upon the validity of the 1 July 2005
Order of the RTC-Makati and the 12 January 2006 Order of
the RTC-Manila, considering the pendency of CA G.R. SP No.
95-198 (Lilia Cheng v. Republic) wherein the validity of both
orders was challenged? 62
After the oral arguments, the parties were directed to file their respective
memoranda, which they did, 63 and the petition was thereafter deemed
submitted for resolution.
II.
Petitioner's general advocacy is that the bank inquiry orders issued by the Manila
and Makati RTCs are valid and immediately enforceable whereas the assailed
rulings, which effectively stayed the enforcement of the Manila and Makati RTCs
bank inquiry orders, are sullied with grave abuse of discretion. These conclusions
72
flow from the posture that a bank inquiry order, issued upon a finding of
probable cause, may be issued ex parte and, once issued, is immediately
executory. Petitioner further argues that the information obtained following the
bank inquiry is necessarily beneficial, if not indispensable, to the AMLC in
discharging its awesome responsibility regarding the effective implementation of
the AMLA and that any restraint in the disclosure of such information to
appropriate agencies or other judicial fora would render meaningless the relief
supplied by the bank inquiry order.
Petitioner raises particular arguments questioning Lilia Cheng's right to seek
injunctive relief before the Court of Appeals, noting that not one of the bank
inquiry orders is directed against her. Her "cryptic assertion" that she is the wife
of Cheng Yong cannot, according to petitioner, "metamorphose into the requisite
legal standing to seek redress for an imagined injury or to maintain an action in
behalf of another." In the same breath, petitioner argues that Alvarez cannot
assert any violation of the right to financial privacy in behalf of other persons
whose bank accounts are being inquired into, particularly those other persons
named in the Makati RTC bank inquiry order who did not take any step to
oppose such orders before the courts.
Ostensibly, the proximate question before the Court is whether a bank inquiry
order issued in accordance with Section 10 of the AMLA may be stayed by
injunction. Yet in arguing that it does, petitioner relies on what it posits as the
final and immediately executory character of the bank inquiry orders issued by
the Manila and Makati RTCs. Implicit in that position is the notion that the
inquiry orders are valid, and such notion is susceptible to review and validation
based on what appears on the face of the orders and the applications which
triggered their issuance, as well as the provisions of the AMLA governing the
issuance of such orders. Indeed, to test the viability of petitioner's argument,
the Court will have to be satisfied that the subject inquiry orders are valid in the
first place. However, even from a cursory examination of the applications for
inquiry order and the orders themselves, it is evident that the orders are
inconsistent with the AMLA and the Constitution.
III.
A brief overview of the AMLA is called for.
Money laundering has been generally defined by the International Criminal Police
Organization (Interpol) as "any act or attempted act to conceal or disguise the
identity of illegally obtained proceeds so that they appear to have originated
from legitimate sources." 64 Even before the passage of the AMLA, the problem
was addressed by the Philippine government through the issuance of various
circulars by the Bangko Sentral ng Pilipinas. Yet ultimately, legislative
proscription was necessary, especially with the inclusion of the Philippines in the
Financial Action Task Force's list of non-cooperative countries and territories in
the fight against money laundering. 65 The original AMLA, Republic Act (R.A.)
No. 9160, was passed in 2001. It was amended by R.A. No. 9194 in 2003.
Section 4 of the AMLA states that "[m]oney laundering is a crime whereby the
proceeds of an unlawful activity as [defined in the law] are transacted, thereby
making them appear to have originated from legitimate sources." 66 The section
further provides the three modes through which the crime of money laundering
is committed. Section 7 creates the AMLC and defines its powers, which
generally relate to the enforcement of the AMLA provisions and the initiation of
legal actions authorized in the AMLA such as civil forefeiture proceedings and
complaints for the prosecution of money laundering offenses. 67
In addition to providing for the definition and penalties for the crime of money
laundering, the AMLA also authorizes certain provisional remedies that would aid
the AMLC in the enforcement of the AMLA. These are the "freeze order"
authorized under Section 10, and the "bank inquiry order" authorized under
Section 11.
Respondents posit that a bank inquiry order under Section 11 may be obtained
only upon the pre-existence of a money laundering offense case already filed
before the courts. 68 The conclusion is based on the phrase "upon order of any
competent court in cases of violation of this Act," the word "cases" generally
understood as referring to actual cases pending with the courts.
We are unconvinced by this proposition, and agree instead with the then
Solicitor General who conceded that the use of the phrase "in cases of" was
unfortunate, yet submitted that it should be interpreted to mean "in the event
there are violations" of the AMLA, and not that there are already cases pending
in court concerning such violations. 69 If the contrary position is adopted, then
the bank inquiry order would be limited in purpose as a tool in aid of litigation of
live cases, and wholly inutile as a means for the government to ascertain
whether there is sufficient evidence to sustain an intended prosecution of the
account holder for violation of the AMLA. Should that be the situation, in all
likelihood the AMLC would be virtually deprived of its character as a discovery
tool, and thus would become less circumspect in filing complaints against
suspect account holders. After all, under such set-up the preferred strategy
would be to allow or even encourage the indiscriminate filing of complaints
under the AMLA with the hope or expectation that the evidence of money
laundering would somehow surface during the trial. Since the AMLC could not
make use of the bank inquiry order to determine whether there is evidentiary
basis to prosecute the suspected malefactors, not filing any case at all would not
be an alternative. Such unwholesome set-up should not come to pass. Thus
Section 11 cannot be interpreted in a way that would emasculate the remedy it
has established and encourage the unfounded initiation of complaints for money
laundering.
Still, even if the bank inquiry order may be availed of without need of a pre-
existing case under the AMLA, it does not follow that such order may be availed
of ex parte. There are several reasons why the AMLA does not generally sanction
ex parte applications and issuances of the bank inquiry order.
IV.
73
It is evident that Section 11 does not specifically authorize, as a general rule,
the issuance ex parte of the bank inquiry order. We quote the provision in full:
SEC. 11.Authority to Inquire into Bank Deposits.
Notwithstanding the provisions of Republic Act No. 1405, as
amended, Republic Act No. 6426, as amended, Republic Act
No. 8791, and other laws, the AMLC may inquire into or
examine any particular deposit or investment with any
banking institution or non bank financial institution upon
order of any competent court in cases of violation of this
Act, when it has been established that there is
probable cause that the deposits or investments are
related to an unlawful activity as defined in Section
3(i) hereof or a money laundering offense under
Section 4 hereof, except that no court order shall be
required in cases involving unlawful activities defined
in Sections 3(i)1, (2) and (12).
To ensure compliance with this Act, the Bangko Sentral ng
Pilipinas (BSP) may inquire into or examine any deposit of
investment with any banking institution or non bank
financial institution when the examination is made in the
course of a periodic or special examination, in accordance
with the rules of examination of the BSP. 70 (Emphasis
supplied)
Of course, Section 11 also allows the AMLC to inquire into bank accounts without
having to obtain a judicial order in cases where there is probable cause that the
deposits or investments are related to kidnapping for ransom, 71 certain
violations of the Comprehensive Dangerous Drugs Act of 2002, 72 hijacking and
other violations under R.A. No. 6235, destructive arson and murder. Since such
special circumstances do not apply in this case, there is no need for us to pass
comment on this proviso. Suffice it to say, the proviso contemplates a situation
distinct from that which presently confronts us, and for purposes of the
succeeding discussion, our reference to Section 11 of the AMLA excludes said
proviso.
In the instances where a court order is required for the issuance of the bank
inquiry order, nothing in Section 11 specifically authorizes that such court order
may be issued ex parte. It might be argued that this silence does not preclude
the ex parte issuance of the bank inquiry order since the same is not prohibited
under Section 11. Yet this argument falls when the immediately preceding
provision, Section 10, is examined.
SEC. 10.Freezing of Monetary Instrument or Property.
The Court of Appeals, upon application ex parte by the
AMLC and after determination that probable cause exists
that any monetary instrument or property is in any way
related to an unlawful activity as defined in Section 3(i)
hereof, may issue a freeze order which shall be effective
immediately. The freeze order shall be for a period of
twenty (20) days unless extended by the court. 73
Although oriented towards different purposes, the freeze order under Section 10
and the bank inquiry order under Section 11 are similar in that they are
extraordinary provisional reliefs which the AMLC may avail of to effectively
combat and prosecute money laundering offenses. Crucially, Section 10 uses
specific language to authorize an ex parte application for the provisional relief
therein, a circumstance absent in Section 11. If indeed the legislature had
intended to authorize ex parte proceedings for the issuance of the bank inquiry
order, then it could have easily expressed such intent in the law, as it did with
the freeze order under Section 10.
Even more tellingly, the current language of Sections 10 and 11 of the AMLA was
crafted at the same time, through the passage of R.A. No. 9194. Prior to the
amendatory law, it was the AMLC, not the Court of Appeals, which had authority
to issue a freeze order, whereas a bank inquiry order always then required,
without exception, an order from a competent court. 74 It was through the
same enactment that ex parte proceedings were introduced for the first time
into the AMLA, in the case of the freeze order which now can only be issued by
the Court of Appeals. It certainly would have been convenient, through the same
amendatory law, to allow a similar ex parte procedure in the case of a bank
inquiry order had Congress been so minded. Yet nothing in the provision itself,
or even the available legislative record, explicitly points to an ex parte judicial
procedure in the application for a bank inquiry order, unlike in the case of the
freeze order.
That the AMLA does not contemplate ex parte proceedings in applications for
bank inquiry orders is confirmed by the present implementing rules and
regulations of the AMLA, promulgated upon the passage of R.A. No. 9194. With
respect to freeze orders under Section 10, the implementing rules do expressly
provide that the applications for freeze orders be filed ex parte, 75 but no similar
clearance is granted in the case of inquiry orders under Section 11. 76 These
implementing rules were promulgated by the Bangko Sentral ng Pilipinas, the
Insurance Commission and the Securities and Exchange Commission, 77 and if it
was the true belief of these institutions that inquiry orders could be issued ex
parte similar to freeze orders, language to that effect would have been
incorporated in the said Rules. This is stressed not because the implementing
rules could authorize ex parte applications for inquiry orders despite the absence
of statutory basis, but rather because the framers of the law had no intention to
allow such ex parte applications.
Even the Rules of Procedure adopted by this Court in A.M. No. 05-11-04-SC 78
to enforce the provisions of the AMLA specifically authorize ex parte applications
with respect to freeze orders under Section 10 79 but make no similar
authorization with respect to bank inquiry orders under Section 11.
The Court could divine the sense in allowing ex parte proceedings under Section
10 and in proscribing the same under Section 11. A freeze order under Section
10 on the one hand is aimed at preserving monetary instruments or property in
74
any way deemed related to unlawful activities as defined in Section 3 (i) of the
AMLA. The owner of such monetary instruments or property would thus be
inhibited from utilizing the same for the duration of the freeze order. To make
such freeze order anteceded by a judicial proceeding with notice to the account
holder would allow for or lead to the dissipation of such funds even before the
order could be issued.
On the other hand, a bank inquiry order under Section 11 does not necessitate
any form of physical seizure of property of the account holder. What the bank
inquiry order authorizes is the examination of the particular deposits or
investments in banking institutions or non-bank financial institutions. The
monetary instruments or property deposited with such banks or financial
institutions are not seized in a physical sense, but are examined on particular
details such as the account holder's record of deposits and transactions. Unlike
the assets subject of the freeze order, the records to be inspected under a bank
inquiry order cannot be physically seized or hidden by the account holder. Said
records are in the possession of the bank and therefore cannot be destroyed at
the instance of the account holder alone as that would require the extraordinary
cooperation and devotion of the bank.
Interestingly, petitioner's memorandum does not attempt to demonstrate before
the Court that the bank inquiry order under Section 11 may be issued ex parte,
although the petition itself did devote some space for that argument. The
petition argues that the bank inquiry order is "a special and peculiar remedy,
drastic in its name, and made necessary because of a public necessity . . .
[t]hus, by its very nature, the application for an order or inquiry must
necessarily, be ex parte." This argument is insufficient justification in light of the
clear disinclination of Congress to allow the issuance ex parte of bank inquiry
orders under Section 11, in contrast to the legislature's clear inclination to allow
the ex parte grant of freeze orders under Section 10.
Without doubt, a requirement that the application for a bank inquiry order be
done with notice to the account holder will alert the latter that there is a plan to
inspect his bank account on the belief that the funds therein are involved in an
unlawful activity or money laundering offense. 80 Still, the account holder so
alerted will in fact be unable to do anything to conceal or cleanse his bank
account records of suspicious or anomalous transactions, at least not without the
whole-hearted cooperation of the bank, which inherently has no vested interest
to aid the account holder in such manner.
V.
The necessary implication of this finding that Section 11 of the AMLA does not
generally authorize the issuance ex parte of the bank inquiry order would be
that such orders cannot be issued unless notice is given to the owners of the
account, allowing them the opportunity to contest the issuance of the order.
Without such a consequence, the legislated distinction between ex parte
proceedings under Section 10 and those which are not ex parte under Section
11 would be lost and rendered useless.
There certainly is fertile ground to contest the issuance of an ex parte order.
Section 11 itself requires that it be established that "there is probable cause that
the deposits or investments are related to unlawful activities," and it obviously is
the court which stands as arbiter whether there is indeed such probable cause.
The process of inquiring into the existence of probable cause would involve the
function of determination reposed on the trial court. Determination clearly
implies a function of adjudication on the part of the trial court, and not a
mechanical application of a standard pre-determination by some other body. The
word "determination" implies deliberation and is, in normal legal contemplation,
equivalent to "the decision of a court of justice." 81
The court receiving the application for inquiry order cannot simply take the
AMLC's word that probable cause exists that the deposits or investments are
related to an unlawful activity. It will have to exercise its own determinative
function in order to be convinced of such fact. The account holder would be
certainly capable of contesting such probable cause if given the opportunity to
be apprised of the pending application to inquire into his account; hence a notice
requirement would not be an empty spectacle. It may be so that the process of
obtaining the inquiry order may become more cumbersome or prolonged
because of the notice requirement, yet we fail to see any unreasonable burden
cast by such circumstance. After all, as earlier stated, requiring notice to the
account holder should not, in any way, compromise the integrity of the bank
records subject of the inquiry which remain in the possession and control of the
bank.
Petitioner argues that a bank inquiry order necessitates a finding of probable
cause, a characteristic similar to a search warrant which is applied to and heard
ex parte. We have examined the supposed analogy between a search warrant
and a bank inquiry order yet we remain to be unconvinced by petitioner.
The Constitution and the Rules of Court prescribe particular requirements
attaching to search warrants that are not imposed by the AMLA with respect to
bank inquiry orders. A constitutional warrant requires that the judge personally
examine under oath or affirmation the complainant and the witnesses he may
produce, 82 such examination being in the form of searching questions and
answers. 83 Those are impositions which the legislative did not specifically
prescribe as to the bank inquiry order under the AMLA, and we cannot find
sufficient legal basis to apply them to Section 11 of the AMLA. Simply put, a
bank inquiry order is not a search warrant or warrant of arrest as it
contemplates a direct object but not the seizure of persons or property.
Even as the Constitution and the Rules of Court impose a high procedural
standard for the determination of probable cause for the issuance of search
warrants which Congress chose not to prescribe for the bank inquiry order under
the AMLA, Congress nonetheless disallowed ex parte applications for the inquiry
order. We can discern that in exchange for these procedural standards normally
applied to search warrants, Congress chose instead to legislate a right to notice
75
and a right to be heard characteristics of judicial proceedings which are not
ex parte. Absent any demonstrable constitutional infirmity, there is no reason for
us to dispute such legislative policy choices.
VI.
recognized that bank accounts are not covered by either the right to information
89 under Section 7, Article III or under the requirement of full public disclosure
90 under Section 28, Article II. 91 Unless the Bank Secrecy Act is repealed or
amended, the legal order is obliged to conserve the absolutely confidential
nature of Philippine bank deposits.

Any exception to the rule of absolute confidentiality must be specifically

The Court's construction of Section 11 of the AMLA is undoubtedly influenced by
legislated. Section 2 of the Bank Secrecy Act itself prescribes exceptions
right to privacy considerations. If sustained, petitioner's argument that a bank
whereby these bank accounts may be examined by "any person, government
account may be inspected by the government following an ex parte proceeding
official, bureau or office"; namely when: (1) upon written permission of the
about which the depositor would know nothing would have significant
depositor; (2) in cases of impeachment; (3) the examination of bank accounts is
implications on the right to privacy, a right innately cherished by all
upon order of a competent court in cases of bribery or dereliction of duty of
notwithstanding the legally recognized exceptions thereto. The notion that the
public officials; and (4) the money deposited or invested is the subject matter of
government could be so empowered is cause for concern of any individual who
the litigation. Section 8 of R.A. Act No. 3019, the Anti-Graft and Corrupt
values the right to privacy which, after all, embodies even the right to be "let
Practices Act, has been recognized by this Court as constituting an additional
alone," the most comprehensive of rights and the right most valued by civilized
exception to the rule of absolute confidentiality, 92 A subsequent law, the
people. 84
Ombudsman Act of 1989, contains a provision relating to "access to bank
accounts and records." 93
One might assume that the constitutional dimension of the right to privacy, as
applied to bank deposits, warrants our present inquiry. We decline to do so.
Admittedly, that question has proved controversial in American jurisprudence.
Notably, the United States Supreme Court in U.S. v. Miller 85 held that there
was no legitimate expectation of privacy as to the bank records of a depositor. The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11,
86 Moreover, the text of our Constitution has not bothered with the triviality of the AMLC may inquire into a bank account upon order of any competent court in
allocating specific rights peculiar to bank deposits. cases of violation of the AMLA, it having been established that there is probable
cause that the deposits or investments are related to unlawful activities as
defined in Section 3 (i) of the law, or a money laundering offense under Section
However, sufficient for our purposes, we can assert there is a right to privacy
4 thereof. Further, in instances where there is probable cause that the deposits
governing bank accounts in the Philippines, and that such right finds application
or investments are related to kidnapping for ransom, 94 certain violations of the
to the case at bar. The source of such right is statutory, expressed as it is in R.A.
Comprehensive Dangerous Drugs Act of 2002, 95 hijacking and other violations
No. 1405 otherwise known as the Bank Secrecy Act of 1955. The right to privacy
under R.A. No. 6235, destructive arson and murder, then there is no need for
is enshrined in Section 2 of that law, to wit:
the AMLC to obtain a court order before it could inquire into such accounts.

SECTION. 2.All deposits of whatever nature with banks

or banking institutions in the Philippines including
investments in bonds issued by the Government of the
Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction of duty of
public officials, or in cases where the money deposited or
invested is the subject matter of the litigation. (Emphasis
supplied)
Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a
basic state policy in the Philippines. 87 Subsequent laws, including the AMLA,
may have added exceptions to the Bank Secrecy Act, yet the secrecy of bank
deposits still lies as the general rule. It falls within the zones of privacy
recognized by our laws. 88 The framers of the 1987 Constitution likewise
It cannot be successfully argued the proceedings relating to the bank inquiry
order under Section 11 of the AMLA is a "litigation" encompassed in one of the
exceptions to the Bank Secrecy Act which is when "the money deposited or
invested is the subject matter of the litigation." The orientation of the bank
inquiry order is simply to serve as a provisional relief or remedy. As earlier
stated, the application for such does not entail a full-blown trial.
Nevertheless, just because the AMLA establishes additional exceptions to the
Bank Secrecy Act it does not mean that the later law has dispensed with the
general principle established in the older law that "[a]ll deposits of whatever
nature with banks or banking institutions in the Philippines . . . are hereby
considered as of an absolutely confidential nature." 96 Indeed, by force of
statute, all bank deposits are absolutely confidential, and that nature is
unaltered even by the legislated exceptions referred to above. There is disfavor
towards construing these exceptions in such a manner that would authorize
unlimited discretion on the part of the government or of any party seeking to
enforce those exceptions and inquire into bank deposits. If there are doubts in
upholding the absolutely confidential nature of bank deposits against affirming
76
the authority to inquire into such accounts, then such doubts must be resolved
in favor of the former. Such a stance would persist unless Congress passes a law
reversing the general state policy of preserving the absolutely confidential
nature of Philippine bank accounts.
The presence of this statutory right to privacy addresses at least one of the
arguments raised by petitioner, that Lilia Cheng had no personality to assail the
inquiry orders before the Court of Appeals because she was not the subject of
said orders. AMLC Resolution No. 75, which served as the basis in the successful
application for the Makati inquiry order, expressly adverts to Citibank Account
No. 88576248 "owned by Cheng Yong and/or Lilia G. Cheng with Citibank N.A.,"
97 whereas Lilia Cheng's petition before the Court of Appeals is accompanied by
a certification from Metrobank that Account Nos. 300852436-0 and 700149801-
7, both of which are among the subjects of the Manila inquiry order, are
accounts in the name of "Yong Cheng or Lilia Cheng." 98 Petitioner does not
specifically deny that Lilia Cheng holds rights of ownership over the three said
accounts, laying focus instead on the fact that she was not named as a subject
of either the Makati or Manila RTC inquiry orders. We are reasonably convinced
that Lilia Cheng has sufficiently demonstrated her joint ownership of the three
accounts, and such conclusion leads us to acknowledge that she has the
standing to assail via certiorari the inquiry orders authorizing the examination of
her bank accounts as the orders interfere with her statutory right to maintain
the secrecy of said accounts.
While petitioner would premise that the inquiry into Lilia Cheng's accounts finds
root in Section 11 of the AMLA, it cannot be denied that the authority to inquire
under Section 11 is only exceptional in character, contrary as it is to the general
rule preserving the secrecy of bank deposits. Even though she may not have
been the subject of the inquiry orders, her bank accounts nevertheless were,
and she thus has the standing to vindicate the right to secrecy that attaches to
said accounts and their owners. This statutory right to privacy will not prevent
the courts from authorizing the inquiry anyway upon the fulfillment of the
requirements set forth under Section 11 of the AMLA or Section 2 of the Bank
Secrecy Act; at the same time, the owner of the accounts have the right to
challenge whether the requirements were indeed complied with.
VII.
There is a final point of concern which needs to be addressed. Lilia Cheng argues
that the AMLA, being a substantive penal statute, has no retroactive effect and
the bank inquiry order could not apply to deposits or investments opened prior
to the effectivity of Rep. Act No. 9164, or on 17 October 2001. Thus, she
concludes, her subject bank accounts, opened between 1989 to 1990, could not
be the subject of the bank inquiry order lest there be a violation of the
constitutional prohibition against ex post facto laws.
No ex post facto law may be enacted, 99 and no law may be construed in such
fashion as to permit a criminal prosecution offensive to the ex post facto clause.
As applied to the AMLA, it is plain that no person may be prosecuted under the
penal provisions of the AMLA for acts committed prior to the enactment of the
law on 17 October 2001. As much was understood by the lawmakers since they
deliberated upon the AMLA, and indeed there is no serious dispute on that point.
Does the proscription against ex post facto laws apply to the interpretation of
Section 11, a provision which does not provide for a penal sanction but which
merely authorizes the inspection of suspect accounts and deposits? The answer
is in the affirmative. In this jurisdiction, we have defined an ex post facto law as
one which either:
(1)makes criminal an act done before the passage of the law
and which was innocent when done, and punishes such an
act;
(2)aggravates a crime, or makes it greater than it was,
when committed;
(3)changes the punishment and inflicts a greater
punishment than the law annexed to the crime when
committed;
(4)alters the legal rules of evidence, and authorizes
conviction upon less or different testimony than the law
required at the time of the commission of the offense;
(5)assuming to regulate civil rights and remedies only, in
effect imposes penalty or deprivation of a right for
something which when done was lawful; and
(6)deprives a person accused of a crime of some
lawful protection to which he has become entitled,
such as the protection of a former conviction or
acquittal, or a proclamation of amnesty. (Emphasis
supplied) 100
Prior to the enactment of the AMLA, the fact that bank accounts or deposits
were involved in activities later on enumerated in Section 3 of the law did not,
by itself, remove such accounts from the shelter of absolute confidentiality. Prior
to the AMLA, in order that bank accounts could be examined, there was need to
secure either the written permission of the depositor or a court order authorizing
such examination, assuming that they were involved in cases of bribery or
dereliction of duty of public officials, or in a case where the money deposited or
invested was itself the subject matter of the litigation. The passage of the AMLA
stripped another layer off the rule on absolute confidentiality that provided a
measure of lawful protection to the account holder. For that reason, the
application of the bank inquiry order as a means of inquiring into records of
transactions entered into prior to the passage of the AMLA would be
constitutionally infirm, offensive as it is to the ex post facto clause.
77
Still, we must note that the position submitted by Lilia Cheng is much broader
than what we are willing to affirm. She argues that the proscription against ex
post facto laws goes as far as to prohibit any inquiry into deposits or
investments included in bank accounts opened prior to the effectivity of the
AMLA even if the suspect transactions were entered into when the law had
already taken effect. The Court recognizes that if this argument were to be
affirmed, it would create a horrible loophole in the AMLA that would in turn
supply the means to fearlessly engage in money laundering in the Philippines; all
that the criminal has to do is to make sure that the money laundering activity is
facilitated through a bank account opened prior to 2001. Lilia Cheng admits that
"actual money launderers could utilize the ex post facto provision of the
Constitution as a shield" but that the remedy lay with Congress to amend the
law. We can hardly presume that Congress intended to enact a self-defeating
law in the first place, and the courts are inhibited from such a construction by
the cardinal rule that "a law should be interpreted with a view to upholding
rather than destroying it." 101

Besides, nowhere in the legislative record cited by Lilia Cheng does it appear
that there was an unequivocal intent to exempt from the bank inquiry order all
bank accounts opened prior to the passage of the AMLA. There is a cited
exchange between Representatives Ronaldo Zamora and Jaime Lopez where the
latter confirmed to the former that "deposits are supposed to be exempted from
scrutiny or monitoring if they are already in place as of the time the law is
enacted." 102 That statement does indicate that transactions already in place
when the AMLA was passed are indeed exempt from scrutiny through a bank
inquiry order, but it cannot yield any interpretation that records of transactions
undertaken after the enactment of the AMLA are similarly exempt. Due to the
absence of cited authority from the legislative record that unqualifiedly supports
respondent Lilia Cheng's thesis, there is no cause for us to sustain her
interpretation of the AMLA, fatal as it is to the anima of that law.

IX.
FIRST DIVISION
We are well aware that Lilia Cheng's petition presently pending before the Court
of Appeals likewise assails the validity of the subject bank inquiry orders and
[G.R. No. 189206. June 8, 2011.]
precisely seeks the annulment of said orders. Our current declarations may
indeed have the effect of preempting that petition. Still, in order for this Court to
rule on the petition at bar which insists on the enforceability of the said bank GOVERNMENT SERVICE INSURANCE SYSTEM,
inquiry orders, it is necessary for us to consider and rule on the same question petitioner, vs. THE HONORABLE 15TH DIVISION OF THE
which after all is a pure question of law. COURT OF APPEALS and INDUSTRIAL BANK OF
KOREA, TONG YANG MERCHANT BANK, HANAREUM
WHEREFORE, the PETITION is DISMISSED. No pronouncement as to costs. BANKING CORP., LAND BANK OF THE PHILIPPINES,
WESTMONT BANK and DOMSAT HOLDINGS, INC.,
respondents.
SO ORDERED.

||| (Republic v. Eugenio, Jr., G.R. No. 174629, [February 14, 2008], 569 PHIL
98-136) DECISION

78
PEREZ, J p:
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
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 loan including interest has been fully paid and
Republic of the Philippines
GOVERNMENT SERVICE INSURANCE SYSTEM
GENERAL INSURANCE FUND
GSIS Headquarters, Financial Center
Roxas Boulevard, Pasay City
G(16) GIF Bond 027461
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS: HICcSA
That we, DOMSAT HOLDINGS, INC., represented by its
President as PRINCIPAL, and the GOVERNMENT SERVICE
INSURANCE SYSTEM, as Administrator of the GENERAL
DOMSAT HOLDINGS, INC.
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:
CAPT. RODRIGO A. SILVERIO
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.
THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:
WHEREAS, the above bounden PRINCIPAL, on the 12th 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
liquidated,
a copy of which contract/agreement is hereto attached and
made part hereof; DACTSH
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
contract/agreements, then this obligation shall be null and
void; otherwise, it shall remain in full force and effect.
GOVERNMENT SERVICE INSURANCE
Principal SYSTEM
General Insurance Fund
By: By:
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
79
The Banks filed a complaint before the RTC of Makati against Domsat and
GSIS. aHATDI
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 cashier's/manager's 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;
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;
4. All applications for cashier's/manager's 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 DHIcET
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: . . . (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
On 26 June 2003, another Order was issued by the RTC denying
the motion for reconsideration filed by the 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 reconsideration filed by GSIS
was denied on 30 December 2003. EACIaT
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.
80
 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.
The Court of Appeals declared that Domsat's deposit in Westmont
Bank is covered by Republic Act No. 6426 or the Bank Secrecy Law. We
quote the pertinent portion of the Decision: cSIADa
It is our considered opinion that Domsat's 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 No. 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 Domsat's
$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 above-said 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
ISDHEa
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.
The Court of Appeals however upheld the issuance of subpoena
praying for the production of applications for cashier's or manager's checks
by Domsat through Westmont Bank, as well as a copy of an Agreement
and/or Contract and/or Memorandum between Domsat and/or Philippine
Agila Satellite and Intersputnik for the acquisition and/or lease of a Gorizon
Satellite. The appellate court believed that the production of these
documents does not involve the examination of Domsat's account since it
will never be known how much 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 Domsat's bank ledger in Westmont Bank is
upheld while respondent court is hereby ordered to issue
81
 subpoena duces tecum ad testificandum directing the
records custodian of Westmont Bank to bring to court the
following documents:
a) applications for cashier's or manager's 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.
aTIAES
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 Domsat's 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 adequate remedy in
the ordinary course of law. That action is not a substitute for a lost appeal in
general; it is 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
Yet, even if this procedural infirmity is discarded for the broader
interest of justice, the petition sorely lacks merit.
GSIS insists that Domsat's deposit with Westmont Bank can be
examined and inquired into. It anchored its argument on Republic Act No.
1405 or the "Law on Secrecy of Bank Deposits," which allows the disclosure
of bank deposits in cases where the money deposited is the subject matter
of the litigation. GSIS asserts that the subject matter of the litigation is the
U.S. $11 Million obtained by Domsat from the Banks to supposedly 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 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. ATCaDE
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.
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.
It appears that only GSIS appealed the ruling of the Court of
Appeals pertaining to the quashal of the subpoena for the production of
Domsat's bank ledger with Westmont Bank. Since neither Domsat nor the
Banks interposed an appeal from the other portions of the decision,
particularly for the production of applications for cashier's or manager's
checks by Domsat through Westmont Bank, as well as a copy of an
agreement and/or contract and/or memorandum between Domsat and/or
Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of
a Gorizon satellite, the latter became final and executory.
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. EHDCAI
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:
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
82
 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 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.)
On the one hand, Republic Act No. 1405 provides for four (4)
exceptions when records of deposits may be disclosed. These are under any
of the following instances: a) upon written permission of the depositor, (b)
in cases of impeachment, (c) upon order of a competent court in the case of
bribery or dereliction of duty of public officials or, (d) when the money
deposited or invested is the subject matter of the litigation, and e) in cases
of violation of the Anti-Money Laundering Act (AMLA), the Anti-Money
Laundering Council (AMLC) may inquire into a bank account upon order of
any competent court. 22 On the other hand, the lone exception to the non-
disclosure of foreign currency deposits, under Republic Act No. 6426, is
disclosure upon the written permission of the depositor. DEcSaI
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 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 in the
Philippines and no distinction was made between domestic and foreign
deposits. Thus, Republic Act No. 1405 is considered a law of general
application. On the other hand, Republic Act No. 6426 was intended to
encourage deposits from foreign lenders and investors. 24 It is a special law
designed especially for foreign currency deposits in the Philippines. A
general law does not nullify a specific or special law. Generalia specialibus
non derogant. 25 Therefore, it is beyond cavil that Republic Act No. 6426
applies in this case.
Intengan v. Court of Appeals affirmed the above-cited principle and
categorically declared that for foreign currency deposits, such as U.S.
dollar deposits, the applicable law is Republic Act No. 6426.
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 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
checks from Citibank and deposited them to her account in China Bank. The
subject checks were presented in evidence. A subpoena was issued to
employees of China Bank to testify on these checks. China Bank argued that
the Citibank dollar checks with both respondent and/or her daughter as
payees, deposited with China Bank, may not be looked into under the law
on secrecy of foreign currency deposits. This Court highlighted the
exception to the non-disclosure of foreign currency deposits, i.e., in the
case of a written permission of the depositor, and ruled that respondent, as
owner of the funds unlawfully taken and which are undisputably now
deposited with China Bank, he has the right to inquire into the said
deposits. CAIaHS
Applying Section 8 of Republic Act No. 6426, absent the written
permission from Domsat, Westmont 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
The basis for the application of subpoena is to prove that the loan
intended for Domsat by the Banks and guaranteed by GSIS, was diverted to
a purpose other than that stated in the surety bond. The Banks, however,
argue that GSIS is in fact liable to them for the proper applications of the
loan proceeds and not vice-versa. We are however not prepared to rule on
the merits of this case lest we pre-empt the findings of the lower courts on
the matter.
The third issue raised by GSIS was properly addressed by the
appellate court. The appellate court maintained that the judge may, in the
exercise of his sound discretion, grant the second motion for 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
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.
83
 WHEREFORE, the petition for certiorari is DISMISSED. The
Decision dated 29 February 2008 and 19 June 2009 Resolution of the Court
of Appeals are hereby AFFIRMED.
SO ORDERED.
||| (Government Service Insurance System v. Court of Appeals, G.R. No.
189206, [June 8, 2011], 666 PHIL 656-672)
SECOND DIVISION
[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.
SYNOPSIS
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. Petitioners' motion for reconsideration was
denied. Hence, the present petition. The instant petition was initially denied by
the Third Division of the Court on the ground that petitioners had failed to show
that a reversible error had been committed. On motion for reconsideration,
however, the petition was reinstated and eventually given due course. Apart
from the reversal of the decision and resolution of the appellate court, as well as
the resolutions of the Department of Justice, petitioners prayed 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 Supreme Court found the petition unmeritorious. According to the Court, the
accounts in question are U.S. dollar deposits; consequently, the applicable law is
not Republic Act No. 1405, but Republic Act No. 6426, known as the "Foreign
Currency Deposit Act of the Philippines." 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 latter's written permission. It does not
matter if such disclosure was necessary to establish Citibank's case against
Dante L. Santos and Marilou Genuino. Lim's 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. The Court also ruled that
applying Act No. 3326, the offense prescribes in eight years. Per available
records, private respondents may no longer be haled before the courts for
violation of Republic Act No. 6426. 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.
DECISION
DE LEON, JR., J p:
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.
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 vice-president 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, N.A., such as peso
and dollar deposits, mortgage backed securities and money
placements, among others.
xxx xxx xxx
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
84
 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, N.A. 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 xxx xxx
b) Carmen Intengan
xxx xxx xxx
d) Rosario Neri
xxx xxx xxx
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;
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
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.
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 client's deposits was done
through the accomplishment of either an Application For
Manager's 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 Manager's 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.
85
 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/or Torrance 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 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.
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.
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
Lim's 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 tribunal's 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 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 I.S. 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.
xxx xxx xxx
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.
86
Petitioners' motion for reconsideration was similarly denied in a Resolution dated
April 16, 1997. Appeal was made in due time to this Court.
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 court's 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 I.S.
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)
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.
III.
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 I.S. NO.
93-8469.
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 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 (emphasis supplied)
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.
87
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 latter's written permission. It does not matter if that such disclosure was
necessary to establish Citibank's case against Dante L. Santos and Marilou
Genuino. Lim's 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 . . ., 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. . . . 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 . . . :
`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 offense
punished by imprisonment for six years or more, except the
crime, of treason, which shall prescribe after twenty years:
Provided, however, That all offenses 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. ACaDTH
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 on
October 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
88
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.
SO ORDERED.
||| (Intengan v. Court of Appeals, G.R. No. 128996, [February 15, 2002], 427
PHIL 293-309)
SECOND DIVISION
[G.R. No. L-45710. October 3, 1985.]
CENTRAL BANK OF THE PHILIPPINES and ACTING
DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK,
in his capacity as statutory receiver of Island Savings
Bank, petitioners, vs. THE HONORABLE COURT OF
APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for
petitioners.
Antonio R. Tupaz for private respondent.
DECISION
MAKASIAR, C.J p:
This is a petition for review on certiorari to set aside as null and void the
decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11,
1977, modifying the decision dated February 15, 1972 of the Court of First
Instance of Agusan, which dismissed the petition of respondent Sulpicio M.
Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its
legal department, approved the loan application for P80,000.00 of Sulpicio M.
Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan,
and covered by TCT No. T-305, and which mortgage was annotated on the said
title the next day. The approved loan application called for a lump sum
P80,000.00 loan, repayable in semi-annual installments for a period of 3 years,
with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the
loan proceeds solely as an additional capital to develop his other property into a
subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was
made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed
a promissory note for P17,000.00 at 12% annual interest, payable within 3
years from the date of execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.), An advance interest for the P80,000.00 loan covering a
6-month period amounting to P4,800.00 was deducted from the partial release
of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no
fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The
Bank, thru its vice-president and treasurer, promised repeatedly the release of
the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding
Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides:
"In view of the chronic reserve deficiencies of the Island
Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:
"1) To prohibit the bank from making new
loans and investments [except investments in
government securities] excluding extensions or
renewals of already approved loans, provided that
such extensions or renewals shall be subject to
review by the Superintendent of Banks, who may
impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as
possible;
89
 . . ." (p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding that Island Savings Bank
failed to put up the required capital to restore its solvency, issued Resolution No.
967 which prohibited Island Savings Bank from doing business in the Philippines
and instructed the Acting Superintendent of Banks to take charge of the assets
of Island Savings Bank (pp. 48-49, rec.).
On August 1, 1968, Island Savings Bank, in view of non-payment of the
P17,000.00 covered by the promissory note, filed an application for the extra-
judicial foreclosure of the real estate mortgage covering the 100-hectare land of
Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22,
1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First
Instance of Agusan for injunction, specific performance or rescission and
damages with preliminary injunction, alleging that since Island Savings Bank
failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to
specific performance by ordering Island Savings Bank to deliver the P63,000.00
with interest of 12% per annum from April 28, 1965, and if said balance cannot
be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond,
issued a temporary restraining order enjoining the Island Savings Bank from
continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying
for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of
the restraining order, filed by the Central Bank and by the Acting Superintendent
of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits, rendered its
decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him
to pay Island Savings Bank the amount of P17,000.00 plus legal interest and
legal charges due thereon, and lifting the restraining order so that the sheriff
may proceed with the foreclosure (pp. 135-136, rec.).
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino,
modified the Court of First Instance decision by affirming the dismissal of
Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island
Savings Bank can neither foreclose the real estate mortgage nor collect the
P17,000.00 loan (pp. 30-31, rec.). prcd
Hence, this instant petition by the Central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the
promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?.
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00
loan agreement on April 28, 1965, they undertook reciprocal obligations. In
reciprocal obligations, the obligation or promise of each party is the
consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda.
de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed
or is ready and willing to perform his part of the contract, the other party who
has not performed or is not ready and willing to perform incurs in delay (Art.
1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the P80,000.00
loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28,
1965, he signified his willingness to pay the P80,000.00 loan. From such date,
the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued.
Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary Board of the Central
Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent banks
for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.
The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot
interrupt the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited the
Bank from making new loans and investments, and nowhere did it prohibit
Island Savings Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an engagement does
not discharge the obligation of the contract, nor does it constitute any defense
to a decree of specific performance (Gutierrez Repide vs. Afzelins and Afzelins,
39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but instead it is taken as a breach
of the contract by him (Vol. 17A, 1974 ed., CJS p. 650). LexLib
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the
pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan
covering a 6-month period cannot be taken as a waiver of his right to collect the
P63,000.00 balance. The act of Island Savings Bank, in asking the advance
interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A
person cannot be legally charged interest for a non-existing debt. Thus, the
receipt by Sulpicio M. Tolentino of the pre-deducted interest was an exercise of
his right to it, which right exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one right does not affect,
much less neutralize, the exercise of the other.
90
The alleged discovery by Island Savings Bank of the over-valuation of the loan
collateral cannot exempt it from complying with its reciprocal obligation to
furnish the entire P80,000.00 loan. This Court previously ruled that bank officials
and employees are expected to exercise caution and prudence in the discharge
of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]).
It is the obligation of the bank's officials and employees that before they
approve the loan application of their customers, they must investigate the
existence and valuation of the properties being offered as a loan security. The
recent rush of events where collaterals for bank loans turn out to be non-
existent or grossly over-valued underscore the importance of this responsibility.
The mere reliance by bank officials and employees on their customer's
representation regarding the loan collateral being offered as loan security is a
patent non-performance of this responsibility. If ever, bank officials and
employees totally rely on the representation of their customers as to the
valuation of the loan collateral, the bank shall bear the risk in case the collateral
turn out to be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation.
Furthermore, the lower court, on objections of Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation because
of their failure to raise the same in their pleadings (pp. 198-199, t.s.n., Sept.
15, 1971). The lower court's action is sanctioned by the Rules of Court, Section
2, Rule 9, which states that "defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived." Petitioners, thus,
cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation
under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil
Code, may choose between specific performance or rescission with damages in
either case. But since Island Savings Bank is now prohibited from doing further
business by Monetary Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M. Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission
is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is
in default only insofar as such amount is concerned, as there is no doubt that
the bank failed to give the P63,000.00. As far as the partial release of
P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory
note to cover it, the bank was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan. The promissory note gave rise to
Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it
falls due. His failure to pay the overdue amortizations under the promissory note
made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to
the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a
promissory note setting the date for payment of P17,000.00 within 3 years, he
would be entitled to ask for rescission of the entire loan because he cannot
possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they
are both liable for damages. Cdpr
Article 1192 of the Civil Code provides that in case both parties have committed
a breach of their reciprocal obligations, the liability of the first infractor shall be
equitably tempered by the courts. WE rule that the liability of Island Savings
Bank for damages in not furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for
not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his P17,000.00 debt shall not be included in offsetting the liabilities
of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of
the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot
be entirely foreclosed to satisfy his P17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same
as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443
[1979]). For the debtor, the consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil
Code).
The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island
Savings Bank had not made any release on the loan, does not make the real
estate mortgage void for lack of consideration. It is not necessary that any
consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). It may either be a prior or
subsequent matter. But when the consideration is subsequent to the mortgage,
the mortgage can take effect only when the debt secured by it is created as a
binding contract to pay (Parks vs. Sherman, Vol. 176 N.W. p. 583, cited in the
8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure
(Dow, et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p.
138). Where the indebtedness actually owing to the holder of the mortgage is
less than the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19,
F(2d) p. 88, cited in 6th ed., Wiltsie on Mortgage, Vol. 1, p. 180). LLpr
Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the
real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares
91
subsists as a security for the P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of
the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
"A pledge or mortgage is indivisible even though the debt
may be divided among the successors in interest of the
debtor or creditor.
"Therefore, the debtor's heirs who has paid a part of the
debt can not ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely
satisfied.
"Neither can the creditor's heir who have received his share
of the debt return the pledge or cancel the mortgage, to the
prejudice of other heirs who have not been paid."
The rule of indivisibility of the mortgage as outlined by Article 2089 above-
quoted presupposes several heirs of the debtor or creditor which does not obtain
in this case. Hence, the rule of indivisibility of a mortgage cannot apply.
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11,
1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17,000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST
22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED' FROM
AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE
MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY
HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY
DECLARED UNENFORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
||| (Central Bank of the Phils. v. Court of Appeals, G.R. No. L-45710, [October
3, 1985], 223 PHIL 266-279)
SECOND DIVISION
[G.R. No. 150197. July 28, 2005.]
PRUDENTIAL BANK, petitioner, vs. DON A. ALVIAR and
GEORGIA B. ALVIAR, respondents.
TINGA, J p:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner Prudential Bank seeks the reversal of the Decision 1 of the
Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming
the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor
of respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered
owners of a parcel of land in San Juan, Metro Manila, covered by Transfer
Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July
1975, they executed a deed of real estate mortgage in favor of petitioner
Prudential Bank to secure the payment of a loan worth P250,000.00. 2 This
mortgage was annotated at the back of TCT No. 438157. On 4 August 1975,
respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976
at an interest rate of 12% per annum with a 2% service charge, and that the
note is secured by a real estate mortgage as aforementioned. 3 Significantly, the
real estate mortgage contained the following clause:
That for and in consideration of certain loans, overdraft and
other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter
referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby
fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos,
Philippine Currency, as well as those that the Mortgagee
may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary
as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey
by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended
hereto, together with all the buildings and improvements
now existing or which may hereafter be erected or
constructed thereon, of which the Mortgagor declares that
he/it is the absolute owner free from all liens and
incumbrances. . . . 4
92
On 22 October 1976, Don Alviar executed another promissory note, PN
BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that
the loan was secured by a "hold-out" on the mortgagor's foreign currency
savings account with the bank under Account No. 129, and that the mortgagor's
passbook is to be surrendered to the bank until the amount secured by the
"hold-out" is settled. 5
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc.,
of which the husband and wife were President and Chairman of the Board and
Vice President, 6 respectively, PN BD#76/C-430 covering P545,000.000. As
provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923,"
which means that the temporary overdraft incurred by Donalco Trading, Inc.
with petitioner is to be converted into an ordinary loan in compliance with a
Central Bank circular directing the discontinuance of overdrafts. 7
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of
its approval of a straight loan of P545,000.00, the proceeds of which shall be
used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise
mentioned that the securities for the loan were the deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various
heavy and transportation equipment. 8
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to
the obligations of G.B. Alviar Realty and Development, Inc. and for the release
of the real estate mortgage for the P450,000.00 loan covering the two (2) lots
located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro
Manila. The payment was acknowledged by petitioner who accordingly released
the mortgage over the two properties. 9
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the
mortgage on the property covered by TCT No. 438157. Per petitioner's
computation, respondents had the total obligation of P1,608,256.68, covering
the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN
BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus
assessed past due interests and penalty charges. The public auction sale of the
mortgaged property was set on 15 January 1980. 10
Respondents filed a complaint for damages with a prayer for the issuance of a
writ of preliminary injunction with the RTC of Pasig, 11 claiming that they have
paid their principal loan secured by the mortgaged property, and thus the
mortgage should not be foreclosed. For its part, petitioner averred that the
payment of P2,000,000.00 made on 6 March 1979 was not a payment made by
respondents, but by G.B. Alviar Realty and Development Inc., which has a
separate loan with the bank secured by a separate mortgage. 12
On 15 March 1994, the trial court dismissed the complaint and ordered the
Sheriff to proceed with the extra-judicial foreclosure. 13 Respondents sought
reconsideration of the decision. 14 On 24 August 1994, the trial court issued an
Order setting aside its earlier decision and awarded attorney's fees to
respondents. 15 It found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157. On the other hand, the
P382,680.83 loan is secured by the foreign currency deposit account of Don A.
Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere
conversion of the temporary overdraft of Donalco Trading, Inc. in compliance
with a Central Bank circular. According to the trial court, the "blanket mortgage
clause" relied upon by petitioner applies only to future loans obtained by the
mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of
errors:
I. The trial court erred in holding that the real estate
mortgage covers only the promissory note BD#75/C-252 for
the sum of P250,000.00.
II. The trial court erred in holding that the promissory note
BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding
principal balance) is not covered by the real estate mortgage
by expressed agreement.
III. The trial court erred in holding that Promissory Note
BD#76/C-430 for P545,000.00 is not covered by the real
estate mortgage.
IV. The trial court erred in holding that the real estate
mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable
to pay plaintiffs-appellees attorney's fees for P20,000.00. 16
The Court of Appeals affirmed the Order of the trial court but deleted the award
of attorney's fees. 17 It ruled that while a continuing loan or credit
accommodation based on only one security or mortgage is a common practice in
financial and commercial institutions, such agreement must be clear and
unequivocal. In the instant case, the parties executed different promissory notes
agreeing to a particular security for each loan. Thus, the appellate court ruled
that the extrajudicial foreclosure sale of the property for the three loans is
improper. 18
The Court of Appeals, however, found that respondents have not yet paid the
P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty
and Development, Inc. 19
Aggrieved, petitioner filed the instant petition, reiterating the assignment of
errors raised in the Court of Appeals as grounds herein.
93
Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause"
in the real estate mortgage expressly covers not only the P250,000.00 under PN
BD#75/C-252, but also the two other promissory notes included in the
application for extrajudicial foreclosure of real estate mortgage. 20 Thus, it
claims that it acted within the terms of the mortgage contract when it filed its
petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on
the cases of Lim Julian v. Lutero, 21 Tad-Y v. Philippine National Bank, 22
Quimson v. Philippine National Bank, 23 C & C Commercial v. Philippine National
Bank, 24 Mojica v. Court of Appeals, 25 and China Banking Corporation v. Court
of Appeals, 26 all of which upheld the validity of mortgage contracts securing
future advancements. SIDTCa
Anent the Court of Appeals' conclusion that the parties did not intend to include
PN BD#76/C-345 in the real estate mortgage because the same was specifically
secured by a foreign currency deposit account, petitioner states that there is no
law or rule which prohibits an obligation from being covered by more than one
security. 27 Besides, respondents even continued to withdraw from the same
foreign currency account even while the promissory note was still outstanding,
strengthening the belief that it was the real estate mortgage that principally
secured all of respondents' promissory notes. 28 As for PN BD#76/C-345, which
the Court of Appeals found to be exclusively secured by the Clean-Phase out
TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet
clause" of the real estate mortgage covers all the obligations of the respondents.
29
Moreover, petitioner insists that respondents attempt to evade foreclosure by the
expediency of stating that the promissory notes were executed by them not in
their personal capacity but as corporate officers. It claims that PN BD#76/C-430
was in fact for home construction and personal consumption of respondents.
Thus, it states that there is a need to pierce the veil of corporate fiction. 30
Finally, petitioner alleges that the mortgage contract was executed by
respondents with knowledge and understanding of the "dragnet clause," being
highly educated individuals, seasoned businesspersons, and political
personalities. 31 There was no oppressive use of superior bargaining power in
the execution of the promissory notes and the real estate mortgage. 32
For their part, respondents claim that the "dragnet clause" cannot be applied to
the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since
these loans are covered by separate promissory notes that expressly provide for
a different form of security. 33 They reiterate the holding of the trial court that
the "blanket mortgage clause" would apply only to loans obtained jointly by
respondents, and not to loans obtained by other parties. 34 Respondents also
place a premium on the finding of the lower courts that the real estate mortgage
clause is a contract of adhesion and must be strictly construed against petitioner
bank. 35
The instant case thus poses the following issues pertaining to: (i) the validity of
the "blanket mortgage clause" or the "dragnet clause"; (ii) the coverage of the
"blanket mortgage clause"; and consequently, (iii) the propriety of seeking
foreclosure of the mortgaged property for the non-payment of the three loans.
CaHAcT
At this point, it is important to note that one of the loans sought to be included
in the "blanket mortgage clause" was obtained by respondents for Donalco
Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on behalf
of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the
Court to pierce the veil of corporate fiction and hold respondents liable even for
obligations they incurred for the corporation. The mortgage contract states that
the mortgage covers "as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary." Well-settled is the rule that a corporation has a personality separate
and distinct from that of its officers and stockholders. Officers of a corporation
are not personally liable for their acts as such officers unless it is shown that
they have exceeded their authority. 36 However, the legal fiction that a
corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues. 37 PN BD#76/C-430,
being an obligation of Donalco Trading, Inc., and not of the respondents, is not
within the contemplation of the "blanket mortgage clause." Moreover, petitioner
is unable to show that respondents are hiding behind the corporate structure to
evade payment of their obligations. Save for the notation in the promissory note
that the loan was for house construction and personal consumption, there is no
proof showing that the loan was indeed for respondents' personal consumption.
Besides, petitioner agreed to the terms of the promissory note. If respondents
were indeed the real parties to the loan, petitioner, a big, well-established
institution of long standing that it is, should have insisted that the note be made
in the name of respondents themselves, and not to Donalco Trading Inc., and
that they sign the note in their personal capacity and not as officers of the
corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet clause" in American
jurisprudence, is one which is specifically phrased to subsume all debts of past
or future origins. Such clauses are "carefully scrutinized and strictly construed."
38 Mortgages of this character enable the parties to provide continuous dealings,
the nature or extent of which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a new security on each
new transaction. 39 A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available additional funds without
their having to execute additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
40 Indeed, it has been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts, 41 and the amounts
named as consideration in said contracts do not limit the amount for which the
94
mortgage may stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered. 42
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and
other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter
referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is
hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the
accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the
back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or
which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute
owner free from all liens and incumbrances. . . . 43
(Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only the P250,000.00 loan from
the petitioner, but also future credit facilities and advancements that may be
obtained by the respondents. The terms of the above provision being clear and
unambiguous, there is neither need nor excuse to construe it otherwise. caDTSE
The cases cited by petitioner, while affirming the validity of "dragnet clauses" or
"blanket mortgage clauses," are of a different factual milieu from the instant
case. There, the subsequent loans were not covered by any security other than
that for the mortgage deeds which uniformly contained the "dragnet clause."
In the case at bar, the subsequent loans obtained by respondents were secured
by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured
by a "hold-out" on his foreign currency savings account, while PN BD#76/C-430,
executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase
out TOD CA 3923" and eventually by a deed of assignment on two promissory
notes executed by Bancom Realty Corporation with Deed of Guarantee in favor
of A.U. Valencia and Co., and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-430 has already been
discussed. Thus, the critical issue is whether the "blanket mortgage" clause
applies even to subsequent advancements for which other securities were
intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this
question. One school advocates that a "dragnet clause" so worded as to be
broad enough to cover all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such other debt is secured
by another mortgage. 44 The contrary thinking maintains that a mortgage with
such a clause will not secure a note that expresses on its face that it is otherwise
secured as to its entirety, at least to anything other than a deficiency after
exhausting the security specified therein, 45 such deficiency being an
indebtedness within the meaning of the mortgage, in the absence of a special
contract excluding it from the arrangement. 46
The latter school represents the better position. The parties having conformed to
the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude
that they also agreed to an implied understanding that subsequent loans need
not be secured by other securities, as the subsequent loans will be secured by
the first mortgage. In other words, the sufficiency of the first security is a
corollary component of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually requiring
other securities for the subsequent loans. Thus, when the mortgagor takes
another loan for which another security was given it could not be inferred that
such loan was made in reliance solely on the original security with the "dragnet
clause," but rather, on the new security given. This is the "reliance on the
security test."
Hence, based on the "reliance on the security test," the California court in the
cited case made an inquiry whether the second loan was made in reliance on the
original security containing a "dragnet clause." Accordingly, finding a different
security was taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The rationale involved,
the court said, was that the "dragnet clause" in the first security instrument
constituted a continuing offer by the borrower to secure further loans under the
security of the first security instrument, and that when the lender accepted a
different security he did not accept the offer. 47
In another case, it was held that a mortgage with a "dragnet clause" is an
"offer" by the mortgagor to the bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was concluded that the "offer"
was not accepted by the bank when a subsequent advance was made because
(1) the second note was secured by a chattel mortgage on certain vehicles, and
the clause therein stated that the note was secured by such chattel mortgage;
(2) there was no reference in the second note or chattel mortgage indicating a
connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the mortgagor doing business
under an assumed name; and (4) there was no allegation by the bank, and
apparently no proof, that it relied on the security of the real estate mortgage in
making the advance. 48
95
Indeed, in some instances, it has been held that in the absence of clear,
supportive evidence of a contrary intention, a mortgage containing a "dragnet
clause" will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing security
therefor. 49
It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory notes.
While the existence and validity of the "dragnet clause" cannot be denied, there
is a need to respect the existence of the other security given for PN BD#76/C-
345. The foreclosure of the mortgaged property should only be for the
P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered
by the security for the second promissory note. As held in one case, where
deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment of such note, was in
the absence of a special agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special security. 50 This is
recognition that while the "dragnet clause" subsists, the security specifically
executed for subsequent loans must first be exhausted before the mortgaged
property can be resorted to. TEDHaA
One other crucial point. The mortgage contract, as well as the promissory notes
subject of this case, is a contract of adhesion, to which respondents' only
participation was the affixing of their signatures or "adhesion" thereto. 51 A
contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot
modify. 52
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be
strictly construed against the party responsible for its preparation. 53 If the
parties intended that the "blanket mortgage clause" shall cover subsequent
advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken
contra proferentum, that is, construed against the party who caused the
ambiguity which could have avoided it by the exercise of a little more care. 54
To be more emphatic, any ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the party who drafted it, 55
which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by
petitioner, and as such are likewise contracts of adhesion. Being of such nature,
the same should be interpreted strictly against petitioner and with even more
reason since having been accomplished by respondents in the presence of
petitioner's personnel and approved by its manager, they could not have been
unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the
trial court found that respondents have not yet paid the P250,000.00, and gave
no credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN
BD#76/C-345, has been exhausted, subject of course to defenses which are
available to respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 59543 is AFFIRMED.
Costs against petitioner.
SO ORDERED.
||| (Prudential Bank v. Spouses Alviar, G.R. No. 150197, [July 28, 2005], 502
PHIL 595-611
SECOND DIVISION
[G.R. No. 170785. October 19, 2007.]
REPUBLIC PLANTERS BANK (now known as MAYBANK
PHILIPPINES, INC.) and PHILMAY PROPERTY, INC.,
petitioners, vs. VIVENCIO T. SARMIENTO, JESUSA N.
SARMIENTO, JOSE N. SARMIENTO AND ELIZABETH B.
SARMIENTO, respondents.
TINGA, J p:
This is an appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure
assailing the Decision 1 of the Court of Appeals in CA-G.R. CV No. 74451. The
Court of Appeals' decision affirmed the decision 2 of the Regional Trial Court
(RTC) of Paraaque City, Branch 258, which ordered petitioner Maybank
Philippines, Inc. (Maybank) to execute in favor of respondents a deed of
redemption covering two pieces of mortgaged realty and rescinded the deeds of
sale executed by Maybank in favor of petitioner Philmay Property, Inc. (Philmay)
and Clara Fabra (Fabra).
As found by the Court of Appeals, the factual antecedents are as follows:
On 13 March 1979, respondents spouses Vivencio and Jesusa Sarmiento, their
son, Jose, and the latter's spouse, Elizabeth, executed a promissory note,
obligating themselves to pay Maybank, then known as Republic Planters Bank,
the amount of P80,000.00 due 360 days after date plus interest at the rate of 12
percent per annum. 3
96
Earlier, on 9 March 1979, all four respondents executed a Real Estate Mortgage
over two parcels of land covered by OCT No. 5781 and TCT No. 145850 and
registered under the names of respondents Jesusa and Jose, respectively. The
mortgage secured the payment of the principal loan of P80,000.00 and all other
obligations, overdrafts and other credit accommodations obtained and those that
may be obtained in the future from Maybank. 4 cDTaSH
On 8 April 1980, Vivencio for himself and as attorney-in-fact of Jesusa and Jose,
executed a promissory note in which he undertook to pay the amount of
P100,000.00 plus 14% interest per annum on or before April 1981. 5 In the
same month, all four respondents executed an amendment to the real estate
mortgage changing the consideration of the mortgage from P80,000.00 to
P100,000.00 but adopting all the terms and conditions of the previous mortgage
as integral parts of the later one. 6
Vivencio was the owner of V. Sarmiento Rattan Furniture, a sole proprietorship
engaged in export business. On various occasions in 1981, he incurred loan
obligations from Maybank by way of export advances. As of 08 September 1982,
the debts incurred under the export bills transactions totaled P1,281,748.03.
On 3 September 1981, Vivencio, Jose and Elizabeth executed a Suretyship
Agreement, 7 whereby they agreed to be solidarily liable with V. Sarmiento
Rattan Furniture for the payment of P100,000.00 plus all obligations which the
latter incurred or would incur from Maybank.
Respondents defaulted in the payment of the export advances, prompting
Maybank to institute an extrajudicial foreclosure of the real estate mortgage on
9 November 1982. At the foreclosure sale, Maybank was awarded the property
for its bid of P254,000.00 and issued a certificate of sale. The certificate of sale
was registered with the Register of Deeds on 04 March 1983. 8
Maricel Sarmiento, sister of respondent Jose, purchased a manager's check from
Maybank in the amount of P300,000.00 on 21 July 1983. 9 A week later,
respondent Jesusa deposited the amount of P12,000.00. 10 Maybank treated
the total amount of P312,000.00 as a deposit and did not grant respondents'
request for certificate of redemption releasing the foreclosed property. Sometime
in November 1983, Maybank demanded the payment of all outstanding loans
under the export bills transactions. On 3 December 1983, respondents tendered
the amount of P302,333.33 in the name of V. Sarmiento Rattan Furniture.
On 4 July 1990, Maybank consolidated its ownership over the foreclosed
property. On 12 November 1997, Maybank and Philmay executed a deed of
absolute sale, transferring ownership of the foreclosed property to the latter. On
15 July 1998, Philmay sold the same to Fabra. STIcEA
On 3 September 1998, respondents Vivencio and Jose instituted an action for
specific performance against Maybank, Philmay and Fabra. The Complaint, 11
docketed as Civil Case No. 98-0323, prayed for judgment directing Maybank to
execute a deed of redemption in favor of respondents and revoking the
subsequent sale of the property to Philmay and Fabra. During the pendency of
the trial, Fabra died and was substituted by Kim Caro as the legal representative
of the former's heirs.
On 8 January 2002, the RTC rendered a Decision, the dispositive portion of
which reads:
WHEREFORE, viewed in the light of the foregoing, the
plaintiffs having been able to preponderantly prove their
case against the defendants, judgment for specific
performance is hereby rendered ordering defendant
Maybank to execute in favor of the plaintiffs a Deed of
Redemption covering the two (2) parcels of land formerly
embraced in and covered by Transfer Certificates of Title
Nos. 5281 and 145850 of the Register of Deeds of the City
of Paraaque together with all the improvements existing
thereon free from all liens and encumbrances and once
accomplished, to immediately deliver the said document to
plaintiffs.
Likewise, the Deed of Sale executed by Republic Planters
Bank, now Maybank, in favor of Philmay Property, Inc., and
thereafter, from Philmay Property, Inc. to Clara Fabra, are
hereby revoked and rescinded as well as Certificate of Title
No. 139161 registered in the latter's name for being null and
void.
So also, Phimay Property is hereby directed to reimburse
Clara Fabra, now represented by Kim Caro, the amount of
P4,200,000.00[,] representing the purchase price of the
property plus interest thereon at the legal rate computed
from the filing of the complaint until fully paid.
Defendants are likewise ordered to pay plaintiffs jointly and
severally the following, to wit:
1. The amount of P100,000.00 as moral damages;
2. The amount of P50,000.00 as exemplary
damages;
3. The amount of P100,000.00 as and by way of
attorney's fees; and
4. The cost of suit.
The counterclaims of the defendants are DISMISSED.
97
 SO ORDERED. 12 IaDSEA
The RTC based its finding that respondents were able to tender to Maybank
within the redemption period the redemption price of P312,000.00 on the
testimony of respondent Jose on and the official bank receipts evidencing the
separate payments totaling said amount made by Maricel Sarmiento and
respondent Jesusa. Upon this finding, the trial court held that Maybank had no
justifiable legal reason to refuse the execution of documents reconveying the
titles of the mortgaged property to respondents. Thus, the trial court concluded
that the subsequent transfers of the mortgaged property to Philmay and then to
Fabra were void because Maybank had not acquired any rights thereto in the
first place. The trial court, however, declared Fabra as a purchaser in good faith
and, therefore, entitled to reimbursement of the purchase price.
The RTC rejected Maybank's defense that the suretyship agreement signed by
respondents Vivencio, Jose and Elizabeth also constituted the mortgaged
property as security for the export advances incurred in the name of V.
Sarmiento Rattan Furniture because the real estate mortgage documents were
signed by respondents in their personal capacity, whereas the suretyship
agreement was signed by Vivencio in his capacity as manager of V. Sarmiento
Rattan Furniture. The trial court noted that the suretyship agreement was not
even annotated in the titles of the mortgaged property.
On 12 December 2005, the Court of Appeals rendered the assailed Decision
affirming the trial court's judgment, particularly the latter's finding that
respondents made a valid tender of the redemption price and that the export
advances in the name of V. Sarmiento Rattan Furniture did not belong to the
species of obligations secured by the real estate mortgage. Furthermore, the
appellate court construed as a contract of adhesion the proviso in the mortgage
contract that included "interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary, as appears in
the accounts, books and records of the Mortgagee." 13 Describing the same as
a "dragnet clause," the appellate court held that it should be carefully scrutinized
and strictly construed.
Only petitioners Maybank and Philmay appealed from the decision of the Court
of Appeals. In the instant petition, they raise the following arguments:
THE TRIAL COURT AND THE COURT OF APPEALS ERRED IN
FINDING THAT PETITIONERS HAVE PROPERLY REDEEMED
THE FORECLOSED PROPERTIES. cdasia2005
THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT
TREATING RESPONDENTS' EXPORT ADVANCES AS SECURED
BY THE REAL ESTATE MORTGAGE AND THUS SHOULD ALSO
BE PAID.
THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT
RULING THAT THE RESPONDENTS' CLAIM IS ALREADY
BARRED BY LACHES.
THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT
CONSIDERING AND FINDING THAT PHILMAY AND
DEFENDANT CLARA FABRA ARE BUYERS IN GOOD FAITH.
THE LOWER COURT AND THE COURT OF APPEALS ERRED IN
FINDING THAT MAYBANK ACTED IN BAD FAITH.
RESPONDENTS ARE NOT ENTITLED TO MORAL AND
EXEMPLARY DAMAGES AS WELL AS ATTORNEY'S FEES. 14
In a nutshell, the instant petition raises the issue of whether the deposits made
by respondents constituted a valid tender of the redemption price. Essential to
the resolution of this issue is the determination of the amount of indebtedness
that respondents were legally obligated to satisfy in order to consider the
payment thereof as a valid redemption of the foreclosed property.
Maybank argues that respondents' outstanding obligation amounted to more
than P1 million as of the date of the foreclosure sale. Hence, the tender by
respondents of an amount less than that did not constitute a valid redemption of
the foreclosed property. For their part, respondents contend that the factual
finding of both the trial court and the Court of Appeals to the effect that they
were able to make a valid tender of the redemption price, is binding on this
Court.
The petition is meritorious.
The crux of the controversy pertains not to the amount of redemption price
tendered by respondents but rather to the sufficiency of the amount tendered
that would warrant the redemption of the foreclosed property. The determination
of whether the amount tendered by respondents was enough to redeem the
foreclosed property calls for the ascertainment of the liabilities covered and
secured by the mortgage based on the text of the mortgage deed. Both the trial
court and the appellate court concurred in concluding that the export advances
obtained by respondent Vivencio from Maybank did not belong to the species of
obligations secured by the mortgage and that, hence, respondents' tender of an
amount exceeding the principal loan of P100,000.00 was sufficient. Whether or
not this conclusion is correct is a question of law 15 that is within the purview of
a Rule 45 petition. cCSTHA
The real estate mortgage provides:
xxx xxx xxx
98
 That, for and in consideration of certain loans, overdrafts
and other credit accommodations obtained from the
Mortgagee, and to secure the payment of the same and
those that may hereafter be obtained, the principal of all
of which is hereby fixed as EIGHTY THOUSAND ONLY Pesos
(P80,000.00), Philippine Currency, as well as those that
the Mortgagee may extend to the Mortgagor, including
interest and expenses or any other obligation owing
to the Mortgagee, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of
the Mortgagee, the Mortgagor does hereby transfer and
convey by way of mortgage unto the Mortgagee, its
successor or assigns, the parcels of land which are described
in the list inserted on the back of this document, and/or
appended hereto; . . . (Emphasis supplied) 16
The aforementioned clause is a "blanket mortgage clause." A blanket mortgage
clause, also known as a dragnet clause in American jurisprudence, is one that is
specifically phrased to subsume all debts of past or future origins. Such clauses
are carefully scrutinized and strictly construed. Mortgages of this character
enable the parties to provide continuous dealings, the nature or extent of which
may not be known or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction. A dragnet
clause operates as a convenience and accommodation to the borrowers as it
makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of
extra legal services, recording fees, etc. 17
It is basic in the interpretation and construction of contracts that the literal
meaning of the stipulations shall control if the terms of the contract are clear
and leave no doubt on the intention of the contracting parties. 18 It is only
when the words appear to contravene the evident intention of the parties that
the latter shall prevail over the former. The real nature of a contract may be
determined from the express terms of the agreement and from the
contemporaneous and subsequent acts of the parties thereto. 19
Although at the time of the execution of the real estate mortgage the export
advances had not yet been incurred and the principal obligation was fixed at
P80,000.00 and thereafter amended to P100,000.00, the express tenor of the
mortgage contract contemplated the inclusion of future loans and obligations
obtained from Maybank to be secured by the mortgaged property. Nothing in the
mortgage contract would suggest that the parties actually intended to limit the
security to only the principal amount of the loan fixed therein. The stipulations of
the mortgage contract being clear, there is no necessity to ascertain the real
intention of the parties. Be that as it may, nothing in the records would reveal
that by the parties' acts contemporaneous and subsequent to the execution of
the real estate mortgage, they intended to be bound by terms and conditions
other than those provided in the mortgage contract. STaCIA
The trial court reached the conclusion that the export advances were excluded
from the security of the real estate mortgage based on the theory that
respondent Vivencio agreed to be bound as surety for the payment of the export
advances in his capacity as manager of V. Sarmiento Rattan Furniture, whereas
he signed the real estate mortgage in his personal capacity.
This theory is defensible if V. Sarmiento Rattan Furniture were a corporation
having a personality distinct and separate from its corporate officers and
Vivencio signed merely as a corporate representative of V. Sarmiento Rattan
Furniture. Even then, a corporate officer may still be held personally liable for
the debts of the corporation if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty.
For its part, the Court of Appeals opined that the dragnet clause in the subject
real estate mortgage should be strictly construed and, therefore, the subsequent
export advances obtained from Maybank should not be included in the obligation
secured by the mortgage contract.
It is well settled that mortgages given to secure future advancements or loans
are valid and legal contracts, and that the amounts named as consideration in
said contracts do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future
and other indebtedness can be gathered. 20 A mortgage given to secure
advancements is a continuing security and is not discharged by repayment of
the amount named in the mortgage, until the full amount of the advancements
is paid. 21
At the time of the foreclosure sale of the mortgaged property, the outstanding
obligation arising from the export bills transactions had already amounted to
more than P1 million. In accordance with Section 78 of the General Banking Act,
as amended, 22 then governing the foreclosure of the mortgaged property,
redemption may only be made by paying the amount due under the mortgage
deed within one year from the sale of the property. Since respondents failed to
satisfy the full amount of the indebtedness to Maybank, the latter was justified
in refusing to grant respondents' demand for redemption of the foreclosed
property.
WHEREFORE, the instant petition for review on certiorari is GRANTED and the
Decision of the Court of Appeals in CA-G.R. CV No. 74451 is hereby REVERSED
and SET ASIDE. The complaint in Civil Case No. 98-0323 before the Regional
Trial Court, Branch 258, Paraaque City is DISMISSED. Costs against
respondents.
99

SECOND DIVISION
[G.R. No. 179063. October 23, 2009.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
UNITED COCONUT PLANTERS BANK, respondent.
ABAD, J p:
This is an action involving a disputed assessment for deficiencies in
the payment of creditable withholding tax and documentary stamps tax due
from a foreclosure sale.
The Facts and the Case
Respondent United Coconut Planters Bank (UCPB) granted loans of
P68,840,000.00 and P335,000,000.00 to George C. Co, Go Tong Electrical
Supply Co., Inc., and Tesco Realty Co. that the borrowers caused to be
secured by several real estate mortgages. When the latter later failed to pay
their loans, UCPB filed a petition for extrajudicial foreclosure of the
mortgaged properties. Pursuant to that petition, on December 31, 2001 a
notary public for Manila held a public auction sale of the mortgaged
properties. UCPB made the highest winning bid of P504,785,000.00 for the
whole lot.
On January 4, 2002 the notary public submitted the Certificate of
Sale to the Executive Judge of Regional Trial Court (RTC) of Manila for his
approval. 1 But, on February 18, 2002 the executive judge returned it with
instruction to the notary public to explain an inconsistency in the tax
declaration of one mortgaged property. The executive judge further ordered
the notary public to show proof of payment of the Sheriff's percentage of
the bid price. 2 The notary public complied. 3 On March 1, 2002 the
executive judge finally signed the certificate of sale and approved its
issuance to UCPB as the highest bidder. 4
On June 18, 2002 UCPB presented the certificate of sale to the
Register of Deeds of Manila for annotation on the transfer certificates of title
of the foreclosed properties. On July 5, 2002 the bank paid creditable
withholding taxes (CWT) of P28,640,700.00 and documentary stamp taxes
(DST) of P7,160,165.00 in relation to the extrajudicial foreclosure sale. It
then submitted an affidavit of consolidation of ownership to the Bureau of
Internal Revenue (BIR) with proof of tax payments and other documents in
support of the bank's application for a tax clearance certificate and
certificate authorizing registration.
Petitioner Commissioner of Internal Revenue (CIR), however,
charged UCPB with late payment of the corresponding DST and CWT, citing
Section 2.58 of Revenue Regulation 2-98, which stated that the CWT must
be paid within 10 days after the end of each month, and Section 5 of
Revenue Regulation 06-01, which required payment of DST within five days
after the close of the month when the taxable document was made, signed,
accepted or transferred. These taxes accrued upon the lapse of the
redemption period of the mortgaged properties. The CIR pointed out that
the mortgagor, a juridical person, had three months after foreclosure within
which to redeem the properties. 5 SDIaHE
The CIR theorized that the three-month redemption period was to
be counted from the date of the foreclosure sale. Here, he said, the
redemption period lapsed three months from December 31, 2001 or on
March 31, 2002. Thus, UCPB was in default for having paid the CWT and
DST only on July 5, 2002. For this reason the CIR issued a Pre-Assessment
Notice 6 and, subsequently, a Final Assessment Notice 7 to UCPB for
deficiency CWT of P8,617,210.00 and deficiency DST of P2,173,051.75.
UCPB protested the assessment. It claimed that the redemption
period lapsed on June 1, 2002 or three months after the executive judge of
Manila approved the issuance of the certificate of sale. "Foreclosure" under
Section 47 of the General Banking Law, said UCPB, referred to the date of
approval by the executive judge, and not the date of the auction sale. But
the CIR denied UCPB's protest, prompting UCPB to file a petition for review
with the CTA in CTA Case 7164.
On July 26, 2006 the CTA Second Division set aside the decision of
the CIR and held that the redemption period lapsed three months after the
executive judge approved the certificate of sale. It said that "foreclosure"
under the law referred to the whole process of foreclosure which included
the approval and issuance of the certificate of sale. There was no sale to
speak of which could be taxed prior to such approval and issuance. Since
the executive judge approved the issuance only on March 1, 2002, the
redemption period expired on June 1, 2002. Hence, UCPB's payments of
CWT and DST in early July were well within the prescribed period. On appeal
to the CTA En Banc in CTA EB 234, the latter affirmed the decision of the
Second Division on June 5, 2007. With the denial of its motion for
100
reconsideration, petitioner has taken recourse to this Court via a petition for
review on certiorari.
Issue
The key issue in this case is whether or not the three-month
redemption period for juridical persons should be reckoned from the date of
the auction sale.
Ruling
The CIR argues that he has the more reasonable position: the
redemption period should be reckoned from the date of the auction sale for,
otherwise, the taxing authority would be left at the mercy of the executive
judge who may unnecessarily delay the approval of the certificate of sale
and thus prevent the early payment of taxes.
But the Supreme Court had occasion under its resolution in
Administrative Matter 99-10-05-0 8 to rule that the certificate of sale shall
issue only upon approval of the executive judge who must, in the interest of
fairness, first determine that the requirements for extrajudicial foreclosures
have been strictly followed. For instance, in United Coconut Planters Bank v.
Yap, 9 this Court sustained a judge's resolution requiring payment of
notarial commission as a condition for the issuance of the certificate of sale
to the highest bidder.
Here, the executive judge approved the issuance of the certificate
of sale to UCPB on March 1, 2002. Consequently, the three-month
redemption period ended only on June 1, 2002. Only on this date then did
the deadline for payment of CWT and DST on the extrajudicial foreclosure
sale become due. IcADSE
Under Section 2.58 of Revenue Regulation 2-98, the CWT return
and payment become due within 10 days after the end of each month,
except for taxes withheld for the month of December of each year, which
shall be filed on or before January 15 of the following year. On the other
hand, under Section 5 of Revenue Regulation 06-01, the DST return and
payment become due within five days after the close of the month when the
taxable document was made, signed, accepted, or transferred.
The BIR confirmed and summarized the above provisions under
Revenue Memorandum Circular 58-2008 in this manner:
[I]f the property is an ordinary asset of the mortgagor, the
creditable expanded withholding tax shall be due and paid
within ten (10) days following the end of the month in
which the redemption period expires. . . . Moreover, the
payment of the documentary stamp tax and the filing of the
return thereof shall have to be made within five (5) days
from the end of the month when the redemption
period expires.
UCPB had, therefore, until July 10, 2002 to pay the CWT and July
5, 2002 to pay the DST. Since it paid both taxes on July 5, 2002, it is not
liable for deficiencies. Thus, the Court finds no reason to reverse the
decision of the CTA.
Besides, on August 15, 2008, the Bureau of Internal Revenue
issued Revenue Memorandum Circular 58-2008 10 which clarified among
others, the time within which to reckon the redemption period of real estate
mortgages. It reads:
For purposes of reckoning the one-year redemption period in
the case of individual mortgagors, or the three-month
redemption period for juridical persons/mortgagors, the
same shall be reckoned from the date of the
confirmation of the auction sale which is the date
when the certificate of sale is issued.
The CIR must have in the meantime conceded the
unreasonableness of the previous position it had taken on this matter.
WHEREFORE, the petition is DENIED.
SO ORDERED.
||| (Commissioner of Internal Revenue v. United Coconut Planters Bank, G.R.
No. 179063, [October 23, 2009], 619 PHIL 329-334)
FIRST DIVISION
[G.R. No. 171169. August 24, 2009.]
GC DALTON INDUSTRIES, INC., petitioner, vs.
EQUITABLE PCI BANK, respondent.
CORONA, J p:
In 1999, respondent Equitable PCI Bank extended a P30-million
credit line to Camden Industries, Inc. (CII) allowing the latter to avail of
several loans (covered by promissory notes) and to purchase trust receipts.
To facilitate collection, CII executed a "hold-out" agreement in favor of
respondent authorizing it to deduct from its savings account any amounts
due. To guarantee payment, petitioner GC Dalton Industries, Inc. executed
a third-party mortgage of its real properties in Quezon City 1 and Malolos,
Bulacan 2 as security for CII's loans. 3
CII did not pay its obligations despite respondent's demands. By
2003, its outstanding consolidated promissory notes and unpaid trust
receipts had reached a staggering P68,149,132.40. 4
101
 Consequently, respondent filed a petition for extrajudicial
foreclosure of petitioner's Bulacan properties in the Regional Trial Court
(RTC) of Bulacan on May 7, 2004. 5 On August 3, 2004, the mortgaged
properties were sold at a public auction where respondent was declared the
highest bidder. Consequently, a certificate of sale 6 was issued in
respondent's favor on August 3, 2004.
On September 13, 2004, respondent filed the certificate of sale and
an affidavit of consolidation of ownership 7 in the Register of Deeds of
Bulacan pursuant to Section 47 of the General Banking Law. 8 Hence,
petitioner's TCTs covering the Bulacan properties were cancelled and new
ones were issued in the name of respondent. 9 cHEATI
In view of the foregoing, respondent filed an ex parte motion for
the issuance of a writ of possession 10 in the RTC Bulacan, Branch 10 on
January 10, 2005. 11
Previously, however, on August 4, 2004, CII had filed an action for
specific performance and damages 12 in the RTC of Pasig, Branch 71 (Pasig
RTC), asserting that it had allegedly paid its obligation in full to respondent.
13 CII sought to compel respondent to render an accounting in order to
prove that the bank fraudulently foreclosed on petitioner's mortgaged
properties.
Because respondent allegedly failed to appear during the trial, the
Pasig RTC rendered a decision on March 30, 2005 14 based on the evidence
presented by CII. It found that, while CII's past due obligation amounted
only to P14,426,485.66 as of November 30, 2002, respondent had deducted
a total of P108,563,388.06 from CII's savings account. Thus, the Pasig RTC
ordered respondent: (1) to return to CII the "overpayment" with legal
interest of 12% per annum amounting to P94,136,902.40; (2) to
compensate it for lost profits amounting to P2,000,000 per month starting
August 2004 with legal interest of 12% per annum until full payment and
(3) to return the TCTs covering the mortgaged properties to petitioner. It
likewise awarded CII P2,000,000 and P300,000, respectively, as moral and
exemplary damages and P500,000 as attorney's fees.
Respondent filed a notice of appeal. CII, on the other hand, moved
for the immediate entry and execution of the abovementioned decision.
In an order dated December 7, 2005, 15 the Pasig RTC dismissed
respondent's notice of appeal due to its failure to pay the appellate docket
fees. It likewise found respondent guilty of forum-shopping for filing the
petition for the issuance of a writ of possession in the Bulacan RTC. Thus,
the Pasig RTC ordered the immediate entry of its March 30, 2005 decision.
16
Meanwhile, in view of the pending case in the Pasig RTC, petitioner
opposed respondent's ex parte motion for the issuance of a writ of
possession in the Bulacan RTC. It claimed that respondent was guilty of
fraud and forum-shopping, and that it was not informed of the foreclosure.
Furthermore, respondent fraudulently foreclosed on the properties since the
Pasig RTC had not yet determined whether CII indeed failed to pay its
obligations.
In an order dated December 10, 2005, the Bulacan RTC granted
the motion and a writ of possession was issued in respondent's favor on
December 19, 2005. CcaASE
Petitioner immediately assailed the December 10, 2005 order of
the Bulacan RTC via a petition for certiorari in the Court of Appeals (CA). It
claimed that the order violated Section 14, Article VIII of the Constitution
17 which requires that every decision must clearly and distinctly state its
factual and legal bases. In a resolution dated January 13, 2006, 18 the CA
dismissed the petition for lack of merit on the ground that an order
involving the issuance of a writ of possession is not a judgment on the
merits, hence, not covered by the requirement of Section 14, Article VIII of
the Constitution.
Petitioner elevated the matter to this Court, assailing the January
13, 2006 resolution of the CA. It insists that the December 10, 2005 order
of the Bulacan RTC was void as it was bereft of factual and legal bases.
Petitioner likewise cites the conflict between the December 10,
2005 order of the Bulacan RTC and the December 7, 2005 order of the Pasig
RTC. Petitioner claims that, since the Pasig RTC already ordered the entry of
its March 30, 2005 decision (in turn ordering respondent to return TCT No.
351231 and all such other owner's documents of title as may have been
placed in its possession by virtue of the subject trust receipt and loan
transactions), the same was already final and executory. Thus, inasmuch as
CII had supposedly paid respondent in full, it was erroneous for the Bulacan
RTC to order the issuance of a writ of possession to respondent.
Respondent, on the other hand, asserts that petitioner is raising a
question of fact as it essentially assails the propriety of the issuance of the
writ of possession. It likewise points out that petitioner did not truthfully
disclose the status of the March 30, 2005 decision of the Pasig RTC because,
in an order dated April 4, 2006, the Pasig RTC partially reconsidered its
December 7, 2005 order and gave due course to respondent's notice of
appeal. (The propriety of the said April 4, 2006 order is still pending review
in the CA.)
We deny the petition.
The issuance of a writ of possession to a purchaser in an
extrajudicial foreclosure is summary and ministerial in nature as such
proceeding is merely an incident in the transfer of title. 19 The trial court
does not exercise discretion in the issuance thereof. 20 For this reason, an
order for the issuance of a writ of possession is not the judgment on the
merits contemplated by Section 14, Article VIII of the Constitution. Hence,
the CA correctly upheld the December 10, 2005 order of the Bulacan RTC.
caHCSD
Furthermore, the mortgagor loses all legal interest over the
foreclosed property after the expiration of the redemption period. 21 Under
Section 47 of the General Banking Law, 22 if the mortgagor is a juridical
person, it can exercise the right to redeem the foreclosed property until, but
not after, the registration of the certificate of foreclosure sale within three
months after foreclosure, whichever is earlier. Thereafter, such mortgagor
loses its right of redemption.
102
 Respondent filed the certificate of sale and affidavit of consolidation
with the Register of Deeds of Bulacan on September 13, 2004. This
terminated the redemption period granted by Section 47 of the General
Banking Law. Because consolidation of title becomes a right upon the
expiration of the redemption period, 23 respondent became the owner of
the foreclosed properties. 24 Therefore, when petitioner opposed the ex
parte motion for the issuance of the writ of possession on January 10, 2005
in the Bulacan RTC, it no longer had any legal interest in the Bulacan
properties.
Nevertheless, even if the ownership of the Bulacan properties had
already been consolidated in the name of respondent, petitioner still had,
and could have availed of, the remedy provided in Section 8 of Act 3135. 25
It could have filed a petition to annul the August 3, 2004 auction sale and to
cancel the December 19, 2005 writ of possession, 26 within 30 days after
respondent was given possession. 27 But it did not. Thus, inasmuch as the
30-day period to avail of the said remedy had already lapsed, petitioner
could no longer assail the validity of the August 3, 2004 sale.
Any question regarding the validity of the mortgage or its
foreclosure cannot be a legal ground for the refusal to issue
a writ of possession. Regardless of whether or not there is a
pending suit for the annulment of the mortgage or the
foreclosure itself, the purchaser is entitled to a writ of
possession, without prejudice, of course, to the eventual
outcome of the pending annulment case. 28
Needless to say, petitioner committed a misstep by completely
relying and pinning all its hopes for relief on its complaint for specific
performance and damages in the Pasig RTC, 29 instead of resorting to the
remedy of annulment (of the auction sale and writ of possession) under
Section 8 of Act 3135 in the Bulacan RTC. caSDCA
WHEREFORE, the petition is hereby DENIED.
Costs against petitioner.
SO ORDERED.
||| (GC Dalton Industries, Inc. v. Equitable PCI Bank, G.R. No. 171169, [August
24, 2009], 613 PHIL 329-337)
SECOND DIVISION
[G.R. No. 183987. July 25, 2012.]
ASIATRUST DEVELOPMENT BANK, petitioner, vs.
CARMELO H. TUBLE, respondent.
SERENO, J p:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court, seeking to review the Court of Appeals (CA) 28 March
2008 Decision and 30 July 2008 Resolution in CA-G.R. CV No. 87410. The CA
affirmed the Regional Trial Court (RTC) Decision of 15 May 2006 in Civil Case No.
67973, which granted to respondent the refund of P845,805.49 1 representing
the amount he had paid in excess of the redemption price.
The antecedent facts are as follows: 2
Respondent Carmelo H. Tuble, who served as the vice-president of petitioner
Asiatrust Development Bank, availed himself of the car incentive plan and loan
privileges offered by the bank. He was also entitled to the bank's Senior
Managers Deferred Incentive Plan (DIP).
Respondent acquired a Nissan Vanette through the company's car incentive plan.
The arrangement was made to appear as a lease agreement requiring only the
payment of monthly rentals. Accordingly, the lease would be terminated in case
of the employee's resignation or retirement prior to full payment of the price.
As regards the loan privileges, Tuble obtained three separate loans. The first, a
real estate loan evidenced by the 18 January 1993 Promissory Note No. 0142 3
with maturity date of 1 January 1999, was secured by a mortgage over his
property covered by Transfer Certificate of Title No. T-145794. No interest on
this loan was indicated.
The second was a consumption loan, evidenced by the 10 January 1994
Promissory Note No. 0143 4 with the maturity date of 31 January 1995 and
interest at 18% per annum. Aside from the said indebtedness, Tuble allegedly
obtained a salary loan, his third loan. EHSTDA
On 30 March 1995, he resigned. Subsequently, he was given the option to either
return the vehicle without any further obligation or retain the unit and pay its
remaining book value.
Respondent had the following obligations to the bank after his retirement: (1)
the purchase or return of the Nissan Vanette; (2) P100,000 as consumption
loan; (3) P421,800 as real estate loan; and (4) P16,250 as salary loan. 5
In turn, petitioner owed Tuble (1) his pro-rata share in the DIP, which was to be
issued after the bank had given the resigned employee's clearance; and (2)
P25,797.35 representing his final salary and corresponding 13th month pay.
Respondent claimed that since he and the bank were debtors and creditors of
each other, the offsetting of loans could legally take place. He then asked the
bank to simply compute his DIP and apply his receivables to his outstanding
loans. 6 However, instead of heeding his request, the bank sent him a 1 June
103
1995 demand letter 7 obliging him to pay his debts. The bank also required him The obligations arising from the salary loan and car insurance should have
to return the Nissan Vanette. Despite this demand, the vehicle was not also been excluded, for there was no proof that these debts existed. The
surrendered. interest and penalty charges should have been deleted, too, because
Promissory Note No. 0142 did not indicate any interest or penalty charges.
Neither should litigation expenses have been added, since there was no proof
On 14 August 1995, Tuble wrote the bank again to follow up his request to offset
that the bank incurred those expenses.
the loans. This letter was not immediately acted upon. It was only on 13 October
1995 that the bank finally allowed the offsetting of his various claims and
liabilities. As a result, his liabilities were reduced to P970,691.46 plus the As for the 18% annual interest on the bid price of P421,800, the RTC agreed
unreturned value of the vehicle. with Tuble that this charge was unlawful. Act 3135 12 as amended, in relation to
Section 28 of Rule 39 of the Rules of Court, 13 only allows the mortgagee to
charge an interest of 1% per month if the foreclosed property is redeemed.
In order to recover the Nissan Vanette, the bank filed a Complaint for replevin
Ultimately, under the principle of solutio indebiti, the trial court required the
against Tuble. Petitioner obtained a favorable judgment. Then, to collect the
refund of these amounts charged in excess of the correct redemption price.
liabilities of respondent, it also filed a Petition for Extra-judicial Foreclosure of
TAESDH
real estate mortgage over his property. The Petition was based only on his real
estate loan, which at that time amounted to P421,800. His other liabilities to
the bank were excluded. The foreclosure proceedings terminated, with the bank On appeal, the CA affirmed the findings of the RTC. 14 The appellate court only
emerging as the purchaser of the secured property. Thereafter, Tuble timely expounded the rule that, at the time of redemption, the one who redeemed is
redeemed the property on 17 March 1997 for P1,318,401.91. 8 Notably, the liable to pay only 1% monthly interest plus taxes. Thus, the CA also concluded
redemption price increased to this figure, because the bank had unilaterally that there was practically no basis to impose the additional charges.
imposed additional interest and other charges.
Before this Court, petitioner reiterates its claims regarding the inclusion in the
With the payment of P1,318,401.91, Tuble was deemed to have fully paid his redemption price of the 18% annual interest on the bid price of P421,800 and
accountabilities. Thus, three years after his payment, the bank issued him a the interest charges on Promissory Note No. 0142.
Clearance necessary for the release of his DIP share. Subsequently, he received
a Manager's Check in the amount of P166,049.73 representing his share in the
Petitioner emphasizes that an 18% interest rate allegedly referred to in the
DIP funds. CHcESa
mortgage deed is the proper basis of the interest. Pointing to the Real Estate
Mortgage Contract, the bank highlights the blanket security clause or "dragnet
Despite his payment of the redemption price, Tuble questioned how the clause" that purports to cover all obligations owed by Tuble: 15
foreclosure basis of P421,800 ballooned to P1,318,401.91 in a matter of one
year. Belatedly, the bank explained that this redemption price included the
All obligations of the Borrower and/or Mortgagor, its
Nissan Vanette's book value, the salary loan, car insurance, 18% annual
renewal, extension, amendment or novation irrespective of
interest on the bank's redemption price of P421,800, penalty and interest
whether such obligations as renewed, extended, amended or
charges on Promissory Note No. 0142, and litigation expenses. 9 By way of
novated are in the nature of new, separate or additional
note, from these items, the amounts that remained to be collected as stated in
obligations;
the Petition before us, are (1) the 18% annual interest on the redemption price
and (2) the interest charge on Promissory Note No. 0142.
All other obligations of the Borrower and/or Mortgagor in
favor of the Mortgagee, executed before or after the
Because Tuble disputed the redemption price, he filed a Complaint for recovery
execution of this document whether presently owing or
of a sum of money and damages before the RTC. He specifically sought to collect
hereinafter incurred and whether or not arising from or
P896,602.02 10 representing the excess charges on the redemption price.
connection with the aforesaid loan/Credit
Additionally, he prayed for moral and exemplary damages.
accommodation; . . . .

The RTC ruled in favor of Tuble. The trial court characterized the redemption
Tuble's obligations are defined in Promissory Note Nos. 0142 and 0143. By way
price as excessive and arbitrary, because the correct redemption price should
of recap, Promissory Note No. 0142 refers to the real estate loan; it does not
not have included the above-mentioned charges. Moral and exemplary damages
contain any stipulation on interest. On the other hand, Promissory Note No.
were also awarded to him.
0143 refers to the consumption loan; it charges an 18% annual interest rate.
Petitioner uses this latter rate to impose an interest over the bid price of
According to the trial court, 11 the value of the car should not have been P421,800.
included, considering that the bank had already recovered the Nissan Vanette.

104
Further, the bank sees the inclusion in the redemption price of an addition 12%
annual interest on Tuble's real estate loan.
On top of these claims, the bank raises a new item the car's rental fee to
be included in the redemption price. In dealing with this argument raised for the
first time on certiorari, this Court dismisses the contention based on the well-
entrenched prohibition on raising new issues, especially factual ones, on appeal.
16 cSCTEH
Thus, the pertinent issue in the instant appeal is whether or not the bank is
entitled to include these items in the redemption price: (1) the interest charges
on Promissory Note No. 0142; and (2) the 18% annual interest on the bid price
of P421,800.
RULING OF THE COURT
The 18% Annual Interest on the Bid
Price of P421,800
The Applicable Law
The bank argues that instead of referring to the Rules of Court to compute the
redemption price, the courts a quo should have applied the General Banking
Law, 17 considering that petitioner is a banking institution.
The statute referred to requires that in the event of judicial or extrajudicial
foreclosure of any mortgage on real estate that is used as security for an
obligation to any bank, banking institution, or credit institution, the mortgagor
can redeem the property by paying the amount fixed by the court in the order of
execution, with interest thereon at the rate specified in the mortgage. 18
Petitioner is correct. We have already established in Union Bank of the
Philippines v. Court of Appeals, 19 citing Ponce de Leon v. Rehabilitation Finance
Corporation 20 and Sy v. Court of Appeals, 21 that the General Banking Act
being a special and subsequent legislation has the effect of amending Section
6 of Act No. 3135, insofar as the redemption price is concerned, when the
mortgagee is a bank. Thus, the amount to be paid in redeeming the property
is determined by the General Banking Act, and not by the Rules of Court in
Relation to Act 3135.
The Remedy of Foreclosure
In reviewing the bank's additional charges on the redemption price as a result of
the foreclosure, this Court will first clarify certain vital points of fact and law that
both parties and the courts a quo seem to have missed. cATDIH
Firstly, at the time respondent resigned, which was chronologically before the
foreclosure proceedings, he had several liabilities to the bank. Secondly, when
the bank later on instituted the foreclosure proceedings, it foreclosed only the
mortgage secured by the real estate loan of P421,800. 22 It did not seek
to include, in the foreclosure, the consumption loan under Promissory Note No.
0143 or the other alleged obligations of respondent. Thirdly, on 28 February
1996, the bank availed itself of the remedy of foreclosure and, in doing so,
effectively gained the property.
As a result of these established facts, one evident conclusion surfaces: the Real
Estate Mortgage Contract on the secured property is already extinguished.
In foreclosures, the mortgaged property is subjected to the proceedings for the
satisfaction of the obligation. 23 As a result, payment is effected by abnormal
means whereby the debtor is forced by a judicial proceeding to comply with the
presentation or to pay indemnity. 24
Once the proceeds from the sale of the property are applied to the payment of
the obligation, the obligation is already extinguished. 25 Thus, in Spouses
Romero v. Court of Appeals, 26 we held that the mortgage indebtedness was
extinguished with the foreclosure and sale of the mortgaged property, and that
what remained was the right of redemption granted by law.
Consequently, since the Real Estate Mortgage Contract is already extinguished,
petitioner can no longer rely on it or invoke its provisions, including the dragnet
clause stipulated therein. It follows that the bank cannot refer to the 18%
annual interest charged in Promissory Note No. 0143, an obligation allegedly
covered by the terms of the Contract.
Neither can the bank use the consummated contract to collect on the rest of the
obligations, which were not included when it earlier instituted the foreclosure
proceedings. It cannot be allowed to use the same security to collect on the
other loans. To do so would be akin to foreclosing an already foreclosed
property.
Rather than relying on an expired contract, the bank should have collected on
the excluded loans by instituting the proper actions for recovery of sums of
money. Simply put, petitioner should have run after Tuble separately, instead of
hostaging the same property to cover all of his liabilities. HaAISC
The Right of Redemption
Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the
right to redeem the security by paying the redemption price. The right of
redemption of foreclosed properties was a statutory privilege 27 he enjoyed.
Redemption is by force of law, and the purchaser at public auction is bound to
accept it. 28 Thus, it is the law that provides the terms of the right; the
mortgagee cannot dictate them. The terms of this right, based on Section 47 of
the General Banking Law, are as follows:
105
 1. The redemptioner shall have the right within one year
after the sale of the real estate, to redeem the
property.
2. The redemptioner shall pay the amount due under the
mortgage deed, with interest thereon at rate
specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from
the sale and custody of said property less the
income derived therefrom.
3. In case of redemptioners who are considered by law as
juridical persons, they shall have the right to
redeem not after the registration of the certificate
of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three
(3) months after foreclosure, whichever is earlier.
Consequently, the bank cannot alter that right by imposing additional charges
and including other loans. Verily, the freedom to stipulate the terms and
conditions of an agreement is limited by law. 29
Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court
30 that the power to decide whether or not to foreclose is the prerogative of the
mortgagee; however, once it has made the decision by filing a petition with the
sheriff, the acts of the latter shall thereafter be governed by the provisions of
the mortgage laws, and not by the instructions of the mortgagee. In direct
contravention of this ruling, though, the bank included numerous charges and
loans in the redemption price, which inexplicably ballooned to P1,318,401.91.
On this error alone, the claims of petitioner covering all the additional charges
should be denied. Thus, considering the undue inclusions of the additional
charges, the bank cannot impose the 18% annual interest on the redemption
price. HSDCTA
The Dragnet Clause
In any event, assuming that the Real Estate Mortgage Contract subsists, we rule
that the dragnet clause therein does not justify the imposition of an
18% annual interest on the redemption price.
This Court has recognized that, through a dragnet clause, a real estate
mortgage contract may exceptionally secure future loans or advancements. 31
But an obligation is not secured by a mortgage, unless, that mortgage comes
fairly within the terms of the mortgage contract. 32
We have also emphasized that the mortgage agreement, being a contract of
adhesion, is to be carefully scrutinized and strictly construed against the bank,
the party that prepared the agreement. 33
Here, after reviewing the entire deed, this Court finds that there is no specific
mention of interest to be added in case of either default or redemption.
The Real Estate Mortgage Contract itself is silent on the computation of the
redemption price. Although it refers to the Promissory Notes as constitutive of
Tuble's secured obligations, the said contract does not state that the interest to
be charged in case of redemption should be what is specified in the Promissory
Notes.
In Philippine Banking Communications v. Court of Appeals, 34 we have
construed such silence or omission of additional charges strictly against the
bank. In that case, we affirmed the findings of the courts a quo that penalties
and charges are not due for want of stipulation in the mortgage contract.
Worse, when petitioner invites us to look at the Promissory Notes in determining
the interest, these loan agreements offer different interest charges: Promissory
Note No. 0142, which corresponds exactly to the real estate loan, contains no
stipulation on interest; while Promissory Note No. 0143, which in turn
corresponds to the consumption loan, provides a charge of 18% interest per
annum.
Thus, an ambiguity results as to which interest shall be applied, for to apply an
18% interest per annum based on Promissory Note No. 0143 will negate the
existence of the 0% interest charged by Promissory Note No. 0142. Notably, it is
this latter Promissory Note that refers to the principal agreement to which the
security attaches. DTAIaH
In resolving this ambiguity, we refer to a basic principle in the law of contracts:
"[A]ny ambiguity is to be taken contra proferent[e]m, that is, construed against
the party who caused the ambiguity which could have avoided it by the exercise
of a little more care." 35 Therefore, the ambiguity in the mortgage deed whose
terms are susceptible of different interpretations must be read against the bank
that drafted it. Consequently, we cannot impute grave error on the part of the
courts a quo for not appreciating a charge of 18% interest per annum.
Furthermore, this Court refuses to be blindsided by the dragnet clause in the
Real Estate Mortgage Contract to automatically include the consumption loan,
and its corresponding interest, in computing the redemption price.
As we have held in Prudential Bank v. Alviar, 36 in the absence of clear and
supportive evidence of a contrary intention, a mortgage containing a dragnet
clause will not be extended to cover future advances, unless the document
evidencing the subsequent advance refers to the mortgage as providing security
therefor.
In this regard, this Court adopted the "reliance on the security test" used in the
above-mentioned cases, Prudential Bank 37 and Philippine Bank of
Communications. 38 In these Decisions, we elucidated the test as follows:
106
 . . . [A] mortgage with a "dragnet clause" is an "offer" by
the mortgagor to the bank to provide the security of the
mortgage for advances of and when they were made.
Thus, it was concluded that the "offer" was not accepted
by the bank when a subsequent advance was made
because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein
stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second
note or chattel mortgage indicating a connection
between the real estate mortgage and the advance;
(3) the mortgagor signed the real estate mortgage by her
name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business
under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof,
that it relied on the security of the real estate
mortgage in making the advance. 39 (Emphasis
supplied) AHCaED
Here, the second loan agreement, or Promissory Note No. 0143, referring to the
consumption loan makes no reference to the earlier loan with a real estate
mortgage. Neither does the bank make any allegation that it relied on the
security of the real estate mortgage in issuing the consumption loan to Tuble.
It must be remembered that Tuble was petitioner's previous vice-president.
Hence, as one of the senior officers, the consumption loan was given to him not
as an ordinary loan, but as a form of accommodation or privilege. 40 The bank's
grant of the salary loan to Tuble was apparently not motivated by the creation of
a security in favor of the bank, but by the fact the he was a top executive of
petitioner.
Thus, the bank cannot claim that it relied on the previous security in granting
the consumption loan to Tuble. For this reason, the dragnet clause will not be
extended to cover the consumption loan. It follows, therefore, that its
corresponding interest 18% per annum is inapplicable. Consequently, the
courts a quo did not gravely abuse their discretion in refusing to apply an annual
interest of 18% in computing the redemption price. A finding of grave abuse of
discretion necessitates that the judgment must have been exercised arbitrarily
and without basis in fact and in law. 41
The Interest Charges on Promissory
Note No. 0142
In addition to the 18% annual interest, the bank also claims a 12% interest per
annum on the consumption loan. Notwithstanding that Promissory Note No.
0142 contains no stipulation on interest payments, the bank still claims that
Tuble is liable to pay the legal interest. This interest is currently at 12% per
annum, pursuant to Central Bank Circular No. 416 and Article 2209 of the Civil
Code, which provides:
If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest,
which is six per cent per annum. (Emphasis supplied)
While Article 2209 allows the recovery of interest sans stipulation, this charge is
provided not as a form of monetary interest, but as one of compensatory
interest. 42 AEcIaH
Monetary interest refers to the compensation set by the parties for the use or
forbearance of money. 43 On the other hand, compensatory interest refers to
the penalty or indemnity for damages imposed by law or by the courts. 44
Compensatory interest, as a form of damages, is due only if the obligor is
proven to have defaulted in paying the loan. 45
Thus, a default must exist before the bank can collect the compensatory legal
interest of 12% per annum. In this regard, Tuble denies being in default since,
by way of legal compensation, he effectively paid his liabilities on time.
This argument is flawed. The bank correctly explains in its Petition that in order
for legal compensation to take effect, Article 1279 of the Civil Code requires that
the debts be liquidated and demandable. This provision reads:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis
supplied)
Liquidated debts are those whose exact amount has already been determined.
46 In this case, the receivable of Tuble, including his DIP share, was not yet
determined; it was the petitioner's policy to compute and issue the computation
only after the retired employee had been cleared by the bank. Thus, Tuble
107
incorrectly invoked legal compensation in addressing this issue of default. bank cannot collect the interest because of the contract's ambiguity. Fourth, the
AaITCS dragnet clause referred to in the contract cannot be presumed to include the
18% annual interest specified in the consumption loan. Fifth, with respect to the
compensatory interest claimed by the bank, we hold that neither is the interest
Nevertheless, based on the findings of the RTC and the CA, the obligation of
due, because Tuble cannot be deemed to be in default of his obligations.
Tuble as evidenced by Promissory Note No. 0142, was set to mature on 1
January 1999. But then, he had already settled his liabilities on 17 March
1997 by paying P1,318,401.91 as redemption price. Then, in 1999, the bank IN VIEW THEREOF, the assailed 28 March 2008 Decision and 30 July 2008
issued his Clearance and share in the DIP in view of the full settlement of his Resolution of the Court of Appeals in CA-G.R. CV No. 87410 are hereby
obligations. Thus, there being no substantial delay on his part, the CA did not AFFIRMED. cSTHaE
grievously err in not declaring him to be in default.
SO ORDERED.
The Award of Moral and Exemplary
Damages
||| (Asiatrust Development Bank v. Tuble, G.R. No. 183987, [July 25, 2012],
691 PHIL 732-751
The courts a quo awarded Tuble P200,000 as moral damages and P50,000 as
exemplary damages. As appreciated by the RTC, which had the opportunity to
examine the parties, 47 the bank treated Tuble unfairly and unreasonably by SECOND DIVISION
refusing to lend even a little charity and human consideration when it
immediately foreclosed the loans of its previous vice-president instead of
heeding his request to make a straightforward calculation of his receivables and [G.R. No. 178429. October 23, 2009.]
offset them against his liabilities. 48

To the mind of the trial court, this was such a simple request within the control JOSE C. GO, petitioner, vs. BANGKO SENTRAL NG
of the bank to grant; and if petitioner had only acceded, the troubles of the PILIPINAS, respondent.
lawsuit would have been avoided.

BRION, J. p:
Moreover, the RTC found that the bank caused Tuble severe humiliation when
the Nissan Vanette was seized from his new office at Kuok Properties Philippines.
The trial court also highlighted the fact that respondent as the previous vice- Through the present petition for review on certiorari, 1 petitioner
president of petitioner was no ordinary employee he was a man of good Jose C. Go (Go) assails the October 26, 2006 decision 2 of the Court of
professional standing, and one who actively participated in civic organizations. Appeals (CA) in CA-G.R. SP No. 79149, as well as its June 4, 2007
The RTC then concluded that a man of his standing deserved fair treatment from resolution. 3 The CA decision and resolution annulled and set aside the May
his employer, especially since they served common goals. 20, 2003 4 and June 30, 2003 5 orders of the Regional Trial Court (RTC),
Branch 26, Manila which granted Go's motion to quash the Information filed
against him.
This Court affirms the dispositions of the RTC and the CA. They correctly ruled
that the award of moral damages also includes cases of besmirched reputation, THE FACTS
moral shock, social humiliation and similar injury. In this regard, the social and
On August 20, 1999, an Information 6 for violation of Section 83 of
financial standings of the parties are additional elements that should be taken
Republic Act No. 337 (RA 337) or the General Banking Act, as amended by
into account in the determination of the amount of moral damages. 49 Based on
Presidential Decree No. 1795, was filed against Go before the RTC. The
their findings that Tuble suffered undue embarrassment, given his social
charge reads:
standing, the courts a quo had factual basis 50 to justify the award of moral
damages and, consequently, exemplary damages 51 in his favor.
That on or about and during the period comprised between
June 27, 1996 and September 15, 1997, inclusive, in the
From all the foregoing, we rule that the appellate court correctly deleted the
City of Manila, Philippines, the said accused, being then
18% annual interest charges, albeit for different reasons. First, the interest
the Director and the President and Chief Executive
cannot be imposed, because any reference to it under the Real Estate Mortgage
Officer of the Orient Commercial Banking Corporation
Contract is misplaced, as the contract is already extinguished. Second, the said
(Orient Bank), a commercial banking institution created,
interest cannot be collected without any basis in terms of Tuble's redemption
organized and existing under Philippines laws, with its main
rights. Third, assuming that the Real Estate Mortgage Contract subsists, the
branch located at C.M. Recto Avenue, this City, and taking
108
 advantage of his position as such officer/director of the said
bank, did then and there wilfully, unlawfully and
knowingly borrow, either directly or indirectly, for
himself or as the representative of his other related
companies, the deposits or funds of the said banking
institution and/or become a guarantor, indorser or
obligor for loans from the said bank to others, by then
and there using said borrowed deposits/funds of the
said bank in facilitating and granting and/or caused
the facilitating and granting of credit lines/loans and,
among others, to the New Zealand Accounts loans in
the total amount of TWO BILLION AND SEVEN HUNDRED
FIFTY-FOUR MILLION NINE HUNDRED FIVE THOUSAND AND
EIGHT HUNDRED FIFTY-SEVEN AND 0/100 PESOS, Philippine
Currency, said accused knowing fully well that the
same has been done by him without the written
approval of the majority of the Board of Directors of
said Orient Bank and which approval the said accused
deliberately failed to obtain and enter the same upon the
records of said banking institution and to transmit a copy of
which to the supervising department of the said bank, as
required by the General Banking Act.
CONTRARY TO LAW. [Emphasis supplied.] EDATSI
On May 28, 2001, Go pleaded not guilty to the offense charged.
After the arraignment, both the prosecution and accused Go took
part in the pre-trial conference where the marking of the voluminous
evidence for the parties was accomplished. After the completion of the
marking, the trial court ordered the parties to proceed to trial on the merits.
Before the trial could commence, however, Go filed on February 26,
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 he become a guarantor, indorser, or
surety for loans from such bank, to others, or in any manner
be an obligor for money borrowed from the bank or loaned
by it, except with the written approval of the majority of the
directors of the bank, excluding the director concerned. Any
such approval shall be entered upon the records of the
corporation and a copy of such entry shall be transmitted
forthwith to the appropriate supervising department. The
office of any director or officer of a bank who violates the
provisions of this section shall immediately become vacant
and the director or officer shall be punished by
imprisonment of not less than one year nor more than ten
years and by a fine of not less than one thousand nor more
than ten thousand pesos.
The Monetary Board may regulate the amount of credit
accommodations that may be extended, directly or
indirectly, by banking institutions to their directors, officers,
or stockholders. However, the outstanding credit
accommodations which a bank may extend to each of its
stockholders owning two percent (2%) or more of the
subscribed capital stock, its directors, or its officers, shall be
limited to an amount equivalent to the respective
outstanding deposits and book value of the paid-in capital
contribution in the bank. Provided, however, that loans and
advances to officers in the form of fringe benefits granted in
accordance with rules and regulations as may be prescribed
by Monetary Board shall not be subject to the preceding
limitation. (As amended by PD 1795)
In addition to the conditions established in the preceding
paragraph, no director or a building and loan association
shall engage in any of the operations mentioned in said
paragraphs, except upon the pledge of shares of the
association having a total withdrawal value greater than the
amount borrowed. (As amended by PD 1795)
In support of his motion to quash, Go averred that based on the
facts alleged in the Information, he was being prosecuted for borrowing the
deposits or funds of the Orient Bank and/or acting as a guarantor, indorser
or obligor for the bank's loans to other persons. The use of the word
"and/or" meant that he was charged for being either a borrower or a
guarantor, or for being both a borrower and guarantor. Go claimed that the
charge was not only vague, but also did not constitute an offense. He
posited that Section 83 of RA 337 penalized only directors and officers of
banking institutions who acted either as borrower or as guarantor, but not
as both.
Go further pointed out that the Information failed to state that his
alleged act of borrowing and/or guarantying was not among the exceptions
provided for in the law. According to Go, the second paragraph of Section 83
allowed banks to extend credit accommodations to their directors, officers,
and stockholders, provided it is "limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank". Extending credit accommodations to bank
directors, officers, and stockholders is not per se prohibited, unless the
amount exceeds the legal limit. Since the Information failed to state that
the amount he purportedly borrowed and/or guarantied was beyond the
limit set by law, Go insisted that the acts so charged did not constitute an
offense.
109
 Finding Go's contentions persuasive, the RTC granted Go's motion
to quash the Information on May 20, 2003. It denied on June 30, 2003 the
motion for reconsideration filed by the prosecution. DTSaIc
The prosecution did not accept the RTC ruling and filed a petition
for certiorari to question it before the CA. The Information, the prosecution
claimed, was sufficient. The word "and/or" did not materially affect the
validity of the Information, as it merely stated a mode of committing the
crime penalized under Section 83 of RA 337. Moreover, the prosecution
asserted that the second paragraph of Section 83 (referring to the credit
accommodation limit) cannot be interpreted as an exception to what the
first paragraph provided. The second paragraph only sets borrowing limits
that, if violated, render the bank, not the director-borrower, liable. A
violation of the second paragraph of Section 83 under which Go is being
prosecuted is therefore separate and distinct from a violation of the first
paragraph. Thus, the prosecution prayed that the orders of the RTC
quashing the Information be set aside and the criminal case against Go be
reinstated.
On October 26, 2006, the CA rendered the assailed decision
granting the prosecution's petition for certiorari. 9 The CA declared that the
RTC misread the law when it decided to quash the Information against Go.
It explained that the allegation that Go acted either as a borrower or a
guarantor or as both borrower and guarantor merely set forth the different
modes by which the offense was committed. It did not necessarily mean
that Go acted both as borrower and guarantor for the same loan at the
same time. It agreed with the prosecution's stand that the second
paragraph of Section 83 of RA 337 is not an exception to the first
paragraph. Thus, the failure of the Information to state that the amount of
the loan Go borrowed or guaranteed exceeded the legal limits was, to the
CA, an irrelevant issue. For these reasons, the CA annulled and set aside
the RTC's orders and ordered the reinstatement of the criminal charge
against Go. After the CA's denial of his motion for reconsideration, 10 Go
filed the present appeal by certiorari.
THE PETITION
In his petition, Go alleges that the appellate court legally erred in
overturning the trial court's orders. He insists that the Information failed to
allege the acts or omissions complained of with sufficient particularity to
enable him to know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render proper
judgment.
Repeating his arguments in his motion to quash, Go reads Section
83 of RA 337 as penalizing a director or officer of a banking institution for
either borrowing the deposits or funds of the bank, or guaranteeing or
indorsing loans to others, but not for assuming both capacities. He claimed
that the prosecution's shotgun approach in alleging that he acted as
borrower and/or guarantor rendered the Information highly defective for
failure to specify with certainty the specific act or omission complained of.
To petitioner Go, the prosecution's approach was a clear violation of his
constitutional right to be informed of the nature and cause of the accusation
against him.
Additionally, Go reiterates his claim that credit accommodations by
banks to their directors and officers are legal and valid, provided that these
are limited to their outstanding deposits and book value of the paid-in
capital contribution in the bank. The failure to state that he borrowed
deposits and/or guaranteed loans beyond this limit rendered the
Information defective. He thus asks the Court to reverse the CA decision to
reinstate the criminal charge.
In its Comment, 11 the prosecution raises the same defenses
against Go's contentions. It insists on the sufficiency of the allegations in
the Information and prays for the denial of Go's petition.
THE COURT'S RULING
The Court does not find the petition meritorious and
accordingly denies it. DEHcTI
The Accused's Right to be Informed
Under the Constitution, a person who stands charged of a criminal
offense has the right to be informed of the nature and cause of the
accusation against him. 12 The Rules of Court, in implementing the right,
specifically require that the acts or omissions complained of as constituting
the offense, including the qualifying and aggravating circumstances, must
be stated in ordinary and concise language, not necessarily in the language
used in the statute, but in terms sufficient to enable a person of common
understanding to know what offense is being charged and the attendant
qualifying and aggravating circumstances present, so that the accused can
properly defend himself and the court can pronounce judgment. 13 To
broaden the scope of the right, the Rules authorize the quashal, upon
motion of the accused, of an Information that fails to allege the acts
constituting the offense. 14 Jurisprudence has laid down the fundamental
test in appreciating a motion to quash an Information grounded on the
insufficiency of the facts alleged therein. We stated in People v. Romualdez
15 that:
The determinative test in appreciating a motion to
quash . . . 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]
110
The facts and circumstances necessary to be included in the Information are
determined by reference to the definition and elements of the specific
crimes. The Information must allege clearly and accurately the
elements of the crime charged. 16
Elements of Violation of
Section 83 of RA 337
Under Section 83, RA 337, the following elements must be present
to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking
institution;
2. the offender, either directly or indirectly, for himself or as
representative or agent of another, performs any of
the following acts:
a. he borrows any of the deposits or funds of such
bank; or
b. he becomes a guarantor, indorser, or surety for
loans from such bank to others, or
c. he becomes in any manner an obligor for
money borrowed from bank or loaned
by it;
3. the offender has performed any of such acts without the
written approval of the majority of the directors of
the bank, excluding the offender, as the director
concerned.
A simple reading of the above elements easily rejects Go's
contention that the law penalizes a bank director or officer only either for
borrowing the bank's deposits or funds or for guarantying loans by the
bank, but not for acting in both capacities. The essence of the crime is
becoming an obligor of the bank without securing the necessary
written approval of the majority of the bank's directors.
The second element merely lists down the various modes of
committing the offense. The third mode, by declaring that "[no director or
officer of any banking institution shall . . .] in any manner be an obligor
for money borrowed from the bank or loaned by it," in fact serves a
catch-all phrase that covers any situation when a director or officer of the
bank becomes its obligor. The prohibition is directed against a bank
director or officer who becomes in any manner an obligor for money
borrowed from or loaned by the bank without the written approval
of the majority of the bank's board of directors. To make a distinction
between the act of borrowing and guarantying is therefore unnecessary
because in either situation, the director or officer concerned becomes an
obligor of the bank against whom the obligation is juridically demandable.
TSADaI
The language of the law is broad enough to encompass either act
of borrowing or guaranteeing, or both. While the first paragraph of Section
83 is penal in nature, and by principle should be strictly construed in favor
of the accused, the Court is unwilling to adopt a liberal construction that
would defeat the legislature's intent in enacting the statute. The objective of
the law should allow for a reasonable flexibility in its construction. Section
83 of RA 337, as well as other banking laws adopting the same prohibition,
17 was enacted to ensure that loans by banks and similar financial
institutions to their own directors, officers, and stockholders are above
board. 18 Banks were not created for the benefit of their directors and
officers; they cannot use the assets of the bank for their own benefit,
except as may be permitted by law. Congress has thus deemed it essential
to impose restrictions on borrowings by bank directors and officers in order
to protect the public, especially the depositors. 19 Hence, when the law
prohibits directors and officers of banking institutions from becoming in any
manner an obligor of the bank (unless with the approval of the board), the
terms of the prohibition shall be the standards to be applied to directors'
transactions such as those involved in the present case.
Credit accommodation limit is not an
exception nor is it an element of the
offense
Contrary to Go's claims, the second paragraph of Section 83, RA
337 does not provide for an exception to a violation of the first paragraph
thereof, nor does it constitute as an element of the offense charged. Section
83 of RA 337 actually imposes three restrictions: approval, reportorial, and
ceiling requirements.
The approval requirement (found in the first sentence of the first
paragraph of the law) refers to the written approval of the majority of the
bank's board of directors required before bank directors and officers can in
any manner be an obligor for money borrowed from or loaned by the bank.
Failure to secure the approval renders the bank director or officer concerned
liable for prosecution and, upon conviction, subjects him to the penalty
provided in the third sentence of first paragraph of Section 83.
The reportorial requirement, on the other hand, mandates that
any such approval should be entered upon the records of the corporation,
and a copy of the entry be transmitted to the appropriate supervising
department. The reportorial requirement is addressed to the bank itself,
which, upon its failure to do so, subjects it to quo warranto proceedings
under Section 87 of RA 337. 20
The ceiling requirement under the second paragraph of Section
83 regulates the amount of credit accommodations that banks may extend
to their directors or officers by limiting these to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Again, this is a requirement directed at the bank.
In this light, a prosecution for violation of the first paragraph of Section 83,
such as the one involved here, does not require an allegation that the loan
111
exceeded the legal limit. Even if the loan involved is below the legal limit, a SO ORDERED.
written approval by the majority of the bank's directors is still required;
otherwise, the bank director or officer who becomes an obligor of the bank
is liable. Compliance with the ceiling requirement does not dispense with the FIRST DIVISION
approval requirement.
Evidently, the failure to observe the three requirements under
[G.R. Nos. 173090-91. September 7, 2011.]
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
UNION BANK OF THE PHILIPPINES, petitioner, vs.
other two were likewise not observed. HaAIES
SPOUSES RODOLFO T. TIU AND VICTORIA N. TIU,
Rules of Court allow amendment of respondents.
insufficient Information
Assuming that the facts charged in the Information do not
LEONARDO-DE CASTRO, J p:
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: This is a Petition for Review on Certiorari seeking to reverse the
Joint Decision 1 of the Court of Appeals dated February 21, 2006 in CA-G.R.
CV No. 00190 and CA-G.R. SP No. 00253, as well as the Resolution 2 dated
SEC. 4. Amendment of complaint or information. If the June 1, 2006 denying the Motion for Reconsideration.
motion to quash is based on an alleged defect of the
complaint or information which can be cured by amendment, The factual and procedural antecedents of this case are as follows:
the court shall order that an amendment be made.
On November 21, 1995, petitioner Union Bank of the Philippines
(Union Bank) and respondent spouses Rodolfo T. Tiu and Victoria N. Tiu (the
If it is based on the ground that the facts charged do spouses Tiu) entered into a Credit Line Agreement (CLA) whereby Union
not constitute an offense, the prosecution shall be Bank agreed to make available to the spouses Tiu credit facilities in such
given by the court an opportunity to correct the defect amounts as may be approved. 3 From September 22, 1997 to March 26,
by amendment. The motion shall be granted if the 1998, the spouses Tiu took out various loans pursuant to this CLA in the
prosecution fails to make the amendment, or the total amount of three million six hundred thirty-two thousand dollars
complaint or information still suffers from the same (US$3,632,000.00), as evidenced by promissory notes:
defect despite the amendment. [Emphasis supplied]
PN No. Amount in US$ Date Granted
Although an Information may be defective because the facts
charged do not constitute an offense, the dismissal of the case will not
necessarily follow. The Rules specifically require that the prosecution should 87/98/111 72,000.00 02/16/98
be given a chance to correct the defect; the court can order the dismissal 87/98/108 84,000.00 02/13/98
only upon the prosecution's failure to do so. The RTC's failure to provide the
prosecution this opportunity twice 21 constitutes an arbitrary exercise of 87/98/152 320,000.00 03/02/98
power that was correctly addressed by the CA through the certiorari 87/98/075 150,000.00 01/30/98
petition. This defect in the RTC's action on the case, while not central to the
issue before us, strengthens our conclusion that this criminal case should be 87/98/211 32,000.00 03/26/98
resolved through full-blown trial on the merits. 87/98/071 110,000.00 01/29/98
WHEREFORE, we DENY the petitioner's petition for review on 87/98/107 135,000.00 02/13/98
certiorari and AFFIRM the decision of the Court of Appeals in CA-G.R. SP
No. 79149, promulgated on October 26, 2006, as well as its resolution of 87/98/100 75,000.00 02/12/98
June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed to 87/98/197 195,000.00 03/19/98
PROCEED with the hearing of Criminal Case No. 99-178551. Costs against
the petitioner. 87/97/761 60,000.00 09/26/97
87/97/768 30,000.00 09/29/97

112
 87/97/767 180,000.00 09/29/97
87/97/970 110,000.00 12/29/97
87/97/747 50,000.00 09/22/97
87/96/944 605,000.00 12/19/97
87/98/191 470,000.00 03/16/98
87/98/198 505,000.00 03/19/98
87/98/090 449,000.00 02/09/98
US$3,632,000.00 4
============
On June 23, 1998, Union Bank advised the spouses Tiu through a
letter 5 that, in view of the existing currency risks, the loans shall be
redenominated to their equivalent Philippine peso amount on July 15, 1998.
On July 3, 1998, the spouses Tiu wrote to Union Bank authorizing the latter
to redenominate the loans at the rate of US$1 = P41.40 6 with interest of
19% for one year. 7 AECacS
On December 21, 1999, Union Bank and the spouses Tiu entered
into a Restructuring Agreement. 8 The Restructuring Agreement contains a
clause wherein the spouses Tiu confirmed their debt and waived any action
on account thereof. To quote said clause:
1. Confirmation of Debt The BORROWER hereby
confirms and accepts that as of December 8, 1999,
its outstanding principal indebtedness to the BANK
under the Agreement and the Notes amount to ONE
HUNDRED FIFTY[-]FIVE MILLION THREE HUNDRED
SIXTY[-]FOUR THOUSAND EIGHT HUNDRED PESOS
(PHP155,364,800.00) exclusive of interests, service
and penalty charges (the "Indebtedness") and
further confirms the correctness, legality,
collectability and enforceability of the Indebtedness.
The BORROWER unconditionally waives any action,
demand or claim that they may otherwise have to
dispute the amount of the Indebtedness as of the
date specified in this Section, or the collectability
and enforceability thereof. It is the understanding
of the parties that the BORROWER's
acknowledgment, affirmation, and waiver herein
are material considerations for the BANK's agreeing
to restructure the Indebtedness which would have
already become due and payable as of the above
date under the terms of the Agreement and the
Notes. 9
The restructured amount (P155,364,800.00) is the sum of the
following figures: (1) P150,364,800.00, which is the value of the
US$3,632,000.00 loan as redenominated under the above-mentioned
exchange rate of US$1 = P41.40; and (2) P5,000,000.00, an additional loan
given to the spouses Tiu to update their interest payments. 10
Under the same Restructuring Agreement, the parties declared that
the loan obligation to be restructured (after deducting the dacion price of
properties ceded by the Tiu spouses and adding: [1] the taxes, registration
fees and other expenses advanced by Union Bank in registering the Deeds
of Dation in Payment; and [2] other fees and charges incurred by the
Indebtedness) is one hundred four million six hundred sixty-eight thousand
seven hundred forty-one pesos (P104,668,741.00) (total restructured
amount). 11 The Deeds of Dation in Payment referred to are the following:
1. Dation of the Labangon properties Deed executed by
Juanita Tiu, the mother of respondent Rodolfo Tiu,
involving ten parcels of land with improvements
located in Labangon, Cebu City and with a total
land area of 3,344 square meters, for the amount
of P25,130,000.00. The Deed states that these
properties shall be leased to the Tiu spouses at a
monthly rate of P98,000.00 for a period of two
years. 12
2. Dation of the Mandaue property Deed executed by
the spouses Tiu involving one parcel of land with
improvements located in A.S. Fortuna St., Mandaue
City, covered by TCT No. T-31604 and with a land
area of 2,960 square meters, for the amount of
P36,080,000.00. The Deed states that said property
shall be leased to the Tiu spouses at a monthly rate
of P150,000.00 for a period of two years. 13
As likewise provided in the Restructuring Agreement, the spouses
Tiu executed a Real Estate Mortgage in favor of Union Bank over their
"residential property inclusive of lot and improvements" located at P. Burgos
St., Mandaue City, covered by TCT No. T-11951 with an area of 3,096
square meters. 14 DCaEAS
The spouses Tiu undertook to pay the total restructured amount
(P104,668,741.00) via three loan facilities (payment schemes).
The spouses Tiu claim to have made the following payments: (1)
P15,000,000.00 on August 3, 1999; and (2) another P13,197,546.79 as of
May 8, 2001. Adding the amounts paid under the Deeds of Dation in
Payment, the spouses Tiu postulate that their payments added up to
P89,407,546.79. 15
Asserting that the spouses Tiu failed to comply with the payment
schemes set up in the Restructuring Agreement, Union Bank initiated
extrajudicial foreclosure proceedings on the residential property of the
113
spouses Tiu, covered by TCT No. T-11951. The property was to be sold at
public auction on July 18, 2002.
The spouses Tiu, together with Juanita T. Tiu, Rosalinda T. King,
Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu, filed with the Regional
Trial Court (RTC) of Mandaue City a Complaint seeking to have the
Extrajudicial Foreclosure declared null and void. The case was docketed as
Civil Case No. MAN-4363. 16 Named as defendants were Union Bank and
Sheriff IV Veronico C. Ouano (Sheriff Oano) of Branch 55, RTC, Mandaue
City. Complainants therein prayed for the following: (1) that the spouses Tiu
be declared to have fully paid their obligation to Union Bank; (2) that
defendants be permanently enjoined from proceeding with the auction sale;
(3) that Union Bank be ordered to return to the spouses Tiu their properties
as listed in the Complaint; (4) that Union Bank be ordered to pay the
plaintiffs the sum of P10,000,000.00 as moral damages, P2,000,000.00 as
exemplary damages, P3,000,000.00 as attorney's fees and P500,000.00 as
expenses of litigation; and (5) a writ of preliminary injunction or temporary
restraining order be issued enjoining the public auction sale to be held on
July 18, 2002. 17
The spouses Tiu claim that from the beginning the loans were in
pesos, not in dollars. Their office clerk, Lilia Gutierrez, testified that the
spouses Tiu merely received the peso equivalent of their US$3,632,000.00
loan at the rate of US$1 = P26.00. The spouses Tiu further claim that they
were merely forced to sign the Restructuring Agreement and take up an
additional loan of P5,000,000.00, the proceeds of which they never saw
because this amount was immediately applied by Union Bank to interest
payments. 18
The spouses Tiu allege that the foreclosure sale of the mortgaged
properties was invalid, as the loans have already been fully paid. They also
allege that they are not the owners of the improvements constructed on the
lot because the real owners thereof are their co-petitioners, Juanita T. Tiu,
Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu. 19
The spouses Tiu further claim that prior to the signing of the
Restructuring Agreement, they entered into a Memorandum of Agreement
with Union Bank whereby the former deposited with the latter several
certificates of shares of stock of various companies and four certificates of
title of various parcels of land located in Cebu. The spouses Tiu claim that
these properties have not been subjected to any lien in favor of Union Bank,
yet the latter continues to hold on to these properties and has not returned
the same to the former. 20 HAICcD
On the other hand, Union Bank claims that the Restructuring
Agreement was voluntarily and validly entered into by both parties.
Presenting as evidence the Warranties embodied in the Real Estate
Mortgage, Union Bank contends that the foreclosure of the mortgage on the
residential property of the spouses Tiu was valid and that the improvements
thereon were absolutely owned by them. Union Bank denies receiving
certificates of shares of stock of various companies or the four certificates of
title of various parcels of land from the spouses Tiu. However, Union Bank
also alleges that even if said certificates were in its possession it is
authorized under the Restructuring Agreement to retain any and all
properties of the debtor as security for the loan. 21
The RTC issued a Temporary Restraining Order 22 and, eventually,
a Writ of Preliminary Injunction 23 preventing the sale of the residential
property of the spouses Tiu. 24
On December 16, 2004, the RTC rendered its Decision 25 in Civil
Case No. MAN-4363 in favor of Union Bank. The dispositive portion of the
Decision read:
WHEREFORE, premises considered, judgment is hereby
rendered dismissing the Complaint and lifting and setting
aside the Writ of Preliminary Injunction. No pronouncement
as to damages, attorney's fees and costs of suit. 26
In upholding the validity of the Restructuring Agreement, the RTC
held that the spouses Tiu failed to present any evidence to prove either
fraud or intimidation or any other act vitiating their consent to the same.
The exact obligation of the spouses Tiu to Union Bank is therefore
P104,668,741.00, as agreed upon by the parties in the Restructuring
Agreement. As regards the contention of the spouses Tiu that they have
fully paid their indebtedness, the RTC noted that they could not present any
detailed accounting as to the total amount they have paid after the
execution of the Restructuring Agreement. 27
On January 4, 2005, Union Bank filed a Motion for Partial
Reconsideration, 28 protesting the finding in the body of the December 16,
2004 Decision that the residential house on Lot No. 639 is not owned by the
spouses Tiu and therefore should be excluded from the real properties
covered by the real estate mortgage. On January 6, 2005, the spouses Tiu
filed their own Motion for Partial Reconsideration and/or New Trial. 29 They
alleged that the trial court failed to rule on their fourth cause of action
wherein they mentioned that they turned over the following titles to Union
Bank: TCT Nos. 30271, 116287 and 116288 and OCT No. 0-3538. They also
prayed for a partial new trial and for a declaration that they have fully paid
their obligation to Union Bank. 30
On January 11, 2005, the spouses Tiu received from Sheriff Oano a
Second Notice of Extra-judicial Foreclosure Sale of Lot No. 639 to be held on
February 3, 2005. To prevent the same, the Tiu spouses filed with the Court
of Appeals a Petition for Prohibition and Injunction with Application for
TRO/Writ of Preliminary Injunction. 31 The petition was docketed as CA-
G.R. SP No. 00253. The Court of Appeals issued a Temporary Restraining
Order on January 27, 2005. 32 cDAEIH
On January 19, 2005, the RTC issued an Order denying Union
Bank's Motion for Partial Reconsideration and the Tiu spouses' Motion for
Partial Reconsideration and/or New Trial. 33
Both the spouses Tiu and Union Bank appealed the case to the
Court of Appeals. 34 The two appeals were given a single docket number,
CA-G.R. CEB-CV No. 00190. Acting on a motion filed by the spouses Tiu, the
114
Court of Appeals consolidated CA-G.R. SP No. 00253 with CA-G.R. CEB-CV
No. 00190. 35
On April 19, 2005, the Court of Appeals issued a Resolution finding
that there was no need for the issuance of a Writ of Preliminary Injunction
as the judgment of the lower court has been stayed by the perfection of the
appeal therefrom. 36
On May 9, 2005, Sheriff Oano proceeded to conduct the
extrajudicial sale. Union Bank submitted the lone bid of P18,576,000.00. 37
On June 14, 2005, Union Bank filed a motion with the Court of Appeals
praying that Sheriff Oano be ordered to issue a definite and regular
Certificate of Sale. 38 On July 21, 2005, the Court of Appeals issued a
Resolution denying the Motion and suspending the auction sale at whatever
stage, pending resolution of the appeal and conditioned upon the filing of a
bond in the amount of P18,000,000.00 by the Tiu spouses. 39 The Tiu
spouses failed to file said bond. 40
On February 21, 2006, the Court of Appeals rendered the assailed
Joint Decision in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253. The
Court of Appeals dismissed the Petition for Prohibition, CA-G.R. SP No.
00253, on the ground that the proper venue for the same is with the RTC.
41
On the other hand, the Court of Appeals ruled in favor of the
spouses Tiu in CA-G.R. CV No. 00190. The Court of Appeals held that the
loan transactions were in pesos, since there was supposedly no stipulation
the loans will be paid in dollars and since no dollars ever exchanged hands.
Considering that the loans were in pesos from the beginning, the Court of
Appeals reasoned that there is no need to convert the same. By making it
appear that the loans were originally in dollars, Union Bank overstepped its
rights as creditor, and made unwarranted interpretations of the original loan
agreement. According to the Court of Appeals, the Restructuring
Agreement, which purportedly attempts to create a novation of the original
loan, was not clearly authorized by the debtors and was not supported by
any cause or consideration. Since the Restructuring Agreement is void, the
original loan of P94,432,000.00 (representing the amount received by the
spouses Tiu of US$3,632,000.00 using the US$1 = P26.00 exchange rate)
should subsist. The Court of Appeals likewise invalidated (1) the
P5,000,000.00 charge for interest in the Restructuring Agreement, for
having been unilaterally imposed by Union Bank; and (2) the lease of the
properties conveyed in dacion en pago, for being against public policy. 42
In sum, the Court of Appeals found Union Bank liable to the
spouses Tiu in the amount of P927,546.79. For convenient reference, we
quote relevant portion of the Court of Appeal's Decision here:
To summarize the obligation of the Tiu spouses, they owe
Union Bank P94,432,000.00. The Tiu spouses had already
paid Union Bank the amount of P89,407,546.79. On the
other hand, Union Bank must return to the Tiu spouses the
illegally collected rentals in the amount of P5,952,000.00.
Given these findings, the obligation of the Tiu spouses has
already been fully paid. In fact, it is the Union Bank that
must return to the Tiu spouses the amount of NINE
HUNDRED TWENTY[-]SEVEN THOUSAND FIVE HUNDRED
FORTY[-]SIX PESOS AND SEVENTY[-]NINE CENTAVOS
(P927,546.79). 43 ESHAIC
With regard to the ownership of the improvements on the subject
mortgaged property, the Court of Appeals ruled that it belonged to
respondent Rodolfo Tiu's father, Jose Tiu, since 1981. According to the Court
of Appeals, Union Bank should not have relied on warranties made by
debtors that they are the owners of the property. The appellate court went
on to permanently enjoin Union Bank from foreclosing the mortgage not
only of the property covered by TCT No. T-11951, but also any other
mortgage over any other property of the spouses Tiu. 44
The Court of Appeals likewise found Union Bank liable to return the
certificates of stocks and titles to real properties of the spouses Tiu in its
possession. The appellate court held that Union Bank made judicial
admissions of such possession in its Reply to Plaintiff's Request for
Admission. 45 In the event that Union Bank can no longer return these
certificates and titles, it was mandated to shoulder the cost for their
replacement. 46
Finally, the Court of Appeals took judicial notice that before or
during the financial crisis, banks actively convinced debtors to make dollar
loans in the guise of benevolence, saddling borrowers with loans that
ballooned twice or thrice their original loans. The Court of Appeals, noting
"the cavalier way with which banks exploited and manipulated the
situation," 47 held Union Bank liable to the spouses Tiu for P100,000.00 in
moral damages, P100,000.00 in exemplary damages, and P50,000.00 in
attorney's fees. 48
The Court of Appeals disposed of the case as follows:
WHEREFORE, in view of the foregoing premises, judgment is
hereby rendered by us permanently enjoining Union Bank
from foreclosing the mortgage of the residential property of
the Tiu spouses which is covered by Transfer Certificate of
Title No. 11951 and from pursuing other foreclosure of
mortgages over any other properties of the Tiu spouses for
the above-litigated debt that has already been fully paid. If a
foreclosure sale has already been made over such
properties, this Court orders the cancellation of such
foreclosure sale and the Certificate of Sale thereof if any has
been issued. This Court orders Union Bank to return to the
Tiu spouses the amount of NINE HUNDRED
TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX
PESOS AND SEVENTY[-]NINE CENTAVOS (P927,546.79)
representing illegally collected rentals. This Court also orders
Union Bank to return to the Tiu spouses all the certificates of
shares of stocks and titles to real properties of the Tiu
spouses that were deposited to it or, in lieu thereof, to pay
the cost for the replacement and issuance of new certificates
and new titles over the said properties. This Court finally
115
 orders Union Bank to pay the Tiu spouses ONE HUNDRED
THOUSAND PESOS (P100,000.00) in moral damages, ONE
HUNDRED THOUSAND PESOS (P100,000.00) in exemplary
damages, FIFTY THOUSAND PESOS (P50,000.00) in
attorney's fees and cost, both in the lower court and in this
Court. 49
On June 1, 2006, the Court of Appeals rendered the assailed
Resolution denying Union Bank's Motion for Reconsideration.
Hence, this Petition for Review on Certiorari, wherein Union Bank
submits the following issues for the consideration of this Court: IcSHTA
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT
CONCLUDED THAT THERE WERE NO DOLLAR
LOANS OBTAINED BY [THE] TIU SPOUSES FROM
UNION BANK DESPITE [THE] CLEAR ADMISSION OF
INDEBTEDNESS BY THE BORROWER-MORTGAGOR
TIU SPOUSES.
2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT
NULLIFIED THE RESTRUCTURING AGREEMENT
BETWEEN TIU SPOUSES AND UNION BANK FOR
LACK OF CAUSE OR CONSIDERATION DESPITE THE
ADMISSION OF THE BORROWER-MORTGAGOR TIU
SPOUSES OF THE DUE AND VOLUNTARY
EXECUTION OF SAID RESTRUCTURING
AGREEMENT.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT
PERMANENTLY ENJOINED UNION BANK FROM
FORECLOSING THE MORTGAGE ON THE
RESIDENTIAL PROPERTY OF THE TIU SPOUSES
DESPITE THE ADMISSION OF NON-PAYMENT OF
THEIR OUTSTANDING LOAN TO THE BANK BY THE
BORROWER-MORTGAGOR TIU SPOUSES;
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT FIXED
THE AMOUNT OF THE OBLIGATION OF
RESPONDENT SPOUSES CONTRARY TO THE
PROVISIONS OF THE PROMISSORY NOTES,
RESTRUCTURING AGREEMENT AND [THE]
VOLUNTARY ADMISSIONS BY BORROWER-
MORTGAGOR TIU SPOUSES;
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT RULED
ON THE ALLEGED RENTALS PAID BY RESPONDENT
SPOUSES WITHOUT ANY FACTUAL BASIS;
6. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT HELD
WITHOUT ANY FACTUAL BASIS THAT THE LOAN
OBLIGATION OF TIU SPOUSES HAS BEEN FULLY
PAID;
7. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR WHEN IT HELD
WITHOUT ANY FACTUAL BASIS THAT THE HOUSE
INCLUDED IN THE REAL ESTATE MORTGAGE DID
NOT BELONG TO THE TIU SPOUSES.
8. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR IN ORDERING
UNION BANK TO RETURN THE CERTIFICATES OF
SHARES OF STOCK AND TITLES TO REAL
PROPERTIES OF TIU SPOUSES ALLEGEDLY IN THE
POSSESSION OF UNION BANK.
9. WHETHER OR NOT THE COURT OF APPEALS VIOLATED
THE DOCTRINES AND PRINCIPLES ON APPELLATE
JURISDICTION.
10. WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE AND REVERSIBLE ERROR IN AWARDING
DAMAGES AGAINST UNION BANK. 50 HDTISa
Validity of the Restructuring Agreement
As previously discussed, the Court of Appeals declared that the
Restructuring Agreement is void on account of its being a failed novation of
the original loan agreements. The Court of Appeals explained that since
there was no stipulation that the loans will be paid in dollars, and since no
dollars ever exchanged hands, the original loan transactions were in pesos.
51 Proceeding from this premise, the Court of Appeals held that the
Restructuring Agreement, which was meant to convert the loans into pesos,
was unwarranted. Thus, the Court of Appeals reasoned that:
Be that as it may, however, since the loans of the Tiu
spouses from Union Bank were peso loans from the very
beginning, there is no need for conversion thereof. A
Restructuring Agreement should merely confirm the loans,
not add thereto. By making it appear in the Restructuring
Agreement that the loans were originally dollar loans, Union
Bank overstepped its rights as a creditor and made
116
unwarranted interpretations of the original loan agreement.
This Court is not bound by such interpretations made by
Union Bank. When one party makes an interpretation of a
contract, he makes it at his own risk, subject to a
subsequent challenge by the other party and a modification
by the courts. In this case, that party making the
interpretation is not just any party, but a well entrenched
and highly respected bank. The matter that was being
interpreted was also a financial matter that is within the
profound expertise of the bank. A normal person who does
not possess the same financial proficiency or acumen as that
of a bank will most likely defer to the latter's esteemed
opinion, representations and interpretations. It has been
often stated in our jurisprudence that banks have a fiduciary
duty to their depositors. According to the case of Bank of
the Philippine Islands vs. IAC (G.R. No. 69162, February 21,
1992), "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." Such fiduciary relationship should also
extend to the bank's borrowers who, more often than not,
are also depositors of the bank. Banks are in the business of
lending while most borrowers hardly know the basics of such
business. When transacting with a bank, most borrowers
concede to the expertise of the bank and consider their
procedures, pronouncements and representations as
unassailable, whether such be true or not. Therefore, when
there is a doubtful banking transaction, this Court will tip the
scales in favor of the borrower.
Given the above ruling, the Restructuring Agreement,
therefore, between the Tiu spouses and Union Bank does not
operate to supersede all previous loan documents, as
claimed by Union Bank. But the said Restructuring
Agreement, as it was crafted by Union Bank, does not
merely confirm the original loan of the Tiu spouses but
attempts to create a novation of the said original loan that is
not clearly authorized by the debtors and that is not
supported by any cause or consideration. According to
Article 1292 of the New Civil Code, in order that an
obligation may by 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. Such is not
the case in this instance. No valid novation of the original
obligation took place. Even granting arguendo that there
was a novation, the sudden change in the original amount of
the loan to the new amount declared in the Restructuring
Agreement is not supported by any cause or consideration.
Under Article 1352 of the Civil Code, contracts without
cause, or with unlawful cause, produce no effect whatever. A
contract whose cause did not exist at the time of the
transaction is void. Accordingly, Article 1297 of the New Civil
Code mandates that, if the new obligation is void, the
original one shall subsist, unless the parties intended that
the former relation should be extinguished at any event.
Since the Restructuring Agreement is void and since there
was no intention to extinguish the original loan, the original
loan shall subsist. 52 CTEacH
Union Bank does not dispute that the spouses Tiu received the
loaned amount of US$3,632,000.00 in Philippine pesos, not dollars, at the
prevailing exchange rate of US$1 = P26. 53 However, Union Bank claims
that this does not change the true nature of the loan as a foreign currency
loan, 54 and proceeded to illustrate in its Memorandum that the spouses Tiu
obtained favorable interest rates by opting to borrow in dollars (but
receiving the equivalent peso amount) as opposed to borrowing in pesos. 55
We agree with Union Bank on this point. Although indeed, the
spouses Tiu received peso equivalents of the borrowed amounts, the loan
documents presented as evidence, i.e., the promissory notes, 56 expressed
the amount of the loans in US dollars and not in any other currency. This
clearly indicates that the spouses Tiu were bound to pay Union Bank in
dollars, the amount stipulated in said loan documents. Thus, before the
Restructuring Agreement, the spouses Tiu were bound to pay Union Bank
the amount of US$3,632,000.00 plus the interest stipulated in the
promissory notes, without converting the same to pesos. The spouses Tiu,
who are in the construction business and appear to be dealing primarily in
Philippine currency, should therefore purchase the necessary amount of
dollars to pay Union Bank, who could have justly refused payment in any
currency other than that which was stipulated in the promissory notes.
We disagree with the finding of the Court of Appeals that the
testimony of Lila Gutierrez, which merely attests to the fact that the
spouses Tiu received the peso equivalent of their dollar loan, proves the
intention of the parties that such loans should be paid in pesos. If such had
been the intention of the parties, the promissory notes could have easily
indicated the same.
Such stipulation of payment in dollars is not prohibited by any
prevailing law or jurisprudence at the time the loans were taken. In this
regard, Article 1249 of the Civil Code provides:
Art. 1249. The payment of debts in money shall be made in
the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in
the Philippines.
Although the Civil Code took effect on August 30, 1950, jurisprudence had
upheld 57 the continued effectivity of Republic Act No. 529, which took
effect earlier on June 16, 1950. Pursuant to Section 1 58 of Republic Act
No. 529, any agreement to pay an obligation in a currency other than the
Philippine currency is void; the most that could be demanded is to pay said
117
obligation in Philippine currency to be measured in the prevailing rate of
exchange at the time the obligation was incurred. 59 On June 19, 1964,
Republic Act No. 4100 took effect, modifying Republic Act No. 529 by
providing for several exceptions to the nullity of agreements to pay in
foreign currency. 60
On April 13, 1993, Central Bank Circular No. 1389 61 was issued,
lifting foreign exchange restrictions and liberalizing trade in foreign
currency. In cases of foreign borrowings and foreign currency loans,
however, prior Bangko Sentral approval was required. On July 5, 1996,
Republic Act No. 8183 took effect, 62 expressly repealing Republic Act No.
529 in Section 2 63 thereof. The same statute also explicitly provided that
parties may agree that the obligation or transaction shall be settled in a
currency other than Philippine currency at the time of payment. 64 SAcaDE
Although the Credit Line Agreement between the spouses Tiu and
Union Bank was entered into on November 21, 1995, 65 when the
agreement to pay in foreign currency was still considered void under
Republic Act No. 529, the actual loans, 66 as shown in the promissory
notes, were taken out from September 22, 1997 to March 26, 1998,
during which time Republic Act No. 8183 was already in effect. In United
Coconut Planters Bank v. Beluso, 67 we held that:
[O]pening a credit line does not create a credit transaction
of loan or mutuum, since the former is merely a preparatory
contract to the contract of loan or mutuum. Under such
credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not
exceeding the limit provided. The credit transaction thus
occurred not when the credit line was opened, but rather
when the credit line was availed of. . . . . 68
Having established that Union Bank and the spouses Tiu validly
entered into dollar loans, the conclusion of the Court of Appeals that there
were no dollar loans to novate into peso loans must necessarily fail.
Similarly, the Court of Appeals' pronouncement that the novation
was not supported by any cause or consideration is likewise incorrect. This
conclusion suggests that when the parties signed the Restructuring
Agreement, Union Bank got something out of nothing or that the spouses
Tiu received no benefit from the restructuring of their existing loan and was
merely taken advantage of by the bank. It is important to note at this point
that in the determination of the nullity of a contract based on the lack of
consideration, the debtor has the burden to prove the same. Article 1354 of
the Civil Code provides that "[a]lthough the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless the debtor proves
the contrary."
In the case at bar, the Restructuring Agreement was signed at the
height of the financial crisis when the Philippine peso was rapidly
depreciating. Since the spouses Tiu were bound to pay their debt in dollars,
the cost of purchasing the required currency was likewise swiftly increasing.
If the parties did not enter into the Restructuring Agreement in December
1999 and the peso continued to deteriorate, the ability of the spouses Tiu to
pay and the ability of Union Bank to collect would both have immensely
suffered. As shown by the evidence presented by Union Bank, the peso
indeed continued to deteriorate, climbing to US$1 = P50.01 on December
2000. 69 Hence, in order to ensure the stability of the loan agreement,
Union Bank and the spouses Tiu agreed in the Restructuring Agreement to
peg the principal loan at P150,364,800.00 and the unpaid interest at
P5,000,000.00.
Before this Court, the spouses Tiu belatedly argue that their
consent to the Restructuring Agreement was vitiated by fraud and mistake,
alleging that (1) the Restructuring Agreement did not take into
consideration their substantial payment in the amount of P40,447,185.60
before its execution; and (2) the dollar loans had already been
redenominated in 1997 at the rate of US$1 = P26.34. 70
We have painstakingly perused over the records of this case, but
failed to find any documentary evidence of the alleged payment of
P40,447,185.60 before the execution of the Restructuring Agreement. In
paragraph 16 of their Amended Complaint, the Spouses Tiu alleged payment
of P40,447,185.60 for interests before the conversion of the dollar loan. 71
This was specifically denied by Union Bank in paragraph 5 of its Answer with
Counterclaim. 72 Respondent Rodolfo Tiu testified that they made "50
million plus" in cash payment plus "other monthly interest payments," 73
and identified a computation of payments dated July 17, 2002 signed by
himself. 74 Such computation, however, was never formally offered in
evidence and was in any event, wholly self-serving. HSDaTC
As regards the alleged redenomination of the same dollar loans in 1997 at the
rate of US$1 = P26.34, the spouses Tiu merely relied on the following direct
testimony of Herbert Hojas, one of the witnesses of Union Bank:
Q: Could you please describe what kind of loan was the loan
of the spouses Rodolfo Tiu, the plaintiffs in this
case?
A: It was originally an FCDU, meaning a dollar loan.
Q: What happened to this FCDU loan or dollar loan?
A: The dollar loan was re-denominated in view of the very
unstable exchange of the dollar and the peso at
that time.
Q: Could you still remember what year this account was
redenominated from dollar to peso?
A: I think it was on the year 1997.
118
 Q: Could [you] still remember what was then the prevailing
exchange rate between the dollar and the peso at
that year 1997?
A: Yes. I have here the list of the dollar exchange rate from
January 1987 (sic). It was P26.34 per dollar. 75
Neither party presented any documentary evidence of the alleged
redenomination in 1997. Respondent Rodolfo Tiu did not even mention it in
his testimony. Furthermore, Hojas was obviously uncertain in his statement
that said redenomination was made in 1997.
As pointed out by the trial court, the Restructuring Agreement,
being notarized, is a public document enjoying a prima facie presumption of
authenticity and due execution. Clear and convincing evidence must be
presented to overcome such legal presumption. 76 The spouses Tiu, who
attested before the notary public that the Restructuring Agreement "is their
own free and voluntary act and deed," 77 failed to present sufficient
evidence to prove otherwise. It is difficult to believe that the spouses Tiu,
veteran businessmen who operate a multi-million peso company, would sign
a very important document without fully understanding its contents and
consequences.
This Court therefore rules that the Restructuring Agreement is valid
and, as such, a valid and binding novation of loans of the spouses Tiu
entered into from September 22, 1997 to March 26, 1998 which had a total
amount of US$3,632,000.00.
Validity of the Foreclosure of Mortgage
The spouses Tiu challenge the validity of the foreclosure of the
mortgage on two grounds, claiming that: (1) the debt had already been
fully paid; and (2) they are not the owners of the improvements on the
mortgaged property. ETDHaC
(1) Allegation of full payment of the mortgage debt
In the preceding discussion, we have ruled that the Restructuring
Agreement is a valid and binding novation of loans of the spouses Tiu
entered into from September 22, 1997 to March 26, 1998 in the total
amount of US$3,632,000.00. Thus, in order that the spouses Tiu can be
held to have fully paid their loan obligation, they should present evidence
showing their payment of the total restructured amount under the
Restructuring Agreement which was P104,668,741.00. As we have
discussed above, however, while respondent Rodolfo Tiu appeared to have
identified during his testimony a computation dated July 17, 2002 of the
alleged payments made to Union Bank, 78 the same was not formally
offered in evidence. Applying Section 34, Rule 132 79 of the Rules of Court,
such computation cannot be considered by this Court. We have held that a
formal offer is necessary because judges are mandated to rest their findings
of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. It has several functions: (1) to enable the trial judge
to know the purpose or purposes for which the proponent is presenting the
evidence; (2) to allow opposing parties to examine the evidence and object
to its admissibility; and (3) to facilitate review by the appellate court, which
will not be required to review documents not previously scrutinized by the
trial court. 80 Moreover, even if such computation were admitted in
evidence, the same is self-serving and cannot be given probative weight. In
the case at bar, the records do not contain even a single receipt evidencing
payment to Union Bank.
The Court of Appeals, however, held that several payments made
by the spouses Tiu had been admitted by Union Bank. Indeed, Section 11,
Rule 8 of the Rules of Court provides that an allegation not specifically
denied is deemed admitted. In such a case, no further evidence would be
required to prove the antecedent facts. We should therefore examine which
of the payments specified by the spouses Tiu in their Amended Complaint
81 were not specifically denied by Union Bank.
The allegations of payment are made in paragraphs 16 to 21 of the
Amended Complaint:
16. Before conversion of the dollar loan into a peso loan[,]
the spouses Tiu had already paid the defendant bank the
amount of P40,447,185.60 for interests;
17. On August 3, 1999 and August 12, 1999, plaintiffs made
payments in the amount of P15,000,000.00;
18. In order to lessen the obligation of plaintiffs, the mother
of plaintiff Rodolfo T. Tiu, plaintiff Juanita T. Tiu, executed a
deed of dacion in payment in favor of defendant involving
her 10 parcels of land located in Labangon, Cebu City for the
amount of P25,130,000.00. Copy of the deed was attached
to the original complaint as Annex "C";
19. For the same purpose, plaintiffs spouses Tiu also
executed a deed of dacion in payment of their property
located at A.S. Fortuna St., Mandaue City for the amount of
P36,080,000.00. Copy of the deed was attached to the
original complaint as Annex "D";
20. The total amount of the two dacions in payment made
by the plaintiffs was P61,210,000.00;
21. Plaintiffs spouses Tiu also made other payment of the
amount of P13,197,546.79 as of May 8, 2001; 82
In paragraphs 4 and 5 of their Answer with Counterclaim, 83 Union
Bank specifically denied the allegation in paragraph 9 of the Complaint, but
admitted the allegations in paragraphs 17, 18, 19, 20 and 21 thereof.
Paragraphs 18, 19 and 20 allege the two deeds of dacion. However, these
instruments were already incorporated in the computation of the
outstanding debt (i.e., subtracted from the confirmed debt of
119
 P155,364,800.00), as can be gleaned from the following provisions in the
Restructuring Agreement: CaDATc
a.) The loan obligation to the BANK to be restructured herein
after deducting from the Indebtedness of the
BORROWER the dacion price of the properties
subject of the Deeds of Dacion and adding to the
Indebtedness all the taxes, registration fees and
other expenses advanced by the bank in registering
the Deeds of Dacion, and also adding to the
Indebtedness the interest, and other fees and
charges incurred by the Indebtedness, amounts to
ONE HUNDRED FOUR MILLION SIX HUNDRED
SIXTY-EIGHT THOUSAND SEVEN HUNDRED FORTY-
ONE PESOS (PHP104,668,741.00) (the "TOTAL
RESTRUCTURED AMOUNT"). 84
As regards the allegations of cash payments in paragraphs 17 and
21 of the Amended Complaint, the date of the alleged payment is critical as
to whether they were included in the Restructuring Agreement. The
payment of P15,000,000.00 alleged in paragraph 17 of the Amended
Complaint was supposedly made on August 3 and 12, 1999. This payment
was before the date of execution of the Restructuring Agreement on
December 21, 1999, and is therefore already factored into the restructured
obligation of the spouses. 85 On the other hand, the payment of
P13,197,546.79 alleged in paragraph 21 of the Amended Complaint was
dated May 8, 2001. Said payment cannot be deemed included in the
computation of the spouses Tiu's debt in the Restructuring Agreement,
which was assented to more than a year earlier. This amount
(P13,197,546.79) is even absent 86 in the computation of Union Bank of
the outstanding debt, in contrast with the P15,000,000.00 payment which is
included 87 therein. Union Bank did not explain this discrepancy and merely
relied on the spouses Tiu's failure to formally offer supporting evidence.
Since this payment of P13,197,546.79 on May 8, 2001 was admitted by
Union Bank in their Answer with Counterclaim, there was no need on the
part of the spouses Tiu to present evidence on the same. Nonetheless, if we
subtract this figure from the total restructured amount (P104,668,741.00)
in the Restructuring Agreement, the result is that the spouses Tiu still owe
Union Bank P91,471,194.21.
(2) Allegation of third party ownership of the improvements on the
mortgaged lot
The Court of Appeals, taking into consideration its earlier ruling
that the loan was already fully paid, permanently enjoined Union Bank from
foreclosing the mortgage on the property covered by Transfer Certificate of
Title No. 11951 (Lot No. 639) and from pursuing other foreclosure of
mortgages over any other properties of the spouses Tiu. The Court of
Appeals ruled:
The prayer, therefore, of the Tiu spouses to enjoin the
foreclosure of the real estate mortgage over their residential
property has merit. The loan has already been fully paid. It
should also be noted that the house constructed on the
residential property of the Tiu spouses is not registered in
the name of the Tiu spouses, but in the name of Jose Tiu
(Records, pp. 127-132), the father of appellant and
petitioner Rodolfo Tiu, since 1981. It had been alleged by
the Tiu spouses that Jose Tiu died on December 18, 1983,
and, that consequently upon his death, Juanita T. Tiu,
Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and
Rosenda T. Tiu became owners of the house (Records, p.
116). This allegation has not been substantially denied by
Union Bank. All that the Union Bank presented to refute this
allegation are a Transfer Certificate of Title and a couple of
Tax Declarations which do not indicate that a residential
house is titled in the name of the Tiu spouses. In fact, in one
of the Tax Declarations, the market value of the
improvements is worth only P3,630.00. Certainly, Union
Bank should have been aware that this Tax Declaration did
not cover the residential house. Union Bank should also not
rely on warranties made by debtors that they are the owners
of the property. They should investigate such
representations. The courts have made consistent rulings
that a bank, being in the business of lending, is obligated to
verify the true ownership of the properties mortgaged to
them. Consequently, this Court permanently enjoins Union
Bank from foreclosing the mortgage of the residential
property of the Tiu spouses which is covered by Transfer
Certificate of Title No. 11951 and from pursuing other
foreclosure of mortgages over any other properties of the
Tiu spouses. If a foreclosure sale has already been made
over such properties, this Court orders the cancellation of
such foreclosure sale and the Certificate of Sale thereof if
any has been issued, and the return of the title to the Tiu
spouses. 88 aEIcHA
We disagree. Contrary to the ruling of the Court of Appeals, the
burden to prove the spouses Tiu's allegation that they do not own the
improvements on Lot No. 639, despite having such improvements included
in the mortgage is on the spouses Tiu themselves. The fundamental rule
is that he who alleges must prove. 89 The allegations of the spouses Tiu on
this matter, which are found in paragraphs 35 to 39 90 of their Amended
Complaint, were specifically denied in paragraph 9 of Union Bank's Answer
with Counterclaim. 91
Upon careful examination of the evidence, we find that the spouses
Tiu failed to prove that the improvements on Lot No. 639 were owned by
third persons. In fact, the evidence presented by the spouses Tiu merely
attempt to prove that the improvements on Lot No. 639 were declared for
taxes in the name of respondent Rodolfo Tiu's father, Jose Tiu, who
allegedly died on December 18, 1983. There was no effort to show how
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their co-plaintiffs in the original complaint, namely Juanita T. Tiu, Rosalinda
T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu, became co-
owners of the house. The spouses Tiu did not present evidence as to (1)
who the heirs of Jose Tiu are; (2) if Juanita T. Tiu, Rosalinda T. King, Rufino
T. Tiu, Rosalie T. Young and Rosenda T. Tiu are indeed included as heirs; and
(3) why petitioner Rodolfo Tiu is not included as an heir despite being the
son of Jose Tiu. No birth certificate of the alleged heirs, will of the deceased,
or any other piece of evidence showing judicial or extrajudicial settlement of
the estate of Jose Tiu was presented.
In light of the foregoing, this Court therefore sets aside the ruling
of the Court of Appeals permanently enjoining Union Bank from foreclosing
the mortgage on Lot No. 639, including the improvements thereon.
Validity of Alleged Rental Payments on
the Properties Conveyed to the Bank via
Dacion en Pago
The Court of Appeals found the lease contracts over the properties
conveyed to Union Bank via dacion en pago to be void for being against
public policy. The appellate court held that since the General Banking Law of
2000 92 mandates banks to immediately dispose of real estate properties
that are not necessary for its own use in the conduct of its business, banks
should not enter into two-year contracts of lease over properties paid to
them through dacion. 93 The Court of Appeals thus ordered Union Bank to
return the rentals it collected. To determine the amount of rentals paid by
the spouses Tiu to Union Bank, the Court of Appeals simply multiplied the
monthly rental stipulated in the Restructuring Agreement by the stipulated
period of the lease agreement:
For the Labangon property, the Tiu spouses paid rentals in
the amount of P98,000.00 per month for two years, or a
total amount of P2,352,000.00. For the A.S. Fortuna
property, the Tiu spouses paid rentals in the amount of
P150,000.00 per month for two years, or a total amount of
P3,600,000.00. The total amount in rentals paid by the Tiu
spouses to Union Bank is FIVE MILLION NINE HUNDRED
FIFTY-TWO THOUSAND PESOS (P5,952,000.00). This Court
finds that the return of this amount to the Tiu spouses is
called for since it will better serve public policy. These
properties that were given by the Tiu spouses to Union Bank
as payment should not be used by the latter to extract more
money from the former. This situation is analogous to having
a debtor pay interest for a debt already paid. Instead of
leasing the properties, Union Bank should have instructed
the Tiu spouses to vacate the said properties so that it could
dispose of them. 94 cdasia
The Court of Appeals committed a serious error in this regard. As
pointed out by petitioner Union Bank, the spouses Tiu did not present any
proof of the alleged rental payments. Not a single receipt was formally
offered in evidence. The mere stipulation in a contract of the monthly rent
to be paid by the lessee is certainly not evidence that the same has been
paid. Since the spouses Tiu failed to prove their payment to Union Bank of
the amount of P5,952,000.00, we are constrained to reverse the ruling of
the Court of Appeals ordering its return.
Even assuming arguendo that the spouses Tiu had duly proven that
it had paid rent to Union Bank, we nevertheless disagree with the finding of
the Court of Appeals that it is against public policy for banks to enter into
two-year contracts of lease of properties ceded to them through dacion en
pago. The provisions of law cited by the Court of Appeals, namely Sections
51 and 52 of the General Banking Law of 2000, merely provide:
SECTION 51.Ceiling on Investments in Certain Assets.
Any bank may acquire real estate as shall be necessary for
its own use in the conduct of its business: Provided,
however, That the total investment in such real estate and
improvements thereof, including bank equipment, shall not
exceed fifty percent (50%) of combined capital accounts:
Provided, further, That the equity investment of a bank in
another corporation engaged primarily in real estate shall be
considered as part of the bank's total investment in real
estate, unless otherwise provided by the Monetary Board.
SECTION 52. Acquisition of Real Estate by Way of
Satisfaction of Claims. Notwithstanding the limitations of
the preceding Section, a bank may acquire, hold or convey
real property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way
of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings; or
52.3. 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 it.
Any real property acquired or held under the circumstances
enumerated in the above paragraph shall be disposed of by
the bank within a period of five (5) years or as may be
prescribed by the Monetary Board: Provided, however, That
the bank may, after said period, continue to hold the
property for its own use, subject to the limitations of the
preceding Section.
Section 52.2 contemplates a dacion en pago. Thus, Section 52
undeniably gives banks five years to dispose of properties conveyed to them
in satisfaction of debts previously contracted in the course of its dealings,
unless another period is prescribed by the Monetary Board. Furthermore,
there appears to be no legal impediment for a bank to lease the real
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properties it has received in satisfaction of debts, within the five-year period
that such bank is allowed to hold the acquired realty. EcTaSC
We do not dispute the interpretation of the Court of Appeals that
the purpose of the law is to prevent the concentration of land holdings in a
few hands, and that banks should not be allowed to hold on to the
properties contemplated in Section 52 beyond the five-year period unless
such bank has exerted its best efforts to dispose of the property in good
faith but failed. However, inquiries as to whether the banks exerted best
efforts to dispose of the property can only be done if said banks fail to
dispose of the same within the period provided. Such inquiry is furthermore
irrelevant to the issues in the case at bar.
Order to Return Certificates Allegedly in
Union Bank's Possession
In the Amended Complaint, the spouses Tiu alleged 95 that they
delivered several certificates and titles to Union Bank pursuant to a
Memorandum of Agreement. These certificates and titles were not subjected
to any lien in favor of Union Bank, but the latter allegedly continued to hold
on to said properties.
The RTC failed to rule on this issue. The Court of Appeals, tackling
this issue for the first time, ruled in favor of the Tiu spouses and ordered
the return of these certificates and titles. The appellate court added that if
Union Bank can no longer return these certificates or titles, it should
shoulder the cost for their replacement. 96
Union Bank, asserting that the Memorandum of Agreement did not,
in fact, push through, denies having received the subject certificates and
titles. Union Bank added that even assuming arguendo that it is in
possession of said documents, the Restructuring Agreement itself allows
such possession. 97
The evidence on hand lends credibility to the allegation of Union
Bank that the Memorandum of Agreement did not push through. The copy
of the Memorandum of Agreement attached by the spouses Tiu themselves
to their original complaint did not bear the signature of any representative
from Union Bank and was not notarized. 98
We, however, agree with the finding of the Court of Appeals that
despite the failure of the Memorandum of Agreement to push through, the
certificates and titles mentioned therein do appear to be in the possession
of Union Bank. As held by the Court of Appeals:
Lastly, this Court will order, as it hereby orders, Union Bank
to return to the Tiu spouses all the certificates of shares of
stocks and titles to real properties of the Tiu spouses in its
possession. Union Bank cannot deny possession of these
items since it had made judicial admissions of such
possession in their document entitled "Reply to Plaintiffs'
request for Admission" (records, pp. 216-217). While in that
document, Union Bank only admitted to the possession of
four real estate titles, this Court is convinced that all the
certificates and titles mentioned in the unconsummated
Memorandum of Agreement (Records, pp. 211-213) were
given by the Tiu spouses to Union Bank for appraisal. This
finding is further bolstered by the admission of the Union
Bank that it kept the titles for safekeeping after it rejected
the Memorandum of Agreement. Since Union Bank rejected
these certificates and titles of property, it should return the
said items to the Tiu spouses. If Union Bank can no longer
return these certificates and titles or if it has misplaced
them, it shall shoulder the cost for the replacement and
issuance of new certificates and new titles over the said
properties. 99 HEcaIC
As regards Union Bank's argument that it has the right to retain
said documents pursuant to the Restructuring Agreement, it is referring to
paragraph 11 (b), which provides that:
11. Effects of Default When the BORROWER is in default,
such default shall have the following effects, alternative,
concurrent and cumulative with each other:
xxx xxx xxx
(b) The BANK shall be entitled to all the remedies provided
for and further shall have the right to effect or apply against
the partial or full payment of any and all obligations of the
BORROWER under this Restructuring Agreement any and all
moneys or other properties of the BORROWER which, for
any reason, are or may hereafter come into the possession
of the Bank or the Bank's agent. All such moneys or
properties shall be deemed in the BANK's possession as soon
as put in transit to the BANK by mail or carrier. 100
In the first place, notwithstanding the foregoing provision, there is
no clear intention on the part of the spouses Tiu to deliver the certificates
over certain shares of stock and real properties as security for their debt.
From the terms of the Memorandum of Agreement, these certificates were
surrendered to Union Bank in order that the said properties described
therein be given their corresponding loan value required for the
restructuring of the spouses Tiu's outstanding obligations. However, in the
event the parties fail to agree on the valuation of the subject properties,
Union Bank agrees to release the same. 101 As Union Bank itself
vehemently alleges, the Memorandum of Agreement was not consummated.
Moreover, despite the fact that the Bank was aware, or in possession, of
these certificates, 102 at the time of execution of the Restructuring
Agreement, only the mortgage over the real property covered by TCT No. T-
11951 was expressly mentioned as a security in the Restructuring
Agreement. In fact, in its Reply to Request for Admission, 103 Union Bank
admitted that (1) the titles to the real properties were submitted to it for
appraisal but were subsequently rejected, and (2) no real estate mortgages
were executed over the said properties. There being no agreement that
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these properties shall secure respondents' obligation, Union Bank has no
right to retain said certificates.
Assuming arguendo that paragraph 11 (b) of the Restructuring
Agreement indeed allows the retention of the certificates (submitted to the
Bank ostensibly for safekeeping and appraisal) as security for spouses Tiu's
debt, Union Bank's position still cannot be upheld. Insofar as said provision
permits Union Bank to apply properties of the spouses Tiu in its possession
to the full or partial payment of the latter's obligations, the same appears to
impliedly allow Union Bank to appropriate these properties for such purpose.
However, said provision cannot be validly applied to the subject certificates
and titles without violating the prohibition against pactum commissorium
contained in Article 2088 of the Civil Code, to the effect that "[t]he creditor
cannot appropriate the things given by way of pledge or mortgage, or
dispose of them[;] [a]ny stipulation to the contrary is null and void."
Applicable by analogy to the present case is our ruling in Nakpil v.
Intermediate Appellate Court, 104 wherein property held in trust was ceded
to the trustee upon failure of the beneficiary to answer for the amounts
owed to the former, to wit:
For, there was to be automatic appropriation of the property
by Valdes in the event of failure of petitioner to pay the
value of the advances. Thus, contrary to respondent's
manifestations, all the elements of a pactum commissorium
were present: there was a creditor-debtor relationship
between the parties; the property was used as security
for the loan; and, there was automatic appropriation by
respondent of Pulong Maulap in case of default of
petitioner. 105 (Emphases supplied.)
This Court therefore affirms the order of the Court of Appeals for
Union Bank to return to the spouses Tiu all the certificates of shares of stock
and titles to real properties that were submitted to it or, in lieu thereof, to
pay the cost for the replacement and issuance of new certificates and new
titles over the said properties. HEDSIc
Validity of the Award of Damages
The Court of Appeals awarded damages in favor of the spouses Tiu
based on its taking judicial notice of the alleged exploitation by many banks
of the Asian financial crisis, as well as the foreclosure of the mortgage of the
home of the spouses Tiu despite the alleged full payment by the latter. As
regards the alleged manipulation of the financial crisis, the Court of Appeals
held:
As a final note, this Court observes the irregularity in the
circumstances [surrounding] dollar loans granted by banks
right before or during the Asian financial crisis. It is of
common knowledge that many banks, around that time,
actively pursued and convinced debtors to make dollar loans
or to convert their peso loans to dollar loans allegedly
because of the lower interest rate of dollar loans. This is a
highly suspect behavior on the part of the banks because it
is irrational for the banks to voluntarily and actively proffer a
conversion that would give them substantially less income.
In the guise of benevolence, many banks were able to
convince borrowers to make dollar loans or to convert their
peso loans to dollar loans. Soon thereafter, the Asian
financial crisis hit, and many borrowers were saddled with
loans that ballooned to twice or thrice the amount of their
original loans. This court takes judicial notice of these events
or matters which are of public knowledge. It is inconceivable
that the banks were unaware of the looming Asian financial
crisis. Being in the forefront of the financial world and
having access to financial data that were not available to the
average borrower, the banks were in such a position that
they had a higher vantage point with respect to the financial
landscape over their average clients. The cavalier way with
which banks exploited and manipulated the situation is
almost too palpable that they openly and unabashedly
struck heavy blows on the Philippine economy, industries
and businesses. The banks have a fiduciary duty to their
clients and to the Filipino people to be transparent in their
dealings and to make sure that the latter's interest are not
prejudiced by the former's interest. Article 1339 of the New
Civil Code provides that the failure to disclose facts, when
there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud.
Undoubtedly, the banks and their clients are bound by
confidential relations. The almost perfect timing of the banks
in convincing their clients to shift to dollar loans just when
the Asian financial crisis struck indicates that the banks not
only failed to disclose facts to their clients of the looming
crisis, but also suggests of the insidious design to take
advantage of these undisclosed facts. 106
We have already held that the foreclosure of the mortgage was
warranted under the circumstances. As regards the alleged exploitation by
many banks of the Asian financial crisis, this Court rules that the
generalization made by the appellate court is unfounded and cannot be the
subject of judicial notice. "It is axiomatic that good faith is always presumed
unless convincing evidence to the contrary is adduced. It is incumbent upon
the party alleging bad faith to sufficiently prove such allegation. Absent
enough proof thereof, the presumption of good faith prevails." 107 The
alleged insidious design of many banks to betray their clients during the
Asian financial crisis is certainly not of public knowledge. The deletion of the
award of moral and exemplary damages in favor of the spouses Tiu is
therefore in order.
WHEREFORE, the Petition is PARTIALLY GRANTED. The Joint
Decision of the Court of Appeals in CA-G.R. CV No. 00190 and CA-G.R. SP
No. 00253 dated February 21, 2006 is hereby AFFIRMED insofar as it
ordered petitioner Union Bank of the Philippines to return to the respondent
spouses Rodolfo T. Tiu and Victoria N. Tiu all the certificates of shares of
123
 stock and titles to real properties that were submitted to it or, in lieu
thereof, to pay the cost for the replacement and issuance of new certificates
and new titles over the said properties. The foregoing Joint Decision is
hereby SET ASIDE: (1) insofar as it permanently enjoined Union Bank of
the Philippines from foreclosing the mortgage of the residential property of
respondent spouses Rodolfo T. Tiu and Victoria N. Tiu which is covered by
Transfer Certificate of Title No. 11951; (2) insofar as it ordered Union Bank
of the Philippines to return to the respondent spouses Rodolfo T. Tiu and
Victoria N. Tiu the amount of P927,546.79 representing illegally collected
rentals; and (3) insofar as it ordered Union Bank of the Philippines to pay
the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu P100,000.00 in
moral damages, P100,000.00 in exemplary damages, P50,000.00 in
attorney's fees and cost, both in the lower court and in this Court. aHTcDA
No further pronouncement as to costs.
SO ORDERED.
||| (Union Bank of the Philippines v. Spouses Tiu, G.R. Nos. 173090-91,
[September 7, 2011], 672 PHIL 531-570)
THIRD DIVISION
[G.R. No. 174912. July 24, 2013.]
BPI EMPLOYEES UNION-DAVAO CITY-FUBU (BPIEU-
DAVAO CITY-FUBU), petitioner, vs. BANK OF THE
PHILIPPINE ISLANDS (BPI), and BPI OFFICERS
CLARO M. REYES, CECIL CONANAN and GEMMA VELEZ,
respondents.
MENDOZA, J p:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure, assailing the April 5, 2006 Decision 1 and August 17,
2006 Resolution 2 of the Court of Appeals (CA) in CA-G.R. SP No. 74595
affirming the December 21, 2001 3 and August 23, 2002 4 Resolutions of the
National Labor Relations Commission (NLRC) in declaring as valid and legal the
action of respondent Bank of the Philippine Islands-Davao City (BPI-Davao) in
contracting out certain functions to BPI Operations Management Corporation
(BOMC).
The Factual Antecedents
BOMC, which was created pursuant to Central Bank 5 Circular No. 1388, Series
of 1993 (CBP Circular No. 1388, 1993), and primarily engaged in providing
and/or handling support services for banks and other financial institutions, is a
subsidiary of the Bank of Philippine Islands (BPI) operating and functioning as an
entirely separate and distinct entity.
A service agreement between BPI and BOMC was initially implemented in BPI's
Metro Manila branches. In this agreement, BOMC undertook to provide services
such as check clearing, delivery of bank statements, fund transfers, card
production, operations accounting and control, and cash servicing, conformably
with BSP Circular No. 1388. Not a single BPI employee was displaced and those
performing the functions, which were transferred to BOMC, were given other
assignments. SEIaHT
The Manila chapter of BPI Employees Union (BPIEU-Metro Manila-FUBU) then
filed a complaint for unfair labor practice (ULP). The Labor Arbiter (LA) decided
the case in favor of the union. The decision was, however, reversed on appeal by
the NLRC. BPIEU-Metro Manila-FUBU filed a petition for certiorari before the CA
which denied it, holding that BPI transferred the employees in the affected
departments in the pursuit of its legitimate business. The employees were
neither demoted nor were their salaries, benefits and other privileges
diminished. 6
On January 1, 1996, the service agreement was likewise implemented in Davao
City. Later, a merger between BPI and Far East Bank and Trust Company
(FEBTC) took effect on April 10, 2000 with BPI as the surviving corporation.
Thereafter, BPI's cashiering function and FEBTC's cashiering, distribution and
bookkeeping functions were handled by BOMC. Consequently, twelve (12)
former FEBTC employees were transferred to BOMC to complete the latter's
service complement.
BPI Davao's rank and file collective bargaining agent, BPI Employees Union-
Davao City-FUBU (Union), objected to the transfer of the functions and the
twelve (12) personnel to BOMC contending that the functions rightfully belonged
to the BPI employees and that the Union was deprived of membership of former
FEBTC personnel who, by virtue of the merger, would have formed part of the
bargaining unit represented by the Union pursuant to its union shop provision in
the CBA. 7
The Union then filed a formal protest on June 14, 2000 addressed to BPI Vice
Presidents Claro M. Reyes and Cecil Conanan reiterating its objection. It
requested the BPI management to submit the BOMC issue to the grievance
procedure under the CBA, but BPI did not consider it as "grievable." Instead, BPI
proposed a Labor Management Conference (LMC) between the parties. 8 aCIHcD
During the LMC, BPI invoked management prerogative stating that the creation
of the BOMC was to preserve more jobs and to designate it as an agency to
124
place employees where they were most needed. On the other hand, the Union
charged that BOMC undermined the existence of the union since it reduced or
divided the bargaining unit. While BOMC employees perform BPI functions, they
were beyond the bargaining unit's coverage. In contracting out FEBTC functions
to BOMC, BPI effectively deprived the union of the membership of employees
handling said functions as well as curtailed the right of those employees to join
the union.
Thereafter, the Union demanded that the matter be submitted to the grievance
machinery as the resort to the LMC was unsuccessful. As BPI allegedly ignored
the demand, the Union filed a notice of strike before the National Conciliation
and Mediation Board (NCMB) on the following grounds:
a) Contracting out services/functions performed by union
members that interfered with, restrained and/or
coerced the employees in the exercise of their right
to self-organization;
b) Violation of duty to bargain; and
c) Union busting. 9
BPI then filed a petition for assumption of jurisdiction/certification with the
Secretary of the Department of Labor and Employment (DOLE), who
subsequently issued an order certifying the labor dispute to the NLRC for
compulsory arbitration. The DOLE Secretary directed the parties to cease and
desist from committing any act that might exacerbate the situation.
On October 27, 2000, a hearing was conducted. Thereafter, the parties were
required to submit their respective position papers. On November 29, 2000, the
Union filed its Urgent Omnibus Motion to Cease and Desist with a prayer that
BPI-Davao and/or Mr. Claro M. Reyes and Mr. Cecil Conanan be held in contempt
for the following alleged acts of BPI: TIaCHA
1. The Bank created a Task Force Committee on November
20, 2000 composed of six (6) former FEBTC
employees to handle the Cashiering, Distributing,
Clearing, Tellering and Accounting functions of the
former FEBTC branches but the "task force"
conducts its business at the office of the BOMC
using the latter's equipment and facilities.
2. On November 27, 2000, the bank integrated the clearing
operations of the BPI and the FEBTC. The clearing
function of BPI, then solely handled by the BPI
Processing Center prior to the labor dispute, is now
encroached upon by the BOMC because with the
merger, differences between BPI and FEBTC
operations were diminished or deleted. What the
bank did was simply to get the total of all clearing
transactions under BPI but the BOMC employees
process the clearing of checks at the Clearing
House as to checks coming from former FEBTC
branches. Prior to the labor dispute, the run-up and
distribution of the checks of BPI were returned to
the BPI processing center, now all checks whether
of BPI or of FEBTC were brought to the BOMC.
Since the clearing operations were previously done
by the BPI processing center with BPI employees,
said function should be performed by BPI
employees and not by BOMC. 10 AaSHED
On December 21, 2001, the NLRC came out with a resolution upholding the
validity of the service agreement between BPI and BOMC and dismissing the
charge of ULP. It ruled that the engagement by BPI of BOMC to undertake some
of its activities was clearly a valid exercise of its management prerogative. 11 It
further stated that the spinning off by BPI to BOMC of certain services and
functions did not interfere with, restrain or coerce employees in the exercise of
their right to self-organization. 12 The Union did not present even an iota of
evidence showing that BPI had terminated employees, who were its members.
In fact, BPI exerted utmost diligence, care and effort to see to it that no union
member was terminated. 13 The NLRC also stressed that Department Order
(D.O.) No. 10 series of 1997, strongly relied upon by the Union, did not apply in
this case as BSP Circular No. 1388, series of 1993, was the applicable rule.
After the denial of its motion for reconsideration, the Union elevated its
grievance to the CA via a petition for certiorari under Rule 65. The CA, however,
affirmed the NLRC's December 21, 2001 Resolution with modification that the
enumeration of functions listed under BSP Circular No. 1388 in the said
resolution be deleted. The CA noted at the outset that the petition must be
dismissed as it merely touched on factual matters which were beyond the ambit
of the remedy availed of. 14 Be that as it may, the CA found that the factual
findings of the NLRC were supported by substantial evidence and, thus, entitled
to great respect and finality. To the CA, the NLRC did not act with grave abuse of
discretion as to merit the reversal of the resolution. 15
Furthermore, the CA ratiocinated that, considering the ramifications of the
corporate merger, it was well within BPI's prerogatives "to determine what
additional tasks should be performed, who should best perform it and what
should be done to meet the exigencies of business." 16 It pointed out that the
Union did not, by the mere fact of the merger, become the bargaining agent of
the merged employees 17 as the Union's right to represent said employees did
not arise until it was chosen by them. 18 AEIcTD
As to the applicability of D.O. No. 10, the CA agreed with the NLRC that the said
order did not apply as BPI, being a commercial bank, its transactions were
subject to the rules and regulations of the BSP.
125
Not satisfied, the Union filed a motion for reconsideration which was, however,
denied by the CA.
Hence, the present petition with the following:
ASSIGNMENT OF ERRORS:
A. THE PETITION BEFORE THE COURT OF APPEALS
INVOLVED QUESTIONS OF LAW AND ITS
DECISION DID NOT ADDRESS THE ISSUE OF
WHETHER BPI'S ACT OF OUTSOURCING
FUNCTIONS FORMERLY PERFORMED BY
UNION MEMBERS VIOLATES THE CBA.
B. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT DOLE DEPARTMENT ORDER
NO. 10 DOES NOT APPLY IN THIS CASE.
The Union is of the position that the outsourcing of jobs included in the existing
bargaining unit to BOMC is a breach of the union-shop agreement in the CBA. In
transferring the former employees of FEBTC to BOMC instead of absorbing them
in BPI as the surviving corporation in the merger, the number of positions
covered by the bargaining unit was decreased, resulting in the reduction of the
Union's membership. For the Union, BPI's act of arbitrarily outsourcing functions
formerly performed by the Union members and, in fact, transferring a number of
its members beyond the ambit of the Union, is a violation of the CBA and
interfered with the employees' right to self organization. The Union insists that
the CBA covers the agreement with respect, not only to wages and hours of
work, but to all other terms and conditions of work. The union shop clause,
being part of these conditions, states that the regular employees belonging to
the bargaining unit, including those absorbed by way of the corporate merger,
were required to join the bargaining union "as a condition for employment."
Simply put, the transfer of former FEBTC employees to BOMC removed them
from the coverage of unionized establishment. While the Union admitted that
BPI has the prerogative to determine what should be done to meet the
exigencies of business in accordance with the case of Sime Darby Pilipinas, Inc.
v. NLRC, 19 it insisted that the exercise of management prerogative is not
absolute, thus, requiring good faith and adherence to the law and the CBA.
Citing the case of Shell Oil Workers' Union v. Shell Company of the Philippines,
Ltd., 20 the Union claims that it is unfair labor practice for an employer to
outsource the positions in the existing bargaining unit. cTAaDC
Position of BPI-Davao
For its part, BPI defended the validity of its service agreement with BOMC on
three (3) grounds: 1] that it was pursuant to the prevailing law at that time,
CBP Circular No. 1388; 2] that the creation of BOMC was within management
prerogatives intended to streamline the operations and provide focus for BPI's
core activities; and 3] that the Union recognized, in its CBA, the exclusive right
and prerogative of BPI to conduct the management and operation of its
business. 21
BPI argues that the case of Shell Oil Workers' Union v. Shell Company of the
Philippines, Ltd., 22 cited by the Union, is not on all fours with the present case.
In said case, the company dissolved its security guard section and replaced it
with an outside agency, claiming that such act was a valid exercise of
management prerogative. The Court, however, ruled against the said
outsourcing because there was an express assurance in the CBA that the
security guard section would continue to exist. Having failed to reserve its right
to effect a dissolution, the company's act of outsourcing and transferring
security guards was invalidated by the Court, ruling that the unfair labor practice
strike called by the Union did have the impression of validity. In contrast, there
is no provision in the CBA between BPI and the Union expressly stipulating the
continued existence of any position within the bargaining unit. For BPI, the
absence of this peculiar fact is enough reason to prevent the application of Shell
to this case.
BPI likewise invokes settled jurisprudence, 23 where the Court upheld the acts
of management to contract out certain functions held by employees, and even
notably those held by union members. In these cases, the decision to outsource
certain functions was a justifiable business judgment which deserved no judicial
interference. The only requisite of this act is good faith on the part of the
employer and the absence of malicious and arbitrary action in the outsourcing of
functions to BOMC.
On the issue of the alleged curtailment of the right of the employees to self-
organization, BPI refutes the Union's allegation that ULP was committed when
the number of positions in the bargaining was reduced. It cites as correct the CA
ruling that the representation of the Union's prospective members is contingent
on the choice of the employee, that is, whether or not to join the Union. Hence,
it was premature for the Union to claim that the rights of its prospective
members to self-organize were restrained by the transfer of the former FEBTC
employees to BOMC. TEcAHI
The Court's Ruling
In essence, the primordial issue in this case is whether or not the act of BPI to
outsource the cashiering, distribution and bookkeeping functions to BOMC is in
conformity with the law and the existing CBA. Particularly in dispute is the
validity of the transfer of twelve (12) former FEBTC employees to BOMC, instead
of being absorbed in BPI after the corporate merger. The Union claims that a
union shop agreement is stipulated in the existing CBA. It is unfair labor practice
for employer to outsource the positions in the existing bargaining unit, citing the
case of Shell Oil Workers' Union v. Shell Company of the Philippines, Ltd. 24
The Union's reliance on the Shell Case is misplaced. The rule now is covered by
Article 261 of the Labor Code,which took effect on November 1, 1974. 25 Article
261 provides:
126
 ART. 261. Jurisdiction of Voluntary Arbitrators or panel of Agreement. 30 Neither had it resulted in any diminution of salaries and benefits
Voluntary Arbitrators. . . . Accordingly, violations of a nor led to any reduction of union membership. 31
Collective Bargaining Agreement, except those which are
gross in character, shall no longer be treated as unfair
As far as the twelve (12) former FEBTC employees are concerned, the Union
labor practice and shall be resolved as grievances under
failed to substantially prove that their transfer, made to complete BOMC's
the Collective Bargaining Agreement. For purposes of this
service complement, was motivated by ill will, anti-unionism or bad faith so as to
article, gross violations of Collective Bargaining Agreement
affect or interfere with the employees' right to self-organization.
shall mean flagrant and/or malicious refusal to comply
with the economic provisions of such agreement.
[Emphases supplied] It is to be emphasized that contracting out of services is not illegal per se. It is
an exercise of business judgment or management prerogative. Absent proof that
the management acted in a malicious or arbitrary manner, the Court will not
Clearly, only gross violations of the economic provisions of the CBA are treated
interfere with the exercise of judgment by an employer. 32 In this case, bad
as ULP. Otherwise, they are mere grievances.
faith cannot be attributed to BPI because its actions were authorized by CBP
Circular No. 1388, Series of 1993 33 issued by the Monetary Board of the then
In the present case, the alleged violation of the union shop agreement in the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas). The circular
CBA, even assuming it was malicious and flagrant, is not a violation of an covered amendments in Book I of the Manual of Regulations for Banks and Other
economic provision in the agreement. The provisions relied upon by the Union Financial Intermediaries, particularly on the matter of bank service contracts. A
were those articles referring to the recognition of the union as the sole and finding of ULP necessarily requires the alleging party to prove it with substantial
exclusive bargaining representative of all rank-and-file employees, as well as the evidence. Unfortunately, the Union failed to discharge this burden. EacHSA
articles on union security, specifically, the maintenance of membership in good
standing as a condition for continued employment and the union shop clause. 26
Much has been said about the applicability of D.O. No. 10. Both the NLRC and
It failed to take into consideration its recognition of the bank's exclusive rights
the CA agreed with BPI that the said order does not apply. With BPI, as a
and prerogatives, likewise provided in the CBA, which included the hiring of
commercial bank, its transactions are subject to the rules and regulations of the
employees, promotion, transfers, and dismissals for just cause and the
governing agency which is the Bangko Sentral ng Pilipinas. 34 The Union insists
maintenance of order, discipline and efficiency in its operations. 27
that D.O. No. 10 should prevail.

The Union, however, insists that jobs being outsourced to BOMC were included in
The Court is of the view, however, that there is no conflict between D.O. No. 10
the existing bargaining unit, thus, resulting in a reduction of a number of
and CBP Circular No. 1388. In fact, they complement each other.
positions in such unit. The reduction interfered with the employees' right to self-
organization because the power of a union primarily depends on its strength in
number. 28 AaECSH Consistent with the maxim, interpretare et concordare leges legibus est optimus
interpretandi modus, a statute should be construed not only to be consistent
with itself but also to harmonize with other laws on the same subject matter, as
It is incomprehensible how the "reduction of positions in the collective
to form a complete, coherent and intelligible system of jurisprudence. 35 The
bargaining unit" interferes with the employees' right to self-organization because
seemingly conflicting provisions of a law or of two laws must be harmonized to
the employees themselves were neither transferred nor dismissed from the
render each effective. 36 It is only when harmonization is impossible that resort
service. As the NLRC clearly stated:
must be made to choosing which law to apply. 37

In the case at hand, the union has not presented even an

In the case at bench, the Union submits that while the Central Bank regulates
iota of evidence that petitioner bank has started to
banking, the Labor Code and its implementing rules regulate the employment
terminate certain employees, members of the union. In fact,
relationship. To this, the Court agrees. The fact that banks are of a specialized
what appears is that the Bank has exerted utmost diligence,
industry must, however, be taken into account. The competence in determining
care and effort to see to it that no union member has been
which banking functions may or may not be outsourced lies with the BSP. This
terminated. In the process of the consolidation or merger of
does not mean that banks can simply outsource banking functions allowed by
the two banks which resulted in increased diversification of
the BSP through its circulars, without giving regard to the guidelines set forth
functions, some of these non-banking functions were merely
under D.O. No. 10 issued by the DOLE. IaHCAD
transferred to the BOMC without affecting the union
membership. 29
While D.O. No. 10, Series of 1997, enumerates the permissible contracting or
subcontracting activities, it is to be observed that, particularly in Sec. 6 (d)
BPI stresses that not a single employee or union member was or would be
invoked by the Union, the provision is general in character ". . . Works or
dislocated or terminated from their employment as a result of the Service
127
services not directly related or not integral to the main business or operation of merely recruits, supplies or places workers to perform a job, work or service for
the principal . . . ." This does not limit or prohibit the appropriate government a principal or if any of the following elements are present:
agency, such as the BSP, to issue rules, regulations or circulars to further and
specifically determine the permissible services to be contracted out. CBP Circular
i) The contractor or subcontractor does not have substantial
No. 1388 38 enumerated functions which are ancillary to the business of banks,
capital or investment which relates to the job, work or
hence, allowed to be outsourced. Thus, sanctioned by said circular, BPI
service to be performed and the employees recruited,
outsourced the cashiering (i.e., cash-delivery and deposit pick-up) and
supplied or placed by such contractor or subcontractor are
accounting requirements of its Davao City branches. 39 The Union even
performing activities which are directly related to the main
described the extent of BPI's actual and intended contracting out to BOMC as
business of the principal; or
follows:

ii) The contractor does not exercise the right to control over
"As an initiatory move, the functions of the Cashiering Unit
the performance of the work of the contractual employee. 45
of the Processing Center of BPI, handled by its regular
rank and file employees who are members of the Union, . . .
[were] transferred to BOMC with the Accounting Department WHEREFORE, the petition is DENIED.
as next in line. The Distributing, Clearing and Bookkeeping
functions of the Processing Center of the former FEBTC SO ORDERED.
were likewise contracted out to BOMC." 40

||| (BPI Employees Union-Davao City-FUBU v. Bank of the Philippine Islands,

Thus, the subject functions appear to be not in any way directly related to the G.R. No. 174912, [July 24, 2013], 715 PHIL 35-54)
core activities of banks. They are functions in a processing center of BPI which
does not handle or manage deposit transactions. Clearly, the functions
outsourced are not inherent banking functions, and, thus, are well within the
permissible services under the circular.

The Court agrees with BPI that D.O. No. 10 is but a guide to determine what
functions may be contracted out, subject to the rules and established
jurisprudence on legitimate job contracting and prohibited labor-only
contracting. 41 Even if the Court considers D.O. No. 10 only, BPI would still be
within the bounds of D.O. No. 10 when it contracted out the subject functions.
This is because the subject functions were not related or not integral to the main
business or operation of the principal which is the lending of funds obtained in
the form of deposits. 42 From the very definition of "banks" as provided under
the General Banking Law, it can easily be discerned that banks perform only two
(2) main or basic functions deposit and loan functions. Thus, cashiering,
distribution and bookkeeping are but ancillary functions whose outsourcing is
sanctioned under CBP Circular No. 1388 as well as D.O. No. 10. Even BPI itself
recognizes that deposit and loan functions cannot be legally contracted out as
they are directly related or integral to the main business or operation of banks.
The CBP's Manual of Regulations has even categorically stated and emphasized
on the prohibition against outsourcing inherent banking functions, which refer to
any contract between the bank and a service provider for the latter to supply, or [REPUBLIC ACT NO. 10641]
any act whereby the latter supplies, the manpower to service the deposit
transactions of the former. 43 aESIHT AN ACT ALLOWING THE FULL ENTRY OF FOREIGN BANKS IN THE
PHILIPPINES, AMENDING FOR THE PURPOSE REPUBLIC ACT NO.
In one case, the Court held that it is management prerogative to farm out any of 7721
its activities, regardless of whether such activity is peripheral or core in nature.
44 What is of primordial importance is that the service agreement does not Be it enacted by the Senate and House of Representatives of the
violate the employee's right to security of tenure and payment of benefits to Philippines in Congress assembled:
which he is entitled under the law. Furthermore, the outsourcing must not
squarely fall under labor-only contracting where the contractor or sub-contractor
128
SECTION 1. Section 2 of Republic Act No. 7721 is hereby amended to
read as follows:
SEC. 2. Modes of Entry. The Monetary Board may authorize foreign
banks to operate in the Philippine banking system through any one of the
following modes of entry: (i) by acquiring, purchasing or owning up to
one hundred percent (100%) of the voting stock of an existing bank; (ii)
by investing in up to one hundred percent (100%) of the voting stockof a
new banking subsidiary incorporated under the laws of the Philippines; or
(iii) by establishing branches with full banking authority.
SEC. 2. Section 3 of Republic Act No. 7721 is hereby amended to read as
follows:
SEC. 3. Guidelines for Approval. In approving entry applications of
foreign banks, the Monetary Board shall: (i) ensure geographic
representation and complementation; (ii) consider strategic trade and
investment relationships between the Philippines and the country of
incorporation of the foreign bank; (iii) study the demonstrated capacity,
global reputation for financial innovations and stability in a competitive
environment of the applicant; (iv) see to it that reciprocity rights are
enjoyed by Philippine banks in the applicants country; and (v) consider
willingness to fully share their technology.
Only established, reputable and financially sound foreign banks shall be
allowed entry in accordance with Section 2 of this Act. The foreign bank
applicant must be widely-owned and publicly-listed in its country of
origin, unless the foreign bank applicant is owned and controlled by the
government of its country of origin.
In the exercise of this authority, the Monetary Board shall adopt such
measures as may be necessary to ensure that the control of at least sixty
percent(60%) of the resources or assets of the entire banking system is
held by domestic banks which are majority-owned by Filipinos.
SEC. 3. Section 4 of Republic Act No. 7721 is hereby amended to read as
follows:
SEC. 4. Capital Requirements. (i) For Locally Incorporated Subsidiaries
The minimum capital required for locally incorporated subsidiaries of
foreign banks shall be equal to that prescribed by the Monetary Board for
domestic banks of the same category.
(ii) For Foreign Bank Branches Foreign banks that shall be authorized
to establish branches pursuant to Section 2(hi) of this Act shah
permanently assign capital of an amount not less than the minimum
capital required for domestic banks of the same category. The
permanently assigned capital shall be inwardly remitted and converted
into Philippine currency.
The foreign bank branch may open up to five (5) sub-branches as may
be approved by the Monetary Board. Locally incorporated subsidiaries of
foreign banks pursuant to Section 2(h) of this Act shall have the same
branching privileges as domestic banks of the same category.
SEC. 4. Section 6 of Republic Act No. 7721 is hereby repealed.
SEC. 5. Section 8 of Republic Act No. 7721 is hereby amended to read as
follows:
SEC. 8. Equal Treatment. Foreign banks authorized to operate under
Section 2 of this Act, shall perform the same functions, enjoy the same
privileges, and be subject to the same limitations imposed upon a
Philippine bank of the same category. The single borrowers limit of a
foreign bank branch shall be aligned with that of a domestic bank.
The foreign banks shall guarantee the observance of the rights of their
employees under the Constitution.
Any right, privilege or incentive granted to foreign banks or their
subsidiaries or affiliates under this Act, shall be equally enjoyed by and
extended under the same conditions to Philippine banks.
SEC. 6. A new provision in Section 9 is hereby inserted in the same Act,
in lieu of the original provisions of Section 9 repealed by Section 11 of
Republic Act No. 10000. Section 9 shall now read as follows:
SEC. 9. Participation in Foreclosure Proceedings.Foreign banks which
are authorized to do banking business in the Philippines through any of
the modes of entry under Section 2 hereof shall be allowed to bid and
take part in foreclosure sales of real property mortgaged to them, as well
as to avail of enforcement and other proceedings, and accordingly take
possession of the mortgaged property, for a period not exceeding five (5)
years from actual possession: Provided, That in no event shall title to the
property be transferred to such foreign bank. In case said bank is the
winning bidder, it shall, during the said five (5)-year period, transfer its
rights to a qualified Philippine national, without prejudice to a borrowers
rights under applicable laws. Should the bank fail to transfer such
property within the five (5)-year period, it shall be penalized one half
(1/2) of one percent (1%) per annum of the price at which the property
was foreclosed until it is able to transfer the property to a qualified
Philippine national.
SEC. 7. Transitory Provisions. Foreign banks which are already
authorized to do banking business in the Philippines through any of the
modes of entry under Section 2 hereof may apply to change their original
mode of entry.
129
Foreign banks operating through branches in the Philippines upon the
effectivity of this Act shall retain their original privilege upon entry to
establish a limited number of sub-branches. However, the previous
restriction on the locations of such additional branches is hereby lifted.
The existing Philippine branches of foreign banks shall comply within one
(1) year from the effectivity of this Act with the minimum capital
requirements as prescribed under Section 4(ii) of this Act, unless
otherwise extended by the Monetary Board.
SEC. 8. Section 12 of Republic Act No. 7721 is hereby amended to read
as follows:
SEC. 12. Applicability of Other Banking Laws. The provisions of
Republic Act No. 7653, otherwise known as the New Central Bank Act and
the provisions of Republic Act No. 8791, otherwise known as The General
Banking Law of 2000, insofar as they are applicable and not in conflict
with any provision of this Act, shall apply to banks authorized pursuant to
this Act.
SEC. 9. Section 13 of Republic Act No. 7721 is hereby amended to read
as follows:
SEC. 13. Rule-Making Powers of the Monetary Board of the Bangko
Sentral ng Pilipinas and Compliance Reports. The Monetary Board is
hereby authorized to issue such rules and regulations as may be needed
to implement the provisions of this Act. On or before May 30 of each
year, the Monetary Board shall file a written report to Congress and its
respective Banks Committees, on the developments in the
implementation of this Act. The implementing rules and regulations of
this Act shall be published in at least two (2) newspapers of general
circulation.
SEC. 10. Repealing Clause. All laws, decrees, executive orders,
proclamations, rules and regulations and other issuances or parts thereof
insofar as they are inconsistent with the provisions of this Act are hereby
repealed or modified accordingly.
SEC. 11. Effectivity. This Act shall take effect fifteen (15) days after its
publication in the Official Gazette or in at least two (2) national
newspapers of general circulation.
THIRD DIVISION
[G.R. No. 156132. February 6, 2007.]
CITIBANK, N.A. (Formerly First National City Bank)
and INVESTORS' FINANCE CORPORATION, doing
business under the name and style of FNCB Finance,
petitioners, vs. MODESTA R. SABENIANO, respondent.
RESOLUTION
CHICO-NAZARIO, J p:
On 16 October 2006, this Court promulgated its Decision 1 in the above-entitled
case, the dispositive portion of which reads
IN VIEW OF THE FOREGOING, the instant Petition is
PARTLY GRANTED. The assailed Decision of the Court of
Appeals in CA-G.R. No. 51930, dated 26 March 2002, as
already modified by its Resolution, dated 20 November
2002, is hereby AFFIRMED WITH MODIFICATION, as
follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and
outstanding. Petitioner Citibank is ORDERED to return to
respondent the principal amounts of the said PNs,
amounting to Three Hundred Eighteen Thousand Eight
Hundred Ninety-Seven Pesos and Thirty-Four Centavos
(P318,897.34) and Two Hundred Three Thousand One
Hundred Fifty Pesos (P203,150.00), respectively, plus the
stipulated interest of Fourteen and a half percent (14.5%)
per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six
Hundred Thirty Two US Dollars and Ninety-Nine Cents
(US$149,632.99) from respondent's Citibank-Geneva
accounts to petitioner Citibank in Manila, and the application
130
 of the same against respondent's outstanding loans with the
latter, is DECLARED illegal, null and void. Petitioner Citibank
is ORDERED to refund to respondent the said amount, or its
equivalent in Philippine currency using the exchange rate at
the time of payment, plus the stipulated interest for each of
the fiduciary placements and current accounts involved,
beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral
damages in the amount of Three Hundred Thousand Pesos
(P300,000.00); exemplary damages in the amount of Two
Hundred Fifty Thousand Pesos (P250,000.00); and
attorney's fees in the amount of Two Hundred Thousand
Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the
balance of her outstanding loans, which, from the respective
dates of their maturity to 5 September 1979, was computed
to be in the sum of One Million Sixty-Nine Thousand Eight
Hundred Forty-Seven Pesos and Forty Centavos
(P1,069,847.40), inclusive of interest. These outstanding
loans shall continue to earn interest, at the rates stipulated
in the corresponding PNs, from 5 September 1979 until
payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to
Clarify and/or Confirm Decision with Notice of Judgment on 20 October 2006;
while, petitioners Citibank, N.A. and FNCB Finance 2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6 November 2006.
The facts of the case, as determined by this Court in its Decision, may be
summarized as follows.
Respondent was a client of petitioners. She had several deposits and market
placements with petitioners, among which were her savings account with the
local branch of petitioner Citibank (Citibank-Manila); 3 money market
placements with petitioner FNCB Finance; and dollar accounts with the Geneva
branch of petitioner Citibank (Citibank-Geneva). At the same time, respondent
had outstanding loans with petitioner Citibank, incurred at Citibank-Manila, the
principal amounts aggregating to P1,920,000.00, all of which had become due
and demandable by May 1979. Despite repeated demands by petitioner Citibank,
respondent failed to pay her outstanding loans. Thus, petitioner Citibank used
respondent's deposits and money market placements to off-set and liquidate her
outstanding obligations, as follows
Respondent's outstanding obligation (principal and interest as of
26 October 1979) P2,156,940.58
Less: Proceeds from respondent's money market placements
with petitioner FNCB Finance (principal and
interest as of 5 September 1979) (1,022,916.66)
Deposits in respondent's bank accounts with petitioner
Citibank (31,079.14)
Proceeds of respondent's money market placements and
dollar accounts with Citibank-Geneva (peso
equivalent as of 26 October 1979) (1,102,944.78)
Balance of respondent's obligation P0.00
===========
Respondent, however, denied having any outstanding loans with petitioner
Citibank. She likewise denied that she was duly informed of the off-setting or
compensation thereof made by petitioner Citibank using her deposits and money
market placements with petitioners. Hence, respondent sought to recover her
deposits and money market placements. cADEHI
Respondent instituted a complaint for "Accounting, Sum of Money and Damages"
against petitioners, docketed as Civil Case No. 11336, before the Regional Trial
Court (RTC) of Makati City. After trial proper, which lasted for a decade, the RTC
rendered a Decision 4 on 24 August 1995, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby
rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by
the defendant Bank [petitioner Citibank] of plaintiff's
[respondent Sabeniano] dollar deposit with Citibank,
Switzerland, in the amount of US$149,632.99, and ordering
the said defendant [petitioner Citibank] to refund the said
amount to the plaintiff with legal interest at the rate of
twelve percent (12%) per annum, compounded yearly, from
31 October 1979 until fully paid, or its peso equivalent at
the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted
to the defendant Bank [petitioner Citibank] in the amount of
P1,069,847.40 as of 5 September 1979 and ordering the
plaintiff [respondent Sabeniano] to pay said amount,
however, there shall be no interest and penalty charges from
the time the illegal setoff was effected on 31 October 1979;
131
 (3) Dismissing all other claims and counterclaims interposed (iv) FNCB NNPN Serial No. 05758 (Cancels and
by the parties against each other. Supersedes NNPN No. 04962), issued on 02 June
1977, P500,000.00 with 17% interest per annum;
Costs against the defendant Bank.
(v) The Two Million (P2,000,000.00) money market
placements of Ms. Sabeniano with the Ayala
All the parties appealed the afore-mentioned RTC Decision to the Court of
Investment & Development Corporation (AIDC)
Appeals, docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate
with legal interest at the rate of twelve percent
court promulgated its Decision, 5 ruling entirely in favor of respondent, to wit
(12%) per annum compounded yearly, from 30
September 1976 until fully paid;
Wherefore, premises considered, the assailed 24 August
1995 Decision of the court a quo is hereby AFFIRMED with
4. Ordering defendants-appellants to jointly and severally
MODIFICATION, as follows:
pay the plaintiff-appellant the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) by way of moral
1. Declaring as illegal, null and void the set-off effected by damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00)
the defendant-appellant Bank of the plaintiff-appellant's as exemplary damages, and ONE HUNDRED THOUSAND
dollar deposit with Citibank, Switzerland, in the amount of PESOS (P100,000.00) as attorney's fees.
US$149,632.99, and ordering defendant-appellant Citibank
to refund the said amount to the plaintiff-appellant with
Acting on petitioners' Motion for Partial Reconsideration, the Court of Appeals
legal interest at the rate of twelve percent (12%) per
issued a Resolution, 6 dated 20 November 2002, modifying its earlier Decision,
annum, compounded yearly, from 31 October 1979 until
thus
fully paid, or its peso equivalent at the time of payment;

WHEREFORE, premises considered, the instant Motion for

2. As defendant-appellant Citibank failed to establish by
Reconsideration is PARTIALLY GRANTED as Sub-
competent evidence the alleged indebtedness of plaintiff-
paragraph (V) paragraph 3 of the assailed Decision's
appellant, the set-off of P1,069,847.40 in the account of Ms.
dispositive portion is hereby ordered DELETED.
Sabeniano is hereby declared as without legal and factual
basis;
The challenged 26 March 2002 Decision of the Court is
AFFIRMED with MODIFICATION.
3. As defendants-appellants failed to account the following
plaintiff-appellant's money market placements, savings
account and current accounts, the former is hereby ordered Since the Court of Appeals Decision, dated 26 March 2002, as modified by the
to return the same, in accordance with the terms and Resolution of the same court, dated 20 November 2002, was still principally in
conditions agreed upon by the contending parties as favor of respondent, petitioners filed the instant Petition for Review on Certiorari
evidenced by the certificates of investments, to wit: under Rule 45 of the Revised Rules of Court. After giving due course to the
instant Petition, this Court promulgated on 16 October 2006 its Decision, now
subject of petitioners' Motion for Partial Reconsideration.
(i) Citibank NNPN Serial No. 023356 (Cancels and
Supersedes NNPN No. 22526) issued on 17 March
1977, P318,897.34 with 14.50% interest p.a.; Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular
points that had not been considered or discussed in its Decision. Even in
(ii) Citibank NNPN Serial No. 23357 (Cancels and
consideration of these points though, this Court remains unconvinced that it
Supersedes NNPN No. 22528) issued on 17 March
should modify or reverse in any way its disposition of the case in its earlier
1977, P203,150.00 with 14.50 interest p.a.;
Decision.

(iii) FNCB NNPN Serial No. 05757 (Cancels and

As to the off-setting or compensation
Supersedes NNPN No. 04952), issued on 02 June
of respondent's outstanding loan
1977, P500,000.00 with 17% interest p.a.;
balance with her dollar deposits in
Citibank-Geneva

132
Petitioners' take exception to the following findings made by this Court in its
Decision, dated 16 October 2006, disallowing the off-setting or compensation of
the balance of respondent's outstanding loans using her dollar deposits in
Citibank-Geneva
Without the Declaration of Pledge, petitioner Citibank had no
authority to demand the remittance of respondent's dollar
accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under
Article 1278 of the Civil Code since, petitioner Citibank itself
admitted that Citibank-Geneva is a distinct and separate
entity. As for the dollar accounts, respondent was the
creditor and Citibank-Geneva is the debtor; and as for the
Pertinent provisions of Republic Act No. 8791, otherwise known as the General
outstanding loans, petitioner Citibank was the creditor and
Banking Law of 2000, governing bank branches are reproduced below
respondent was the debtor. The parties in these transactions
were evidently not the principal creditor of each other.
DcHaET
Petitioners maintain that respondent's Declaration of Pledge, by virtue of which
she supposedly assigned her dollar accounts with Citibank-Geneva as security
for her loans with petitioner Citibank, is authentic and, thus, valid and binding
upon respondent. Alternatively, petitioners aver that even without said
Declaration of Pledge, the off-setting or compensation made by petitioner
Citibank using respondent's dollar accounts with Citibank-Geneva to liquidate the
balance of her outstanding loans with Citibank-Manila was expressly authorized
by respondent herself in the promissory notes (PNs) she signed for her loans, as
well as sanctioned by Articles 1278 to 1290 of the Civil Code. This alternative
argument is anchored on the premise that all branches of petitioner Citibank in
the Philippines and abroad are part of a single worldwide corporate entity and
share the same juridical personality. In connection therewith, petitioners deny
that they ever admitted that Citibank-Manila and Citibank-Geneva are distinct
and separate entities.
Petitioners call the attention of this Court to the following provision found in all
of the PNs 7 executed by respondent for her loans
At or after the maturity of this note, or when same becomes
due under any of the provisions hereof, any money, stocks,
bonds, or other property of any kind whatsoever, on deposit
or otherwise, to the credit of the undersigned on the books
of CITIBANK, N.A. in transit or in their possession, may
without notice be applied at the discretion of the said bank
to the full or partial payment of this note.
It is the petitioners' contention that the term "Citibank, N.A." used therein
should be deemed to refer to all branches of petitioner Citibank in the
Philippines and abroad; thus, giving petitioner Citibank the authority to
apply as payment for the PNs even respondent's dollar accounts with
Citibank-Geneva. Still proceeding from the premise that all branches of
petitioner Citibank should be considered as a single entity, then it should not
matter that the respondent obtained the loans from Citibank-Manila and her
deposits were with Citibank-Geneva. Respondent should be considered the
debtor (for the loans) and creditor (for her deposits) of the same entity,
petitioner Citibank. Since petitioner Citibank and respondent were principal
creditors of each other, in compliance with the requirements under Article
1279 of the Civil Code, 8 then the former could have very well used off-
setting or compensation to extinguish the parties' obligations to one
another. And even without the PNs, off-setting or compensation was still
authorized because according to Article 1286 of the Civil Code,
"Compensation takes place by operation of law, even though the debts may
be payable at different places, but there shall be an indemnity for expenses
of exchange or transportation to the place of payment."
SEC. 20. Bank Branches. Universal or commercial banks
may open branches or other offices within or outside the
Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent
laws.
A bank may, subject to prior approval of the Monetary
Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied
undertaking or its investment house units.
A bank authorized to establish branches or other offices shall
be responsible for all business conducted in such branches
and offices to the same extent and in the same manner as
though such business had all been conducted in the head
office. A bank and its branches and offices shall be treated
as one unit.
xxx xxx xxx
SEC. 72. Transacting Business in the Philippines. The
entry of foreign banks in the Philippines through the
establishment of branches shall be governed by the
provisions of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in the Philippines
shall be governed by the provisions of Presidential Decree
No. 1034, otherwise known as the "Offshore Banking
System Decree."
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 xxx xxx xxx
SEC. 74. Local Branches of Foreign Banks. In case of a
foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1) unit
for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to
such units.
SEC. 75. Head Office Guarantee. In order to provide
effective protection of the interests of the depositors and
other creditors of Philippine branches of a foreign bank, the
head office of such branches shall fully guarantee the
prompt payment of all liabilities of its Philippine branch.
DSETcC
Residents and citizens of the Philippines who are creditors of
a branch in the Philippines of a foreign bank shall have
preferential rights to the assets of such branch in
accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law,
lays down the policies and regulations specifically concerning the establishment
and operation of local branches of foreign banks. Relevant provisions of the said
statute read
Sec. 2. Modes of Entry. The Monetary Board may
authorize foreign banks to operate in the Philippine banking
system through any of the following modes of entry: (i) by
acquiring, purchasing or owning up to sixty percent (60%)
of the voting stock of an existing bank; (ii) by investing in
up to sixty percent (60%) of the voting stock of a new
banking subsidiary incorporated under the laws of the
Philippines; or (iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail itself of
only one (1) mode of entry: Provided, further, That a foreign
bank or a Philippine corporation may own up to a sixty
percent (60%) of the voting stock of only one (1) domestic
bank or new banking subsidiary.
Sec. 5. Head Office Guarantee. The head office of foreign
bank branches shall guarantee prompt payment of all
liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000
expressly states that the bank and its branches shall be treated as one unit. It
should be pointed out, however, that the said provision applies to a universal 9
or commercial bank, 10 duly established and organized as a Philippine
corporation in accordance with Section 8 of the same statute, 11 and authorized
to establish branches within or outside the Philippines.
The General Banking Law of 2000, however, does not make the same categorical
statement as regards to foreign banks and their branches in the Philippines.
What Section 74 of the said law provides is that in case of a foreign bank with
several branches in the country, all such branches shall be treated as one
unit. As to the relations between the local branches of a foreign bank and its
head office, Section 75 of the General Banking Law of 2000 and Section 5 of the
Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in
which the head office of the foreign bank shall guarantee prompt payment of all
liabilities of its Philippine branches. While the Home Office Guarantee is in accord
with the principle that these local branches, together with its head office,
constitute but one legal entity, it does not necessarily support the view that said
principle is true and applicable in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the
protection of the interests of the depositors and other creditors of the local
branches of a foreign bank. 12 Since the head office of the bank is located in
another country or state, such a guarantee is necessary so as to bring the head
office within Philippine jurisdiction, and to hold the same answerable for the
liabilities of its Philippine branches. Hence, the principle of the singular identity
of that the local branches and the head office of a foreign bank are more often
invoked by the clients in order to establish the accountability of the head office
for the liabilities of its local branches. It is under such attendant circumstances
in which the American authorities and jurisprudence presented by petitioners in
their Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can
use the principle for a reverse purpose, in order to extend the liability of a client
to the foreign bank's Philippine branch to its head office, as well as to its
branches in other countries. Thus, if a client obtains a loan from the foreign
bank's Philippine branch, does it absolutely and automatically make the client a
debtor, not just of the Philippine branch, but also of the head office and all other
branches of the foreign bank around the world? This Court rules in the negative.
EIcSTD
There being a dearth of Philippine authorities and jurisprudence on the matter,
this Court, just as what petitioners have done, turns to American authorities and
jurisprudence. American authorities and jurisprudence are significant herein
considering that the head office of petitioner Citibank is located in New York,
United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the relations
among foreign branches of an American bank. Section 25 of the United States
Federal Reserve Act 13 states that
134
 Every national banking association operating foreign
branches shall conduct the accounts of each foreign branch
independently of the accounts of other foreign branches
established by it and of its home office, and shall at the end
of each fiscal period transfer to its general ledger the profit
or loss accrued at each branch as a separate item.
Contrary to petitioners' assertion that the accounts of Citibank-Manila and
Citibank-Geneva should be deemed as a single account under its head
office, the foregoing provision mandates that the accounts of foreign
branches of an American bank shall be conducted independently of each
other. Since the head office of petitioner Citibank is in the U.S.A., then it is
bound to treat its foreign branches in accordance with the said provision. It
is only at the end of its fiscal period that the bank is required to transfer to
its general ledger the profit or loss accrued at each branch, but still
reporting it as a separate item. It is by virtue of this provision that the
Circuit Court of Appeals of New York declared in Pan-American Bank and
Trust Co. v. National City Bank of New York 14 that a branch is not merely a
teller's window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India,
Australia & China 15 are closest to the one at bar. In said case, the Chartered
Bank had branches in several countries, including one in Hamburg, Germany and
another in New York, U.S.A., and yet another in London, United Kingdom. The
New York branch entered in its books credit in favor of four German firms. Said
credit represents collections made from bills of exchange delivered by the four
German firms. The same four German firms subsequently became indebted to
the Hamburg branch. The London branch then requested for the transfer of the
credit in the name of the German firms from the New York branch so as to be
applied or setoff against the indebtedness of the same firms to the Hamburg
branch. One of the question brought before the U.S. District Court of New York
was "whether or not the debts and the alleged setoffs thereto are mutual,"
which could be answered by determining first whether the New York and
Hamburg branches of Chartered Bank are individual business entities or are one
and the same entity. In denying the right of the Hamburg branch to setoff, the
U.S. District Court ratiocinated that
The structure of international banking houses such as
Chartered bank defies one rigorous description. Suffice it to
say for present analysis, branches or agencies of an
international bank have been held to be independent
entities for a variety of purposes (a) deposits payable
only at branch where made; Mutaugh v. Yokohama Specie
Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird
Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249
N.Y.S. 319; (b) checks need be honored only when drawn on
branch where deposited; Chrzanowska v. Corn Exchange
Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed
1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum
on foreign bank's record barred; In re Harris, D.C.S.D.N.Y.
1939, 27 F. Supp. 480; (d) a foreign branch separate for
collection of forwarded paper; Pan-American Bank and Trust
Company v. National City Bank of New York, 2 Cir., 1925, 6
F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct.
18, 70 L. Ed. 408. Thus in law there is nothing innately
unitary about the organization of international
banking institutions. IHcTDA
Defendant, upon its oral argument and in its brief, relies
heavily on Sokoloff v. National City Bank of New York, 1928,
250 N.Y. 69, 164 N.E. 745, as authority for the proposition
that Chartered Bank, not the Hamburg or New York Agency,
is ultimately responsible for the amounts owing its German
customers and, conversely, it is to Chartered Bank that the
German firms owe their obligations. The Sokoloff case, aside
from its violently different fact situation, is centered on the
legal problem of default of payment and consequent breach
of contract by a branch bank. It does not stand for the
principle that in every instance an international bank
with branches is but one legal entity for all purposes.
The defendant concedes in its brief (p. 15) that there are
purposes for which the various agencies and branches of
Chartered Bank may be treated in law as separate entities. I
fail to see the applicability of Sokoloff either as a guide to or
authority for the resolution of this problem. The facts before
me and the cases catalogued supra lend weight to the view
that we are dealing here with Agencies independent of one
another.
xxx xxx xxx
I hold that for instant purposes the Hamburg Agency and
defendant were independent business entities, and the
attempted setoff may not be utilized by defendant against
its debt to the German firms obligated to the Hamburg
Agency.
Going back to the instant Petition, although this Court concedes that all the
Philippine branches of petitioner Citibank should be treated as one unit with its
head office, it cannot be persuaded to declare that these Philippine branches are
likewise a single unit with the Geneva branch. It would be stretching the
principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-
setting or compensation of respondent's loans with Citibank-Manila using her
dollar accounts with Citibank-Geneva cannot be effected. The parties cannot be
considered principal creditor of the other. As for the dollar accounts, respondent
was the creditor and Citibank-Geneva was the debtor; and as for the
outstanding loans, petitioner Citibank, particularly Citibank-Manila, was the
creditor and respondent was the debtor. Since legal compensation was not
possible, petitioner Citibank could only use respondent's dollar accounts with
135
Citibank-Geneva to liquidate her loans if she had expressly authorized it to do so
by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits
with Citibank-Geneva to liquidate her loans with petitioner Citibank when she
signed the PNs 16 for her loans which all contained the provision that
At or after the maturity of this note, or when same becomes
due under any of the provisions hereof, any money, stocks,
bonds, or other property of any kind whatsoever, on deposit
or otherwise, to the credit of the undersigned on the books
of CITIBANK, N.A. in transit or in their possession, may
without notice be applied at the discretion of the said bank
to the full or partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A." can
only refer to the local branches of petitioner Citibank together with its head
office. Unless there is any showing that respondent understood and
expressly agreed to a more far-reaching interpretation, the reference to
Citibank, N.A. cannot be extended to all other branches of petitioner
Citibank all over the world. Although theoretically, books of the branches
form part of the books of the head office, operationally and practically, each
branch maintains its own books which shall only be later integrated and
balanced with the books of the head office. Thus, it is very possible to
identify and segregate the books of the Philippine branches of petitioner
Citibank from those of Citibank-Geneva, and to limit the authority granted
for application as payment of the PNs to respondent's deposits in the books
of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in
a contract come about after deliberate drafting by the parties thereto, there are
certain contracts almost all the provisions of which have been drafted only by
one party, usually a corporation. Such contracts are called contracts of adhesion,
because the only participation of the party is the affixing of his signature or his
"adhesion" thereto. This being the case, the terms of such contract are to be
construed strictly against the party which prepared it. 17
As for the supposed Declaration of Pledge of respondent's dollar accounts with
Citibank-Geneva as security for the loans, this Court stands firm on its ruling
that the non-production thereof is fatal to petitioners' cause in light of
respondent's claim that her signature on such document was a forgery. It bears
to note that the original of the Declaration of Pledge is with Citibank-Geneva, a
branch of petitioner Citibank. As between respondent and petitioner Citibank,
the latter has better access to the document. The constant excuse forwarded by
petitioner Citibank that Citibank-Geneva refused to return possession of the
original Declaration of Pledge to Citibank-Manila only supports this Court's
finding in the preceding paragraphs that the two branches are actually operating
separately and independently of each other. aAcHCT
Further, petitioners keep playing up the fact that respondent, at the beginning of
the trial, refused to give her specimen signatures to help establish whether her
signature on the Declaration of Pledge was indeed forged. Petitioners seem to
forget that subsequently, respondent, on advice of her new counsel, already
offered to cooperate in whatever manner so as to bring the original Declaration
of Pledge before the RTC for inspection. The exchange of the counsels for the
opposing sides during the hearing on 24 July 1991 before the RTC reveals the
apparent willingness of respondent's counsel to undertake whatever course of
action necessary for the production of the contested document, and the evasive,
non-committal, and uncooperative attitude of petitioners' counsel. 18
Lastly, this Court's ruling striking down the Declaration of Pledge is not entirely
based on respondent's allegation of forgery. In its Decision, this Court already
extensively discussed why it found the said Declaration of Pledge highly
suspicious and irregular, to wit
First of all, it escapes this Court why petitioner Citibank took
care to have the Deeds of Assignment of the PNs notarized,
yet left the Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take greater
cautionary measures with the preparation and execution of
the Declaration of Pledge because it involved respondent's
"all present and future fiduciary placements" with a Citibank
branch in another country, specifically, in Geneva,
Switzerland. While there is no express legal requirement
that the Declaration of Pledge had to be notarized to be
effective, even so, it could not enjoy the same prima facie
presumption of due execution that is extended to notarized
documents, and petitioner Citibank must discharge the
burden of proving due execution and authenticity of the
Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date
when the Declaration of Pledge was actually executed. The
photocopy of the Declaration of Pledge submitted by
petitioner Citibank before the RTC was undated. It presented
only a photocopy of the pledge because it already forwarded
the original copy thereof to Citibank-Geneva when it
requested for the remittance of respondent's dollar accounts
pursuant thereto. Respondent, on the other hand, was able
to secure a copy of the Declaration of Pledge, certified by an
officer of Citibank-Geneva, which bore the date 24
September 1979. Respondent, however, presented her
passport and plane tickets to prove that she was out of the
country on the said date and could not have signed the
pledge. Petitioner Citibank insisted that the pledge was
signed before 24 September 1979, but could not provide an
explanation as to how and why the said date was written on
the pledge. Although Mr. Tan testified that the Declaration of
136
Pledge was signed by respondent personally before him, he
could not give the exact date when the said signing took
place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the
RTC was certified by an officer of Citibank-Geneva, which
had possession of the original copy of the pledge. It is dated
24 September 1979, and this Court shall abide by the
presumption that the written document is truly dated. Since
it is undeniable that respondent was out of the country on
24 September 1979, then she could not have executed the
pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out.
The pledge was in a standard printed form. It was
constituted in favor of Citibank, N.A., otherwise referred to
therein as the Bank. It should be noted, however, that in the
space which should have named the pledgor, the name of
petitioner Citibank was typewritten, to wit
The pledge right herewith constituted shall secure
all claims which the Bank now has or in the future
acquires against Citibank, N.A., Manila (full name
and address of the Debtor), regardless of the legal
cause or the transaction (for example current
account, securities transactions, collections, credits,
payments, documentary credits and collections)
which gives rise thereto, and including principal, all
contractual and penalty interest, commissions,
charges, and costs. CIETDc
The pledge, therefore, made no sense, the pledgor and
pledgee being the same entity. Was a mistake made by
whoever filled-out the form? Yes, it could be a possibility.
Nonetheless, considering the value of such a document, the
mistake as to a significant detail in the pledge could only be
committed with gross carelessness on the part of petitioner
Citibank, and raised serious doubts as to the authenticity
and due execution of the same. The Declaration of Pledge
had passed through the hands of several bank officers in the
country and abroad, yet, surprisingly and implausibly, no
one noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the
Declaration of Pledge. She claimed that the signature was a
forgery. When a document is assailed on the basis of
forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject
of inquiry is the contents of a document, no
evidence is admissible other than the original
document itself except in the instances mentioned
in Section 3, Rule 130 of the Revised Rules of
Court. Mere photocopies of documents are
inadmissible pursuant to the best evidence rule.
This is especially true when the issue is that
of forgery.
As a rule, forgery cannot be presumed and must be
proved by clear, positive and convincing evidence
and the burden of proof lies on the party alleging
forgery. The best evidence of a forged signature in
an instrument is the instrument itself reflecting the
alleged forged signature. The fact of forgery can
only be established by a comparison between the
alleged forged signature and the authentic and
genuine signature of the person whose signature is
theorized upon to have been forged. Without the
original document containing the alleged forged
signature, one cannot make a definitive comparison
which would establish forgery. A comparison based
on a mere xerox copy or reproduction of the
document under controversy cannot produce
reliable results.
Respondent made several attempts to have the original copy
of the pledge produced before the RTC so as to have it
examined by experts. Yet, despite several Orders by the
RTC, petitioner Citibank failed to comply with the production
of the original Declaration of Pledge. It is admitted that
Citibank-Geneva had possession of the original copy of the
pledge. While petitioner Citibank in Manila and its branch in
Geneva may be separate and distinct entities, they are still
incontestably related, and between petitioner Citibank and
respondent, the former had more influence and resources to
convince Citibank-Geneva to return, albeit temporarily, the
original Declaration of Pledge. Petitioner Citibank did not
present any evidence to convince this Court that it had
exerted diligent efforts to secure the original copy of the
pledge, nor did it proffer the reason why Citibank-Geneva
obstinately refused to give it back, when such document
would have been very vital to the case of petitioner Citibank.
There is thus no justification to allow the presentation of a
mere photocopy of the Declaration of Pledge in lieu of the
original, and the photocopy of the pledge presented by
petitioner Citibank has nil probative value. In addition, even
if this Court cannot make a categorical finding that
respondent's signature on the original copy of the pledge
was forged, it is persuaded that petitioner Citibank willfully
suppressed the presentation of the original document, and
takes into consideration the presumption that the evidence
137
 willfully suppressed would be adverse to petitioner Citibank
if produced.
As far as the Declaration of Pledge is concerned, petitioners failed to submit any
new evidence or argument that was not already considered by this Court when it
rendered its Decision. AIDcTE
As to the value of the dollar deposits
in Citibank-Geneva ordered
refunded to respondent
In case petitioners are still ordered to refund to respondent the amount of her
dollar accounts with Citibank-Geneva, petitioners beseech this Court to adjust
the nominal values of respondent's dollar accounts and/or her overdue peso
loans by using the values of the currencies stipulated at the time the obligations
were established in 1979, to address the alleged inequitable consequences
resulting from the extreme and extraordinary devaluation of the Philippine
currency that occurred in the course of the Asian crisis of 1997. Petitioners base
their request on Article 1250 of the Civil Code which reads, "In case an
extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable only
when there is extraordinary inflation or deflation of the currency. Inflation has
been defined as the sharp increase of money or credit or both without a
corresponding increase in business transaction. There is inflation when there is
an increase in the volume of money and credit relative to available goods
resulting in a substantial and continuing rise in the general price level. 19 In
Singson v. Caltex (Philippines), Inc., 20 this Court already provided a discourse
as to what constitutes as extraordinary inflation or deflation of currency, thus
We have held extraordinary inflation to exist when there is a
decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase
or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the
time of the establishment of the obligation.
An example of extraordinary inflation, as cited by the Court
in Filipino Pipe and Foundry Corporation vs. NAWASA, supra,
is that which happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced
a case of hyperinflation. In early 1921, the value of
the German mark was 4.2 to the U.S. dollar. By
May of the same year, it had stumbled to 62 to the
U.S. dollar. And as prices went up rapidly, so that
by October 1923, it had reached 4.2 trillion to the
U.S. dollar!" (Bernardo M. Villegas & Victor R.
Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week,
then every day, then every hour. Women were paid
several times a day so that they could rush out and
exchange their money for something of value
before what little purchasing power was left
dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their
money out of the windows to their waiting wives,
who would rush to unload the nearly worthless
paper. A postage stamp cost millions of marks and
a loaf of bread, billions." (Sidney Rutberg, "The
Money Balloon", New York: Simon and Schuster,
1975, p. 19, cited in "Economics, An Introduction"
by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed.
The party alleging it must lay down the factual basis for the
application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that
the voluminous records and statistics submitted by plaintiff-
appellant proved that there has been a decline in the
purchasing power of the Philippine peso, but this downward
fall cannot be considered "extraordinary" but was simply a
universal trend that has not spared our country. Similarly, in
Huibonhoa vs. Court of Appeals, the Court dismissed
plaintiff-appellant's unsubstantiated allegation that the
Aquino assassination in 1983 caused building and
construction costs to double during the period July 1983 to
February 1984. In Serra vs. Court of Appeals, the Court
again did not consider the decline in the peso's purchasing
power from 1983 to 1985 to be so great as to result in an
extraordinary inflation. aEHAIS
Like the Serra and Huibonhoa cases, the instant case also
raises as basis for the application of Article 1250 the
Philippine economic crisis in the early 1980s when, based
on petitioner's evidence, the inflation rate rose to 50.34% in
1984. We hold that there is no legal or factual basis to
support petitioner's allegation of the existence of
extraordinary inflation during this period, or, for that matter,
the entire time frame of 1968 to 1983, to merit the
adjustment of the rentals in the lease contract dated July
16, 1968. Although by petitioner's evidence there was a
138
 decided decline in the purchasing power of the Philippine
peso throughout this period, we are hard put to treat this as
an "extraordinary inflation" within the meaning and intent of
Article 1250.
Rather, we adopt with approval the following observations of
the Court of Appeals on petitioner's evidence, especially the
NEDA certification of inflation rates based on consumer price
index:
. . . (a) from the period 1966 to 1986, the official
inflation rate never exceeded 100% in any single
year; (b) the highest official inflation rate recorded
was in 1984 which reached only 50.34%; (c) over a
twenty one (21) year period, the Philippines
experienced a single-digit inflation in ten (10) years
(i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977,
1978, 1983 and 1986); (d) in other years (i.e.,
1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981,
1982, 1984 and 1989) when the Philippines
experienced double-digit inflation rates, the
average of those rates was only 20.88%; (e) while
there was a decline in the purchasing power of the
Philippine currency from the period 1966 to 1986,
such cannot be considered as extraordinary; rather,
it is a normal erosion of the value of the Philippine
peso which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of
decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly
distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an
official declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or deflation of
the currency is upon the party that alleges it. Such circumstance must be proven
by competent evidence, and it cannot be merely assumed. In this case,
petitioners presented no proof as to how much, for instance, the price index of
goods and services had risen during the intervening period. 21 All the
information petitioners provided was the drop of the U.S. dollar-Philippine peso
exchange rate by 17 points from June 1997 to January 1998. While the said
figure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also significant to note that the BSP did not categorically declare that the same
constitute as an extraordinary inflation. The existence of extraordinary inflation
must be officially proclaimed by competent authorities, and the only competent
authority so far recognized by this Court to make such an official proclamation is
the BSP. 22
Neither can this Court, by merely taking judicial notice of the Asian currency
crisis in 1997, already declare that there had been extraordinary inflation. It
should be recalled that the Philippines likewise experienced economic crisis in
the 1980s, yet this Court did not find that extraordinary inflation took place
during the said period so as to warrant the application of Article 1250 of the Civil
Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on
equitable considerations. Among the maxims of equity are (1) he who seeks
equity must do equity, and (2) he who comes into equity must come with clean
hands. The latter is a frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have equity. 23 Petitioner
Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does not
come to court with clean hands. The delay in the recovery 24 by respondent of
her dollar accounts with Citibank-Geneva was due to the unlawful act of
petitioner Citibank in using the same to liquidate respondent's loans. Petitioner
Citibank even attempted to justify the off-setting or compensation of
respondent's loans using her dollar accounts with Citibank-Geneva by the
presentation of a highly suspicious and irregular, and even possibly forged,
Declaration of Pledge. EcSaHA
The damage caused to respondent of the deprivation of her dollar accounts for
more than two decades is unquestionably relatively more extensive and
devastating, as compared to whatever damage petitioner Citibank, an
international banking corporation with undoubtedly substantial capital, may have
suffered for respondent's non-payment of her loans. It must also be
remembered that petitioner Citibank had already considered respondent's loans
paid or liquidated by 26 October 1979 after it had fully effected compensation
thereof using respondents deposits and money market placements. All this time,
respondent's dollar accounts are unlawfully in the possession of and are being
used by petitioner Citibank for its business transactions. In the meantime,
respondent's businesses failed and her properties were foreclosed because she
was denied access to her funds when she needed them most. Taking these into
consideration, respondent's dollar accounts with Citibank-Geneva must be
deemed to be subsisting and continuously deposited with petitioner Citibank all
this while, and will only be presently withdrawn by respondent. Therefore,
petitioner Citibank should refund to respondent the U.S. $149,632.99 taken
from her Citibank-Geneva accounts, or its equivalent in Philippine currency using
the exchange rate at the time of payment, plus the stipulated interest for
each of the fiduciary placements and current accounts involved, beginning 26
October 1979.
As to respondent's Motion to Clarify
and/or Confirm Decision with Notice
of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modified by the Resolution of the same court,
dated 20 November 2002, would be implemented or executed together with this
Court's Decision.
139
This Court clarifies that its affirmation of the Decision of the Court of Appeals, as
modified, is only to the extent that it recognizes that petitioners had liabilities to
the respondent. However, this Court's Decision modified that of the appellate
court's by making its own determination of the specific liabilities of the
petitioners to respondent and the amounts thereof; as well as by recognizing
that respondent also had liabilities to petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive
portion of this Court's Decision, dated 16 October 2006, should it already
become final and executory, without any further modifications.
As the last point, there is no merit in respondent's Motion for this Court to
already declare its Decision, dated 16 October 2006, final and executory. A
judgment becomes final and executory by operation of law and, accordingly, the
finality of the judgment becomes a fact upon the lapse of the reglementary
period without an appeal or a motion for new trial or reconsideration being filed.
25 This Court cannot arbitrarily disregard the reglementary period and declare a
judgment final and executory upon the mere motion of one party, for to do so
will be a culpable violation of the right of the other parties to due process.
IN VIEW OF THE FOREGOING, petitioners' Motion for Partial Reconsideration of
this Court's Decision, dated 16 October 2006, and respondent's Motion for this
Court to declare the same Decision already final and executory, are both DENIED
for lack of merit. EACIcH
SO ORDERED.
||| (Citibank, N.A. v. Sabeniano, G.R. No. 156132, [February 6, 2007], 543 PHIL
406-435)
THIRD DIVISION
[G.R. No. 115849. January 24, 1996.]
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly
Producers Bank of the Philippines) and MERCURIO
RIVERA, petitioners, vs. COURT OF APPEALS, CARLOS
EJERCITO, in substitution of DEMETRIO DEMETRIA,
and JOSE JANOLO, respondents.
Ongkiko, Dizon, Ongkiko & Panga Law Office and Domingo and Dizon for
petitioners.
Castillo, Laman, Tan, Pantalleon & San Jose for Carlos Ejercito. cdta
PANGANIBAN, J p:
In the absence of a formal deed of sale, may commitments given by bank
officers in an exchange of letters and/or in a meeting with the buyers constitute
a perfected and enforceable contract of sale over 101 hectares of land in Sta.
Rosa, Laguna? Does the doctrine of "apparent authority" apply in this case? If
so, may the Central Bank-appointed conservator of Producers Bank (now First
Philippine International Bank) repudiate such "apparent authority" after said
contract has been deemed perfected? During the pendency of a suit for specific
performance, does the filing of a "derivative suit" by the majority shareholders
and directors of the distressed bank to prevent the enforcement or
implementation of the sale violate the ban against forum-shopping?
Simply stated, these are the major questions brought before this Court in the
instant Petition for review on certiorari under Rule 45 of the Rules of Court, to
set aside the Decision promulgated January 14, 1994 of the respondent Court of
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. cdta
"All references to the original plaintiffs in the decision and its
dispositive portion are deemed, herein and hereafter, to
legally refer to the plaintiff-appellee Carlos C. Ejercito.
"Costs against appellant bank."
140
The dispositive portion of the trial court's 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; cdta
"2.Ordering defendant Producers Bank of the Philippines,
upon finality of this decision and receipt from the plaintiffs
the amount of P5.5 Million, to execute in favor of said
plaintiffs a deed of absolute sale over the aforementioned six
(6) parcels of land, and to immediately deliver to the
plaintiffs the owner's copies of T.C.T. Nos. T-106932 to T-
106937, inclusive, for purposes of registration of the same
deed and transfer of the six (6) titles in the names of the
plaintiffs;
"3.Ordering the defendants, jointly and severally, to pay
plaintiffs Jose A. Janolo and Demetrio Demetria the sums of
P200,000.00 each in moral damages;
"4.Ordering the defendants, jointly and severally, to pay
plaintiffs the sum of P100,000.00 as exemplary damages;
cdta
"5.Ordering the defendants, jointly and severally, to pay the
plaintiffs the amount of P400,000.00 for and by way of
attorney's fees;
"6.Ordering the defendants to pay the plaintiffs, jointly and
severally, actual and moderate damages in the amount of
P20,000.00;
"With costs against the defendants."
After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to
sur-rejoinder, the petition was given due course in a Resolution dated January
18, 1995. Thence, the parties filed their respective memoranda and reply
memoranda. The First Division transferred this case to the Third Division per
resolution dated October 23, 1995. After carefully deliberating on the aforesaid
submissions, the Court assigned the case to the undersigned ponente for the
writing of this Decision. cdta
The Parties
Petitioner First Philippine International Bank (formerly Producers Bank of the
Philippines; petitioner Bank, for brevity) is a banking institution organized and
existing under the laws of the Republic of the Philippines. Petitioner Mercurio
Rivera (petitioner Rivera, for brevity) is of legal age and was, at all times
material to this case, Head Manager of the Property Management Department of
the petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and
is the assignee of original plaintiffs-appellees Demetrio Demetria and Jose
Janolo.
Respondent Court of Appeals is the court which issued the Decision and
Resolution sought to be set aside through this petition. cdta
The Facts
The facts of this case are summarized in the respondent Court's 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 for a loan.
The original plaintiffs, Demetrio Demetria and Jose O.
Janolo, wanted to purchase the property and thus initiated
negotiations for that purpose.
"(2)In the early part of August 1987 said plaintiffs, upon the
suggestion of BYME Investment's legal counsel, Jose
Fajardo, met with defendant Mercurio Rivera, Manager of the
Property Management Department of the defendant bank.
The meeting was held pursuant to plaintiffs' plan to buy the
property (TSN of Jan. 16, 1990, pp. 7-10). After the
meeting, plaintiff Janolo, following the advice of defendant
Rivera, made a formal purchase offer to the bank through a
letter dated August 30, 1987 (Exh. "B"), as follows:
August 30, 1987
141
The Producers Bank of the Philippines cdta September 1, 1987

Makati, Metro Manila

J-P M-P GUTIERREZ ENTERPRISES

Attn.Mr. Mercurio Q. Rivera 142 Charisma St., Doa Andres II

Manager, Property Management Dept. Rosario, Pasig, Metro Manila

Gentlemen:

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

Thank you for your letter-offer to buy our six (6) parcels of
TCT No.AREA
acquired lots at Sta. Rosa, Laguna (formerly owned by Byme
Industrial Corp.). Please be informed however that the
T-106932113,580 sq.m. bank's counter-offer is at P5.5 million for more than 101
hectares on lot basis.
T-10693370,899 sq.m.
We shall be very glad to hear your position on the matter.
T-10693452,246 sq.m.
Best regards.
T-10693596,768 sq.m.
"(4)On September 17, 1987, plaintiff Janolo, responding to
Rivera's aforequoted reply, wrote (Exh. "D"):
T-106936187,114 sq.m.

September 17, 1987

T-106937481,481 sq.m.

Producers Bank
My offer is for PESOS: THREE MILLION FIVE HUNDRED
THOUSAND (P3,500,000.00) PESOS, in cash. cdta
Paseo de Roxas
Kindly contact me at Telephone Number 921-1344.
Makati, Metro Manila cdta
"(3)On September 1, 1987, defendant Rivera made on
behalf of the bank a formal reply by letter which is
hereunder quoted (Exh. "C"):
Attention:Mr. Mercurio Rivera

Gentlemen:

142
In reply to your letter regarding my proposal to purchase Attention:Atty. Demetrio Demetria
your 101-hectare lot located at Sta. Rosa, Laguna, I would
like to amend my previous offer and I now propose to buy
Dear Sir:
the said lot at P4.250 million in CASH.

Your proposal to buy the properties the bank foreclosed from

Hoping that this proposal meets your satisfaction.
"(5)There was no reply to Janolo's 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"): cdta
The Producers Bank of the Philippines
Paseo de Roxas, Makati
Metro Manila
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: cdta

Attention:Mr. Mercurio Rivera

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

Mr. Mercurio Rivera

Gentlemen:
Manager, Producers Bank

Pursuant to our discussion last 28 September 1987, we are

pleased to inform you that we are accepting your offer for us Paseo de Roxas, Makati
to purchase the property at Sta. Rosa, Laguna, formerly
owned by Byme Investment, for a total price of PESOS: FIVE Metro Manila
MILLION FIVE HUNDRED THOUSAND (P5,500,000.00).

Thank you.
Dear Mr. Rivera:
"(6)On October 12, 1987, the conservator of the bank
(which has been placed under conservatorship by the
This is in connection with the offer of our client, Mr. Jose O.
Central Bank since 1984) was replaced by an Acting
Janolo, to purchase your 101-hectare lot located in Sta.
Conservator in the person of defendant Leonida T.
Rosa, Laguna, and which are covered by TCT No. T-106932
Encarnacion. On November 4, 1987, defendant Rivera wrote
to 106937.
plaintiff Demetria the following letter (Exh. "F"): cdta

143
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
Gentlemen:
letter dated September 30, 1987 and was received by you
on October 5, 1987.
We are sending you herewith, in-behalf of our client, Mr.
JOSE O. JANOLO, MBTC Check No. 258387 in the amount of
In view of the above circumstances, we believe that an
P5.5 million as our agreed purchase price of the 101-hectare
agreement has been perfected. We were also informed that
lot covered by TCT Nos. 106932, 106933, 106934, 106935
despite repeated follow-up to consummate the purchase,
106936 and 106937 and registered under Producers Bank.
you now refuse to honor your commitment. Instead, you
have advertised for sale the same lot to others. cdta
This is in connection with the perfected agreement
consequent from your offer of P5.5 Million as the purchase
In behalf of our client, therefore, we are making this formal
price of the said lots. Please inform us of the date of
demand upon you to consummate and execute the
documentation of the sale immediately. cdasia
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 Kindly acknowledge receipt of our payment.
be constrained to file the necessary court action to protect
the interest of our client. "(9)The foregoing letter drew no response for more than
four months. Then, on May 3, 1988, plaintiff, through
We trust that you will be guided accordingly. 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
"(8)Defendant bank, through defendant Rivera,
Record, p. 656), in a reply letter dated May 12, 1988 (Annex
acknowledged receipt of the foregoing letter and stated, in
"4" of defendant's answer to amended complaint), the
its communication of December 2, 1987 (Exh. "I"), that said
defendants through Acting Conservator Encarnacion
letter has been "referred . . . to the office of our Conservator
repudiated the authority of defendant Rivera and claimed
for proper disposition". However, no response came from the
that his dealings with the plaintiffs, particularly his counter-
Acting Conservator. On December 14, 1987, the plaintiffs
offer of P5.5 Million are unauthorized or illegal. On that
made a second tender of payment (Exh. "L" and "L-1"), this
basis, the defendants justified the refusal of the tenders of
time through the Acting Conservator, defendant
payment and the non-compliance with the obligations under
Encarnacion. Plaintiffs' letter reads: cdta
what the plaintiffs considered to be a perfected contract of
sale.

"(10)On May 16, 1988, plaintiffs filed a suit for specific

PRODUCERS BANK OF 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
THE PHILIPPINES
perfected contract of sale. The defendants took the position
that there was no such perfected sale because the defendant
Paseo de Roxas, Rivera is not authorized to sell the property, and that there
was no meeting of the minds as to the price." cdasia
Makati, Metro Manila
On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip
Salazar Hernandez and Gatmaitan, filed a motion to intervene in the trial court,
alleging that as owner of 80% of the Bank's outstanding shares of stock, he had
a substantial interest in resisting the complaint. On July 8, 1991, the trial court
Attn.:Atty. NIDA ENCARNACION 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
Central Bank Conservator reconsideration filed thereafter. From the trial court's decision, the Bank,

144
petitioner Rivera and conservator Encarnacion appealed to the Court of Appeals
which subsequently affirmed with modification the said judgment. Henry Co did
not appeal the denial of his motion for intervention.
In the course of the proceedings in the respondent Court, Carlos Ejercito was
substituted in place of Demetria and Janolo, in view of the assignment of the
latters' rights in the matter in litigation to said private respondent.
On July 11, 1992, during the pendency of the proceedings in the Court of
Appeals, Henry Co and several other stockholders of the Bank, through counsel
Angara Abello Concepcion Regala and Cruz, filed an action (hereafter, the
"Second Case") purportedly a "derivative suit" with the Regional Trial Court
of Makati, Branch 134, docketed as Civil Case No. 92-1606, against Encarnacion,
Demetria and Janolo "to declare any perfected sale of the property as
unenforceable and to stop Ejercito from enforcing or implementing the sale". 4
In his answer, Janolo argued that the Second Case was barred by litis pendentia
by virtue of the case then pending in the Court of Appeals. During the pre-trial
conference in the Second Case, plaintiffs filed a Motion for Leave of Court to
Dismiss the Case Without Prejudice. "Private respondent opposed this motion on
the ground, among others, that plaintiff's act of forum shopping justifies the
dismissal of both cases, with prejudice." 5 Private respondent, in his
memorandum, averred that this motion is still pending in the Makati RTC. cdasia
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. cdasia
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. cdasia
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." cdasia
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? cdasia
5)Did the respondent Court commit any reversible error in its findings of facts?
145
 The First Issue: Was There Forum-Shopping?
In order to prevent the vexations of multiple petitions and actions, the Supreme
Court promulgated Revised Circular No. 28-91 requiring that a party "must
certify under oath . . . [that] (a) he has not (t)heretofore commenced any other
action or proceeding involving the same issues in the Supreme Court, the Court
of Appeals, or any other tribunal or agency; (b) to the best of his knowledge, no
such action or proceeding is pending" in said courts or agencies. A violation of
the said circular entails sanctions that include the summary dismissal of the
multiple petitions or complaints. To be sure, petitioners have included a
VERIFICATION/CERTIFICATION in their Petition stating "for the record(,) the
pendency of Civil Case No. 92-1606 before the Regional Trial Court of Makati,
Branch 134, involving a derivative suit filed by stockholders of petitioner Bank
against the conservator and other defendants but which is the subject of a
pending Motion to Dismiss Without Prejudice." 9
Private respondent Ejercito vigorously argues that in spite of this verification,
petitioners are guilty of actual forum shopping because the instant petition
pending before this Court involves "identical parties or interests represented,
rights asserted and reliefs sought (as that) currently pending before the
Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the issues
in the two cases are so intertwined that a judgment or resolution in either case
will constitute res judicata in the other." 10 cdasia
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; cdasia
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 non-resident litigants are given the option to choose the forum or
place wherein to bring their suit for various reasons or excuses, including to
secure procedural advantages, to annoy and harass the defendant, to avoid
overcrowded dockets, or to select a more friendly venue. To combat these less
than honorable excuses, the principle of forum non conveniens was developed
whereby a court, in conflicts of law cases, may refuse impositions on its
jurisdiction where it is not the most "convenient" or available forum and the
parties are not precluded from seeking remedies elsewhere.
In this light, Black's Law Dictionary 13 says that forum shopping "occurs when a
party attempts to have his action tried in a particular court or jurisdiction where
he feels he will receive the most favorable judgment or verdict." Hence,
according to Words and 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". cdasia
In the Philippines, forum shopping has acquired a connotation encompassing not
only a choice of venues, as it was originally understood in conflicts of laws, but
also to a choice of remedies. As to the first (choice of venues), the Rules of
Court, for example, allow a plaintiff to commence personal actions "where the
defendant or any of the defendants resides or may be found, or where the
plaintiff or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4,
Sec. 2 [b]). As to remedies, aggrieved parties, for example, are given a choice
of pursuing civil liabilities independently of the criminal, arising from the same
set of facts. A passenger of a public utility vehicle involved in a vehicular
accident may sue on culpa contractual, culpa aquiliana or culpa criminal each
remedy being available independently of the others although he cannot
recover more than once.
"In either of these situations (choice of venue or choice of
remedy), the litigant actually shops for a forum of his action.
This was the original concept of the term forum shopping.
"Eventually, however, instead of actually making a choice of
the forum of their actions, litigants, through the
encouragement of their lawyers, file their actions in all
available courts, or invoke all relevant remedies
simultaneously. This practice had not only resulted to (sic)
conflicting adjudications among different courts and
consequent confusion enimical (sic) to an orderly
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 cdasia
146
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. . . ." 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, forum-shopping exists where the elements of
litis pendentia are present or where a final judgment in one case will amount to
res judicata in the other, as follows: cdasia
"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. cdasia
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
147
 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." (Emphasis
supplied)
In an earlier case 23 , but with the same logic and vigor, we held: cdasia
"In other words, the filing by the petitioners of the instant
special civil action for certiorari and prohibition in this Court
despite the pendency of their action in the Makati Regional
Trial Court, is a species of forum-shopping. Both actions
unquestionably involve the same transactions, the same
essential facts and circumstances. The petitioners' claim of
absence of identity simply because the PCGG had not been
impleaded in the RTC suit, and the suit did not involve
certain acts which transpired after its commencement, is
specious. In the RTC action, as in the action before this
Court, the validity of the contract to purchase and sell of
September 1, 1986, i.e., whether or not it had been
efficaciously rescinded, and the propriety of implementing
the same (by paying the pledgee banks the amount of their
loans, obtaining the release of the pledged shares, etc.)
were the basic issues. So, too, the relief was the same: the
prevention of such implementation and/or the restoration of
the status quo ante. When the acts sought to be restrained
took place anyway despite the issuance by the Trial Court of
a temporary restraining order, the RTC suit did not become
functus oficio. It remained an effective vehicle for obtention
of relief; and petitioners' remedy in the premises was plain
and patent: the filing of an amended and supplemental
pleading in the RTC suit, so as to include the PCGG as
defendant and seek nullification of the acts sought to be
enjoined but nonetheless done. The remedy was certainly
not the institution of another action in another forum based
on essentially the same facts. The adoption of this latter
recourse renders the petitioners amenable to disciplinary
action and both their actions, in this Court as well as in the
Court a quo, dismissible."
In the instant case before us, there is also identity of parties, or at least, of
interests represented. Although the plaintiffs in the Second Case (Henry L. Co,
et al.) are not name parties in the First Case, they represent the same interest
and entity, namely, petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct
personal interest in the matter in controversy. They are not principally or even
subsidiarily liable; much less are they direct parties in the assailed contract of
sale; and
Secondly, the allegations of the complaint in the Second Case show that the
stockholders are bringing a "derivative suit". In the caption itself, petitioners
claim to have brought suit "for and in behalf of the Producers Bank of the
Philippines" 24 . Indeed, this is the very essence of a derivative suit: cdasia
"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]; Emphasis supplied).
In the face of the damaging admissions taken from the complaint in the Second
Case, petitioners, quite strangely, sought to deny that the Second Case was a
derivative suit, reasoning that it was brought, not by the minority shareholders,
but by Henry Co et al., who not only own, hold or control over 80% of the
outstanding capital stock, but also constitute the majority in the Board of
Directors of petitioner Bank. That being so, then they really represent the Bank.
So, whether they sued "derivatively" or directly, there is undeniably an identity
of interests/entity represented.
Petitioner also tried to seek refuge in the corporate fiction that the personality of
the Bank is separate and distinct from its shareholders. But the rulings of this
Court are consistent: "When the fiction is urged as a means of perpetrating a
fraud or an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation
of individuals." 25
In addition to the many cases 26 where the corporate fiction has been
disregarded, we now add the instant case, and declare herewith that the
corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority
in direct actions or as the minority in a derivative suit, cannot be allowed to trifle
with court processes, particularly where, as in this case, the corporation itself
has not been remiss in vigorously prosecuting or defending corporate causes and
in using and applying remedies available to it. To rule otherwise would be to
encourage corporate litigants to use their shareholders as fronts to circumvent
the stringent rules against forum shopping. cdasia
148
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, Velhagen's and King's motion to
dismiss Civil Case No. 91-2069 by no means negates the
charge of forum-shopping as such did not exist in the first
place." (Emphasis supplied)
Petitioner pointed out that since it was merely the defendant in the original case,
it could not have chosen the forum in said case.
Respondent, on the other hand, replied that there is a difference in factual
setting between Victronics and the present suit. In the former, as underscored in
the above-quoted Court ruling, the defendants did not file any responsive
pleading in the first case. In other words, they did not make any denial or raise
any defense or counter-claim therein. In the case before us however, petitioners
filed a responsive pleading to the complaint as a result of which, the issues
were joined. cdasia
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.
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 Petition's VERIFICATION/CERTIFICATION contained sufficient
allegations as to the pendency of the Second Case to show good faith in
observing Circular 28-91. The lawyers who filed the Second Case are not before
us; thus the rudiments of due process prevent us from motu propio imposing
disciplinary measures against them in this Decision. However, petitioners
themselves (and particularly Henry Co, et al.) as litigants are admonished to
strictly follow the rules against forum-shopping and not to trifle with court
proceedings and processes. They are warned that a repetition of the same will
be dealt with more severely. cdasia
Having said that, let it be emphasized that this petition should be dismissed not
merely because of forum-shopping but also because of the substantive issues
raised, as will be discussed shortly.
The Second Issue: Was The Contract Perfected?
The respondent Court correctly treated the question of whether or not there
was, on the basis of the facts established, a perfected contract of sale as the
ultimate issue. Holding that a valid contract has been established, respondent
Court stated:
"There is no dispute that the object of the transaction is that
property owned by the defendant bank as acquired assets
consisting of six (6) parcels of land specifically identified
under Transfer Certificates of Title Nos. T-106932 to T-
106937. It is likewise beyond cavil that the bank intended to
sell the property. As testified to by the Bank's Deputy
Conservator, Jose Entereso, the bank was looking for buyers
of the property. It is definite that the plaintiffs wanted to
purchase the property and it was precisely for this purpose
that they met with defendant Rivera, Manager of the
Property Management Department of the defendant bank, in
early August 1987. The procedure in the sale of acquired
assets as well as the nature and scope of the authority of
Rivera on the matter is clearly delineated in the testimony of
Rivera himself, which testimony was relied upon by both the
bank and by Rivera in their appeal briefs. Thus (TSN of July
30, 1990. pp. 19-20): cdasia
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
149
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 pointblank his authority to
sell any property?
A:No, sir. Not point blank although it came from him.
(W)hen I asked him how long it would take because he was
saying that the matter of pricing will be passed upon by the
committee. And when I asked him how long it will take for
the committee to decide and he said the committee meets
every week. If I am not mistaken Wednesday and in about
two week's (sic) time, in effect what he was saying he was
not the one who was to decide. But he would refer it to the
committee and he would relay the decision of the committee
to me. cdasia
Q:Please answer the question.
A:He did not say that he had the authority(.) But he said he
would refer the matter to the committee and he would relay
the decision to me and he did just like that.
"Parenthetically, the Committee referred to was the Past Due
Committee of which Luis Co was the Head, with Jose
Entereso as one of the members.
"What transpired after the meeting of early August 1987 are
consistent with the authority and the duties of Rivera and
the bank's internal procedure in the matter of the sale of
bank's assets. As advised by Rivera, the plaintiffs made a
formal offer by a letter dated August 20, 1987 stating that
they would buy at the price of P3.5 Million in cash. The letter
was for the attention of Mercurio Rivera who was tasked to
convey and accept such offers. Considering an aspect of the
official duty of Rivera as some sort of intermediary between
the plaintiffs-buyers with their proposed buying price on one
hand, and the bank Committee, the Conservator and
ultimately the bank itself with the set price on the other, and
considering further the discussion of price at the meeting of
August resulting in a formal offer of P3.5 Million in cash,
there can be no other logical conclusion than that when, on
September 1, 1987, Rivera informed plaintiffs by letter that
"the bank's counter-offer is at P5.5 Million for more than 101
hectares on lot basis," such counter-offer price had been
determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs' offer
for discussion by the Committee of such matters as original
loan of borrower, bid price during foreclosure, total claim of
the bank, and market value. Tersely put, under the
established facts, the price of P5.5 Million was, as clearly
worded in Rivera's letter (Exh. "E"), the official and definitive
price at which the bank was selling the property.
"There were averments by defendants below, as well as
before this Court, that the P5.5 Million price was not
discussed by the Committee and that 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 bank's
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 bank's 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
150
 as the bank's action on the matter is not in fact so. It is a
familiar doctrine, the doctrine of ostensible authority, that if
a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent
authority, and thus holds him out to the public as possessing
power to do those acts, the corporation will, as against any
one who has in good faith dealt with the corporation through
such agent, he estopped from denying his authority
(Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of
Appeals, 94 SCRA 357, 369-370; Prudential Bank v. Court of
Appeals, G.R. No. 103957, June 14, 1993)." 29
Article 1318 of the Civil Code enumerates the requisites of a valid and perfected
contract as follows: "(1) Consent of the contracting parties; (2) Object certain
which is the subject matter of the contract; (3) Cause of the obligation which is
established."
There is no dispute on requisite no. 2. The object of the questioned contract
consists of the six (6) parcels of land in Sta. Rosa, Laguna with an aggregate
area of about 101 hectares, more or less, and covered by Transfer Certificates of
Title Nos. T-106932 to T-106937. There is, however, a dispute on the first and
third requisites.
Petitioners allege that "there is no counter-offer made by the Bank, and any
supposed counter-offer which Rivera (or Co) may have made is unauthorized.
Since there was no counter-offer by the Bank, there was nothing for Ejercito (in
substitution of Demetria and Janolo) to accept." 30 They disputed the factual
basis of the respondent Court's findings that there was an offer made by Janolo
for P3.5 million, to which the Bank counter-offered P5.5 million. We have
perused the evidence but cannot find fault with the said Court's findings of fact.
Verily, in a petition under Rule 45 such as this, errors of fact if there be any
are, as a rule, not reviewable. The mere fact that respondent Court (and the
trial court as well) chose to believe the evidence presented by respondent more
than that presented by petitioners is not by itself a reversible error. In fact, such
findings merit serious consideration by this Court, particularly where, as in this
case, said courts carefully and meticulously dismissed their findings. This is
basic.
Be that as it may, and in addition to the foregoing disquisitions by the Court of
Appeals, let us review the question of Rivera's authority to act and petitioner's
allegations that the P5.5 million counter-offer was extinguished by the P4.25
million revised offer of Janolo. Here, there are questions of law which could be
drawn from the factual findings of the respondent Court. They also delve into the
contractual elements of consent and cause.
The authority of a corporate officer in dealing with third persons may be actual
or apparent. The doctrine of "apparent authority", with special reference to
banks, was laid out in Prudential Bank vs. Court of 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 agent's apparent representation yields to the principal's
true representation and the contract is considered as
entered into between the principal and the third person
(citing National Food Authority vs. Intermediate Appellate
Court, 184 SCRA 166).
"A bank is liable for wrongful acts of its officers done in the
interest 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 2, p. 114)
Accordingly, a banking corporation is liable to innocent third
persons where the representation is made in the course of
its business by an agent acting within the general scope of
his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person,
for his own ultimate benefit (McIntosh v. Dakota Trust Co.,
52 ND 752, 204 NW 818, 40 ALR 1021).
"Application of these principles is especially necessary
because banks have a fiduciary relationship with the public
and their stability depends on the confidence of the people
in their honesty and efficiency. Such faith will be eroded
where banks do not exercise strict care in the selection and
supervision of its employees, resulting in prejudice to their
depositors. "
From the evidence found by respondent Court, it is obvious that petitioner
Rivera has apparent or implied authority to act for the Bank in the matter of
selling its acquired assets. This evidence includes the following:
(a)The petition itself in par. II-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
Bank's acquired assets (TSN, August 6, 1990, pp. 8-9);
151
(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 Bank's offer of P5.5 million was confirmed by Rivera
(TSN, April 26, 1990, pp. 34-35). At said meeting, Co, a major shareholder and
officer of the Bank, confirmed Rivera's statement as to the finality of the Bank's
counter-offer of P5.5 million (TSN, January 16, 1990, p. 21; TSN, April 26, 1990,
p. 35);
(h)In its newspaper advertisements and announcements, the Bank referred to
Rivera as the officer acting for the Bank in relation to parties interested in
buying assets owned/acquired by the Bank. In fact, Rivera was the officer
mentioned in the Bank's advertisements offering for sale the property in
question (cf. Exhs. "S" and "S-1").
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et
al. 32 , the Court, through Justice Jose A. R. Melo, affirmed the doctrine of
apparent authority as it held that the apparent authority of the officer of the
Bank of P.I. in charge of acquired assets is borne out by similar circumstances
surrounding his dealings with buyers.
To be sure, petitioners attempted to repudiate Rivera's apparent authority
through documents and testimony which seek to establish Rivera's actual
authority. These pieces of evidence, however, are inherently weak as they
consist of Rivera's self-serving testimony and various inter-office memoranda
that purport to show his limited actual authority, of which private respondent
cannot be charged with knowledge. In any event, since the issue is apparent
authority, the existence of which is borne out by the respondent Court's findings,
the evidence of actual authority is immaterial insofar as the liability of a
corporation is concerned. 33
Petitioners also argued that since Demetria and Janolo were experienced lawyers
and their "law firm" had once acted for the Bank in three criminal cases, they
should be charged with actual knowledge of Rivera's limited authority. But the
Court of Appeals in its Decision (p. 12) had already made a factual finding that
the buyers had no notice of Rivera's actual authority prior to the sale. In fact,
the Bank has not shown that they acted as its counsel in respect to any acquired
assets; on the other hand, respondent has proven that Demetria and Janolo
merely associated with a loose aggrupation of lawyers (not a professional
partnership), one of whose members (Atty. Susana Parker) acted in said criminal
cases.
Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer
in the letter dated September 17, 1987 extinguished the Bank's offer of P5.5
million. 34 They disputed the respondent Court's finding that "there was a
meeting of minds when on 30 September 1987 Demetria and Janolo through
Annex 'L' (letter dated September 30, 1987) 'accepted' Rivera's counter offer of
P5.5 million under Annex 'J' (letter dated September 17, 1987)", citing the late
Justice 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 Bank's offer of P5.5 million as confirmed and reiterated to
Demetria and Atty. Jose Fajardo by Rivera and Co during their meeting on
September 28, 1987. Note that the said letter of September 30, 1987 begins
with "(p)ursuant to our discussion last 28 September 1987 . . ."
Petitioners insist that the respondent Court should have believed the testimonies
of Rivera and Co that the September 28, 1987 meeting "was meant to have the
offerors improve on their position of P5.5 million". 38 However, both the trial
court and the Court of Appeals found petitioners' testimonial evidence "not
credible", and we find no basis for changing this finding of fact.
Indeed, we see no reason to disturb the lower courts' (both the RTC and the CA)
common finding that private respondents' evidence is more in keeping with truth
and logic that during the meeting on September 28, 1987, Luis Co and Rivera
"confirmed that the P5.5 million price has been passed upon by the Committee
and could no longer be lowered (TSN of April 27, 1990, pp. 34-35)". 39 Hence,
assuming arguendo that the counter-offer of P4.25 million extinguished the offer
of P5.5 million, Luis Co's reiteration of the said P5.5 million price during the
September 28, 1987 meeting revived the said offer. And by virtue of the
September 30, 1987 letter accepting this revived offer, there was a meeting of
the minds, as the acceptance in said letter was absolute and unqualified.
We note that the Bank's repudiation, through Conservator Encarnacion, of
Rivera's authority and action, particularly the latter's counter-offer of P5.5
million, as being "unauthorized and illegal" came only on May 12, 1988 or more
than seven (7) months after Janolo's acceptance. Such delay, and the absence
of any circumstance which might have justifiably prevented the Bank from acting
earlier, clearly characterizes the repudiation as nothing more than a last-minute
attempt on the Bank's part to get out of a binding contractual obligation.
152
Taken together, the factual findings of the respondent Court point to an implied
admission on the part of the petitioners that the written offer made on
September 1, 1987 was carried through during the meeting of September 28,
1987. This is the conclusion consistent with human experience, truth and good
faith.
It also bears noting that this issue of extinguishment of the Bank's offer of P5.5
million was raised for the first time on appeal and should thus be disregarded.
"This Court in several decisions has repeatedly adhered to
the principle that points of law, theories, issues of fact and
arguments not adequately brought to the attention of the
trial court need not be, and ordinarily will not be, considered
by a reviewing court, as they cannot be raised for the first
time on appeal (Santos vs. IAC, No. 74243, November 14,
1986, 145 SCRA 592)." 40
". . . It is settled jurisprudence that an issue which was
neither averred in the complaint nor raised during the trial in
the court below cannot be raised for the first time on appeal
as it would be offensive to the basic rules of fair play, justice
and due process (Dihiansan vs. CA, 153 SCRA 713 [1987];
Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty &
Development Corp. vs. CA, 157 SCRA 425 [1988]; Ramos
vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029,
August 30, 1990)." 41
Since the issue was not raised in the pleadings as an affirmative defense, private
respondent was not given an opportunity in the trial court to controvert the
same through opposing evidence. Indeed, this is a matter of due process. But
we passed upon the issue anyway, if only to avoid deciding the case on purely
procedural grounds, and we repeat that, on the basis of the evidence already in
the record and as appreciated by the lower courts, the inevitable conclusion is
simply that there was a perfected contract of sale.
The Third Issue: Is the Contract Enforceable?
The petition 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:
". . . Of course, the bank's letter of September 1, 1987 on
the official price and the plaintiffs' acceptance of the price on
September 30, 1987, are not, in themselves, formal
contracts of sale. They are however clear embodiments of
the fact that a contract of sale was perfected between the
parties, such contract being binding in whatever form it may
have been entered into (case citations omitted). Stated
simply, the bank's letter of September 1, 1987, taken
together with plaintiffs' letter dated September 30, 1987,
constitute in law a sufficient memorandum of a perfected
contract of sale."
The respondent Court could have added that the written communications
commenced not only from September 1, 1987 but from Janolo's August 20,
1987 letter. We agree that, taken together, these letters constitute sufficient
memoranda since they include the names of the parties, the terms and
conditions of the contract, the price and a description of the property as the
object of the contract.
But let it be assumed arguendo that the counter-offer during the meeting on
September 28, 1987 did constitute a "new" offer which was accepted by Janolo
on September 30, 1987. Still, the statute of frauds will not apply by reason of
the failure of petitioners to object to oral testimony proving petitioner Bank's
counter-offer of P5.5 million. Hence, petitioners by such utter failure to object
are deemed to have waived any defects of the contract under the statute of
frauds, pursuant to Article 1405 of the Civil Code:
"Art. 1405.Contracts infringing the Statute of Frauds,
referred to in No. 2 of Article 1403, are ratified by the failure
to object to the presentation of oral evidence to prove the
same, or by the acceptance of benefits under them."
As private respondent pointed out in his Memorandum, oral testimony on the
reaffirmation of the counter-offer of P5.5 million is aplenty and the silence of
petitioners all throughout the presentation makes the evidence binding on them
thus:
AYes, 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
QNow, what transpired during this meeting with Luis Co of
the Producers Bank?
153
AAtty. Demetria asked Mr. Luis Co whether the price could and Mr. Mercurio [Rivera] was with us at the time at
be reduced, sir. his office.

QWhat price?
AThe 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.
QFor 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?
AMr. Co himself, Mr. Rivera, Atty. Fajardo and I.

QWhat do you mean? QBy Mr. Co you are referring to?

AThat is the amount they want, sir. AMr. Luis Co.

QWhat is the reaction of the plaintiff Demetria to Luis Co's
statment (sic) that the defendant Rivera's counter-
offer of 5.5 million was the defendant's bank (sic)
final offer?
AHe said in a day or two, he will make final acceptance, sir.
QWhat is the response of Mr. Luis Co?
AHe said he will wait for the position of Atty. Demetria, sir.
QAfter this meeting with Mr. Luis Co, did you and your
partner accede on (sic) the counter offer by the
bank?
AYes, 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.]

xxx xxx xxx

[Direct testimony of Atty. Jose Fajardo, TSN, January 16,
1990, at pp. 18-21.]
QAccording to Atty. Demetrio Demetria, the amount of P5.5
million was reached by the Committee and it is not
xxx xxx xxx
within his power to reduce this amount. What can
you say to that statement that the amount of P5.5
QWhat transpired during that meeting between you and Mr. million was reached by the Committee?
Luis Co of the defendant Bank?
AIt was not discussed by the Committee but it was
AWe went straight to the point because he being a busy discussed initially by Luis Co and the group of Atty.
person, I told him if the amount of P5.5 million Demetrio Demetria and Atty. Pajardo (sic) in that
could still be reduced and he said that was already September 28, 1987 meeting, sir."
passed upon by the committee. What the bank
expects which was contrary to what Mr. Rivera
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp.
stated. And he told me that is the final offer of the
14-15.]
bank P5.5 million and we should indicate our
position as soon as possible.
The Fourth Issue: May the Conservator Revoke the Perfected and
Enforceable Contract?
QWhat was your response to the answer of Mr. Luis Co?

It is not disputed that the petitioner Bank was under a conservator placed by the
AI said that we are going to give him our answer in a few
Central Bank of the Philippines during the time that the negotiation and
days and he said that was it. Atty. Fajardo and I
perfection of the contract of sale took place. Petitioners energetically contended
that the conservator has the power to revoke or overrule actions of the
154
management or the board of directors of a bank, under Section 28-A of Republic
Act No. 265 (otherwise known as the Central Bank Act) as follows:
"Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or a non-bank financial
intermediary performing quasi-banking functions is in a
state of continuing inability or unwillingness to maintain a
state of liquidity deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may appoint a
conservator to take charge of the assets, liabilities, and the
management of that institution, collect all monies and debts
due said institution and exercise all powers necessary to
preserve the assets of the institution, reorganize the
management thereof, and restore its viability. He shall have
the power to overrule or revoke the actions of the previous
management and board of directors of the bank or non-bank
financial intermediary performing quasi-banking functions,
any provision of law to the contrary notwithstanding, and
such other powers as the Monetary Board shall deem
necessary."
In the first place, this issue of the Conservator's alleged authority to revoke or
repudiate the perfected contract of sale was raised for the first time in this
Petition as this was not litigated in the trial court or Court of Appeals. As
already stated earlier, issues not raised and/or ventilated in the trial court, let
alone in the Court of Appeals, "cannot be raised for the first time on appeal as it
would be offensive to the basic rules of fair play, justice and due process." 43
In the second place, there is absolutely no evidence that the Conservator, at the
time the contract was perfected, actually repudiated or overruled said contract
of sale. The Bank's acting conservator at the time, Rodolfo Romey, never
objected to the sale of the property to Demetria and Janolo. What petitioners
are really referring to is the letter of Conservator Encarnacion, who took over
from Romey after the sale was perfected on September 30, 1987 (Annex V,
petition) which unilaterally repudiated not the contract but the authority of
Rivera to make a binding offer and which unarguably came months after the
perfection of the contract. Said letter dated May 12, 1988 is reproduced
hereunder:
"May 12, 1988
"Atty. Noe C. Zarate
Zarate Carandang Perlas & Ass.
Suite 323 Rufino Building
Ayala Avenue, Makati, Metro Manila
Dear Atty. Zarate:
This pertains to your letter dated May 5, 1988 on behalf of
Attys. Janolo and Demetria regarding the six (6) parcels of
land located at Sta. Rosa, Laguna.
We deny that Producers Bank has ever made a legal
counter-offer to any of your clients nor perfected a 'contract
to sell and buy' with any of them for the following reasons.
In the 'Inter-office Memorandum' dated April 25, 1986
addressed to and approved by former Acting Conservator Mr.
Andres I. Rustia, Producers Bank Senior Manager Perfecto
M. Pascua detailed the functions of Property Management
Department (PMD) staff and officers (Annex A), you will
immediately read that Manager Mr. Mercurio Rivera or any of
his subordinates has no authority, power or right to make
any alleged counter-offer. In short, your lawyer-clients did
not deal with the authorized officers of the bank.
Moreover, under Sec. 23 and 36 of the Corporation Code of
the Philippines (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 Bank's Board or
Conservator.
We are, therefore, constrained to refuse any tender of
payment by your clients, as the same is patently violative of
corporate and banking laws. We believe that this is more
than sufficient legal justification for refusing said alleged
tender.
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.
155
 Very truly yours,
(Sgd.) Leonida T.
Encarnacion
Acting
Conservator"
In the third place, while admittedly, the Central Bank law gives vast and far-
reaching powers to the conservator of a bank, it must be pointed out that such
powers must be related to the "(preservation of) the assets of the bank, (the
reorganization of) the management thereof and (the restoration of) its viability."
Such powers, enormous and extensive as they are, cannot extend to the post-
facto repudiation of perfected transactions, otherwise they would infringe
against the non-impairment clause of the Constitution. 44 If the legislature itself
cannot revoke an existing valid contract, how can it delegate such non-existent
powers to the conservator under Section 28-A of said law?
Obviously, therefore, Section 28-A merely gives the conservator power to revoke
contracts that are, under existing law, deemed to be defective i.e., void,
voidable, unenforceable or rescissible. Hence, the conservator merely takes the
place of a bank's board of directors. What the said board cannot do such as
repudiating a contract validly entered into under the doctrine of implied
authority the conservator cannot do either. Ineluctably, his power is not
unilateral and he cannot simply repudiate valid obligations of the Bank. His
authority would be only to bring court actions to assail such contracts as he
has already done so in the instant case. A contrary understanding of the law
would simply not be permitted by the Constitution. Neither by common sense.
To rule otherwise would be to enable a failing bank to become solvent, at the
expense of third parties, by simply getting the conservator to unilaterally revoke
all previous dealings which had one way or another 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:
". . . . The rule regarding questions of fact being raised with
this Court in a petition for certiorari under Rule 45 of the
Revised Rules of Court has been stated in Remalante vs.
Tibe, G.R. No. 59514, February 25, 1988, 158 SCRA 138,
thus:
'The rule in this jurisdiction is that only questions of law may
be raised in a petition for certiorari under Rule 45 of the
Revised Rules of Court.' 'The jurisdiction of the Supreme
Court in cases brought to it from the Court of Appeals is
limited to reviewing and revising the errors of law imputed
to it, its findings of the fact being conclusive' '[Chan vs.
Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA
737, reiterating a long line of decisions]. This Court has
emphatically declared that' 'it is not the function of the
Supreme Court to analyze or weigh such evidence all over
again, its jurisdiction being limited to reviewing errors of law
that might have been committed by the lower court'
(Tiongco v. De la Merced, G.R. No. L-24426, July 25, 1974,
58 SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482,
April 28, 1983, 121 SCRA 865; Baniqued vs. Court of
Appeals, G.R. No. L-47531, February 20, 1984, 127 SCRA
596).' 'Barring, therefore, a showing that the findings
complained of are totally devoid of support in the record, or
that they are so glaringly erroneous as to constitute serious
abuse of discretion, such findings must stand, for this Court
is not expected or required to examine or contrast the oral
and documentary evidence submitted by the parties' [Santa
Ana, Jr. vs. Hernandez, G.R. No. L-16394, December 17,
1966, 18 SCRA 973] [at pp. 144-145.]' "
Likewise, in Bernardo vs. Court of Appeals, 46 we held:
"The resolution of this petition invites us to closely scrutinize
the facts of the case, relating to the sufficiency of evidence
and the credibility of witnesses presented. This Court so held
that it is not the function of the Supreme Court to analyze or
weigh such evidence all over again. The Supreme Court's
jurisdiction is limited to reviewing errors of law that may
have been committed by the lower court. The Supreme
Court is not a trier of facts. . . ."
As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock
Construction and Development Corp.: 47
"The Court has consistently held that the factual findings of
the trial court, as well as the Court of Appeals, are final and
conclusive and may not be reviewed on appeal. Among the
exceptional circumstances where a reassessment of facts
found by the lower courts is allowed are when the conclusion
is a finding grounded entirely on speculation, surmises or
conjectures; when the inference made is manifestly absurd,
mistaken or impossible; when there is grave abuse of
156
 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. . . . (I)t is not the function of this Court
to assess and evaluate all over again the evidence,
testimonial and documentary, adduced by the parties,
particularly where, such as here, the findings of both the
trial court and the appellate court on the matter coincide."
(Emphasis supplied)
Petitioners, however, assailed the respondent Court's Decision as "fraught with
findings and conclusions which were not only contrary to the evidence on record
but have no bases at all," specifically the findings that (1) the "Bank's counter-
offer price of P5.5 million had been determined by the past due committee and
approved by conservator Romey, after Rivera presented the same for discussion"
and (2) "the meeting with Co was not to scale down the price and start
negotiations anew, but a meeting on the already determined price of P5.5
million." Hence, citing Philippine National Bank vs. Court of Appeals 49 ,
petitioners are asking us to review and reverse such factual findings.
The first point was clearly passed upon by the Court of Appeals, 50 thus:
"There can be no other logical conclusion than that when, on
September 1, 1987, Rivera informed plaintiffs by letter that
'the bank's counter-offer is at P5.5 Million for more than 101
hectares on lot basis,' such counter-offer price had been
determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs' offer
for discussion by the Committee. . . . Tersely put, under the
established fact, the price of P5.5 Million was, as clearly
worded in Rivera's letter (Exh. 'E'), the official and definitive
price at which the bank was selling the property." (p. 11, CA
Decision).
xxx xxx xxx
" . . . The argument deserves scant consideration. As
pointed out by plaintiff, during the meeting of September
28, 1987 between the plaintiffs, Rivera and Luis Co, the
senior vice-president of the bank, where the topic was the
possible lowering of the price, the bank official refused it and
confirmed that the P5.5 Million price had been passed upon
by the Committee and could no longer be lowered (TSN of
April 27, 1990, pp. 34-35)" (p. 15, CA Decision).
The respondent Court did not believe the evidence of the petitioners on this
point, characterizing it as "not credible" and "at best equivocal and considering
the gratuitous and self-serving character of these declarations, the bank's
submissions on this point do not inspire belief."
To become credible and unequivocal, petitioners should have presented then
Conservator Rodolfo Romey to testify on their behalf, as he would have been in
the best position to establish their thesis. Under the rules on evidence, 51 such
suppression gives rise to the presumption that his testimony would have been
adverse, if produced.
The second point was squarely raised in the Court of Appeals, but petitioners'
evidence was deemed insufficient by both the trial court and the respondent
Court, and instead, it was respondent's submissions that were believed and
became bases of the conclusions arrived at.
In fine, it is quite evident that the legal conclusions arrived at from the findings
of fact by the lower courts are valid and correct. But the petitioners are now
asking this Court to disturb these findings to fit the conclusion they are
espousing. This we cannot do.
To be sure, there are settled exceptions where the Supreme Court may
disregard findings of fact by the Court of Appeals. 52 We have studied both the
records and the CA Decision and we find no such exceptions in this case. On the
contrary, the findings of the said Court are supported by a preponderance of
competent and credible evidence. The inferences and conclusions are 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. 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
157
In summary, there are two procedural issues involved forum-shopping and
the raising of issues for the first time on appeal [viz., the extinguishment of the
Bank's offer of P5.5 million and the conservator's powers to repudiate contracts
entered into by the Bank's officers] which per se could justify the dismissal of
the present case. We did not limit ourselves thereto, but delved as well into the
substantive issues the perfection of the contract of sale and its enforceability,
which required the determination of questions of fact. While the Supreme Court
is not a trier of facts and as a rule we are not required to look into the factual
bases of respondent Court's decisions and resolutions, we did so just the same,
if only to find out whether there is reason to disturb any of its factual findings,
for we are only too aware of the depth, magnitude and vigor by which the
parties, through their respective eloquent counsel, argued their positions before
this Court.

We are not unmindful of the tenacious plea that the petitioner Bank is operating
abnormally under a government-appointed conservator and "there is need to
rehabilitate the Bank in order to get it back on its feet . . . as many people
depend on (it) for investments, deposits and well as employment. As of June
1987, the Bank's overdraft with the Central Bank had already reached P1.023
billion . . . and there were (other) offers to buy the subject properties for a
substantial amount of money." 53
While we do not deny our sympathy for this distressed bank, at the same time,
the Court cannot emotionally close its eyes to overriding considerations of
substantive and procedural law, like respect for perfected contracts, non-
impairment of obligations and sanctions against forum-shopping, which must be
upheld under the rule of law and blind justice.
This Court cannot just gloss over private respondent's submission that, while the
subject properties may currently command a much higher price, it is equally
true that at the time of the transaction in 1987, the price agreed upon of P5.5
million was reasonable, considering that the Bank acquired these properties at a
foreclosure sale for no more than P3.5 million. 54 That the Bank procrastinated
and refused to honor its commitment to sell cannot now be used by it to
promote its own advantage, to enable it to escape its binding obligation and to
reap the benefits of the increase in land values. To rule in favor of the Bank
simply because the property in question has algebraically accelerated in price
during the long period of litigation is to reward lawlessness and delays in the
fulfillment of binding contracts. Certainly, the Court cannot stamp its imprimatur
on such outrageous proposition.
WHEREFORE, finding no reversible error in the questioned Decision and
Resolution, the Court hereby DENIES the petition. The assailed Decision is
AFFIRMED. Moreover, petitioner Bank is REPRIMANDED for engaging in forum-
shopping and WARNED that a repetition of the same or similar acts will be dealt
with more severely. Costs against petitioners.
FIRST DIVISION
[G.R. No. 150886. February 16, 2007.]
RURAL BANK OF SAN MIGUEL, INC. and HILARIO P.
SORIANO, in his capacity as majority stockholder in
the Rural Bank of San Miguel, Inc., petitioners, vs.
MONETARY BOARD, BANGKO SENTRAL NG PILIPINAS
and PHILIPPINE DEPOSIT INSURANCE
CORPORATION, respondents.
CORONA, J p:
This is a petition for review on certiorari 1 of a decision 2 and resolution 3 of the
Court of Appeals (CA) dated March 28, 2000 and November 13, 2001,
respectively, in CA-G.R. SP No. 57112.
Petitioner Rural Bank of San Miguel, Inc. (RBSM) was a domestic corporation
engaged in banking. It started operations in 1962 and by year 2000 had 15
branches in Bulacan. 4 Petitioner Hilario P. Soriano claims to be the majority
stockholder of its outstanding shares of stock. 5
On January 21, 2000, respondent Monetary Board (MB), the governing board of
respondent Bangko Sentral ng Pilipinas (BSP), issued Resolution No. 105
prohibiting RBSM from doing business in the Philippines, placing it under
receivership and designating respondent Philippine Deposit Insurance
Corporation (PDIC) as receiver:
On the basis of the comptrollership/monitoring report as of
October 31, 1999 as reported by Mr. Wilfredo B. Domo-ong,
Director, Department of Rural Banks, in his memorandum
dated January 20, 2000, which report showed that [RBSM]
(a) is unable to pay its liabilities as they become due in the

158
 ordinary course of business; (b) cannot continue in business
without involving probable losses to its depositors and
creditors; that the management of the bank had been
accordingly informed of the need to infuse additional capital
to place the bank in a solvent financial condition and was
given adequate time within which to make the required
infusion and that no infusion of adequate fresh capital was
made, the Board decided as follows:
1. To prohibit the bank from doing business in the
Philippines and to place its assets and affairs under
receivership in accordance with Section 30 of [RA
7653];
2. To designate the [PDIC] as receiver of the bank;
xxx xxx xxx 6
On January 31, 2000, petitioners filed a petition for certiorari and prohibition in
the Regional Trial Court (RTC) of Malolos, Branch 22 to nullify and set aside
Resolution No. 105. 7 However, on February 7, 2000, petitioners filed a notice of
withdrawal in the RTC and, on the same day, filed a special civil action for
certiorari and prohibition in the CA. On February 8, 2000, the RTC dismissed the
case pursuant to Section 1, Rule 17 of the Rules of Court. 8
The CA's findings of facts were as follows. TcCSIa
To assist its impaired liquidity and operations, the RBSM was
granted emergency loans on different occasions in the
aggregate amount of P375 [million].
million, . . . P12.6 million . . . was not used to service
withdrawals [and] remains unaccounted for as admitted by
[RBSM's Treasury Officer and Officer-in-Charge of Treasury].
Instead of servicing withdrawals of depositors, RBSM paid
Forcecollect Professional Solution, Inc. and Surecollect
Professional, Inc., entities which are owned and controlled
by Hilario P. Soriano and other RBSM officers.
On January 4, 2000, RBSM declared a bank holiday. RBSM
and all of its 15 branches were closed from doing business.
Alarmed and disturbed by the unilateral declaration of bank
holiday, [BSP] wanted to examine the books and records of
RBSM but encountered problems.
Meanwhile, on November 10, 1999, RBSM's designated
comptroller, Ms. Zenaida Cabais of the BSP, submitted to the
Department of Rural Banks, BSP, a Comptrollership Report
on her findings on the financial condition and operations of
the bank as of October 31, 1999. Another set of findings
was submitted by said comptroller [and] this second report
reflected the financial status of RBSM as of December 31,
1999. HISAET
The findings of the comptroller on the financial state of
RBSM as of October 31, 1999 in comparison with the
financial condition as of December 31, 1999 is summed up
pertinently as follows:
FINANCIAL CONDITION OF RBSM

As of Oct. 31, 1999 As of Dec. 31, 1999

As early as November 18, 1998, Land Bank of the
Philippines (LBP) advised RBSM that it will terminate the
clearing of RBSM's checks in view of the latter's frequent Total obligations/
clearing losses and continuing failure to replenish its Special Liabilities P1,076,863,000.00 1,009,898,000.00
Clearing Demand Deposit with LBP. The BSP interceded with
LBP not to terminate the clearing arrangement of RBSM to
Realizable Assets 898,588,000.00 796,930,000.00
protect the interests of RBSM's depositors and creditors.

Deficit 178,275,000.00 212,968,000.00

After a year, or on November 29, 1999, the LBP informed
the BSP of the termination of the clearing facility of RBSM to
take effect on December 29, 1999, in view of the clearing Cash on Hand 101,441.547.00 8,266,450.00
problems of RBSM.
Required Capital Infusion P252,120,000.00
On December 28, 1999, the MB approved the release of
P26.189 [million] which is the last tranche of the P375 Capital Infusion P5,000,000.00
million emergency loan for the sole purpose of servicing and (On Dec. 20, 1999)
meeting the withdrawals of its depositors. Of the P26.180

159
 Actual Breakdown of Total Obligations: SECTION 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising
or examining department, the Monetary Board finds that
1) Deposits of 20,000 depositors P578,201,000.00
a bank or quasi-bank:

2) Borrowings from BSP P320,907,000.00

(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not
3) Unremitted withholding and gross receipt taxes include inability to pay caused by extraordinary demands
P57,403,000.00. 9 induced by financial panic in the banking community;

Based on these comptrollership reports, the director of the Department of Rural (b) has insufficient realizable assets, as determined by the
Banks Supervision and Examination Sector, Wilfredo B. Domo-ong, made a [BSP] to meet its liabilities; or
report to the MB dated January 20, 2000. 10 The MB, after evaluating and
deliberating on the findings and recommendation of the Department of Rural
(c) cannot continue in business without involving probable
Banks Supervision and Examination Sector, issued Resolution No. 105 on
losses to its depositors or creditors; or
January 21, 2000. 11 Thereafter, PDIC implemented the closure order and took
over the management of RBSM's assets and affairs.
(d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
In their petition 12 before the CA, petitioners claimed that respondents MB and
transactions which amount to fraud or a dissipation of the
BSP committed grave abuse of discretion in issuing Resolution No. 105. The
assets of the institution; in which cases, the Monetary
petition was dismissed by the CA on March 28, 2000. It held, among others, that
Board may summarily and without need for prior
the decision of the MB to issue Resolution No. 105 was based on the findings
hearing forbid the institution from doing business in
and recommendations of the Department of Rural Banks Supervision and
the Philippines and designate the Philippine Deposit
Examination Sector, the comptroller reports as of October 31, 1999 and
Insurance Corporation as receiver of the banking
December 31, 1999 and the declaration of a bank holiday. Such could be
institution.
considered as substantial evidence. 13

xxx xxx xxx

Pertinently, on June 9, 2000, on the basis of reports prepared by PDIC stating
that RBSM could not resume business with sufficient assurance of protecting the
interest of its depositors, creditors and the general public, the MB passed The actions of the Monetary Board taken under this section
Resolution No. 966 directing PDIC to proceed with the liquidation of RBSM under or under Section 29 of this Act shall be final and executory,
Section 30 of RA 7653. 14 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
Hence this petition.
discretion as to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the stockholders
It is well-settled that the closure of a bank may be considered as an exercise of of record representing the majority of the capital stock
police power. 15 The action of the MB on this matter is final and executory. 16 within ten (10) days from receipt by the board of directors
Such exercise may nonetheless be subject to judicial inquiry and can be set of the institution of the order directing receivership,
aside if found to be in excess of jurisdiction or with such grave abuse of liquidation or conservatorship. (Emphasis supplied)
discretion as to amount to lack or excess of jurisdiction. 17
xxx xxx xxx
Petitioners argue that Resolution No. 105 was bereft of any basis considering
that no complete examination had been conducted before it was issued. This
Petitioners contend that there must be a current, thorough and complete
case essentially boils down to one core issue: whether Section 30 of RA 7653
examination before a bank can be closed under Section 30 of RA 7653. They
(also known as the New Central Bank Act) and applicable jurisprudence require a
argue that this section should be harmonized with Sections 25 and 28 of the
current and complete examination of the bank before it can be closed and
same law:
placed under receivership. caTESD

Section 30 of RA 7653 provides:

160
 SECTION 25. Supervision and Examination. The [BSP]
shall have supervision over, and conduct periodic or
special examinations of, banking institutions and quasi-
banks, including their subsidiaries and affiliates engaged in
allied activities. TIaDHE
xxx xxx xxx
SECTION 28. Examination and Fees. The supervising
and examining department head, personally or by
deputy, shall examine the books of every banking institution
once in every twelve (12) months, and at such other time as
the Monetary Board by an affirmative vote of five (5)
members may deem expedient and to make a report on
the same to the Monetary Board: Provided that there
shall be an interval of at least twelve (12) months between
annual examinations. (Emphasis supplied)
xxx xxx xxx
According to the petitioners, it is clear from these provisions that the "report
of the supervising or examining department" required under Section 30
refers to the report on the examination of the bank which, under Section
28, must be made to the MB after the supervising or examining head
conducts an examination mandated by Sections 25 and 28. 18 They cite
Banco Filipino Savings & Mortgage Bank v. Monetary Board, Central Bank of
the Philippines 19 wherein the Court ruled:
There is no question that under Section 29 of the Central
Bank Act, the following are the mandatory requirements
to be complied with before a bank found to be insolvent is
ordered closed and forbidden to do business in the
Philippines: Firstly, an examination shall be conducted
by the head of the appropriate supervising or
examining department or his examiners or agents into
the condition of the bank; secondly, it shall be disclosed
in the examination that the condition of the bank is one of
insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors; thirdly, the
department head concerned shall inform the Monetary Board
in writing, of the facts; and lastly, the Monetary Board shall
find the statements of the department head to be true. 20
(Emphasis supplied)
Petitioners assert that an examination is necessary and not a mere report,
otherwise the decision to close a bank would be arbitrary.
Respondents counter that RA 7653 merely requires a report of the head of the
supervising or examining department. They maintain that the term "report"
under Section 30 and the word "examination" used in Section 29 of the old law
are not synonymous. "Examination" connotes in-depth analysis, evaluation,
inquiry or investigation while "report" connotes a simple disclosure or narration
of facts for informative purposes. 21
Petitioners' contention has no merit. Banco Filipino and other cases petitioners
cited 22 were decided using Section 29 of the old law (RA 265):
SECTION 29. Proceedings upon insolvency. Whenever,
upon examination by the head of the appropriate
supervising or examining department or his
examiners or agents into the condition of any bank or
non-bank financial intermediary performing quasi-banking
functions, it shall be disclosed that the condition of the same
is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, it
shall be the duty of the department head concerned
forthwith, in writing, to inform the Monetary Board of the
facts. The Board may, upon finding the statements of the
department head to be true, forbid the institution to do
business in the Philippines and designate an official of the
Central Bank or a person of recognized competence in
banking or finance, as receiver to immediately take charge
of its assets and liabilities, as expeditiously as possible
collect and gather all the assets and administer the same for
the benefits of its creditors, and represent the bank
personally or through counsel as he may retain in all actions
or proceedings for or against the institution, exercising all
the powers necessary for these purposes including, but not
limited to, bringing and foreclosing mortgages in the name
of the bank or non-bank financial intermediary performing
quasi-banking functions. (Emphasis supplied) HAICET
xxx xxx xxx
Thus in Banco Filipino, we ruled that an "examination [conducted] by the head
of the appropriate supervising or examining department or his examiners or
agents into the condition of the bank" 23 is necessary before the MB can order
its closure.
However, RA 265, including Section 29 thereof, was expressly repealed by RA
7653 which took effect in 1993. Resolution No. 105 was issued on January 21,
2000. Hence, petitioners' reliance on Banco Filipino which was decided under RA
265 was misplaced.
In RA 7653, only a "report of the head of the supervising or examining
department" is necessary. It is an established rule in statutory construction that
161
where the words of a statute are clear, plain and free from ambiguity, it must be
given its literal meaning and applied without attempted interpretation: 24
This plain meaning rule or verba legis derived from the
maxim index animi sermo est (speech is the index of
intention) rests on the valid presumption that the words
employed by the legislature in a statute correctly express its
intention or will and preclude the court from construing it
differently. The legislature is presumed to know the meaning
of the words, to have used words advisedly, and to have
expressed its intent by use of such words as are found in the
statute. Verba legis non est recedendum, or from the words
of a statute there should be no departure. 25
The word "report" has a definite and unambiguous meaning which is clearly
different from "examination." A report, as a noun, may be defined as
"something that gives information" or "a usually detailed account or
statement." 26 On the other hand, an examination is "a search,
investigation or scrutiny." 27
This Court cannot look for or impose another meaning on the term "report" or to
construe it as synonymous with "examination." From the words used in Section
30, it is clear that RA 7653 no longer requires that an examination be made
before the MB can issue a closure order. We cannot make it a requirement in the
absence of legal basis.
Indeed, the court may consider the spirit and reason of the statute, where a
literal meaning would lead to absurdity, contradiction, injustice, or would defeat
the clear purpose of the lawmakers. 28 However, these problems are not
present here. Using the literal meaning of "report" does not lead to absurdity,
contradiction or injustice. Neither does it defeat the intent of the legislators. The
purpose of the law is to make the closure of a bank summary and expeditious in
order to protect public interest. This is also why prior notice and hearing are no
longer required before a bank can be closed. 29
Laying down the requisites for the closure of a bank under the law is the
prerogative of the legislature and what its wisdom dictates. The lawmakers could
have easily retained the word "examination" (and in the process also preserved
the jurisprudence attached to it) but they did not and instead opted to use the
word "report." The insistence on an examination is not sanctioned by RA 7653
and we would be guilty of judicial legislation were we to make it a requirement
when such is not supported by the language of the law.
What is being raised here as grave abuse of discretion on the part of the
respondents was the lack of an examination and not the supposed arbitrariness
with which the conclusions of the director of the Department of Rural Banks
Supervision and Examination Sector had been reached in the report which
became the basis of Resolution No. 105. EIASDT
The absence of an examination before the closure of RBSM did not mean that
there was no basis for the closure order. Needless to say, the decision of the MB
and BSP, like any other administrative body, must have something to support
itself and its findings of fact must be supported by substantial evidence. But it is
clear under RA 7653 that the basis need not arise from an examination as
required in the old law.
We thus rule that the MB had sufficient basis to arrive at a sound conclusion that
there were grounds that would justify RBSM's closure. It relied on the report of
Mr. Domo-ong, the head of the supervising or examining department, with the
findings that: (1) RBSM was unable to pay its liabilities as they became due in
the ordinary course of business and (2) that it could not continue in business
without incurring probable losses to its depositors and creditors. 30 The report
was a 50-page memorandum detailing the facts supporting those grounds, an
extensive chronology of events revealing the multitude of problems which faced
RBSM and the recommendations based on those findings.
In short, MB and BSP complied with all the requirements of RA 7653. By relying
on a report before placing a bank under receivership, the MB and BSP did not
only follow the letter of the law, they were also faithful to its spirit, which was to
act expeditiously. Accordingly, the issuance of Resolution No. 105 was untainted
with arbitrariness.
Having dispensed with the issue decisive of this case, it becomes unnecessary to
resolve the other minor issues raised. 31
WHEREFORE, the petition is hereby DENIED. The March 28, 2000 decision and
November 13, 2001 resolution of the Court of Appeals in CA-G.R. SP No. 57112
are AFFIRMED.
Costs against petitioners.
SO ORDERED.
||| (Rural Bank of San Miguel, Inc. v. Monetary Board, G.R. No. 150886,
[February 16, 2007], 545 PHIL 62-74)
EN BANC
[G.R. No. 70054. December 11, 1991.]
BANCO FILIPINO SAVINGS AND MORTGAGE BANK,
petitioner, vs. THE MONETARY BOARD, CENTRAL BANK
OF THE PHILIPPINES, JOSE B. FERNANDEZ, CARLOTA
162
P. VALENZUELA, ARNULFO B. AURELLANO AND RAMON
V. TIAOQUI, respondents.
[G.R. No. 68878. December 11, 1991.]
BANCO FILIPINO SAVINGS AND MORTGAGE BANK,
petitioner, vs. HON. INTERMEDIATE APPELLATE COURT
AND CELESTINA S. PAHIMUNTUNG, assisted by her
husband, respondents.
[G.R. Nos. 77255-58. December 11, 1991.]
TOP MANAGEMENT PROGRAMS CORPORATION AND
PILAR DEVELOPMENT CORPORATION, petitioners, vs.
THE COURT OF APPEALS, The Executive Judge of the
Regional Trial Court of Cavite, Ex-Officio Sheriff
REGALADO E. EUSEBIO, BANCO FILIPINO SAVINGS
AND MORTGAGE BANK, CARLOTA P. VALENZUELA AND
SYCIP, SALAZAR, HERNANDEZ AND GATMAITAN,
respondents.
[G.R. No. 78766. December 11, 1991.]
EL GRANDE CORPORATION, petitioner, vs. THE COURT
OF APPEALS, THE EXECUTIVE JUDGE OF The Regional
Trial Court and Ex-Officio Sheriff REGALADO E.
EUSEBIO, BANCO FILIPINO SAVINGS AND MORTGAGE
BANK, CARLOTA P. VALENZUELA AND SYCIP,
SALAZAR, FELICIANO AND HERNANDEZ, respondents.
[G.R. No. 78767. December 11, 1991.]
Panganiban, Benitez, Barinaga & Bautista Law Offices collaborating counsel for
petitioner.
METROPOLIS DEVELOPMENT CORPORATION, petitioner,
vs. COURT OF APPEALS, CENTRAL BANK OF THE
Florencio T. Domingo, Jr. and Crisanto S. Cornejo for intervenors.
PHILIPPINES, JOSE B. FERNANDEZ, JR., CARLOTA P.
VALENZUELA, ARNULFO AURELLANO AND RAMON
TIAOQUI, respondents.
[G.R. No. 78894. December 11, 1991.]
MEDIALDEA, J p:
BANCO FILIPINO SAVINGS AND MORTGAGE BANK,
petitioner, vs. COURT OF APPEALS, THE CENTRAL BANK
OF THE PHILIPPINES, JOSE B. FERNANDEZ, JR.,
CARLOTA P. VALENZUELA, ARNULFO B. AURELLANO
AND RAMON TIAOQUI, respondents.
[G.R. No. 81303. December 11, 1991.]
PILAR DEVELOPMENT CORPORATION, petitioner, vs.
COURT OF APPEALS, HON. MANUEL M. COSICO, in his
capacity as Presiding Judge of Branch 136 of the
Regional Trial Court of Makati, CENTRAL BANK OF THE
PHILIPPINES AND CARLOTA P. VALENZUELA,
respondents.
[G.R. No. 81304. December 11, 1991.]
BF HOMES DEVELOPMENT CORPORATION, petitioner,
vs. THE COURT OF APPEALS, CENTRAL BANK AND
CARLOTA P. VALENZUELA, respondents.
[G.R. No. 90473. December 11, 1991.]
EL GRANDE DEVELOPMENT CORPORATION, petitioner,
vs. THE COURT OF APPEALS, THE EXECUTIVE JUDGE of
the Regional Trial Court of Cavite, CLERK OF COURT
and Ex-Officio Sheriff ADORACION VICTA, BANCO
FILIPINO SAVINGS AND MORTGAGE BANK, CARLOTA
P. VALENZUELA AND SYCIP, SALAZAR, HERNANDEZ
AND GATMAITAN, respondents.
DECISION
163
This refers to nine (9) consolidated cases concerning the legality of the closure
and receivership of petitioner Banco Filipino Savings and Mortgage Bank (Banco
Filipino for brevity) pursuant to the order of respondent Monetary Board. Six (6)
of these cases, namely, G.R. Nos. 68878, 77255-58, 78766, 81303, 81304 and
90473 involve the common issue of whether or not the liquidator appointed by
the respondent Central Bank (CB for brevity) has the authority to prosecute as
well as to defend suits, and to foreclose mortgages for and in behalf of the bank
while the issue on the validity of the receivership and liquidation of the latter is
pending resolution in G.R. No. 70054. Corollary to this issue is whether the CB
can be sued to fulfill financial commitments of a closed bank pursuant to Section
29 of the Central Bank Act. On the other hand, the other three (3) cases,
namely, G.R. Nos. 70054, which is the main case, 78767 and 78894 all seek to
annul and set aside M.B. Resolution No. 75 issued by respondents Monetary
Board and Central Bank on January 25, 1985.
The antecedent facts of each of the nine (9) cases are as follows:
G.R. No. 68878
This is a motion for reconsideration, filed by respondent Celestina Pahimuntung,
of the decision promulgated by this Court on April 8, 1986, granting the petition
for review on certiorari and reversing the questioned decision of respondent
appellate court, which annulled the writ of possession issued by the trial court in
favor of petitioner.
The respondent-movant contends that the petitioner has no more personality to
continue prosecuting the instant case considering that petitioner bank was
placed under receivership since January 25, 1985 by the Central Bank pursuant
to the resolution of the Monetary Board.
G.R. Nos. 77255-58
Petitioners Top Management Programs Corporation (Top Management for
brevity) and Pilar Development Corporation (Pilar Development for brevity) are
corporations engaged in the business of developing residential subdivisions.
Top Management obtained a loan of P4,836,000 from Banco Filipino as
evidenced by a promissory note dated January 7, 1982 payable in three years
from date. The loan was secured by real estate mortgage in its various
properties in Cavite. Likewise, Pilar Development obtained loans from Banco
Filipino between 1982 and 1983 in the principal amounts of P6,000,000,
P7,370,000 and P5,300,000 with maturity dates on December 28, 1984, January
5, 1985 and February 16, 1984, respectively. To secure the loan, Pilar
Development mortgaged to Banco Filipino various properties in Dasmarias,
Cavite. LLpr
On January 25, 1985, the Monetary Board issued a resolution finding Banco
Filipino insolvent and unable to do business without loss to its creditors and
depositors. It placed Banco Filipino under receivership of Carlota Valenzuela,
Deputy Governor of the Central Bank.
On March 22, 1985, the Monetary Board issued another resolution placing the
bank under liquidation and designating Valenzuela as liquidator. By virtue of her
authority as liquidator, Valenzuela appointed the law firm of Sycip, Salazar, et al.
to represent Banco Filipino in all litigations.
On March 26, 1985, Banco Filipino filed the petition for certiorari in G.R. No.
70054 questioning the validity of the resolutions issued by the Monetary Board
authorizing the receivership and liquidation of Banco Filipino.
In a resolution dated August 29, 1985, this Court in G.R. No. 70054 resolved to
issue a temporary restraining order, effective during the same period of 30 days,
enjoining the respondents from executing further acts of liquidation of the bank;
that acts such as receiving collectibles and receivables or paying off creditors'
claims and other transactions pertaining to normal operations of a bank are not
enjoined. The Central Bank is ordered to designate a comptroller for Banco
Filipino.
Subsequently, Top Management failed to pay its loan on the due date. Hence,
the law firm of Sycip, Salazar, et al. acting as counsel for Banco Filipino under
authority of Valenzuela as liquidator, applied for extra-judicial foreclosure of the
mortgage over Top Management's properties. Thus, the Ex-Officio Sheriff of the
Regional Trial Court of Cavite issued a notice of extra-judicial foreclosure sale of
the properties on December 16, 1985.
On December 9, 1985, Top Management filed a petition for injunction and
prohibition with the respondent appellate court docketed as CA-G.R. SP No.
07892 seeking to enjoin the Regional Trial Court of Cavite, the ex-officio sheriff
of said court and Sycip, Salazar, et al. from proceeding with foreclosure sale.
Similarly, Pilar Development defaulted in the payment of its loans. The law firm
of Sycip, Salazar, et al. filed separate applications with the ex-officio sheriff of
the Regional Trial Court of Cavite for the extra-judicial foreclosure of mortgage
over its properties.
Hence, Pilar Development filed with the respondent appellate court a petition for
prohibition with prayer for the issuance of a writ of preliminary injunction
docketed as CA-G.R. SP Nos. 08962-64 seeking to enjoin the same respondents
from enforcing the foreclosure sale of its properties. CA-G.R. SP Nos. 07892 and
08962-64 were consolidated and jointly decided.
On October 30, 1986, the respondent appellate court rendered a decision
dismissing the aforementioned petitions.
Hence, this petition was filed by the petitioners Top Management and Pilar
Development alleging that Carlota Valenzuela, who was appointed by the
164
Monetary Board as liquidator of Banco Filipino, has no authority to proceed with
the foreclosure sale of petitioners' properties or the ground that the resolution of
the issue on the validity of the closure and liquidation of Banco Filipino is still
pending with this Court in G.R. 70054.
G.R. No. 78766
Petitioner El Grande Development Corporation (El Grande for brevity) is engaged
in the business of developing residential subdivisions. It was extended by
respondent Banco Filipino a credit accommodation to finance its housing
program. Hence, petitioner was granted a loan in the amount of P8,034,130.00
secured by real estate mortgages on its various estates located in Cavite. cdphil
On January 15, 1985, the Monetary Board forbade Banco Filipino to do business,
placed it under receivership and designated Deputy Governor Carlota Valenzuela
as receiver. On March 22, 19869 the Monetary Board confirmed Banco Filipino's
insolvency and designated the receiver Carlota Valenzuela as liquidator.
When petitioner El Grande failed to pay its indebtedness to Banco Filipino, the
latter thru its liquidator, Carlota Valenzuela, initiated the foreclosure with the
Clerk of Court and Ex-officio sheriff of RTC Cavite. Subsequently, on March 31,
1986, the ex-officio sheriff issued the notice of extra-judicial sale of the
mortgaged properties of El Grande scheduled or April 30, 1986.
In order to stop the public auction sale, petitioner El Grande filed a petition for
prohibition with the Court of Appeals alleging that respondent Carlota Valenzuela
could not proceed with the foreclosure of its mortgaged properties on the ground
that this Court in G.R. No. 70054 issued a resolution dated August 29, 1985,
which restrained Carlota Valenzuela from acting as liquidator and allowed Banco
Filipino to resume banking operations only under a Central Bank comptroller.
On March 2, 1987, the Court of Appeals rendered a decision dismissing the
petition.
Hence this petition for review on certiorari was filed alleging that the respondent
court erred when it held in its decision that although Carlota P. Valenzuela was
restrained by this Honorable Court from exercising acts in liquidation of Banco
Filipino Savings & Mortgage Bank, she was not legally precluded from foreclosing
the mortgage over the properties of the petitioner through counsel retained by
her for the purpose.
G.R. No. 81303
On November 8, 1985, petitioner Pilar Development Corporation (Pilar
Development for brevity) filed an action against Banco Filipino, the Central Bank
and Carlota Valenzuela for specific performance, docketed as Civil Case No.
12191. It appears that the former management of Banco Filipino appointed
Quisumbing & Associates as counsel for Banco Filipino. On June 12, 1986 the
said law firm filed an answer for Banco Filipino which confessed judgment
against Banco Filipino.
On June 17, 1986, petitioner filed a second amended complaint. The Central
Bank and Carlota Valenzuela, thru the law firm Sycip, Salazar, Hernandez and
Gatmaitan filed an answer to the complaint.
On June 23, 1986, Sycip, et al., acting for all the defendants including Banco
Filipino moved that the answer filed by Quisumbing & Associates for defendant
Banco Filipino be expunged from the records. Despite opposition from
Quisumbing & Associates, the trial court granted the motion to expunge in an
order dated March 17, 1987. Petitioner Pilar Development moved to reconsider
the order but the motion was denied.
Petitioner Pilar Development filed with the respondent appellate court a petition
for certiorari and mandamus to annul the order of the trial court. The Court of
Appeals rendered a decision dismissing the petition. A petition was filed with this
Court but was denied in a resolution dated March 22, 1988. Hence, this instant
motion for reconsideration.
G.R. No. 81304
On July 9, 1985, petitioner BF Homes Incorporated (BF Homes for brevity) filed
an action with the trial court to compel the Central Bank to restore petitioner's
financing facility with Banco Filipino.
The Central Bank filed a motion to dismiss the action. Petitioner BF Homes in a
supplemental complaint impleaded as defendant Carlota Valenzuela as receiver
of Banco Filipino Savings and Mortgage Bank.
On April 8, 1985, petitioner filed a second supplemental complaint to which
respondents filed a motion to dismiss.
On July 9, 1985, the trial court granted the motion to dismiss the supplemental
complaint on the grounds (1) that plaintiff has no contractual relation with the
defendants, and (2) that the Intermediate Appellate Court in a previous decision
in AC-G.R. SP. No. 04609 had stated that Banco Filipino has been ordered closed
and placed under receivership pending liquidation, and thus, the continuation of
the facility sued for by the plaintiff has become legally impossible and the suit
has become moot. LLjur
The order of dismissal was appealed by the petitioner to the Court of Appeals.
On November 4, 1987, the respondent appellate court dismissed the appeal and
affirmed the order of the trial court.
165
Hence, this petition for review on certiorari was filed, alleging that the
respondent court erred when it found that the private respondents should not be
the ones to respond to the cause of action asserted by the petitioner and the
petitioner did not have any cause of action against the respondents Central Bank
and Carlota Valenzuela.
G.R. No. 90473
Petitioner El Grande Development Corporation (El Grande for brevity) obtained a
loan from Banco Filipino in the amount of P8,034,130.00, secured by a
mortgage over its five parcels of land located in Cavite which were covered by
Transfer Certificate of Title Nos. T-82187, T-109027, T-132897, T-148377, and
T-79371 of the Registry of Deeds of Cavite.
When Banco Filipino was ordered closed and placed under receivership in 1985,
the appointed liquidator of BF, thru its counsel Sycip, Salazar, et al. applied with
the ex-officio sheriff of the Regional Trial Court of Cavite for the extrajudicial
foreclosure of the mortgage constituted over petitioner's properties. on March
24, 1986, the ex-officio sheriff issued a notice of extrajudicial foreclosure sale of
the properties of petitioner.
Thus, petitioner filed with the Court of Appeals a petition for prohibition with
prayer for writ of preliminary injunction to enjoin the respondents from
foreclosing the mortgage and to nullify the notice of foreclosure.
On June 16, 1989, respondent Court of Appeals rendered a decision dismissing
the petition.
Not satisfied with the decision, petitioner filed the instant petition for review on
certiorari.
G.R. No. 70054
Banco Filipino Savings and Mortgage Bank was authorized to operate as such
under M.B. Resolution No. 223 dated February 14, 1963. It commenced
operations on July 9, 1964. It has eighty-nine (89) operating branches, forty-six
(46) of which are in Manila, with more than three (3) million depositors.
As of July 31, 1984, the list of stockholders showed the major stockholders to be
Metropolis Development Corporation, Apex Mortgage and Loans Corporation,
Filipino Business Consultants, Tiu Family Group, LBH Inc. and Anthony Aguirre.
Petitioner Bank had an approved emergency advance of P119.7 million under
M.B. Resolution No. 839 dated June 29, 1984. This was augmented with a P3
billion credit line under M.B. Resolution No. 934 dated July 27, 1984.
On the same date, respondent Board issued M.B. Resolution No. 955 placing
petitioner bank under conservatorship of Basilio Estanislao. He was later
replaced by Gilberto Teodoro as conservator on August 10, 1984. The latter
submitted a report dated January 8, 1985 to respondent Board on the
conservatorship of petitioner bank, which report shall hereinafter be referred to
as the Teodoro report.
Subsequently, another report dated January 23, 1985 was submitted to the
Monetary Board by Ramon Tiaoqui, Special Assistant to the Governor and Head,
SES Department II of the Central Bank, regarding the major findings of
examination on the financial condition of petitioner BF as of July 31, 1984. The
report, which shall be referred to herein as the Tiaoqui Report contained the
following conclusion and recommendation:
"The examination findings as of July 31, 1984, as shown
earlier, indicate one of insolvency and illiquidity and further
confirms the above conclusion of the Conservator.
"All the foregoing provides sufficient justification for
forbidding the bank from engaging in banking.
"Foregoing considered, the following are recommended:
1. Forbid the Banco Filipino Savings &
Mortgage Bank to do business in the Philippines
effective the beginning of office January 1985,
pursuant to Sec. 29 of RA. No. 265, as amended;
2. Designate the Head of the Conservator
Team at the bank, as Receiver of Banco Filipino
Savings & Mortgage Bank, to immediately take
charge of the assets and liabilities, as expeditiously
as possible collect and gather all the assets and
administer the same for the benefit of all the
creditors, and exercise all the powers necessary for
these purposes including but not limited to bringing
suits and foreclosing mortgages in the name of the
bank.
3. The Board of Directors and the principal
officers from Senior Vice Presidents, as listed in the
attached Annex 'A' be included in the watch list of
the Supervision and Examination Sector until such
time that they shall have cleared themselves.
4. Refer to the Central Bank's Legal
Department and Office of Special Investigation the
report on the findings on Banco Filipino for
investigation and possible prosecution of directors,
166
 officers, and employees for activities which led to
its insolvent position." (pp. 61-62, Rollo). LLpr
On January 25, 1985, the Monetary Board issued the assailed MB Resolution No.
75 which ordered the closure of BF and which further provides:
"After considering the report dated January 8, 1985 of the
Conservator for Banco Filipino Savings and Mortgage Bank
that the continuance in business of the bank would involve
probable loss to its depositors and creditors, and after
discussing and finding to be true the statements of the
Special Assistant to the Governor and Head, Supervision and
Examination Sector (SES) Department II as recited in his
memorandum dated January 23, 1985, that the Banco
Filipino Savings & Mortgage Bank is insolvent and that its
continuance in business would involve probable loss to its
depositors and creditors, and in pursuance of Sec. 29 of R.A.
265, as amended, the Board decided:
1. To forbid Banco Filipino Savings and Mortgage Bank and
all its branches to do business in the Philippines;
2. To designate Mrs. Carlota P. Valenzuela, Deputy Governor
as Receiver who is hereby directly vested with jurisdiction
and authority to immediately take charge of the bank's
assets and liabilities, and as expeditiously as possible collect
and gather all the assets and administer the same for the
benefit of its creditors, exercising all the powers necessary
for these purposes including but not limited to, bringing suits
and foreclosing mortgages in the name of the bank;
3. To designate Mr. Arnulfo B. Aurellano, Special Assistant to
the Governor, and Mr. Ramon V. Tiaoqui, Special Assistant to
the Governor and Head, Supervision and Examination Sector
Department II, as Deputy Receivers who are likewise hereby
directly vested with jurisdiction and authority to do all things
necessary or proper to carry out the functions entrusted to
them by the Receiver and otherwise to assist the Receiver in
carrying out the functions vested in the Receiver by law or
Monetary Board Resolutions;
4. To direct and authorize Management to do all other things
and carry out all other measures necessary or proper to
implement this Resolution and to safeguard the interests of
depositors, creditors and the general public; and
5. In consequence of the foregoing, to terminate the
conservatorship over Banco Filipino Savings and Mortgage
Bank." (pp. 10-11, Rollo, Vol. I).
On February 2, 1985, petitioner BF filed a complaint docketed as Civil Case No.
9675 with the Regional Trial Court of Makati to set aside the action of the
Monetary Board placing BF under receivership.
On February 28, 1985, petitioner filed with this Court the instant petition for
certiorari and mandamus under Rule 65 of the Rules of Court seeking to annul
the resolution of January 25, 1985 as made without or in excess of jurisdiction
or with grave abuse of discretion, to order respondents to furnish petitioner with
the reports of examination which led to its closure and to afford petitioner BF a
hearing prior to any resolution that may be issued under Section 29 of R.A. 265,
also known as Central Bank Act.
On March 19, 1985, Carlota Valenzuela, as Receiver and Arnulfo Aurellano and
Ramon Tiaoqui as Deputy Receivers of Banco Filipino submitted their report on
the receivership of BF to the Monetary Board, in compliance with the mandate of
Sec. 29 of R.A. 265 which provides that the Monetary Board shall determine
within sixty (60) days from date of receivership of a bank whether such bank
may be reorganized/permitted to resume business or ordered to be liquidated.
The report contained the following recommendation:
"In view of the foregoing and considering that the condition
of the banking institution continues to be one of insolvency,
i.e., its realizable assets are insufficient to meet all its
liabilities and that the bank cannot resume business with
safety to its depositors, other creditors and the general
public, it is recommended that:
1. Banco Filipino Savings & Mortgage Bank be liquidated
pursuant to paragraph 3, Sec. 29 of RA No. 265, as
amended;
2. The Legal Department, through the Solicitor General, be
authorized to file in the proper court a petition for assistance
in the liquidation of the Bank;
3. The Statutory Receiver be designated as the Liquidator of
said bank; and
4. Management be instructed to inform the stockholders of
Banco Filipino Savings & Mortgage Bark of the Monetary
Board's decision to liquidate the Bank. (p. 167, Rollo, Vol. I)
On July 23, 1985, petitioner filed a motion before this Court praying that a
restraining order or a writ of preliminary injunction be issued to enjoin
respondents from causing the dismantling of BF signs in its main office and 89
167
branches. This Court issued a resolution on August 8, 1985 ordering the
issuance of the aforesaid temporary restraining order.
On August 20, 1985, the case was submitted for resolution.
In a resolution dated August 29, 1985, this Court Resolved to direct the
respondents Monetary Board and Central Bank to hold hearings at which the
petitioner should be heard, and to terminate such hearings and submit its
resolution within thirty (30) days. This Court further resolved to issue a
temporary restraining order enjoining the respondents from executing further
acts of liquidation of a bank. Acts such as receiving collectibles and receivables
or paying off creditors' claims and other transactions pertaining to normal
operations of a bank were not enjoined. The Central Bank was also ordered to
designate a comptroller for the petitioner BF. This Court also ordered the
consolidation of Civil Cases Nos. 8108, 9676 and 10183 in Branch 136 of the
Regional Trial Court of Makati. llcd
However, on September 12, 1985, this Court in the meantime suspended the
hearing it ordered in its resolution of August 29, 1985.
On October 8, 1985, this Court submitted a resolution ordering Branch 136 of
the Regional Trial Court of Makati then presided over by Judge Ricardo Francisco
to conduct the hearing contemplated in the resolution of August 29, 1985 in the
most expeditious manner and to submit its resolution to this Court.
In the Court's resolution of February 19, 1987, the Court stated that the hearing
contemplated in the resolution of August 29, 1985, which is to ascertain whether
substantial administrative due process had been observed by the respondent
Monetary Board, may be expedited by Judge Manuel Cosico who now presides
the court vacated by Judge Ricardo Francisco, who was elevated to the Court of
Appeals, there being no legal impediment or justifiable reason to bar the former
from conducting such hearing. Hence, this Court directed Judge Manuel Cosico
to expedite the hearing and submit his report to this Court.
On February 20, 1988, Judge Manuel Cosico submitted his report to this Court
with the recommendation that the resolutions of respondents Monetary Board
and Central Bank authorizing the closure and liquidation of petitioner BF be
upheld.
On October 21, 1988, petitioner BF filed an urgent motion to reopen hearing to
which respondents filed their comment on December 16, 1988. Petitioner filed
their reply to respondent's comment of January 11, 1989. After having
deliberated on the grounds raised in the pleadings, this Court in its resolution
dated August 3, 1989 declared that its intention as expressed in its resolution of
August 29, 1985 had not been faithfully adhered to by the herein petitioner and
respondents. The aforementioned resolution had ordered a hearing on the
reports that led respondents to order petitioner's closure and its alleged
preplanned liquidation. This Court noted that during the referral hearing
however, a different scheme was followed. Respondents merely submitted to the
commissioner their findings on the examinations conducted on petitioner,
affidavits of the private respondents relative to the findings, their reports to the
Monetary Board and several other documents in support of their position while
petitioner had merely submitted objections to the findings of respondents,
counter-affidavits of its officers and also documents to prove its claims. Although
the records disclose that both parties had not waived cross-examination of their
deponents, no such cross-examination has been conducted. The reception of
evidence in the form of affidavits was followed throughout, until the
commissioner submitted his report and recommendations to the Court. This
Court also held that the documents pertinent to the resolution of the instant
petition are the Teodoro Report, Tiaoqui Report, Valenzuela, Aurellano and
Tiaoqui Report and the supporting documents which were made as the bases by
the reporters of their conclusions contained in their respective reports. This
Court also Resolved in its resolution to re-open the referral hearing that was
terminated after Judge Cosico had submitted his report and recommendation
with the end in view of allowing petitioner to complete its presentation of
evidence and also for respondents to adduce additional evidence, if so minded,
and for both parties to conduct the required cross-examination of
witnesses/deponents, to be done within a period of three months. To obviate all
doubts on Judge Cosico's impartiality, this Court designated a new hearing
commissioner in the person of former Judge Consuelo Santiago of the Regional
Trial Court, Makati, Branch 149 (now Associate Justice of the Court of Appeals).
Three motions for intervention were filed in this case as follows: First, in G.R.
No. 70054 filed by Eduardo Rodriguez and Fortunato M. Dizon, stockholders of
petitioner bank for and on behalf of other stockholders of petitioner; second, in
G.R. No. 78894, filed by the same stockholders, and, third, again in G.R. No.
70054 by BF Depositors' Association and others similarly situated. This Court, on
March 1, 1990, denied the aforesaid motions for intervention.
On January 28, 1991, the hearing commissioner, Justice Consuelo Santiago of
the Court of Appeals submitted her report and recommendation (to be
hereinafter called, "Santiago Report") on the following issues stated therein as
follows:
"1) Had the Monetary Board observed the procedural
requirements laid down in Sec. 29 of R.A. 265, as amended
to justify the closure of the Banco Filipino Savings and
Mortgage Bank?
"2) On the date of BF's closure (January 25, 1985) was its
condition one of insolvency or would its continuance in
business involve probable loss to its depositors or creditors?"
The commissioner after evaluation of the evidence presented, found and
recommended the following:
"1. That the TEODORO and TIAOQUI reports did not
establish, in accordance with Sec. 29 of the R.A. 265, as
amended, BF's insolvency as of July 31, 1984 or that its
168
 continuance in business thereafter would involve probable
loss to its depositors or creditors. On the contrary, the
evidence indicates that BF was solvent on July 31, 1984 and
that on January 25, 1985, the day it was closed, its
insolvency was not clearly established;
"2. That consequently, BF's closure on January 25, 1985, not
having satisfied the requirements prescribed under Sec. 29
of RA 265, as amended, was null and void. prcd
"3. That accordingly, by way of correction, BF should be
allowed to re-open subject to such laws, rules and
regulations that apply to its situation.".
Respondents thereafter filed a motion for leave to file objections to the Santiago
Report. In the same motion, respondents requested that the report and
recommendation be set for oral argument before the Court. On February 7,
1991, this Court denied the request for oral argument of the parties.
On February 25, 1991, respondents filed their objections to the Santiago Report.
On March 5, 1991, respondents submitted a motion for oral argument alleging
that this Court is confronted with two conflicting reports on the same subject,
one upholding on all points the Monetary Board's closure of petitioner, (Cosico
Report dated February 19, 1988) and the other (Santiago Report dated January
25, 1991) holding that petitioner's closure was null and void because petitioner's
insolvency was not clearly established before its closure; and that such a
hearing on oral argument will therefore allow the parties to directly confront the
issues before this Court.
On March 12, 1991 petitioner filed its opposition to the motion for oral
argument. On March 20, 1991, it filed its reply to respondents' objections to the
Santiago Report.
On June 18, 1991, a hearing was held where both parties were heard on oral
argument before this Court. The parties, having submitted their respective
memoranda, the case is now submitted for decision.
G.R. No. 78767
On February 2, 1985, Banco Filipino filed a complaint with the trial court
docketed as Civil Case No. 9675 to annul the resolution of the Monetary Board
dated January 25, 1985, which ordered the closure of the bank and placed it
under receivership.
On February 14, 1985, the Central Bank and the receivers filed a motion to
dismiss the complaint on the ground that the receivers had not authorized
anyone to file the action. In a supplemental motion to dismiss, the Central Bank
cited the resolution of this Court dated October 15, 1985 in G.R No. 65723
entitled, "Central Bank et al. v. Intermediate Appellate Court" whereby We held
that a complaint questioning the validity of the receivership established by the
Central Bank becomes moot and academic upon the initiation of liquidation
proceedings.
While the motion to dismiss was pending resolution, petitioner herein Metropolis
Development Corporation (Metropolis for brevity) filed a motion to intervene in
the aforestated civil case on the ground that as a stockholder and creditor of
Banco Filipino, it has an interest in the subject of the action.
On July 19, 1985, the trial court denied the motion to dismiss and also denied
the motion for reconsideration of the order later filed by Central Bank. On June
5, 1985, the trial court allowed the motion for intervention.
Hence, the Central Bank and the receivers of Banco Filipino filed a petition for
certiorari with the respondent appellate court alleging that the trial court
committed grave abuse of discretion in not dismissing Civil Case No. 9675.
On March 17, 1986, the respondent appellate court rendered a decision
annulling and setting aside the questioned orders of the trial court, and ordering
the dismissal of the complaint filed by Banco Filipino with the trial court as well
as the complaint in intervention of petitioner Metropolis Development
Corporation.
Hence this petition was filed by Metropolis Development Corporation questioning
the decision of the respondent appellate court.
G.R. No. 78894
On February 2, 1985, a complaint was filed with the trial court in the name of
Banco Filipino to annul the resolution of the Monetary Board dated January 25,
1985 which ordered the closure of Banco Filipino and placed it under
receivership. The receivers appointed by the Monetary Board were Carlota
Valenzuela, Arnulfo Aurellano and Ramon Tiaoqui.
On February 14, 1985, the Central Bank and the receivers filed a motion to
dismiss the complaint on the ground that the receiver had not authorized
anyone to file the action.
On March 22, 1985, the Monetary Board placed the bank under liquidation and
designated Valenzuela as liquidator and Aurellano and Tiaoqui as deputy
liquidators. cdphil
The Central Bank filed a supplemental motion to dismiss which was denied.
Hence, the latter filed a petition for certiorari with the respondent appellate
court to set aside the order of the trial court denying the motion to dismiss. On
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March 17, 1986, the respondent appellate court granted the petition and
dismissed the complaint of Banco Filipino with the trial court.
Thus, this petition for certiorari was filed with the petitioner contending that a
bank which has been closed and placed under receivership by the Central Bank
under Section 29 of RA 265 could file suit in court in its name to contest such
acts of the Central Bank, without the authorization of the CB-appointed receiver.
After deliberating on the pleadings in the following cases:
1. In G.R. No. 68878, the respondent's motion for
reconsideration;
2. In G.R. Nos. 77255-58, the petition, comment, reply,
rejoinder and sur-rejoinder;
3. In G.R. No. 78766, the petition, comment, reply and
rejoinder;
4. In G.R. No. 81303, the petitioner's motion for
reconsideration;
5. In G.R. No. 81304, the petition, comment and reply;
6. Finally, in G.R. No. 90473, the petition, comment and
reply,.
We find the motions for reconsideration in G.R. Nos. 68878 and 81303 and
the petitions in G.R. Nos. 77255-58, 78766, 81304 and 90473 devoid of
merit.
Section 29 of the Republic Act No. 265, as amended known as the Central Bank
Act, provides that when a bank is forbidden to do business in the Philippines and
placed under receivership, the person designated as receiver shall immediately
take charge of the bank's assets and liabilities, as expeditiously as possible,
collect and gather all the assets and administer the same for the benefit of its
creditors, and represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution, exercising all
the powers necessary for these purposes including, but not limited to, bringing
and foreclosing mortgages in the name of the bank. If the Monetary Board shall
later determine and confirm that the banking institution is insolvent or cannot
resume business with safety to depositors, creditors and the general public, it
shall, if public interest requires, order its liquidation and appoint a liquidator who
shall take over and continue the functions of the receiver previously appointed
by Monetary Board. The liquidator may, in the name of the bank 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.
When the issue on the validity of the closure and receivership of Banco Filipino
bank was raised in G.R. No. 70054, the pendency of the case did not diminish
the powers and authority of the designated liquidator to effectuate and carry on
the administration of the bank. In fact when We adopted a resolution on August
25, 1985 and issued a restraining order to respondents Monetary Board and
Central Bank, We enjoined merely further acts of liquidation. Such acts of
liquidation, as explained in Sec. 29 of the Central Bank Act are those which
constitute the conversion of the assets of the banking institution to money or the
sale, assignment or disposition of the same to creditors and other parties for the
purpose of paying the debts of such institution. We did not prohibit however acts
such as receiving collectibles and receivables or paying off creditors' claims and
other transactions pertaining to normal operations of a bank. There is no doubt
that the prosecution of suits for collection and the foreclosure of mortgages
against debtors of the bank by the liquidator are among the usual and ordinary
transactions pertaining to the administration of a bank. Neither did Our order in
the same resolution dated August 25, 1985 for the designation by the Central
Bank of a comptroller for Banco Filipino alter the powers and functions of the
liquidator insofar as the management of the assets of the bank is concerned.
The mere duty of the comptroller is to supervise accounts and finances
undertaken by the liquidator and to determine the propriety of the latter's
expenditures incurred in behalf of the bank. Notwithstanding this, the liquidator
is still empowered under the law to continue the functions of the receiver in
preserving and keeping intact the assets of the bank in substitution of its former
management, and to prevent the dissipation of its assets to the detriment of the
creditors of the bank. These powers and functions of the liquidator in directing
the operations of the bank in place of the former management or former officials
of the bank include the retaining of counsel of his choice in actions and
proceedings for purposes of administration. prLL
Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473, the liquidator by
himself or through counsel has the authority to bring actions for foreclosure of
mortgages executed by debtors in favor of the bank. In G.R. No. 81303, the
liquidator is likewise authorized to resist or defend suits instituted against the
bank by debtors and creditors of the bank and by other private persons.
Similarly, in G.R. No. 81304, due to the aforestated reasons, the Central Bank
cannot be compelled to fulfill financial transactions entered into by Banco Filipino
when the operations of the latter were suspended by reason of its closure. The
Central Bank possesses those powers and functions only as provided for in Sec.
29 of the Central Bank Act.
While We recognize the actual closure of Banco Filipino and the consequent legal
effects thereof on its operations, We cannot uphold the legality of its closure and
thus, find the petitions in G.R. Nos. 70054, 78767 and 78894 impressed with
merit. We hold that the closure and receivership of petitioner bank, which was
ordered by respondent Monetary Board on January 25, 1985, is null and void.
It is a well-recognized principle that administrative and discretionary functions
may not be interfered with by the courts. In general, courts have no supervising
power over the proceedings and actions of the administrative departments of the
government. This is generally true with respect to acts involving the exercise of
judgment or discretion, and findings of fact. But when there is a grave abuse of
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discretion which is equivalent to a capricious and whimsical exercise of judgment
or where the power is exercised in an arbitrary or despotic manner, then there is
a justification for the courts to set aside the administrative determination
reached (Lim, Sr. v. Secretary of Agriculture and Natural Resources, L-26990,
August 31, 1970, 34 SCRA 751).
The jurisdiction of this Court is called upon, once again, through these petitions,
to undertake the delicate task of ascertaining whether or not an administrative
agency of the government, like the Central Bank of the Philippines and the
Monetary Board, has committed grave abuse of discretion or has acted without
or in excess of jurisdiction in issuing the assailed order. Coupled with this task is
the duty of this Court not only to strike down acts which violate constitutional
protections or to nullify administrative decisions contrary to legal mandates but
also to prevent acts in excess of authority or jurisdiction, as well as to correct
manifest abuses of discretion committed by the officer or tribunal involved.
The law applicable in the determination of these issues is Section 29 of Republic
Act No. 265, as amended, also known as the Central Bank Act, which provides:
"SECTION 29. Proceedings upon insolvency. Whenever,
upon examination by the head of the appropriate
supervising or examining department or his examiners or
agents into the condition of any bank or non-bank financial
intermediary performing quasi-banking functions, it shall be
disclosed that the condition of the same is one of insolvency,
or that its continuance in business would involve probable
loss to its depositors or creditors, it shall be the duty of the
department head concerned forthwith, in writing, to inform
the Monetary Board of the facts. The Board may, upon
finding the statements of the department head to be true,
forbid the institution to do business in the Philippines and
designate an official of the Central Bank or a person of
recognized competence in banking or finance, as receiver to
immediately take charge of its assets and liabilities, as
expeditiously as possible collect and gather all the assets
and administer the same for the benefits of its creditors, and
represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the
institution, exercising all the powers necessary for these
purposes including, but not limited to, bringing and
foreclosing mortgages in the name of the bank or non-bank
financial intermediary performing quasi-banking functions.
"The Monetary Board shall thereupon determine within sixty
days whether the institution may be reorganized or
otherwise placed in such a condition so that it may be
permitted to resume business with safety to its depositors
and creditors and the general public and shall prescribe the
conditions under which such resumption of business shall
take place as well as the time for fulfillment of such
conditions. In such case, the expenses and fees in the
collection and administration of the assets of the institution
shall be determined by the Board and shall be paid to the
Central Bank out of the assets of such institution.
"If the Monetary Board shall determine and confirm within
the said period that the bank or non-bank financial
intermediary performing quasi-banking functions is insolvent
or cannot resume business with safety to its depositors,
creditors, and the general public, it shall, if the public
interest requires, order its liquidation, indicate the manner
of its liquidation and approve a liquidation plan which may,
when warranted, involve disposition of any or all assets in
consideration for the assumption of equivalent liabilities. The
liquidator designated as hereunder provided shall, by the
Solicitor General, file a petition in the regional trial court
reciting the proceedings which have been taken and praying
the assistance of the court in the liquidation of such
institutions. The court shall have jurisdiction in the same
proceedings to assist in the adjudication of the disputed
claims against the bank or non-bank financial intermediary
performing quasi-banking functions and in the enforcement
of individual liabilities of the stockholders and do all that is
necessary to preserve the assets of such institutions and to
implement the liquidation plan approved by the Monetary
Board. The Monetary Board shall designate an official of the
Central bank or a person of recognized competence in
banking or finance as liquidator who shall take over and
continue the functions of the receiver previously appointed
by the Monetary Board under this Section. The liquidator
shall, with all convenient speed, convert the assets of the
banking institutions or non-bank financial intermediary
performing quasi-banking functions to money or sell, assign
or otherwise dispose of the same to creditors and other
parties for the purpose of paying the debts of such
institution and he may, in the name of the bank or non-bank
financial intermediary performing quasi-banking functions
and with the assistance of counsel as he may retain,
institute such actions as may be necessary in the
appropriate court to collect and recover accounts and assets
of such institution or defend any action filed against the
institution: Provided, However, That after having reasonably
established all claims against the institution, the liquidator
may, with the approval of the court, effect partial payments
of such claims for assets of the institution in accordance with
their legal priority.
"The assets of an institution under receivership or liquidation
shall be deemed in custodia legis in the hands of the
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 receiver or liquidator and shall from the moment of such
receivership or liquidation, be exempt from any order of
garnishment, levy, attachment, or execution. LLpr
"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 abide 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
taxes charge of the assets and liabilities of the bank or non-
bank financial intermediary performing quasi-banking
functions or, in case of conservator ship or liquidation, within
ten (10) days from receipt of notice by the said majority
stockholders of said bark or non-bank financial intermediary
of the order of its placement under conservator ship or
liquidation. No restraining order or injunction shall be issued
by any court enjoining the Central Bank from implementing
its actions under this Section and the second paragraph of
Section 34 of this Act in the absence of any convincing proof
that the action of the Monetary Board is plainly arbitrary and
made in bad faith and the petitioner or plaintiff files a bond,
executed in favor of the Central Bank, in an amount 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.
"xxx xxx xxx."
Based on the aforequoted provision, the Monetary Board may order the
cessation of operations of a bank in the Philippines and place it under
receivership upon a finding of insolvency or when its continuance in business
would involve probable loss to its depositors or creditors. If the Monetary Board
shall determine and confirm within sixty (60) days that the bank is insolvent or
can no longer resume business with safety to its depositors, creditors and the
general public, it shall, if public interest will be served, order its liquidation.
Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and
78894 is whether or not the Central Bank and the Monetary Board acted
arbitrarily and in bad faith in finding and thereafter concluding that petitioner
bank is insolvent, and in ordering its closure on January 25, 1985.
As We have stated in Our resolution dated August 3, 1989, the documents
pertinent to the resolution of these petitions are the Teodoro Report, Tiaoqui
Report, and the Valenzuela, Aurellano and Tiaoqui Report and the supporting
documents made as bases by the supporters of their conclusions contained in
their respective reports. We will focus Our study and discussion however on the
Tiaoqui Report and the Valenzuela, Aurellano and Tiaoqui Report. The former
recommended the closure and receivership of petitioner bank while the latter
report made the recommendation to eventually place the petitioner bank under
liquidation. This Court shall likewise take into consideration the findings
contained in the reports of the two commissioners who were appointed by this
Court to hold the referral hearings, namely the report by Judge Manuel Cosico
submitted February 20, 1988 and the report submitted by Justice Consuelo
Santiago on January 28, 1991.
There is no question that under Section 29 of the Central Bank Act, the following
are the mandatory requirements to be complied with before a bank found to be
insolvent is ordered closed and forbidden to do business in the Philippines:
Firstly, an examination shall be conducted by the head of the appropriate
supervising or examining department or his examiners or agents into the
condition of the bank; secondly, it shall be disclosed in the examination that the
condition of the bank is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors; thirdly, the department
head concerned shall inform the Monetary Board in writing, of the facts; and
lastly, the Monetary Board shall find the statements of the department head to
be true.
Anent the first requirement, the Tiaoqui report, submitted on January 23, 1985,
revealed that the finding of insolvency of petitioner was based on the partial list
of exceptions and findings on the regular examination of the bank as of July 31,
1984 conducted by the Supervision and Examination Sector II of the Central
Bank (p. 1, Tiaoqui Report).
On December 17, 1984, this list of exceptions and findings was submitted to the
petitioner bank (p. 6, Tiaoqui Report). This was attached to the letter dated
December 17, 1984, of examiner-in-charge Dionisio Domingo of SES
Department II of the Central Bank to Teodoro Arcenas, president of petitioner
bank, which disclosed that the examination of the petitioner bank as to its
financial condition as of July 31, 1984 was not yet completed or finished on
December 17, 1984 when the Central Bank submitted the partial list of findings
of examination to the petitioner bank. The letter reads:
"In connection with the regular examination of your
institution as of July 31, 1984, we are submitting herewith a
partial list of our exceptions/findings for your comments.
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 "Please be informed that we have not yet officially
terminated our examination (tentatively scheduled last
December 7, 1984) and that we are still awaiting for the
unsubmitted replies to our previous letters/requests.
Moreover, other findings/observations are still being
summarized including the classification of loans and other
risk assets. These shall be submitted to you in due time" (p.
810, Rollo, Vol. III; emphasis ours)
It is worthy to note that a conference was held on January 21, 1985 at the
Central Bank between the officials of the latter and of petitioner bank. What
transpired and what was agreed upon during the conference was explained in
the Tiaoqui report. LexLib
". . . The discussion centered on the substantial exposure of
the bank to the various entities which would have a
relationship with the bank; the manner by which some bank
funds were made indirectly available to several entities
within the group; and the unhealthy financial status of these
firms in which the bank was additionally exposed through
new funds or refinancing accommodation including accrued
interest.
"Queried in the impact of these clean loans, on the bank
solvency, Mr. Dizon (BF Executive Vice President) intimated
that, collectively, these corporations have large undeveloped
real estate properties in the suburbs which can be made
answerable for the unsecured loans as well as the Central
Bank's credit accommodations. A formal reply of the bank
would still be forthcoming." (pp. 58-59, Rollo, Vol. I;
emphasis ours)
Clearly, Tiaoqui based his report on an incomplete examination of petitioner
bank and outrightly concluded therein that the latter's financial status was one
of insolvency or illiquidity. He arrived at the said conclusion from the following
facts: that as of July 31, 1984, total capital accounts consisting of paid-in capital
and other capital accounts such as surplus, surplus reserves and undivided
profits aggregated P351.8 million; that capital adjustments, however, wiped out
the capital accounts and placed the bank with a capital deficiency amounting to
P334.956 million; that the biggest adjustment which contributed to the deficit is
the provision for estimated losses on accounts classified as doubtful and loss
which was computed at P600.4 million pursuant to the examination. This
provision is also known as valuation reserves which was set up or deducted
against the capital accounts of the bank in arriving at the latter's financial
condition.
Tiaoqui however admits the insufficiency and unreliability of the findings of the
examiner as to the setting up of recommended valuation reserves from the
assets of petitioner bank. He stated:
"The recommended valuation reserves as bases for
determining the financial status of the bank would need to
be discussed with the bank, consistent with standard
examination procedure, for which the bank would in turn
reply. Also, the examination has not been officially
terminated. (p. 7. Tiaoqui report; p. 59, Rollo, Vol. I).
In his testimony in the second referral hearing before Justice Santiago, Tiaoqui
testified that on January 21, 1985, he met with officers of petitioner bank to
discuss the advanced findings and exceptions made by Mr. Dionisio Domingo
which covered 70%-80% of the bank's loan portfolio; that at that meeting,
Fortunato Dizon (BF's Executive Vice President) said that as regards the
unsecured loans granted to various corporations, said corporations had large
undeveloped real estate properties which could be answerable for the said
unsecured loans and that a reply from BF was forthcoming; that he (Tiaoqui)
however prepared his report despite the absence of such reply; that he believed,
as in fact it is stated in his report, that despite the meeting on January 21,
1985, there was still a need to discuss the recommended valuation reserves of
petitioner bank and; that he however, did not wait anymore for a discussion of
the recommended valuation reserves and instead prepared his report two days
after January 21, 1985 (pp. 3313-3314, Rollo).
Records further show that the examination of petitioner bank was officially
terminated only when Central Bank Examiner-in-charge Dionisio Domingo
submitted his final report of examination on March 4, 1985.
It is evident from the foregoing circumstances that the examination
contemplated in Sec. 29 of the CB Act as a mandatory requirement was not
completely and fully complied with. Despite the existence of the partial list of
findings in the examination of the bank, there were still highly significant items
to be weighed and determined such as the matter of valuation reserves, before
these can be considered in the financial condition of the bank. It would be a
drastic move to conclude prematurely that a bank is insolvent if the basis for
such conclusion is lacking and insufficient, especially if doubt exists as to
whether such bases or findings faithfully represent the real financial status of
the bank.
The actuation of the Monetary Board in closing petitioner bank on January 25,
1985 barely four days after a conference with the latter on the examiners'
partial findings on its financial position is also violative of what was provided in
the CB Manual of Examination Procedures. Said manual provides that only after
the examination is concluded, should a pre-closing conference led by the
examiner-in-charge be held with the officers/representatives of the institution on
the findings/exception, and a copy of the summary of the findings/violations
should be furnished the institution examined so that corrective action may be
taken by them as soon as possible (Manual of Examination Procedures, General
Instruction, p. 14). It is hard to understand how a period of four days after the
conference could be a reasonable opportunity for a bank to undertake a
responsive and corrective action on the partial list of findings of the examiner-in-
charge.
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We recognize the fact that it is the responsibility of the Central Bank of the
Philippines to administer the monetary, banking and credit system of the country
and that its powers and functions shall be exercised by the Monetary Board
pursuant to Rep. Act No. 265, known as the Central Bank Act. Consequently, the
power and authority of the Monetary Board to close banks and liquidate them
thereafter when public interest so requires is an exercise of the police power of
the state. Police power, however, may not be done arbitrarily or unreasonably
and could be set aside if it is either capricious, discriminatory, whimsical,
arbitrary, unjust or is tantamount to a denial of due process and equal protection
clauses of the Constitution (Central Bank v. Court of Appeals, Nos. L-50031-32,
July 27, 1981, 106 SCRA 143).
In the instant case, the basic standards of substantial due process were not
observed. Time and again, We have held in several cases, that the procedure of
administrative tribunals must satisfy the fundamentals of fair play and that their
judgment should express a well-supported conclusion.
In the celebrated case of Ang Tibay v. Court of Industrial Relations, 69 Phil. 635,
this Court laid down several cardinal primary rights which must be respected in a
proceeding before an administrative body. prLL
However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does
not require a previous hearing before the Monetary Board implements the
closure of a bank, since its action is subject to judicial scrutiny as provided for
under the same law (Rural Bank of Bato v. IAC, G.R. No. 65642, October 15,
1984, Rural Bank v. Court of Appeals, G.R. 61689, June 20, 1988, 162 SCRA
288).
Notwithstanding the foregoing, administrative due process does not mean that
the other important principles may be dispensed with, namely: the decision of
the administrative body must have something to support itself and the evidence
must be substantial. Substantial evidence is more than a mere scintilla. It
means such relevant evidence as a reasonable mind might except as adequate
to support a conclusion (Ang Tibay vs. CIR, supra). Hence, where the decision is
merely based upon pieces of documentary evidence that are not sufficiently
substantial and probative for the purpose and conclusion they are presented, the
standard of fairness mandated in the due process clause is not met. In the case
at bar, the conclusion arrived at by the respondent Board that the petitioner
bank is in an illiquid financial position on January 23, 1985, as to justify its
closure on January 25, 1985 cannot be given weight and finality as the report
itself admits the inadequacy of its basis to support its conclusion.
The second requirement provided in Section 29, R.A. 265 before a bank may be
closed is that the examination should disclose that the condition of the bank is
one of insolvency.
As to the concept of whether the bank is solvent or not, the respondents
contend that under the Central Bank Manual of Examination Procedures, Central
Bank examiners must recommend valuation reserves, when warranted, to be set
up or deducted against the corresponding asset account to determine the bank's
true condition or net worth. In the case of loan accounts, to which practically all
the questioned valuation reserves refer, the manual provides that:
1. For doubtful loans, or loans the ultimate collection of which is doubtful and in
which a substantial loss is probable but not yet definitely ascertainable as to
extent, valuation reserves of fifty per cent (50%) of the accounts should be
recommended to be set up.
2. For loans classified as loss, or loans regarded by the examiner as absolutely
uncollectible or worthless, valuation reserves of one hundred percent (100%) of
the accounts should be recommended to be set up (p. 8, Objections to Santiago
report).
The foregoing criteria used by respondents in determining the financial condition
of the bank is based on Section 5 of RA 337, known as the General Banking Act
which states:
"SECTION 5. The following terms shall be held to be
synonymous and interchangeable:
xxx xxx xxx
f. 'Unimpaired Capital and Surplus,' 'Combined capital
accounts,' and 'Net worth,' which terms shall mean for the
purposes of this Act, the total of the 'unimpaired paid-in
capital, surplus, and undivided profits net of such valuation
reserves as may be required by the Central Bank."
There is no doubt that the Central Bank Act vests authority upon the Central
Bank and Monetary Board to take charge and administer the monetary and
banking system of the country and this authority includes the power to examine
and determine the financial condition of banks for purposes provided for by law,
such as for the purpose of closure on the ground of insolvency stated in Section
29 of the Central Bank Act. But express grants of power to public officers should
be subjected to a strict interpretation, and will be construed as conferring those
powers which are expressly imposed or necessarily implied (Floyd Mechem,
Treatise on the Law of Public Offices and Officers, p. 335).
In this case, there can be no clearer explanation of the concept of insolvency
than what the law itself states. Sec. 29 of the Central Bank Act provides that
insolvency under the Act, shall be understood to mean that "the realizable
assets of a bank or a non-bank financial intermediary performing quasi-banking
functions as determined by the Central Bank are insufficient to meet its
liabilities."
174
Hence, the contention of the Central Bank that a bank's true financial condition
is synonymous with the terms "unimpaired capital and surplus," "combined
capital accounts" and net worth after deducting valuation reserves from the
capital, surplus and unretained earnings, citing Sec. 5 of RA 337 is misplaced.
Firstly, it is clear from the law that a solvent bank is one in which its assets
exceed its liabilities. It is a basic accounting principle that assets are composed
of liabilities and capital. The term "assets" includes capital and surplus (Exley v.
Harris, 267 p. 970, 973, 126 Kan., 302). On the other hand, the term "capital"
includes common and preferred stock, surplus reserves, surplus and undivided
profits. (Manual of Examination Procedures, Report of Examination on
Department of Commercial and Savings Banks, p. 3-C). If valuation reserves
would be deducted from these items, the result would merely be the net worth
or the unimpaired capital and surplus of the bank applying Sec. 5 of RA 337 but
not the total financial condition of the bank.
Secondly, the statement of assets and liabilities is used in balance sheets. Banks
use statements of condition to reflect the amounts, nature and changes in the
assets and liabilities. The Central Bank Manual of Examination Procedures
provides a format or checklist of a statement of condition to be used by
examiners as guide in the examination of banks. The format enumerates the
items which will compose the assets and liabilities of a bank. Assets include cash
and those due from banks, loans, discounts and advances, fixed assets and
other property owned or acquired and other miscellaneous assets. The amount
of loans, discounts and advances to be stated in the statement of condition as
provided for in the manual is computed after deducting valuation reserves when
deemed necessary. On the other hand, liabilities are composed of demand
deposits, time and savings deposits, cashier's, manager's and certified checks,
borrowings, due to head office, branches and agencies, other liabilities and
deferred credits (Manual of Examination Procedure, p. 9). The amounts stated in
the balance sheets or statements of condition including the computation of
valuation reserves when justified, are based however, on the assumption that
the bank or company will continue in business indefinitely, and therefore, the net
worth shown in the statement is in no sense an indication of the amount that
might be realized if the bank or company were to be liquidated immediately
(Prentice Hall Encyclopedic Dictionary of Business Finance, p. 48). Further, based
on respondents' submissions, the allowance for probable losses on loans and
discounts represents the amount set up against current operations to provide for
possible losses arising from non-collection of loans and advances, and this
account is also referred to as valuation reserve (p. 9, Objections to Santiago
report). Clearly, the statement of condition which contains a provision for
recommended valuation reserves should not be used as the ultimate basis to
determine the solvency of an institution for the purpose of termination of its
operations. cdrep
Respondents acknowledge that under the said CB manual, CB examiners must
recommend valuation reserves, when warranted, to be set up against the
corresponding asset account (p. 8, Objections to Santiago report). Tiaoqui
himself, as author of the report recommending the closure of petitioner bank
admits that the valuation reserves should still be discussed with the petitioner
bank in compliance with standard examination procedure. Hence, for the
Monetary Board to unilaterally deduct an uncertain amount as valuation reserves
from the assets of a bank and to conclude therefrom without sufficient basis that
the bank is insolvent, would be totally unjust and unfair.
The test of insolvency laid down in Section 29 of the Central Bank Act is
measured by determining whether the realizable assets of a bank are less than
its liabilities. Hence, a bank is solvent if the fair cash value of all its assets,
realizable within a reasonable time by a reasonable prudent person, would equal
or exceed its total liabilities exclusive of stock liability; but if such fair cash value
so realizable is not sufficient to pay such liabilities within a reasonable time, the
bank is insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated in
other words, the insolvency of a bank occurs when the actual cash market value
of its assets is insufficient to pay its liabilities, not considering capital stock and
surplus which are not liabilities for such purpose (Exley v. Harris, 267 p. 970,
973, 126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n 115, 117).
In arriving at the computation of realizable assets of petitioner bank,
respondents used its books which undoubtedly are not reflective of the actual
cash or fair market value of its assets. This is not the proper procedure
contemplated in Sec. 29 of the Central Bank Act. Even the CB Manual of
Examination Procedures does not confine examination of a bank solely with the
determination of the books of the bank. The latter is part of auditing which
should not be confused with examination. Examination appraises the soundness
of the institution's assets, the quality and character of management and
determines the institution's compliance with laws, rules and regulations. Audit is
a detailed inspection of the institution's books, accounts, vouchers, ledgers, etc.
to determine the recording of all assets and liabilities. Hence, examination
concerns itself with review and appraisal, while audit concerns itself with
verification (CB Manual of Examination Procedures, General Instructions, p. 5).
This Court however, is not in the position to determine how much cash or market
value shall be assigned to each of the assets and liabilities of the bank to
determine their total realizable value. The proper determination of these matters
by using the actual cash value criteria belongs to the field of fact-finding
expertise of the Central Bank and the Monetary Board. Notwithstanding the fact
that the figures arrived at by the respondent Board as to assets and liabilities do
not truly indicate their realizable value as they were merely based on book
value, We will however, take a look at the figures presented by the Tiaoqui
Report in concluding insolvency as of July 31, 1984 and at the figures presented
by the CB authorized deputy receiver and by the Valenzuela, Aurellano and
Tiaoqui Report which recommended the liquidation of the bank by reason of
insolvency as of January 25, 1985.
The Tiaoqui report dated January 23, 1985, which was based on partial
examination findings on the bank's condition as of July 31, 1984, states that
total liabilities of P5,282.1 million exceeds total assets of P4,947.2 million after
deducting from the assets valuation reserves of P612.2 million. Since, as We
have explained in our previous discussion that valuation reserves can not be
legally deducted as there was no truthful and complete evaluation thereof as
admitted by the Tiaoqui report itself, then an adjustment of the figures will show
that the liabilities of P5,282.1 million will not exceed the total assets which will
amount to P5,559.4 if the 612.2 million allotted to valuation reserves will not, be
175
deducted from the assets. There can be no basis therefore for both the
conclusion of insolvency and for the decision of the respondent Board to close
petitioner bank and place it under receivership.
Concerning the financial position of the bank as of January 25, 1985, the date of
the closure of the bank, the consolidated statement of condition thereof as of
the aforesaid date shown in the Valenzuela, Aurellano and Tiaoqui report on the
receivership of petitioner bank, dated March 19, 1985, indicates that total
liabilities of 4,540.84 million does not exceed the total assets of 4,981.53
million. Likewise, the consolidated statement of condition of petitioner bank as of
January 25, 1985 prepared by the Central Bank Authorized Deputy Receiver
Artemio Cruz shows that total assets amounting to P4,981,522,996.22 even
exceeds total liabilities amounting to P4,540,836,834.15. Based on the
foregoing, there was no valid reason for the Valenzuela, Aurellano and Tiaoqui
report to finally recommend the liquidation of petitioner bank instead of its
rehabilitation.
We take note of the exhaustive study and findings of the Cosico report on the
petitioner bank's having engaged in unsafe, unsound and fraudulent banking
practices by the granting of huge unsecured loans to several subsidiaries and
related companies. We do not see, however, that this has any material bearing
on the validity of the closure. Section 34 of the RA 265, Central Bank Act
empowers the Monetary Board to take action under Section 29 of the Central
Bank Act when a bank "persists in carrying on its business in an unlawful or
unsafe manner." There was no showing whatsoever that the bank had persisted
in committing unlawful banking practices and that the respondent Board had
attempted to take effective action on the bank's alleged activities. During the
period from July 27, 1984 up to January 25, 1985, when petitioner bank was
under conservator ship no official of the bank was ever prosecuted, suspended
or removed for any participation in unsafe and unsound banking practices, and
neither was the entire management of the bank replaced or substituted. In fact,
in her testimony during the second referral hearing, Carlota Valenzuela, CB
Deputy Governor, testified that the reason for petitioner bank's closure was not
unsound, unsafe and fraudulent banking practices but the alleged insolvency
position of the bank (TSN, August 3, 1990, p. 3315, Rollo, Vol. VIII).
Finally, another circumstance which point to the solvency of petitioner bank is
the granting by the Monetary Board in favor of the former a credit line in the
amount of P3 billion along with the placing of petitioner bank under conservator
ship by virtue of M.B. Resolution No. 955 dated July 27, 1984. This paved the
way for the reopening of the bank on August 1, 1984 after a self-imposed bank
holiday on July 23, 1984. cdll
On emergency loans and advances, Section 90 of RA 265 provides two types of
emergency loans that can be granted by the Central Bank to a financially
distressed bank:
"SECTION 90. . . . In periods of emergency or of imminent
financial panic which directly threaten monetary and banking
stability, the Central Bank may grant banking institutions
extraordinary advances secured by any assets which are
defined as acceptable security by a concurrent vote of at
least five members of the Monetary Board. While such
advances are outstanding, the debtor institution may not
expand the total volume of its loans or investments without
the prior authorization of the Monetary Board."
"The Central Bank may, at its discretion, likewise grant
advances to banking institutions, even during normal
periods, for the purpose of assisting a bank in a precarious
financial condition or under serious financial pressures
brought about by unforeseen events, or events which,
though foreseeable, could not be prevented by the bank
concerned. Provided, however, That the Monetary Board has
ascertained that the bank is not insolvent and has clearly
realizable assets to secure the advances. Provided, further,
That a concurrent vote of at least five members of the
Monetary Board is obtained." (Emphasis ours)
The first paragraph of the aforequoted provision contemplates a situation where
the whole banking community is confronted with financial and economic crisis
giving rise to serious and widespread confusion among the public, which may
eventually threaten and gravely prejudice the stability of the banking system.
Here, the emergency or financial confusion involves the whole banking
community and not one bank or institution only. The second situation on the
other hand, provides for a situation where the Central Bank grants a loan to a
bank with uncertain financial condition but not insolvent.
As alleged by the respondents, the following are the reasons of the Central Bank
in approving the resolution granting the P3 billion loan to petitioner bank and the
latter's reopening after a brief self-imposed banking holiday:
"WHEREAS, the closure by Banco Filipino Savings and
Mortgage Bank of its Banking offices on its own initiative has
worked serious hardships on its depositors and has affected
confidence levels in the banking system resulting in a feeling
of apprehension among depositors and unnecessary deposit
withdrawals;
"WHEREAS, the Central Bank is charged with the function of
administering the banking system;
"WHEREAS, the reopening of Banco Filipino would require
additional credit resources from the Central Bank as well as
an independent management acceptable to the Central
Bank;
176
 "WHEREAS, it is the desire of the Central Bank to rapidly 1. The motion for reconsideration in G.R. Nos. 68878 and 81303, and the
diffuse the uncertainty that presently exists; petitions in G.R. Nos. 77255-58, 78766, 81304 and 90473 are DENIED;

". . ." (M.B. Min. No. 35 dated July 27, 1984 cited in 2. The petitions in G.R. No. 70054, 78767 and 78894 are GRANTED and the
Respondents' Objections to Santiago Report, p. 26; p. 3387, assailed order of the Central Bank and the Monetary Board dated January 25,
Rollo, Vol. IX; Emphasis ours). 1985 is hereby ANNULLED AND SET ASIDE. The Central Bank and the Monetary
Board are ordered to reorganize petitioner Banco Filipino Savings and Mortgage
Bank and allow the latter to resume business in the Philippines under the
A perusal of the foregoing "Whereas" clauses unmistakably show that the clear
comptroller ship of both the Central Bank and the Monetary Board and under
reason for the decision to grant the emergency loan to petitioner bank was that
such conditions as may be prescribed by the latter in connection with its
the latter was suffering from financial distress and severe bank "run" as a result
reorganization until such time that petitioner bank can continue in business with
of which it closed on July 23, 1984 and that the release of the said amount is in
safety to its creditors, depositors and the general public.
accordance with the Central Bank's full support to meet Banco Filipino's
depositors' withdrawal requirements (Excerpts of minutes of meeting on MB Min.
No. 35, p. 25, Rollo, Vol. IX). Nothing therein shows that an extraordinary SO ORDERED.
emergency situation exists affecting most banks, not only as regards petitioner
bank. This Court thereby finds that the grant of the said emergency loan was
||| (Banco Filipino Savings and Mortgage Bank v. Monetary Board, G.R. No.
intended from the beginning to fall under the second paragraph of Section 90 of
70054, 68878, 77255-58, 78766, 78767, 78894, 81303, 81304, 90473,
the Central Bank Act, which could not have occurred if the petitioner bank was
[December 11, 1991])
not solvent. Where notwithstanding knowledge of the irregularities and unsafe
banking practices allegedly committed by the petitioner bank, the Central Bank
even granted financial support to the latter and placed it under conservator ship,
such actuation means that petitioner bank could still be saved from its financial
distress by adequate aid and management reform, which was required by
Central Bank's duty to maintain the stability of the banking system and the
preservation of public confidence in it (Ramos v. Central Bank, No. L-29352,
October 4, 1971, 41 SCRA 565).

In view of the foregoing premises, We believe that the closure of the petitioner
bank was arbitrary and committed with grave abuse of discretion. Granting in
gratia argumenti that the closure was based on justified grounds to protect the
public, the fact that petitioner bank was suffering from serious financial
problems should not automatically lead to its liquidation. Section 29 of the SECOND DIVISION
Central Bank provides that a closed bank may be reorganized or otherwise
placed in such a condition that it may be permitted to resume business with
safety to its depositors, creditors and the general public. [G.R. No. 61689. June 20, 1988.]

We are aware of the Central Bank's concern for the safety of Banco Filipino's RURAL BANK OF BUHI, INC., and HONORABLE JUDGE
depositors as well as its creditors including itself which had granted substantial CARLOS R. BUENVIAJE, petitioners, vs. HONORABLE
financial assistance up to the time of the latter's closure. But there are COURT OF APPEALS, CENTRAL BANK OF THE
alternatives to permanent closure and liquidation to safeguard those interests as PHILIPPINES and CONSOLACION ODRA, respondents.
well as those of the general public for the failure of Banco Filipino or any bank
for that matter may be viewed as an irreversible decline of the country's entire
banking system and ultimately, it may reflect on the Central Bank's own viability.
For one thing, the Central Bank and the Monetary Board should exercise strict Manuel B. Tomacruz and Rustico Pasilavan for petitioners.
supervision over Banco Filipino. They should take all the necessary steps not
violative of the laws that will fully secure the repayment of the total financial I.B. Regalado, Jr. and Pacifico T. Torres for respondents.
assistance that the Central Bank had already granted or would grant in the
future.
PARAS, J p:

ACCORDINGLY, decision is hereby rendered as follows:

177
This is a petition for review on certiorari with preliminary mandatory injunction
seeking the reversal of the orders of the Court of Appeals dated March 19, 1982
and March 24, 1982 and its decision) * (HATOL) promulgated on June 17, 1982
in CA-G.R. No. 13944 entitled "Banko Central ng Pilipinas at Consolacion Odra
Laban Kina Rural Bank of Buhi (Camarines Sur), Inc." and praying for a
restraining order or a preliminary mandatory injunction to restrain respondents
from enforcing aforesaid orders and decision of the respondent Court, and to
give due course to the petitioners' complaint in IR-428, pending before Hon.
Judge Carlos R. Buenviaje of Branch VII, CFI, Camarines Sur.
The decretal portion of the appealed decision reads:
"DAHIL DITO, ang utos ng pinasasagot sa Hukom noong ika-
9 ng Marso, 1982, ay isinasang-tabi. Kapalit nito, isang utos
and ipinalabas na nag-uutos sa pinasasagot sa Hukom na
itigil ang anumang pagpapatuloy o pagdidinig kaugnay sa
usaping IR-428 na pinawawalang saysay din ng Hukumang
ito.
SIYANG IPINAG-UUTOS."
The antecedent facts of the case are as follows:
The petitioner Rural Bank of Buhi, Inc. (hereinafter referred to as Buhi) is a
juridical entity existing under the laws of the Philippines. Buhi is a rural bank
that started its operations only on December 26, 1975 (Rollo, p. 86)
In 1980, an examination of the books and affairs of Buhi was ordered conducted
by the Rural Banks and Savings and Loan Association (DRBSLA), Central Bank of
the Philippines, which by law, has charge of the supervision and examination of
rural banks and savings and loan associations in the Philippines. However, said
petitioner refused to be examined and as a result thereof, financial assistance
was suspended.
On January 10, 1980, a general examination of the bank's affairs and operations
was conducted and there were found by DRBSLA represented by herein
respondent Consolacion V. Odra, Director of DRBSLA, among others, massive
irregularities in its operations consisting of loans to unknown and fictitious
borrowers, where the sum of P1,704,782.00 was past due and another sum of
P1,130,000.00 was also past due in favor of the Central Bank (Rollo, p. 86). The
promissory notes evidencing these loans were rediscounted with the Central
Bank for cash. As a result thereof, the bank became insolvent and prejudiced its
depositors and creditors.
Respondent, Consolacion V. Odra, submitted a report recommending to the
Monetary Board of the Central Bank the placing of Buhi under receivership in
accordance with Section 29 of Republic Act No. 265, as amended, the
designation of the Director, DRBSLA, as receiver thereof. On March 28, 1980, the
Monetary Board, finding the report to be true, adopted Resolution No. 583
placing Buhi, petitioner herein, under receivership and designated respondent,
Consolacion V. Odra, as Receiver, pursuant to the provisions of Section 29 of
Republic Act No. 265 as amended (Rollo, p. 111).
In a letter dated April 8, 1980, respondent Consolacion V. Odra, as receiver,
implemented and carried out said Monetary Board Resolution No. 583 by
authorizing deputies of the receiver to take control, possession and charge of
Buhi, its assets and liabilities (Rollo, p. 109).
Imelda del Rosario, Manager of herein petitioner Buhi, filed a petition for
injunction with Restraining Order dated April 23, 1980, docketed as Special
Proceedings IR-428 against respondent Consolacion V. Odra and DRBSLA
deputies in the Court of First Instance of Camarines Sur, Branch VII, Iriga City,
entitled Rural Bank of Buhi vs. Central Bank, which assailed the action of herein
respondent Odra in recommending the receivership over Buhi as a violation of
the provisions of Sections 28 and 29 of Republic Act No. 265 as amended, and
Section 10 of Republic Act No. 720 (The Rural Banks Act) and as being ultra
vires and done with grave abuse of discretion and in excess of jurisdiction (Rollo,
p. 120).
Respondents filed their motion to dismiss dated May 27, 1980 alleging that the
petition did not allege a cause of action and is not sufficient in form and
substance and that it was filed in violation of Section 29, Republic Act No. 265 as
amended by Presidential Decree No. 1007 (Rollo, p. 36).
Petitioners, through their counsel, filed an opposition to the motion to dismiss
dated June 17, 1980 averring that the petition alleged a valid cause of action
and that respondents have violated the due process clause of the Constitution
(Rollo, p. 49).
Later, respondents filed a reply to the opposition dated July 1, 1980, claiming
that the petition is not proper; that Imelda del Rosario is not the proper
representative of the bank; that the petition failed to state a cause of action;
and, that the provisions of Section 29 of Republic Act No. 265 had been faithfully
observed (Rollo, p. 57).
On August 22, 1980, the Central Bank Monetary Board issued a Resolution No.
1514 ordering the liquidation of the Rural Bank of Buhi (Rollo, p. 108).
On September 1, 1981, the Office of the Solicitor General, in accordance with
Republic Act No. 265, Section 29, filed in the same Court of First Instance of
Camarines Sur, Branch VII, a petition for Assistance in the Liquidation of Buhi,
which petition was docketed as SP-IR-553, pursuant to the Monetary Board
Resolution No. 1514 (Rollo, pp. 89; 264).
Meanwhile, respondent Central Bank filed on September 15, 1981, in Civil Case
No. IR-428 a Supplemental Motion To Dismiss on the ground that the
receivership of Buhi, in view of the issuance of the Monetary Board Resolution
No. 1514 had completely become moot and academic (Rollo, p. 68) and the fact
178
that Case SP-IR-553 for the liquidation of Buhi was already pending with the
same Court (Rollo, p. 69).
On October 16, 1981, petitioners herein filed their amended complaint in Civil
Case No. IR-428 alleging that the issuance of Monetary Board Resolution No.
583 was plainly arbitrary and in bad faith under aforequoted Section 29 of
Republic Act No. 265 as amended, among others (Rollo, p. 28). On the same
day, petitioner herein filed a rejoinder to its opposition to the motion to dismiss
(Rollo, p. 145).
On March 9, 1982, herein petitioner Judge Buenviaje, issued an order denying
the respondents' motion to dismiss, supplemental motion to dismiss and
granting a temporary restraining order enjoining respondents from further
managing and administering the Rural Bank of Buhi and to deliver the
possession and control thereof to the petitioner Bank under the same conditions
and with the same financial status as when the same was taken over by herein
respondents (defendants) on April 16, 1980 and further enjoining petitioner to
post a bond in the amount of three hundred thousand pesos (P300,000.00)
(Rollo, p. 72).
The dispositive portion of said decision reads:
"WHEREFORE, premises considered, the motion to dismiss
and supplemental motion to dismiss, in the light of
petitioners' opposition, for want of sufficient merit is denied.
Respondents are hereby directed to file their answer within
ten (10) days from receipt of a copy of this order." (Rollo, p.
4).
On March 11, 1982, petitioner Buhi through counsel, conformably with the
above-mentioned order, filed a Motion to Admit Bond in the amount of
P300,220.00 (Rollo, pp. 78-80).
On March 15, 1982, herein petitioner Judge issued the order admitting the bond
of P300,220.00 filed by the petitioner, and directing the respondents to
surrender the possession of the Rural Bank of Buhi, together with all its
equipments, accessories, etc. to the petitioners (Rollo, p. 6).
Consequently, on March 16, 1982, herein petitioner Judge issued the writ of
execution directing the Acting Provincial Sheriff of Camarines Sur to implement
the Court's order of March 9, 1982 (Rollo, p. 268). Complying with the said
order of the Court, the Deputy Provincial Sheriff went to the Buhi premises to
implement the writ of execution but the vault of the petitioner bank was locked
and no inventory was made, as evidenced by the Sheriffs Report (Rollo, pp. 83-
84). Thus, the petitioner herein filed with the Court an "Urgent Ex-Parte Motion
to Allow Sheriff Calope to Force Open Bank Vault" on the same day (Rollo, p.
268). Accordingly, on March 17, 1982, herein petitioner Judge granted the
aforesaid Ex-Parte Motion to Force Open the Bank Vault (Rollo, p. 269).
On March 18, 1982, counsel for petitioner filed another "Urgent Ex-Parte Motion
to Order Manager of City Trust to Allow Petitioner to Withdraw Rural Bank
Deposits" while a separate "Urgent Ex-Parte Motion to Order Manager of
Metrobank to Release Deposits of Petitioners" was filed on the same date. The
motion was granted by the Court in an order directing the Manager of Metro
Bank-Naga City (Rollo, p. 269) to comply as prayed for.
In view thereof, herein respondents filed in the Court of Appeals a petition for
certiorari and prohibition with preliminary injunction docketed as CA-G.R. No.
13944 against herein petitioners, seeking to set aside the restraining order and
reiterating therein that petitioner Buhi's complaint in the lower court be
dismissed (Rollo, p. 270).
On March 19, 1982, the Court of Appeals issued a Resolution (KAPASIYAHAN) in
tagalog, restraining the Hon. Judge Carlos R. Buenviaje, from enforcing his order
of March 9, 1982 and suspending further proceedings in Sp. Proc. No. IR-428
pending before him while giving the Central Bank counsel, Atty. Ricardo Quintos,
authority to carry out personally said orders and directing the "Punong Kawani"
of the Court of Appeals to send telegrams to the Office of the President and the
Supreme Court (Rollo, p. 168).
Herein petitioners did not comply with the Court of Appeals' order of March 19,
1982, but filed instead on March 21, 1982 a motion for reconsideration of said
order of the Court of Appeals, claiming that the lower court's order of March 9,
1982 referred only to the denial of therein respondents' motion to dismiss and
supplemental motion to dismiss and that the return of Buhi to the petitioners
was already an accomplished fact. The motion was denied by the respondent
court in a resolution dated June 1, 1982 (Rollo, p. 301).
In view of petitioners' refusal to obey the Court of Appeals' Order of March 19,
1982, herein respondents filed with the Court of Appeals a Motion to Cite
Petitioners in Contempt, dated April 22, 1982 [Rollo, p. 174).
The Court of Appeals issued on May 24, 1982 an order requiring herein
petitioner Rural Bank of Buhi, Inc., through its then Acting Manager, Imelda del
Rosario and herein petitioner Judge Carlos Buenviaje, as well as Manuel Genova
and Rodolfo Sosa, to show cause within ten (10) days from notice why they
should not be held in contempt of court, and further directing the Ministry of
National Defense or its representative to cause the return of possession and
management of the Rural Bank to the respondents Central Bank and Consolacion
Odra (Rollo, p. 180).
On June 9, 1982, petitioners filed their objection to respondents' motion for
contempt dated June 5, 1982 claiming that the properties, subject of the order,
had already been returned to the herein petitioners who are the lawful owners
thereof and that the returning could no longer be undone (Rollo, p. 181).
179
Later, petitioners filed another motion dated June 17, 1982 for the
reconsideration of the resolution of June 1, 1982 of the Court of Appeals alleging
that the same contravened and departed from the rulings of the Supreme Court
that consummated acts or acts already done could no longer be the subject of
mandatory injunction and that the respondent Court of Appeals had no
jurisdiction to issue the order unless it was in aid of its appellate jurisdiction,
claiming that the case (CA-G.R. No. 13944) did not come to it on appeal (Rollo,
p. 302).
As aforestated, on June 17, 1982, respondent Court of Appeals rendered its
decision (HATOL) setting aside the lower court's restraining order dated March 9,
1982 and ordering the dismissal of herein petitioners' amended complaint in
Civil Case No. IR-428 (Rollo, p. 186).
On July 9, 1982, petitioners (respondents in CA-G.R. No. 13944) filed a Motion
for Reconsideration of the Decision dated June 17, 1982 insofar as the complaint
with the lower court (Civil Case No. IR-428 was ordered dismissed (Rollo, p.
305).
On August 23, 1982, the respondent Court of Appeals issued its Resolution
denying for lack of merit, herein petitioners' motion for reconsideration of the
resolution issued by the respondent Court of Appeals on June 1, 1982 and set on
August 31, 1982 the hearing of the motion to cite the respondents in CA-G.R.
No. SP-13944 (herein petitioner) for contempt (Rollo, p. 193).
At said hearing, counsel for Rural Bank of Buhi agreed and promised in open
court to restore and return to the Central Bank the possession and control of the
Bank within three (3) days from August 31, 1982.
However on September 3, 1982, Rosalia Guevara, Manager thereof, vigorously
and adamantly refused to surrender the premises unless she received a written
order from the Court.
In a subsequent hearing of the contempt incident, the Court of Appeals issued
its Order dated October 13, 1982, but Rosalia Guevara still refused to obey,
whereupon she was placed under arrest and the Court of Appeals ordered her to
be detained until she decided to obey the Court's Order (Rollo, pp. 273-274).
Earlier, on September 14, 1982 petitioners had filed this petition even while a
motion for reconsideration of the decision of June 17, 1982 was still pending
consideration in the Court of Appeals.
In the resolution of October 20, 1982, the Second Division of this Court without
giving due course to the petition required respondents to COMMENT (Rollo, p.
225).
Counsel for respondents manifested (Rollo, p. 226) that they could not file the
required comment because they were not given a copy of the petition.
Meanwhile, they filed an urgent motion dated October 28, 1982 with the Court
of Appeals to place the bank through its representatives in possession of the
Rural Bank of Buhi (Camarines Sur), Inc. (Rollo, p. 237).
On December 9, 1982, petitioners filed a Supplemental Petition with urgent
motion for the issuance of a restraining order dated December 2, 1982 praying
that the restraining order be issued against respondent court (Rollo, p. 229).
In the resolution of December 15, 1982, the Court resolved to require
petitioners to furnish the respondents with a copy of the petition and to require
the respondents to comment on both the original and the supplemental petitions
(Rollo, p. 243).
In a resolution of February 21, 1983, the Court NOTED Rosalia V. Guevara's
letter dated February 4, 1983 (Rollo, p. 252) addressed to Hon. Chief Justice
Enrique M. Fernando, requesting that she be allowed to file a petition for the
issuance of a writ of habeas corpus (Rollo, p. 256).
At the hearing of the said petition on February 23, 1983 where the counsel of
both parties appeared, this Court noted the Return of the Writ of Habeas Corpus
as well as the release of petitioner Rosalia V. Guevara from detention by the
National Bureau of Investigation. After hearing aforesaid counsel and petitioner
herself, and it appearing that the latter had resigned since January 18, 1983 as
Manager of the Rural Bank of Buhi, Inc. and that the Central Bank might avail of
more than adequate legal measures to take over the management, possession
and control of the said bank (and not through contempt proceedings and
detention and confinement of petitioner), with Assistant Solicitor General Andin
manifesting that respondents were not insisting on the continued detention of
petitioner, the Court Resolved to SET the petitioner at liberty and to consider the
contempt incident closed (Rollo, p. 339).
On April 11, 1983, respondents filed their comment on the original and
supplemental petitions.
Meanwhile, the Court of Appeals, acting on respondents' urgent motion filed on
October 28, 1982 ordered on April 13, 1983 the return to the petitioners (herein
respondents) or their duly authorized representatives of the possession,
management and control of subject Rural Bank (Rollo, p. 319), together with its
properties.
On April 28, 1983, petitioner filed an urgent motion: (1) to give due course to
the petition and (2) for immediate issuance of a Restraining Order against the
respondent court to prevent it from enforcing its aforesaid resolution dated April
13, 1983 and from further proceeding in AC-G.R. No. 13944-SP (Rollo, p. 315).
On May 16, 1983, this Court resolved to deny the petition for lack of merit
(Rollo, p. 321). On July 25, 1983, petitioners filed their verified Motion for
Reconsideration (Rollo, p. 337) praying that the HATOL dated June 17, 1982 of
the Court of Appeals be set aside as nulland void and that Special Proceedings
180
No. IR-428 of CFI-Camarines Sur, Iriga City, Branch VII, be ordered remanded to
the RTC of Camarines Sur, Iriga City, for further proceedings. LLpr
A Motion for Early Resolution was filed by herein petitioners on March 12, 1984
(Rollo, p. 348).
Petitioners raised the following legal issues in their motion for reconsideration:
I. UNDER SEC. 29, R.A. 265, AS AMENDED, MAY THE
MONETARY BOARD (MB) OF THE CENTRAL BANK
(CB) PLACE A RURAL BANK UNDER RECEIVERSHIP
WITHOUT PRIOR NOTICE TO SAID RURAL BANK TO
ENABLE IT TO BE HEARD ON THE GROUND RELIED
UPON FOR SUCH RECEIVERSHIP?
II. UNDER THE SAME SECTION OF SAID LAW, WHERE THE
MONETARY BOARD (MB) OF THE CENTRAL BANK
(CB) HAS PLACED A RURAL BANK UNDER
RECEIVERSHIP, IS SUCH ACTION OF THE
MONETARY BOARD (MB) SUBJECT TO JUDICIAL
REVIEW? IF SO, WHICH COURT MAY EXERCISE
SUCH POWER AND WHEN MAY IT EXERCISE THE
SAME?
III. UNDER THE SAID SECTION OF THE LAW, SUPPOSE A
CIVIL CASE IS INSTITUTED SEEKING ANNULMENT
OF THE RECEIVERSHIP ON THE GROUND OF
ARBITRARINESS AND BAD FAITH ON THE PART OF
THE MONETARY BOARD (MB), MAY SUCH CASE BE
DISMISSED BY THE IAC (THEN CA) ON THE
GROUND OF INSUFFICIENCY OF EVIDENCE EVEN IF
THE TRIAL COURT HAS NOT HAD A CHANCE YET TO
RECEIVE EVIDENCE AND THE PARTIES HAVE NOT
YET PRESENTED EVIDENCE EITHER IN THE TRIAL
COURT OR IN SAID APPELLATE COURT? (Rollo, pp.
330-331).
I. Petitioner Rural Bank's position is to the effect that due process was not
observed by the Monetary Board before said bank was placed under
receivership. Said Rural Bank claimed that it was not given the chance to deny
and disprove such claim of insolvency and/or any other ground which the
Monetary Board used in justification of its action.
Relative thereto, the provision of Republic Act No. 265 on the proceedings upon
insolvency reads:
"SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising and
examining department or his examiners or agents into the
condition of any banking institution, 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, and the Board may, upon
finding the statements of the department head to be true,
forbid the institution to do business in the Philippines and
shall designate an official of the Central Bank, or a person of
recognized competence in banking, 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,
exercising all the powers necessary for these purposes
including, but not limited to, bringing suits and foreclosing
mortgages in the name of the banking institution.
"The Monetary Board shall thereupon determine within sixty
days whether the institution may be recognized or otherwise
placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors
and the general public and shall prescribe the conditions
under which such redemption of business shall take place as
the time for fulfillment of such conditions. In such case, the
expenses and fees in the collection and administration of the
assets of the institution shall be determined by the Board
and shall be paid to the Central Bank out of the assets of
such banking institution.
"If the Monetary Board shall determine and confirm within
the said period that the banking institution is insolvent or
cannot resume business with safety to its depositors,
creditors and the general public, it shall, if the public interest
requires, order its liquidation, indicate the manner of its
liquidation and approve a liquidation plan. The Central Bank
shall, by the Solicitor General, file a petition in the Court of
First Instance reciting the proceedings which have been
taken and praying the assistance of the court in the
liquidation of the banking institution. The Court shall have
jurisdiction in the same proceedings to adjudicate disputed
claims against the bank and enforce individual liabilities of
the stockholders and do all that is necessary to preserve the
assets of the banking institution and to implement the
liquidation plan approved by the Monetary Board. The
Monetary Board shall designate an official of the Central
Bank or a person of recognized competence in banking, as
liquidator who shall take over the functions of the receiver
previously appointed by the Monetary Board under this
Section. The liquidator shall, with all convenient speed,
181
 convert the assets of the banking institution to money or
sell, assign or otherwise dispose of the same to creditors
and other parties for the purpose of paying the debts of such
bank and he may, in the name of the banking institution,
institute such actions as may be necessary in the
appropriate court to collect and recover accounts and assets
of the banking institution.
"The provisions of any law to the contrary notwithstanding
the actions of the Monetary Board under this Section 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. 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.
"Insolvency, under this Act, shall be understood to mean the
inability of a banking institution to pay its liabilities as they
fall due in the usual and ordinary course of business:
Provided, however, that this shall not include the inability to
pay of an otherwise non-insolvent bank caused by
extraordinary demands induced by financial panic commonly
evidenced by a run on the banks in the banking community.
"The appointment of a conservator under Section 28-A of
this Act or the appointment of receiver under this Section
shall be vested exclusively with the Monetary Board, the
provision of any law, general or special, to the contrary
notwithstanding."
It will be observed from the foregoing provision of law, that there is no
requirement whether express or implied, that a hearing be first conducted
before a banking institution may be placed under receivership. On the contrary,
the law is explicit as to the conditions prerequisite to the action of the Monetary
Board to forbid the institution to do business in the Philippines and to appoint a
receiver to immediately take charge of the bank's assets and liabilities. They
are: (a) an examination made by the examining department of the Central
Bank; (b) report by said department to the Monetary Board; and (c) prima facie
showing that the bank is in a condition of insolvency or so situated that its
continuance in business would involve probable loss to its depositors or
creditors.
Supportive of this theory is the ruling of this Court, which established the
authority of the Central Bank under the foregoing circumstances, which reads:
prLL
"As will be noted, whenever it shall appear prima facie that a
banking institution is in 'a condition of insolvency' or so
situated 'that its continuance in business would involved
probable loss to its depositors or creditors,' the Monetary
Board has authority:
First, to forbid the institution to do business and appoint a
receiver therefor; and
Second, to determine, within 60 days, whether or not:
1) the institution may be reorganized and rehabilitated to
such an extent as to be permitted to resume business with
safety to depositors, creditors and the general public; or
2) it is indeed insolvent or cannot resume business with
safety to depositors, creditors and the general public, and
public interest requires that it be liquidated.
In this latter case (i.e., the bank can no longer resume business with safety to
depositors, creditors and the public, etc.) its liquidation will be ordered and a
liquidator appointed by the Monetary Board. The Central Bank shall thereafter
file a petition in the Regional Trial Court praying for the Court's assistance in the
liquidation of the bank." . . . (Salud vs. Central Bank, 143 SCRA 590 [1986]).
Petitioner further argues, that there is also that constitutional guarantee that no
property shall be taken without due process of law, so that Section 29, R.A. 265,
as amended, could not have intended to disregard and do away with such
constitutional requirement when it conferred upon the Monetary Board the
power to place Rural Banks under receivership (Rollo, p. 333).
The contention is without merit. It has long been established and recognized in
this jurisdiction that the closure and liquidation of a bank may be considered as
an exercise of police power. Such exercise may, however, be subject to judicial
inquiry and could be set aside if found to be capricious, discriminatory,
182
whimsical, arbitrary, unjust or a denial of the due process and equal protection
clauses of the Constitution (Central Bank vs. Court of Appeals, 106 SCRA 155
[1981]).
The evident implication of the law, therefore, is that the appointment of a
receiver may be made by the Monetary Board without notice and hearing but its
action is subject to judicial inquiry to insure the protection of the banking
institution. Stated otherwise, 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.
In Mendiola vs. Court of Appeals, (106 SCRA 130), the Supreme Court held:
cdphil
"The pivotal issue raised by petitioner is whether or not the
appointment of a receiver by the Court of First Instance on
January 14, 1969 was in order.
Respondent Court correctly stated that the appointment of a
receiver pendente lite is a matter principally addressed to
and resting largely on the sound discretion of the court to
which the application is made. This Tribunal has so held in a
number of cases. However, receivership being admittedly a
harsh remedy, it should be granted with extreme caution.
Sound reasons for receivership must appear of record, and
there should be a clear showing of a necessity therefor.
Before granting the remedy, the court is advised to consider
the consequence or effects thereof in order to avoid
irreparable injustice or injury to others who are entitled to
as much consideration as those seeking it.
xxx xxx xxx
This is not to say that a hearing is an indispensable
requirement for the appointment of a receiver. As petitioner
correctly contends in his first assignment of error, courts
may appoint receivers without prior presentation of evidence
and solely on the basis of the averments of the pleadings.
Rule 59 of the Revised Rules of Court allows the
appointment of a receiver upon an ex parte application."
There is no question that the action of the Monetary Board in this regard may be
subject to judicial review. Thus, it has been held that the courts may interfere
with the Central Bank's exercise of discretion in determining whether or not a
distressed bank shall be supported or liquidated. Discretion has its limits and has
never been held to include arbitrariness, discrimination or bad faith (Ramos vs.
Central Bank of the Philippines, 41 SCRA 567 [1971]).
It has likewise been held that resolutions of the Monetary Board under Section
29 of the Central Bank Act, such as: forbidding bank institutions to do business
on account of a "condition of insolvency" or because its continuance in business
would involve probable loss to depositors or creditors; or appointing a receiver
to take charge of the bank's assets and liabilities, or determining whether the
bank may be rehabilitated or should be liquidated and appointing a liquidator for
that purpose, are under the law "final and executory" and may be set aside only
on one ground, that is "if there is convincing proof that the action is plainly
arbitrary and made in bad faith" (Salud vs. Central Bank, supra).
There is no dispute that under the above-quoted Section 29 of the Central Bank
Act, the Regional Trial Court has jurisdiction to adjudicate the question of
whether or not the action of the Monetary Board directing the dissolution of the
subject Rural Bank is attended by arbitrariness and bad faith. Such position has
been sustained by this Court in Salud vs. Central Bank of the Philippines (supra).
In the same case, the Court ruled further that a banking institution's claim that
a resolution of the Monetary Board under Section 29 of the Central Bank Act
should be set aside as plainly arbitrary and made in bad faith, may be asserted
as an affirmative defense (Sections 1 and 4[b], Rule 6, Rules of Court) or a
counterclaim (Section 6, Rule 6, Section 2, Rule 72 of the Rules of Court) in the
proceedings for assistance in liquidation or as a cause of action in a separate
and distinct action where the latter was filed ahead of the petition for assistance
in liquidation (ibid; Central Bank vs. Court of Appeals, 106 SCRA 143 [1981]).
LexLib
III. It will be noted that in the issuance of the Order of the Court of First
Instance of Camarines Sur, Branch VII, Iriga City, dated March 9, 1982 (Rollo,
pp. 72-77), there was no trial on the merits. Based on the pleadings filed, the
Court merely acted on the Central Bank's Motion to Dismiss and Supplemental
Motion to Dismiss, denying both for lack of sufficient merit. Evidently, the trial
court merely acted on an incident and has not as yet inquired, as mandated by
Section 29 of the Central Bank Act, into the merits of the claim that the
Monetary Board's action is plainly arbitrary and made in bad faith. It has not
appreciated certain facts which would render the remedy of liquidation proper
and rehabilitation improper, involving as it does an examination of the probative
value of the evidence presented by the parties properly belonging to the trial
court and not properly cognizable on appeal (Central Bank vs. Court of Appeals,
supra, p. 156).
183
Still further, without a hearing held for both parties to substantiate their
allegations in their respective pleadings, there is lacking that "convincing proof"
prerequisite to justify the temporary restraining order (mandatory injunction)
issued by the trial court in its Order of March 9, 1982.
PREMISES CONSIDERED, the decision of the Court of Appeals is MODIFIED; We
hereby order the remand of this case to the Regional Trial Court for further
proceedings, but We LIFT the temporary restraining order issued by the trial
court in its Order dated March 9, 1982.
SO ORDERED.
||| (Rural Bank of Buhi, Inc. v. Court of Appeals, G.R. No. 61689, [June 20,
1988], 245 PHIL 263-280)
EN BANC
[G.R. No. 76118. March 30, 1993.]
THE CENTRAL BANK OF THE PHILIPPINES and RAMON
V. TIAOQUI, petitioners, vs. COURT OF APPEALS and
TRIUMPH SAVINGS BANK respondents.
BELLOSILLO, J p:
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. SP
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 proof of
arbitrariness and had 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 certiorari under
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
184
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. cdphil
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.E. No. 70054) where management of the
bank was restored to its duly elected directors and officers,
but subject to the Central Bank comptrollership." 10
On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui,
filed this petition under Rule 45 of the Rules of Court praying that the decision of
the Court of Appeals in CA-G.R. SP No. 07867 be set aside, and that the civil
case pending before the RTC of Quezon City, Civil Case No. Q-45139, be
dismissed. Petitioners allege that the Court of Appeals erred
(1) in affirming that an insolvent bank that had been
summarily closed by the Monetary Board should be restored
to its private management supposedly because such
summary closure was "arbitrary and in bad faith" and a
denial of "due process";
(2) in holding that the "charge of lack of due process" for
"want of prior hearing" in a complaint to annul a Monetary
Board receivership resolution under Sec. 29 of RA 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.
185
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? LexLib
Under Sec. 29 of R.A. 265, 15 the Central Bank, through the Monetary Board, is
vested with exclusive authority to assess, evaluate and determine the condition
of any bank, and finding such condition to be one of insolvency, or that its
continuance in business would involve probable loss to its depositors or
creditors, forbid the bank or non-bank financial institution to do business in the
Philippines; and shall designate an official of the CB or other competent person
as receiver to immediately take charge of its assets and liabilities. The fourth
paragraph, 16 which was then in effect at the time the action was commenced,
allows the filing of a case to set aside the actions of the Monetary Board which
are tainted with arbitrariness and bad faith.
Contrary to the notion of private respondent, Sec. 29 does not contemplate prior
notice and hearing before a bank may be directed to stop operations and placed
under receivership. When par. 4 (now par. 5, as amended by E.O. 289) provides
for the filing of a case within ten (10) days alter 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. Area [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 of 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 nor
require a previous hearing before the Monetary Board can implement its
resolution closing a bank, since its actions is subject to judicial scrutiny as
provided by law.
It may be emphasized that Sec. 29 does not altogether divest a bank or a non-
bank financial institution placed under receivership of the opportunity to be
heard and present evidence on arbitrariness and bad faith because within ten
(10) days from the date the receiver takes charge of the assets of the bank,
resort to judicial review may be had by filing an appropriate pleading with the
court. Respondent TSB did in fact avail of this remedy by filing a complaint with
the RTC of Quezon City on the 8th day following the takeover by the receiver of
the bank's assets on 3 June 1985.
This "close now and hear later" scheme is grounded on practical and legal
considerations to prevent unwarranted dissipation of the bank's assets and as a
valid exercise of police power to protect the depositors, creditors, stockholders
and the general public.
In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that
"...due process does not necessarily require a prior hearing;
a hearing or an opportunity to be heard may be subsequent
to the closure. One can just imagine the dire consequences
of a prior hearing; bank runs would be the order of the day,
resulting in panic and hysteria. In the process, fortunes may
be wiped out and disillusionment will run the gamut of the
entire banking community."
We stressed in Central Bank of the Philippines v. Court of Appeals 20 that
"...the banking business is properly subject to reasonable
regulation under the police power of the state because of its
nature and relation to the fiscal affairs of the people and the
revenues of the state (9 CJS 32).Banks are affected with
public interest because they receive funds from the general
public in the form of deposits. Due to the nature of their
transactions and functions, a fiduciary relationship is created
between the banking institutions and their depositors.
Therefore, banks are under the obligation to treat with
meticulous care and outmost fidelity the accounts of those
who have reposed their trust and confidence in them (Simex
International [Manila],Inc.,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. It 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; corollary, 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 institutions if its continued operation
would cause prejudice to its depositors, creditors and the
general public as well. This power has been expressly
recognized by this Court. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Banks (189
SCRA 14 [1990]), this Court held that:
186
 '...[u]nless adequate and determined
efforts are taken by the government against the
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
continue to be dissipated or plundered by those
entrusted with their management.' "
Section 29 of R.A. 265 should 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.
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 General Bank were
reached.
Once again, We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and
reiterate Our pronouncement therein that
"...the law is explicit as to the conditions prerequisite to the
action of the Monetary Board to forbid the institution to do
business in the Philippines and to appoint a receiver to
immediately take charge of the bank's assets and liabilities.
They are: (a) an examination made by the examining
department of the Central Bank; (b) report by said
department to the Monetary Board; and (c) prima facie
showing that its continuance in the business would involve
probable loss to its depositors or creditors."

In sum, appeal to procedural due process cannot just outweigh the evil sought
Admittedly, the mere filing of a case for receivership by the Central Bank cab
to be prevented; hence, We rule that Sec. 29 of R.A. 265 is a sound legislation
trigger a bank run and drain its assets in days or even hours leading to
promulgated in accordance with the Constitution in the exercise of police power
insolvency even if the bank be actually solvent. The procedure prescribed in Sec.
of the state. Consequently, the absence of notice and hearing is not valid ground
29 is truly designed to protect the interest of all concerned, i.e.,the depositors,
to annul a Monetary Board resolution placing a bank under receivership, or
creditors and stockholders, the bank itself, and the general public, and the
conservatorship for that matter, may only be annulled after a determination has
summary closure pales in comparison to the protection afforded public interest.
been made by the trial court that its issuance was tainted with arbitrariness and
At any rate, the bank is given full opportunity to prove arbitrariness and bad
bad faith. Until such determination is made, the status quo shall be maintained,
faith in placing the bank under receivership, in which event, the resolution may
i.e., the bank shall continue to be under receivership.
properly nullified and the receivership lifted as the trial court may determine.

As regards the second ground, to rule that only the receiver may bring suit in
The heavy reliance of respondents of the Banco Filipino case is misplaced in view
behalf of the bank is, to echo the respondent appellate court, "asking for
of factual circumstances therein which are not attendant in the present case. We
impossible, for it cannot be expected that the master, the CB, will allow the
ruled in Banco Filipino that the closure of the bank was arbitrary and attendant
receiver it has appointed to question that very appointment." Consequently, only
with grave abuse of discretion, not because of the absence of prior notice and
stockholders of a bank could file an action for annulment of a Monetary Board
hearing, but the Monetary Board had no sufficient basis to arrive at a sound
resolution placing the bank under receivership and prohibiting it from continuing
conclusion of insolvency to justify the closure. In other words, the arbitrariness,
operations. 22 In Central Bank v. Court of Appeals, 23 We explained the purpose
bad faith and abuse of discretion were determined only after the bank was
of the law
placed under the 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 "...in requiring that only the stockholders of record
the true financial condition of the bank. For instance, the subtraction of an representing the majority of the capital stock may bring the
uncertain amount as valuation reserve from the assets of the bank would merely action to set aside a resolution to a place a bank under
result in its net worth or the unimpared capital and surplus; it did not reflect the conservatorship is to ensure that it be not frustrated or
total financial conditions of Banco Filipino. 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
Furthermore, the same reports showed that the total assets of Banco Filipino far
resolution is directed principally against acts of said
exceeded its total liabilities. Consequently, on the basis thereof, the Monetary
Directors and officers which is directed principally against
Board had no valid reason to liquidate the bank; perhaps it could have merely
acts of said Directors and officers which place the bank in a
ordered its reorganization or rehabilitation ,if need be. Clearly, there was in that
state of continuing inability to maintain a condition of
case a manifest arbitrariness, abuse of discretion and bad faith in the closure of
187
 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 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
||| (Central Bank of the Philippines v. Court of Appeals, G.R. No. 76118, [March
30, 199
THIRD DIVISION
[G.R. No. 162270. April 6, 2005.]
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC.,
petitioner, vs. THE MANILA BANKING CORPORATION,
respondent.
GARCIA, J p:
Thru this appeal by way of a petition for review on certiorari under Rule 45 of
the Rules of Court, petitioner Abacus Real Estate Development Center, Inc.
seeks to set aside the following issuances of the Court of Appeals in CA-G.R. CV
No. 64877, to wit:
1. Decision dated May 26, 2003, 1 reversing an earlier
decision of the Regional Trial Court at Makati City,
Branch 59, in an action for specific performance
and damages thereat commenced by the petitioner
against the herein respondent Manila Banking
Corporation; and
2. Resolution of February 17, 2004, 2 denying petitioner's
motion for reconsideration.
The petition is cast against the following factual backdrop:
Respondent Manila Banking Corporation (Manila Bank, for brevity), owns a
1,435-square meter parcel of land located along Gil Puyat Avenue Extension,
Makati City and covered by Transfer Certificate of Title (TCT) No. 132935 of the
Registry of Deeds of Makati. Prior to 1984, the bank began constructing on said
land a 14-storey building. Not long after, however, the bank encountered
financial difficulties that rendered it unable to finish construction of the building.
On May 22, 1987, the Central Bank of the Philippines, now Bangko Sentral ng
Pilipinas, ordered the closure of Manila Bank and placed it under receivership,
with Feliciano Miranda, Jr. being initially appointed as Receiver. The legality of
the closure was contested by the bank before the proper court.
On November 11, 1988, the Central Bank, by virtue of Monetary Board (MB)
Resolution No. 505, ordered the liquidation of Manila Bank and designated Atty.
Renan V. Santos as Liquidator. The liquidation, however, was held in abeyance
pending the outcome of the earlier suit filed by Manila Bank regarding the
legality of its closure. Consequently, the designation of Atty. Renan V. Santos as
Liquidator was amended by the Central Bank on December 22, 1988 to that of
Statutory Receiver.
In the interim, Manila Bank's then acting president, the late Vicente G. Puyat, in
a bid to save the bank's investment, started scouting for possible investors who
could finance the completion of the building earlier mentioned. On August 18,
1989, a group of investors, represented by Calixto Y. Laureano (hereafter
referred to as Laureano group), wrote Vicente G. Puyat offering to lease the
building for ten (10) years and to advance the cost to complete the same, with
the advanced cost to be amortized and offset against rental payments during the
term of the lease. Likewise, the letter-offer stated that in consideration of
advancing the construction cost, the group wanted to be given the "exclusive
option to purchase" the building and the lot on which it was constructed. acEHSI
188
Since no disposition of assets could be made due to the litigation concerning
Manila Bank's closure, an arrangement was thought of whereby the property
would first be leased to Manila Equities Corporation (MEQCO, for brevity), a
wholly-owned subsidiary of Manila Bank, with MEQCO thereafter subleasing the
property to the Laureano group.
In a letter dated August 30, 1989, Vicente G. Puyat accepted the Laureano
group's offer and granted it an "exclusive option to purchase" the lot and
building for One Hundred Fifty Million Pesos (P150,000,000.00). Later, or on
October 31, 1989, the building was leased to MEQCO for a period of ten (10)
years pursuant to a contract of lease bearing that date. On March 1, 1990,
MEQCO subleased the property to petitioner Abacus Real Estate Development
Center, Inc. (Abacus, for short), a corporation formed by the Laureano group for
the purpose, under identical provisions as that of the October 31, 1989 lease
contract between Manila Bank and MEQCO.
The Laureano group was, however, unable to finish the building due to the
economic crisis brought about by the failed December 1989 coup attempt. On
account thereof, the Laureano group offered its rights in Abacus and its
"exclusive option to purchase" to Benjamin Bitanga (Bitanga hereinafter), for
Twenty Million Five Hundred Thousand Pesos (P20,500,000.00). Bitanga would
later allege that because of the substantial amount involved, he first had to talk
with Atty. Renan Santos, the Receiver appointed by the Central Bank, to discuss
Abacus' offer. Bitanga further alleged that, over lunch, Atty. Santos then verbally
approved his entry into Abacus and his take-over of the sublease and option to
purchase.
On March 30, 1990, the Laureano group transferred and assigned to Bitanga all
of its rights in Abacus and the "exclusive option to purchase" the subject land
and building.
On September 16, 1994, Abacus sent a letter to Manila Bank informing the latter
of its desire to exercise its "exclusive option to purchase". However, Manila Bank
refused to honor the same.
Such was the state of things when, on November 10, 1995, in the Regional Trial
Court (RTC) at Makati, Abacus Real Estate Development Center, Inc. filed a
complaint 3 for specific performance and damages against Manila Bank and/or
the Estate of Vicente G. Puyat. In its complaint, docketed as Civil Case No. 96-
1638 and raffled to Branch 59 of the court, plaintiff Abacus prayed for a
judgment ordering Manila Bank, inter alia, to sell, transfer and convey unto it for
P150,000,000.00 the land and building in dispute "free from all liens and
encumbrances", plus payment of damages and attorney's fees.
Subsequently, defendant Manila Bank, followed a month later by its co-
defendant Estate of Vicente G. Puyat, filed separate motions to dismiss the
complaint.
In an Order dated April 15, 1996, the trial court granted the motion to dismiss
filed by the Estate of Vicente G. Puyat, but denied that of Manila Bank and
directed the latter to file its answer.
Before plaintiff Abacus could adduce evidence but after pre-trial, defendant
Manila Bank filed a Motion for Partial Summary Judgment, followed by a
Supplement to Motion for Partial Summary Judgment. While initially opposed,
Abacus would later join Manila Bank in submitting the case for summary
judgment.
Eventually, in a decision dated May 27, 1999, 4 the trial court rendered
judgment for Abacus in accordance with the latter's prayer in its complaint,
thus:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff as follows:
1. Ordering the defendant [Manila Bank] to immediately sell
to plaintiff the parcel of land and building, with an area of
1,435 square meters and covered by TCT No. 132935 of the
Makati Registry of Deeds, situated along Sen. Gil J. Puyat
Ave. in Makati City, at the price of One Hundred Fifty Million
(P150,000,000.00) Pesos in accordance with the said
exclusive option to purchase, and to execute the appropriate
deed of sale therefor in favor of plaintiff;
2. Ordering the defendant [Manila Bank] to pay plaintiff the
amount of Two Million (P2,000,000.00) Pesos representing
reasonable attorney's fees;
3. Ordering the DISMISSAL of defendant's counterclaim, for
lack of merit; and
4. With costs against the defendant.
SO ORDERED. ETIDaH
Its motion for reconsideration of the aforementioned decision having been
denied by the trial court in its Order of August 17, 1999, 5 Manila Bank then
went on to the Court of Appeals whereat its appellate recourse was docketed as
CA-G.R. CV No. 64877.
As stated at the threshold hereof, the Court of Appeals, in a decision dated May
26, 2003, 6 reversed and set aside the appealed decision of the trial court, thus:
WHEREFORE, finding serious reversible error, the appeal is
GRANTED.
189
 The Decision dated May 27, 1999 of the Regional Trial Court
of Makati City, Branch 59 is REVERSED and SET ASIDE.
Cost of the appeal to be paid by the appellee.
SO ORDERED.
On June 25, 2003, Abacus filed a Motion for Reconsideration, followed, with
leave of court, by an Amended Motion for Reconsideration. Pending resolution of
its motion for reconsideration, as amended, Abacus filed a Motion to Dismiss
Appeal, 7 therein praying for the dismissal of Manila Bank's appeal from the RTC
decision of May 27, 1999, contending that said appeal was filed out of time.
In its Resolution of February 17, 2004, 8 the appellate court denied Abacus'
aforementioned motion for reconsideration.
Hence, this recourse by petitioner Abacus Real Estate Development Center, Inc.
As we see it, two (2) issues commend themselves for the resolution of the
Court, namely:
WHETHER OR NOT RESPONDENT BANK'S APPEAL TO THE
COURT OF APPEALS WAS FILED ON TIME; and
WHETHER OR NOT PETITIONER ABACUS HAS ACQUIRED
THE RIGHT TO PURCHASE THE LOT AND BUILDING IN
QUESTION.
We rule for respondent Manila Bank on both issues.
Addressing the first issue, petitioner submits that respondent bank's appeal to
the Court of Appeals from the adverse decision of the trial court was belatedly
filed. Elaborating thereon, petitioner alleges that respondent bank received a
copy of the May 27, 1999 RTC decision on June 22, 1999, hence, petitioner had
15 days, or only up to July 7, 1999 within which to take an appeal from the
same decision or move for a reconsideration thereof. Petitioner alleges that
respondent furnished the trial court with a copy of its Motion for Reconsideration
only on July 7, 1999, the last day for filing an appeal. Under Section 3, Rule 41
of the 1997 Rules of Civil Procedure, "the period of appeal shall be interrupted
by a timely motion for new trial or reconsideration". Since, according to
petitioner, respondent filed its Motion for Reconsideration on the last day of the
period to appeal, it only had one (1) more day within which to file an appeal, so
much so that when it received on August 23, 1999 a copy of the trial court's
order denying its Motion for Reconsideration, respondent bank had only up to
August 24, 1999 within which to file the corresponding appeal. As respondent
bank appealed the decision of the trial court only on August 25, 1999, petitioner
thus argues that respondent's appeal was filed out of time.
As a counterpoint, respondent alleges that it sent the trial court a copy of its
Motion for Reconsideration on July 6, 1999, through registered mail. Having sent
a copy of its Motion for Reconsideration to the trial court with still two (2) days
left to appeal, respondent then claims that its filing of an appeal on August 25,
1999, two (2) days after receiving the Order of the trial court denying its Motion
for Reconsideration, was within the reglementary period.
Agreeing with respondent, the appellate court declared that respondent's appeal
was filed on time. Explained that court in its Resolution of February 17, 2004,
denying petitioner's motion for reconsideration:
Firstly, the file copy of the motion for reconsideration
contains the written annotations "Registry Receipt No. 1633
Makati P.O. 7-6-99" in its page 13. The presence of the
annotations proves that the motion for reconsideration was
truly filed by registered mail on July 6, 1999 through
registry receipt no. 1633. aDHCcE
Secondly, the appellant's manifestation filed in the RTC
personally on July 7, 1999 contains the following self-
explanatory statements, to wit:
2. Defendant [Manila Bank] also filed with this
Honorable Court a Motion for Reconsideration of the
Decision dated 27 May 1999 promulgated by this
Honorable Court in this case, and served a copy
thereof to the plaintiff, by registered mail
yesterday, 6 July 1999, due to lack of material time
and messenger to effect personal service and filing.
3. In order for this Honorable Court to be able to
review defendant [Manila Bank's] Motion for
Reconsideration without awaiting the mailed copy,
defendant [Manila Bank] is now furnishing this
Honorable Court with a copy of said motion, as well
as the entry of appearance, by personal service.
The aforecited reference in the manifestation to the mailing
of the motion for reconsideration on July 6, 1999, in light of
the handwritten annotations adverted to herein, renders
beyond doubt the appellant's insistence of filing through
registered mail on July 6, 1999.
Thirdly, the registry return cards attached to the envelopes
separately addressed and mailed to the RTC and the
appellee's counsel, found in pages 728 and 729 of the rollo,
indicate that the contents were the motion for
190
 reconsideration and the formal entry of appearance.
Although the appellee argues that the handwritten
annotations of what were contained by the envelopes at the
time of mailing was easily self-serving, the fact remains that
the envelope addressed to the appellee's counsel appears
thereon to have been received on July 6, 1999 ("7/6/99"),
which enhances the probability of the motion for
reconsideration being mailed, hence filed, on July 6, 1999,
as claimed by the appellant.
Fourthly, the certification issued on October 2, 2003 by Atty.
Jayme M. Luy, Branch Clerk of Court, Branch 59, RTC in
Makati City, has no consequence because Atty. Luy based his
data only on page 3 of the 1995 Civil Case Docket Book
without reference to the original records which were already
with the Court of Appeals.
Fifthly, since the appellant received the denial of the motion
for reconsideration on August 23, 1999, it had until August
25, 1999 within which to perfect its appeal from the decision
of the RTC because 2 days remained in its reglementary
period to appeal. It is not disputed that the appellant filed its
notice of appeal and paid the appellate court docket fees on
August 25, 1999.
These circumstances preponderantly demonstrate that the
appellant's appeal was not late by one day. (Emphasis in the
original)
Petitioner would, however, contest the above findings of the appellate court,
stating, among other things, that if it were true that respondent filed its Motion
for Reconsideration by registered mail and then furnished the trial court with a
copy of said Motion the very next day, then the rollo should have had two copies
of the Motion for Reconsideration in question. Respondent, on the other hand,
insists that it indeed filed a Motion for Reconsideration on July 6, 1999 through
registered mail.
It is evident that the issue raised by petitioner relates to the correctness of the
factual finding of the Court of Appeals as to the precise date when respondent
filed its motion for reconsideration before the trial court. Such issue, however, is
beyond the province of this Court to review. It is not the function of the Court to
analyze or weigh all over again the evidence or premises supportive of such
factual determination. 9 The Court has consistently held that the findings of the
Court of Appeals and other lower courts are, as a rule, accorded great weight, if
not binding upon it, 10 save for the most compelling and cogent reasons. 11 As
nothing in the record indicates any of such exceptions, the factual conclusion of
the appellate court that respondent filed its appeal on time, supported as it is by
substantial evidence, must be affirmed.
Going to the second issue, petitioner insists that the option to purchase the lot
and building in question granted to it by the late Vicente G. Puyat, then acting
president of Manila Bank, was binding upon the latter. On the other hand,
respondent has consistently maintained that the late Vicente G. Puyat had no
authority to act for and represent Manila Bank, the latter having been placed
under receivership by the Central Bank at the time of the granting of the
"exclusive option to purchase." aEAcHI
There can be no quibbling that respondent Manila Bank was under receivership,
pursuant to Central Bank's MB Resolution No. 505 dated May 22, 1987, at the
time the late Vicente G. Puyat granted the "exclusive option to purchase" to the
Laureano group of investors. Owing to this defining reality, the appellate court
was correct in declaring that Vicente G. Puyat was without authority to grant the
exclusive option to purchase the lot and building in question. The invocation by
the appellate court of the following pronouncement in Villanueva vs. Court of
Appeals 12 was apropos, to say the least:
. . . the assets of the bank pass beyond its control into the
possession and control of the receiver whose duty it is to
administer the assets for the benefit of the creditors of the
bank. Thus, the appointment of a receiver operates to
suspend the authority of the bank and of its directors and
officers over its property and effects, such authority being
reposed in the receiver, and in this respect, the receivership
is equivalent to an injunction to restrain the bank officers
from intermeddling with the property of the bank in any
way.
With respondent bank having been already placed under receivership, its
officers, inclusive of its acting president, Vicente G. Puyat, were no longer
authorized to transact business in connection with the bank's assets and
property. Clearly then, the "exclusive option to purchase" granted by Vicente G.
Puyat was and still is unenforceable against Manila Bank. 13
Petitioner, however, asseverates that the "exclusive option to purchase" was
ratified by Manila Bank's receiver, Atty. Renan Santos, during a lunch meeting
held with Benjamin Bitanga in March 1990.
Petitioner's argument is tenuous at best. Concededly, a contract unenforceable
for lack of authority by one of the parties may be ratified by the person in whose
name the contract was executed. However, even assuming, in gratia argumenti,
that Atty. Renan Santos, Manila Bank's receiver, approved the "exclusive option
to purchase" granted by Vicente G. Puyat, the same would still be of no force
and effect.
Section 29 of the Central Bank Act, as amended, 14 pertinently provides:
Sec. 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising and
191
 examining department or his examiners or agents into the
condition of any banking institution, 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, and the Board may, upon
finding the statements of the department head to be true,
forbid the institution to do business in the Philippines and
shall designate an official of the Central Bank 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,
exercising all the powers necessary for these purposes
including, but not limited to, bringing suits and foreclosing
mortgages in the name of the banking institution. (Emphasis
supplied)
Clearly, the receiver appointed by the Central Bank to take charge of the
properties of Manila Bank only had authority to administer the same for the
benefit of its creditors. Granting or approving an "exclusive option to purchase"
is not an act of administration, but an act of strict ownership, involving, as it
does, the disposition of property of the bank. Not being an act of administration,
the so-called "approval" by Atty. Renan Santos amounts to no approval at all, a
bank receiver not being authorized to do so on his own.
For sure, Congress itself has recognized that a bank receiver only has powers of
administration. Section 30 of the New Central Bank Act 15 expressly provides
that "[t]he receiver shall immediately gather and take charge of all the assets
and liabilities of the institution, administer the same for the benefit of its
creditors, and exercise the general powers of a receiver under the Revised Rules
of Court but shall not, with the exception of administrative expenditures, pay or
commit any act that will involve the transfer or disposition of any asset of the
institution . . ."
In all, respondent bank's receiver was without any power to approve or ratify the
"exclusive option to purchase" granted by the late Vicente G. Puyat, who, in the
first place, was himself bereft of any authority, to bind the bank under such
exclusive option. Respondent Manila Bank may not thus be compelled to sell the
land and building in question to petitioner Abacus under the terms of the latter's
"exclusive option to purchase". TcSAaH
WHEREFORE, the instant petition is DENIED and the challenged issuances of the
Court of Appeals AFFIRMED.
Costs against petitioner.
SO ORDERED.
||| (Abacus Real Estate Develoment Center Inc. v. Manila Banking Corp., G.R.
No. 162270, [April 6, 2005], 495 PHIL 86-99)
FIRST DIVISION
[G.R. No. 114870. May 26, 1995.]
MIGUELA R. VILLANUEVA, RICHARD R. VILLANUEVA,
and MERCEDITA VILLANUEVA-TIRADOS, petitioners, vs.
COURT OF APPEALS, CENTRAL BANK OF THE
PHILIPPINES, ILDEFONSO C. ONG, and PHILIPPINE
VETERANS BANK, respondents.
DAVIDE, JR., J p:
Do petitioners have a better right than private respondent
Ildefonso Ong to purchase from the Philippine Veterans Bank (PVB) the two
parcels of land described as Lot No. 210-D-1 and Lot No. 210-D-2 situated
at Muntinglupa, Metro Manila, containing an area of 529 and 300 square
meters, respectively? This is the principal legal issue raised in this petition.
In its decision of 27 January 1994 in CA-G.R. CV No. 35890, 1 the
Court of Appeals held for Ong, while the trial court, Branch 39 of the
Regional Trial Court (RTC) of Manila, ruled for the petitioners in its joint
decision of 31 October 1991 in Civil Case No. 87-42550 2 and Sp. Proc. No.
85-32311. 3
The operative antecedent facts are set forth in the challenged
decision as follows:
The disputed lots were originally owned by the spouses
Celestino Villanueva and Miguela Villanueva, acquired by the
latter during her husband's sojourn in the United States
since 1968. Sometime in 1975, Miguela Villanueva sought
the help of one Jose Viudez, the then Officer-in-Charge of
the PVB branch in Makati if she could obtain a loan from said
bank. Jose Viudez told Miguela Villanueva to surrender the
titles of said lots as collaterals. And to further facilitate a
bigger loan, Viudez, in connivance with one Andres
Sebastian, swayed Miguela Villanueva to execute a deed of
sale covering the two (2) disputed lots, which she did but
without the signature of her husband Celestino. Miguela
Villanueva, however, never got the loan she was expecting.
Subsequent attempts to contact Jose Viudez proved futile,
until Miguela Villanueva thereafter found out that new titles
192
over the two (2) lots were already issued in the name of the
PVB. It appeared upon inquiry from the Registry of Deeds
that the original titles of these lots were canceled and new
ones were issued to Jose Viudez, which in turn were again
cancelled and new titles issued in favor of Andres Sebastian,
until finally new titles were issued in the name of PNB
[should be PVB] after the lots were foreclosed for failure to
pay the loan granted in the name of Andres Sebastian.
Miguela Villanueva sought to repurchase the lots from the
PVB after being informed that the lots were about to be sold
at auction. The PVB told her that she can redeem the lots for
the price of P110,416.00. Negotiations for the repurchase of
the lots nevertheless were stalled by the filing of liquidation
proceedings against the PVB on August of 1985.
Plaintiff-appellant [Ong] on the other hand expounds on his
claim over the disputed lots in this manner:
"In October 1984, plaintiff-appellant offered to
purchase two pieces of land that had been acquired
by PVB through foreclosure. To back-up plaintiff-
appellant's offer he deposited the sum of
P10,000.00.
In 23 November 1984, while appellant was still
abroad, PVB approved his subject offer under Board
Resolution No. 10901-84. Among the conditions
imposed by PVB is that: 'The purchase price shall
be P110,000.00 (less deposit of P10,000.00)
payable in cash within fifteen (15) days from
receipt of approval of the offer.'
In mid-April 1985, appellant returned to the
country. He immediately verified the status of his
offer with the PVB, now under the control of CB,
where he was informed that the same had already
been approved. On 16 April 1985, appellant
formally informed CB of his desire to pay the
subject balance provided the bank should execute
in his favor the corresponding deed of conveyance.
The letter was not answered.
Plaintiff-appellant sent follow-up letters that went
unheeded, the last of which was on 21 May 1987.
On 26 May 1987, appellant's payment for the
balance of the subject properties were accepted by
CB under Official Receipt #0816.
On 17 September 1987, plaintiff-appellant through
his counsel, sent a letter to CB demanding for the
latter to execute the corresponding deed of
conveyance in favor of appellant. CB did not bother
to answer the same. Hence, the instant case.
While appellant's action for specific performance
against CB was pending, Miguela Villanueva and her
children filed their claims with the liquidation
court." (Appellant's Brief, pp. 3-4). 4
From the pleadings, the following additional or amplificatory facts
are established:
The efforts of Miguela Villanueva to reacquire the property began
on 8 June 1983 when she offered to purchase the lots for P60,000.00 with a
20% downpayment and the balance payable in five years on a quarterly
amortization basis. 5
Her offer not having been accepted,6 Miguela Villanueva increased
her bid to P70,000.00. It was only at this time that she disclosed to the
bank her private transactions with Jose Viudez. 7
After this and her subsequent offers were rejected, 8 Miguela sent
her sealed bid of P110,417.00 pursuant to the written advice of the vice
president of the PVB. 9
The PVB was placed under receivership pursuant to Monetary
Board (MB) Resolution No. 334 dated 3 April 1985 and later, under
liquidation pursuant to MB Resolution No. 612 dated 7 June 1985.
Afterwards, a petition for liquidation was filed with the RTC of Manila, which
was docketed as Sp. Proc. No. 85-32311 and assigned to Branch 39 of the
said court. Cdpr
On 26 May 1987, Ong tendered the sum of P100,000.00
representing the balance of the purchase price of the litigated lots.10 An
employee of the PVB received the amount conditioned upon approval by the
Central Bank liquidator.12 It was raffled to Branch 47 thereof. Upon learning
that the PVB had been placed under liquidation, the presiding judge of
Branch 47 ordered the transfer of the case to Branch 39, the liquidation
court.13
On 15 June 1989, then Presiding Judge Enrique B. Inting issued an
order allowing the purchase of the two lots at the price of P150,000.00.14
The Central Bank liquidator of the PVB moved for the reconsideration of the
order asserting that it is contrary to law as the disposal of the lots should be
made through public auction.15
On 26 July 1989, Miguela Villanueva filed her claim with the
liquidation court. She averred, among others, that she is the lawful and
registered owner of the subject lots which were mortgaged in favor of the
PVB thru the falsification committed by Jose Viudez, the manager of the PVB
Makati Branch, in collusion with Andres Sebastian; that upon discovering
this fraudulent transaction, she offered to purchase the property from the
bank; and that she reported the matter to the PC/INP Criminal Investigation
193
Service Command, Camp Crame, and after investigation, the CIS officer transactions and related documents
recommended the filing of a complaint for estafa through falsification of executed thereafter referring to the two
public documents against Jose Viudez and Andres Sebastian. She then lots covered by the above stated titles as
asked that the lots be excluded from the assets of the PVB and be conveyed null and void;
back to her. 16 Later, in view of the death of her husband, she amended her
claim to include her children, herein petitioners Mercedita Villanueva-Tirados
4. Ordering the Register of Deeds of Makati which
and Richard Villanueva. 17
has jurisdiction over the two parcels of
On 31 October 1991, the trial court rendered judgment 18 holding land in question to re-instate in his land
that while the board resolution approving Ong's offer may have created in records, TCT No. 438073 in the name of
his favor a vested right which may be enforced against the PVB at the time Miguela Villanueva and TCT No. 366364 in
or against the liquidator after the bank was placed under liquidation the name of Celestino Villanueva who were
proceedings, the said right was no longer enforceable, as he failed to the registered owners thereof, and to
exercise it within the prescribed 15-day period. As to Miguela's claim, the cancel all subsequent titles emanating
court ruled that the principle of estoppel bars from questioning the therefrom; and
transaction with Viudez and the subsequent transactions because she was a
co-participant thereto, though only with respect to her undivided one-half 5. Ordering the Liquidator to reconvey the two lots
(1/2) conjugal share in the disputed lots and her one-third (1/3) hereditary described in TCT No. 115631 and 115632
share in the estate of her husband. llcd and executing the corresponding deed of
conveyance of the said lots upon the
payment of One Hundred Ten Thousand
Nevertheless, the trial court allowed her to purchase the lots if only Four Hundred Sixteen and 20/100
to restore their status as conjugal properties. It further held that by reason (P110,416.20) Pesos without interest and
of estoppel, the transactions having been perpetrated by a responsible less the amount deposited by the claimant,
officer of the PVB, and for reasons of equity, the PVB should not be allowed Miguela Villanueva in connection with the
to charge interest on the price of the lots; hence, the purchase price should bidding where she had participated and
be the PVB's claim as of 29 August 1984 when it considered the sealed bids, conducted by the PVB on August 29, 1984.
i.e., P110,416.20, which should be borne by Miguela Villanueva alone.
The dispositive portion of the decision of the trial court reads as Cost against Ildefonso Ong and the PVB.
follows:

SO ORDERED. 19
WHEREFORE, judgment is hereby rendered as follows:

1. Setting aside the order of this court issued on
June 15, 1989 under the caption Civil Case
No. 87-42550 entitled "Ildefonso Ong vs.
Central Bank of the Phils., et al.;
Only Ong appealed the decision to the Court of Appeals. The appeal
was docketed as CA-G.R. CV No. 35890. In its decision of 27 January 1994,
the Court of Appeals reversed the decision of the trial court and ruled as
follows:

WHEREFORE, premises considered, the assailed decision is

2. Dismissing the claim of Ildefonso Ong over the
two parcels of land originally covered by
TCT No. 438073 and 366364 in the names
of Miguela Villanueva and Celestino
Villanueva, respectively which are now
covered by TCT No. 115631 and 115632 in
the name of the PVB;
3. Declaring the Deed of Absolute Sale bearing the
signature of Miguela Villanueva and the
falsified signature of Celestino [sic] Viudez
under date May 6, 1975 and all
hereby REVERSED and SET ASIDE, and a new one entered
ordering the disputed lots be awarded in favor of plaintiff-
appellant Ildefonso Ong upon defendant-appellee Central
Bank's execution of the corresponding deed of sale in his
favor. 20
In support thereof, the Court of Appeals declared that Ong's failure to pay
the balance within the prescribed period was excusable because the PVB
neither notified him of the approval of his bid nor answered his letters
manifesting his readiness to pay the balance, for which reason he could not
have known when to reckon the 15-day period prescribed under its
resolution. It went further to suggest that the Central Bank was in estoppel

194
because it accepted Ong's late payment of the balance. As to the
petitioners' claim, the Court of Appeals stated: prLL
The conclusion reached by the lower court favorable to
Miguela Villanueva is, as aptly pointed out by plaintiff-
appellant, indeed confusing. While the lower court's decision
declared Miguela Villanueva as estopped from recovering her
proportionate share and interest in the two (2) disputed lots
for being a "co-participant" in the fraudulent scheme
perpetrated by Jose Viudez and Andres Sebastian a
factual finding which We conform to and which Miguela
Villanueva does not controvert in this appeal by not filing her
appellee's brief, yet it ordered the reconveyance of the
disputed lots to Miguela Villanueva as the victorious party
upon her payment of P110,416.20. Would not estoppel
defeat the claim of the party estopped? If so, which in fact
must be so, would it not then be absurd or even defiant for
the lower court to finally entitle Miguela Villanueva to the
disputed lots after having been precluded from assailing
their subsequent conveyance in favor of Jose Viudez by
reason of her own negligence and/or complicity therein? The
intended punitive effect of estoppel would merely be a dud if
this Court leaves the lower court's conclusion unrectified. 21
Their motion for reconsideration22 having been denied,23 the
petitioners filed this petition for review on certiorari.24
Subsequently, the respondent Central Bank apprised this Court that
the PVB was no longer under receivership or liquidation and that the PVB
has been back in operation since 3 August 1992. It then prayed that it be
dropped from this case or at least be substituted by the PVB, which is the
real party in interest. 25
In its Manifestation and Entry of Appearance, the PVB declared that
it submits to the jurisdiction of this Court and that it has no objection to its
inclusion as a party respondent in this case in lieu of the Central Bank.26
The petitioners did not object to the substitution.27
Later, in its Comment dated 10 October 1994, the PVB stated that
it "submits to and shall abide by whatever judgment this Honorable
Supreme Tribunal may announce as to whom said lands may be awarded
without any touch of preference in favor of one or the other party litigant in
the instant case."28
In support of their contention that the Court of Appeals gravely
erred in holding that Ong is better entitled to purchase the disputed lots,
the petitioners maintain that Ong is a disqualified bidder, his bid of
P110,000.00 being lower than the starting price of P110,417.00 and his
deposit of P10,000.00 being less than the required 10% of the bid price;
that Ong failed to pay the balance of the price within the 15-day period
from notice of the approval of his bid; and that his offer of payment is
ineffective since it was conditioned on PVB's execution of the deed of
absolute sale in his favor.
On the other hand, Ong submits that his offer, though lower than
Miguela Villanueva's bid by P417.00, is much better, as the same is payable
in cash, while Villanueva's bid is payable in installment; that his payment
could not be said to have been made after the expiration of the 15-day
period because this period has not even started to run, there being no
notice yet of the approval of his offer; and that he has a legal right to
compel the PVB or its liquidator to execute the corresponding deed of
conveyance. LLpr
There is no doubt that the approval of Ong's offer constitutes an
acceptance, the effect of which is to perfect the contract of sale upon notice
thereof to Ong. 29 The peculiar circumstances in this case, however, pose a
legal obstacle to his claim of a better right and deny support to the
conclusion of the Court of Appeals.
Ong did not receive any notice of the approval of his offer. It was
only sometime in mid-April 1985 when he returned from the United States
and inquired about the status of his bid that he came to know of the
approval.
It must be recalled that the PVB was placed under receivership
pursuant to the MB Resolution of 3 April 1985 after a finding that it was
insolvent, illiquid, and could not operate profitably, and that its continuance
in business would involve probable loss to its depositors and creditors. The
PVB was then prohibited from doing business in the Philippines, and the
receiver appointed was directed 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, exercising all the
powers necessary for these purposes."
Under Article 1323 of the Civil Code, an offer becomes ineffective
upon the death, civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed. The reason for this is that:
[T]he contract is not perfected except by the concurrence of
two wills which exist and continue until the moment that
they occur. The contract is not yet perfected at any time
before acceptance is conveyed; hence, the disappearance of
either party or his loss of capacity before perfection prevents
the contractual tie from being formed. 30
It has been said that where upon the insolvency of a bank a
receiver therefor is appointed, the assets of the bank pass beyond its
control into the possession and control of the receiver whose duty it is to
administer to assets for the benefit of the creditors of the bank.31 Thus,
the appointment of a receiver operates to suspend the authority of the bank
and of its directors and officers over its property and effects, such authority
being reposed in the receiver, and in this respect, the receivership is
equivalent to an injunction to restrain the bank officers from intermeddling
with the property of the bank in any way.32
Section 29 of the Central Bank Act, as amended, provides thus:
195
 SEC. 29. Proceedings upon insolvency. Whenever, upon The Court of Appeals therefore erred when it held that Ong had a
examination by the head of the appropriate supervising or better right than the petitioners to the purchase of the disputed lots.
examining department or his examiners or agents into the
Considering then that only Ong appealed the decision of the trial
condition of any bank or non-bank financial intermediary
court, the PVB and the Central Bank, as well as the petitioners, are deemed
performing quasi-banking functions, it shall be disclosed that
to have fully and unqualifiedly accepted the judgment, which thus became
the condition of the same is one of insolvency, or that its
final as to them for their failure to appeal.
continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the WHEREFORE, the instant petition is GRANTED and the challenged
department head concerned forthwith, in writing, to inform decision of the Court of Appeals of 27 January 1994 in CA-G.R. CV No.
the Monetary Board of the facts. The Board may, upon 35890 is hereby SET ASIDE. The decision of Branch 39 of the Regional Trial
finding the statements of the department head to be true, Court of Manila of 31 October 1991 in Civil Case No. 87-42550 and Sp. Proc.
forbid the institution to do business in the Philippines and No. 85-32311 is hereby REINSTATED.
designate an official of the Central Bank or a person of
Respondent Philippine Veterans Bank is further directed to return to
recognized competence in banking or finance as receiver to
private respondent Ildefonso C. Ong the amount of P100,000.00.
immediately take charge of its assets and liabilities, as
expeditiously as possible collect and gather all the assets No pronouncement as to costs.
and administer the same for the benefit of its creditors . . .
SO ORDERED.
exercising all the powers necessary for these purposes . . .
||| (Villanueva v. Court of Appeals, G.R. No. 114870, [May 26, 1995], 314 PHIL
297-312)

xxx xxx xxx

The assets of an institution under receivership or liquidation

shall be deemed in custodia legis in the hands of the
receiver or liquidator and shall, from the moment of such
receivership or liquidation, be exempt from any order or
garnishment, levy, attachment, or execution.
SECOND DIVISION
In a nutshell, the insolvency of a bank and the consequent
appointment of a receiver restrict the bank's capacity to act, especially in
relation to its property. Applying Article 1323 of the Civil Code, Ong's offer [G.R. No. 109373. March 20, 1995.]
to purchase the subject lots became ineffective because the PVB became
insolvent before the bank's acceptance of the offer came to his knowledge.
Hence, the purported contract of sale between them did not reach the stage PACIFIC BANKING CORPORATION EMPLOYEES
of perfection. Corollarily, he cannot invoke the resolution of the bank ORGANIZATION, PAULA S. PAUG, and its officers and
approving his bid as basis for his alleged right to buy the disputed members, petitioners, vs. THE HONORABLE COURT OF
properties. APPEALS and VITALIANO N. NAAGAS II, as
Liquidator of Pacific Banking Corporation, respondents.
Nor may the acceptance by an employee of the PVB of Ong's
payment of P100,00.00 benefit him since the receipt of the payment was
made subject to the approval by the Central Bank liquidator of the PVB
[G.R. No. 112991. March 20, 1995.]
thus: LexLib
Payment for the purchase of the former property of
Andres Sebastian per approved BR No. 10902-84 THE PRESIDENT OF THE PHILIPPINE DEPOSIT
dated 11/13/84, subject to the approval of CB INSURANCE CORPORATION, as Liquidator of the
liquidator. 33 Pacific Banking Corporation, petitioner, vs. COURT OF
APPEALS, HON. JUDGE REGINO T. VERIDIANO II,
This payment was disapproved on the ground that the subject property was DEPUTY SHERIFF RAMON ENRIQUEZ and ANG ENG
already in custodia legis, and hence, disposable only by public auction and JOO, ANG KEONG LAN and E.J. ANG INT'L. LTD.,
subject to the approval of the liquidation court. 34

196
 represented by their Attorney-in-fact, GONZALO C. SY,
respondents.
MENDOZA, J p:
These cases have been consolidated because the principal question
involved is the same: whether a petition for liquidation under 29 of Rep. Act
No. 265, otherwise known as the Central Bank Act, is a special proceeding
or an ordinary civil action. The Fifth and the Fourteenth Divisions of the
Court of Appeals reached opposite results on this question and consequently
applied different periods for appealing. cdphil
The facts are as follows:
I.
Proceedings in the CB and the RTC
On July 5, 1985, the Pacific Banking Corporation (PaBC) was placed
under receivership by the Central Bank of the Philippines pursuant to
Resolution No. 699 of its Monetary Board. A few months later, it was placed
under liquidation 1 and a Liquidator was appointed. 2
On April 7, 1986, the Central Bank filed with the Regional Trial
Court of Manila, Branch 31, a petition entitled "Petition for Assistance in the
Liquidation of Pacific Banking Corporation." 3 The petition was approved,
after which creditors filed their claims with the court.
On May 17, 1991, a new Liquidator, Vitaliano N. Naagas, 4
President of the Philippine Deposit Insurance Corporation (PDIC), was
appointed by the Central Bank. prcd
On March 13, 1989 the Pacific Banking Corporation Employees
Organization (Union for short), petitioner in G.R. No. 109373, filed a
complaint-in-intervention seeking payment of holiday pay, 13th month pay
differential, salary increase differential, Christmas bonus, and cash
equivalent of Sick Leave Benefits due its members as employees of PaBC.
In its order dated September 13, 1991, the trial court ordered payment of
the principal claims of the Union. 5
The Liquidator received a copy of the order on September 16,
1991. On October 16, 1991, he filed a Motion for Reconsideration and
Clarification of the order. In his order of December 6, 1991, the judge
modified his September 13, 1991 6 but in effect denied the Liquidator's
Motion for reconsideration. This order was received by the Liquidator on
December 9, 1991. The following day, December 10, 1991, he filed a Notice
of Appeal and a Motion for Additional Time to Submit Record on Appeal. On
December 20, 1991, he filed the Record on Appeal. On December 23, 1991,
another Notice of Appeal was filed by the Office of the Solicitor General in
behalf of Naagas.
In his order of February 10, 1992, respondent judge disallowed the
Liquidator's Notice of Appeal on the ground that it was late, i.e., more than
15 days after receipt of the decision. The judge declared his September 13,
1991 order and subsequent orders to be final and executory and denied
reconsideration. On March 27, 1992 he granted the Union's Motion for
Issuance of a Writ of Execution.
Ang Keong Lan and E.J. Ang Int'l., private respondents in G.R. No.
112991, likewise filed claims for the payment of investment in the PaBC
allegedly in the form of shares of stocks amounting to US$2,531,632.18.
The shares of stocks, consisting of 154,462 common shares, constituted
11% of the total subscribed capital stock of the PaBC. They alleged that
their claim constituted foreign exchange capital investment entitled to
preference in payment under the Foreign Investments Law. cdll
In his order dated September 11, 1992, respondent judge of the
RTC directed the Liquidator to pay private respondents the total amount of
their claim as preferred creditors. 7
The Liquidator received the order on September 16, 1992. On
September 30, 1992 he moved for reconsideration, but his motion was
denied by the court on October 2, 1992. He received the order denying his
Motion for Reconsideration on October 5, 1992. On October 14,1992 he filed
a Notice of Appeal from the orders of September 16, 1992 and October 2,
1992. As in the case of the Union, however, the judge ordered the Notice of
Appeal stricken off the record on the ground that it had been filed without
authority of the Central Bank and beyond 15 days. In his order of October
28, 1992, the judge directed the execution of his September 11, 1992 order
granting the Stockholders/Investors' claim.
II.
Proceedings in the Court of Appeals
The Liquidator filed separate Petitions for Certiorari, Prohibition and
Mandamus in the Court of Appeals to set aside the orders of the trial court
denying his appeal from the orders granting the claims of Union and of the
Stockholders/Investors. The two Divisions of the Court of Appeals, to which
the cases were separately raffled, rendered conflicting rulings.
In its decision of November 17, 1992 in CA-G.R. SP No. 27751
(now G.R. No. 109373) the Fifth Division 8 held in the case of the Union
that the proceeding before the trial court was a special proceeding and,
therefore, the period for appealing from any decision or final order rendered
therein is 30 days. Since the notice of appeal of the Liquidator was filed on
the 30th day of his receipt of the decision granting the Union's claims, the
appeal was brought on time. The Fifth Division, therefore, set aside the
orders of the lower court and directed the latter to give due course to the
appeal of the Liquidator and set the Record on Appeal he had filed for
hearing. llcd
On the other hand, on December 16, 1993, the Fourteenth Division
9 ruled in CA-G.R. SP No. 29351 (now G.R. No. 112991) in the case of the
Stockholders/Investors that a liquidation proceeding is an ordinary action.
Therefore, the period for appealing from any decision or final order rendered
therein is 15 days and that since the Liquidator's appeal notice was filed on
the 23rd day of his receipt of the order appealed from, deducting the period
during which his motion for reconsideration was pending, the notice of
197
appeal was filed late. Accordingly, the Fourteenth Division dismissed the
Liquidator's petition.
III.
Present Proceedings
The Union and the Liquidator then separately filed petitions before
this Court.
In G.R. No. 109373 the Union contends that:
1. The Court of Appeals acted without jurisdiction over the
subject matter or nature of the suit.
2. The Court of Appeals gravely erred in taking cognizance
of the petition for certiorari filed by Naagas who
was without any legal authority to file it.
3. The Court of Appeals erred in concluding that the case is
a special proceeding governed by Rules 72 to 109
of the Revised Rules of Court.
4. The Court of Appeals erred seriously in concluding that
the notice of appeal filed by Naagas was filed on
time.
5. The Court of Appeals erred seriously in declaring that the
second notice of appeal filed on December 23, 1991
by the Solicitor General is a superfluity.
On the other hand, in G.R. No. 112991 the Liquidator contends
that:
1. The Petition for Assistance in the Liquidation of the Pacific
Banking Corporation is a Special Proceeding case
and/or one which allows multiple appeals, in which
case the period of appeal is 30 days and not 15
days from receipt of the order/judgment appealed
from.
2. Private respondents are not creditors of PaBC but are
plain stockholders whose right to receive payment
as such would accrue only after all the creditors of
the insolvent bank have been paid.
3. The claim of private respondents in the amount of
US$22,531,632.18 is not in the nature of foreign
investment as it is understood in law.
4. The claim of private respondents has not been clearly
established and proved.
5. The issuance of a writ of execution against the assets of
PaBC was made with grave abuse of discretion.
The petitions in these cases must be dismissed.
First. As stated in the beginning, the principal question in these
cases is whether a petition for liquidation under 29 of Rep. Act No. 265 is
in the nature of a special proceeding. If it is, then the period of appeal is 30
days and the party appealing must, in addition to a notice of appeal, file
with the trial court a record on appeal in order to perfect his appeal.
Otherwise, if a liquidation proceeding is an ordinary action, the period of
appeal is 15 days from notice of the decision or final order appealed from.
cdphil
BP Blg. 129 provides:
39. Appeals. The period for appeal from final orders,
resolutions, awards, judgments, or decisions of any court in
all cases shall be fifteen (15) days counted from the notice
of the final order, resolution, award, judgment or decision
appealed from: Provided, however, that in habeas corpus
cases the period for appeal shall be forty-eight (48) hours
from the notice of the judgment appealed from.
No record on appeal shall be required to take an appeal. In
lieu thereof, the entire record shall be transmitted with all
the pages prominently numbered consecutively, together
with an index of the contents thereof.
This section shall not apply in appeals in special proceedings
and in other cases wherein multiple appeals are allowed
under applicable provisions of the Rules of Court.
The Interim Rules and Guidelines to implement BP Blg. 129
provides:
19. Period of Appeals.
(a) All appeals, except in habeas corpus cases and in the
cases referred to in paragraph (b) hereof, must be taken
within fifteen (15) days from notice of the judgment, order,
resolution or award appealed from.
(b) In appeals in special proceedings in accordance with Rule
109 of the Rules of Court and other cases wherein multiple
appeals are allowed, the period of appeals shall be thirty
(30) days, a record on appeal being required.
198
 The Fourteenth Division of the Court of Appeals held that the
proceeding is an ordinary action similar to an action for interpleader under
Rule 63. 10 The Fourteenth Division stated:
The petition filed is akin to an interpleader under Rule 63 of
the Rules of Court where there are conflicting claimants or
several claims upon the same subject matter, a person who
claims no interest thereon may file an action for interpleader
to compel the claimants to "interplead" and litigate their
several claims among themselves. (Section 1, Rule 63).
An interpleader is in the category of a special civil action
under Rule 62 which, like an ordinary action, may be
appealed only within fifteen (15) days from notice of the
judgment or order appealed from. Under Rule 62, the
preceding rules covering ordinary civil actions which are not
inconsistent with or may serve to supplement the provisions
of the rule relating to such civil actions are applicable to
special civil actions. This embraces Rule 41 covering appeals
from the regional trial court to the Court of Appeals.
...
Thus, under Section 1, Rule 2 of the Rules of Court, an
action is defined as "an ordinary suit in a court of justice by
which one party prosecutes another for the enforcement or
protection of a right or the prevention or redress of a
wrong." On the other hand, Section 2 of the same Rule
states that "every other remedy including one to establish
the status or right of a party or a particular fact shall be by
special proceeding."
To our mind, from the aforequoted definitions of an action
and a special proceeding, the petition for assistance of the
court in the liquidation of an asset of a bank is not "one to
establish the status or right of a party or a particular fact."
Contrary to the submission of the petitioner, the petition is
not intended to establish the fact of insolvency of the bank.
The insolvency of the bank had already been previously
determined by the Central Bank in accordance with Section
9 of the CB Act before the petition was filed. All that needs
to be done is to liquidate the assets of the bank and thus the
assistance of the respondent court is sought for that
purpose. LLphil
It should be pointed out that this petition filed is not among
the cases categorized as a special proceeding under Section
1, Rule 72 of the Rules of Court, nor among the special
proceedings that may be appealed under Section 1, Rule
109 of the Rules.
We disagree with the foregoing view of the Fourteenth Division.
Rule 2 of the Rules of Court provide:
1. Action defined. Action means an ordinary suit in a
court of justice, by which one party prosecutes another for
the enforcement or protection of a right, or the prevention
or redress of a wrong.
2. Special proceeding distinguished. Every other remedy,
including one to establish the status or right of a party or a
particular fact, shall be by special proceeding.
Elucidating the crucial distinction between an ordinary action and a
special proceeding, Chief Justice Moran states: 11
Action is the act by which one sues another in a court of
justice for the enforcement or protection of a right, or the
prevention or redress of a wrong while special proceeding is
the act by which one seeks to establish the status or right of
a party, or a particular fact. Hence, action is distinguished
from special proceeding in that the former is a formal
demand of a right by one against another, while the latter is
but a petition for a declaration of a status, right or fact.
Where a party-litigant seeks to recover property from
another, his remedy is to file an action. Where his purpose is
to seek the appointment of a guardian for an insane, his
remedy is a special proceeding to establish the fact or status
of insanity calling for an appointment of guardianship.
Considering this distinction, a petition for liquidation of an insolvent
corporation should be classified a special proceeding and not an ordinary
action. Such petition does not seek the enforcement or protection of a right
nor the prevention or redress of a wrong against a party. It does not pray
for affirmative relief for injury arising from a party's wrongful act or
omission nor state a cause of action that can be enforced against any
person.
What it seeks is merely a declaration by the trial court of the
corporation's insolvency so that its creditors may be able to file their claims
in the settlement of the corporation's debts and obligations. Put in another
way, the petition only seeks a declaration of the corporation's debts and
obligations. Put in another way, the petition only seeks a declaration of the
corporation's state of insolvency and the concomitant right of creditors and
the order of payment of their claims in the disposition of the corporation's
assets.
Contrary to the rulings of the Fourteenth Division, liquidation
proceedings do not resemble petitions for interpleader. For one, an action
for interpleader involves claims on a subject matter against a person who
has no interest therein. 12 This is not the case in a liquidation proceeding
199
where the Liquidator, as representative of the corporation, takes charge of
its assets and liabilities for the benefit of the creditors. 13 He is thus
charged with insuring that the assets of the corporation are paid only to
rightful claimants and in the order of payment provided by law.
Rather, a liquidation proceeding resembles the proceeding for the
settlement of estate of deceased persons under Rules 73 to 91 of the Rules
of Court. The two have a common purpose: the determination of all the
assets and the payment of all the debts and liabilities of the insolvent
corporation or the estate. The Liquidator and the administrator or executor
are both charged with the assets for the benefit of the claimants. In both
instances, the liability of the corporation and the estate is not disputed. The
court's concern is with the declaration of creditors and their rights and the
determination of their order of payment. LexLib
Furthermore, as in the settlement of estates, multiple appeals are
allowed in proceedings for liquidation of an insolvent corporation. As the
Fifth Division of the Court of Appeals, quoting the Liquidator, correctly
noted:
A liquidation proceeding is a single proceeding which
consists of a number of cases properly classified as "claims."
It is basically a two-phased proceeding. The first phase is
concerned with the approval and disapproval of claims. Upon
the approval of the petition seeking the assistance of the
proper court in the liquidation of a closed entity, all money
claims against the bank are required to be filed with the
liquidation court. This phase may end with the declaration
by the liquidation court that the claim is not proper or
without basis. On the other hand, it may also end with the
liquidation court allowing the claim. In the latter case, the
claim shall be classified whether it is ordinary or preferred,
and thereafter included Liquidator. In either case, the order
allowing or disallowing a particular claim is final order, and
may be appealed by the party aggrieved thereby.
The second phase involves the approval by the Court of the
distribution plan prepared by the duly appointed liquidator.
The distribution plan specifies in detail the total amount
available for distribution to creditors whose claim were
earlier allowed. The Order finally disposes of the issue of
how much property is available for disposal. Moreover, it
ushers in the final phase of the liquidation proceeding
payment of all allowed claims in accordance with the order
of legal priority and the approved distribution plan.
Verily, the import of the final character of an Order of
allowance or disallowance of a particular claim cannot be
overemphasized. It is the operative fact that constitutes a
liquidation proceeding a "case where multiple appeals are
allowed by law." The issuance of an Order which, by its
nature, affects only the particular claims involved, and which
may assume finality if no appeal is made therefrom, ipso
facto creates a situation where multiple appeals are allowed.
A liquidation proceeding is commenced by the filing of a
single petition by the Solicitor General with a court of
competent jurisdiction entitled, "Petition for Assistance in
the Liquidation" of e.g., Pacific Banking Corporation. All
claims against the insolvent are required to be filed with the
liquidation court. Although the claims are litigated in the
same proceeding, the treatment is individual. Each claim is
heard separately. And the Order issued relative to a
particular claim applies only to said claim, leaving the other
claims unaffected, as each claim is considered separate and
distinct from the others. Obviously, in the event that an
appeal from an Order allowing or disallowing a particular
claim is made, only said claim is affected, leaving the others
to proceed with their ordinary course. In such case, the
original records of the proceeding are not elevated to the
appellate court. They remain with the liquidation court. In
lieu of the original record, a record of appeal is instead
required to be prepared and transmitted to the appellate
court.
Inevitably, multiple appeals are allowed in liquidation
proceedings. Consequently, a record on appeal is necessary
in each and every appeal made. Hence, the period to appeal
therefrom should be thirty (30) days, a record on appeal
being required. (Record, pp. 162-164).
In G.R. No. 112991 (the case of the Stockholders/Investors), the
Liquidator's notice of appeal was filed on time, having been filed on the 23rd
day of receipt of the order granting the claims of the
Stockholders/Investors. However, the Liquidator did not file a record on
appeal with the result that he failed to perfect his appeal. As already stated,
a record on appeal is required under the Interim Rules and Guidelines in
special proceedings and for cases where multiple appeals are allowed. The
reason for this is that the several claims are actually separate ones and a
decision or final order with respect to any claim can be appealed.
Necessarily the original record on appeal must remain in the trial court
where other claims may still be pending.
Because of the Liquidator's failure to perfect his appeal, the order
granting the claims of the Stockholders/Investors became final.
Consequently, the Fourteenth Division's decision dismissing the Liquidator's
Petition for Certiorari, Prohibition and Mandamus must be affirmed albeit for
a different reason.
On the other hand, in G.R. No. 109373 (case of the Labor Union),
we find that the Fifth Division correctly granted the Liquidator's Petition for
Certiorari, Prohibition and Mandamus. As already noted, the Liquidator filed
a notice of appeal and a motion for extension to file a record appeal on
December 10, 1991, i.e., within 30 days of his receipt of the order granting
200
the Union's claim. Without waiting for the resolution of his motion for
extension, he filed on December 20, 1991 within the extension sought a
record on appeal. Respondent judge thus erred in disallowing the notice on
appeal and denying the Liquidator's motion for extension to file a record on
appeal. Cdpr
The Fifth Division of the Court of Appeals correctly granted the
Liquidator's Petition for Certiorari, Prohibition and Mandamus and its
decision should, therefore, be affirmed.
Second. In G.R. No. 109373, The Union claims that under 29 of
Rep. Act No. 265, the court merely assists in adjudicating the claims of
creditors, preserves the assets of the institution, and implements the
liquidation plan approved by the Monetary Board and that, therefore, as
representative of the Monetary Board, the Liquidator cannot question the
order of the court or appeal from it. It contends that since the Monetary
Board had previously admitted PaBC's liability to the laborers by in fact
setting aside the amount of P112,234,292.44 for the payment of their
claims, there was nothing else for the Liquidator to do except to comply
with the order of the court.
The Union's contention is untenable. In liquidation proceedings, the
function of the trial court is not limited to assisting in the implementation of
the orders of the Monetary Board. Under the same section (29) of the law
invoked by the Union, the court has authority to set aside the decision of
the Monetary Board "if there is a convincing proof that the action is plainly
arbitrary and made in bad faith." 14 As this Court held in Rural Bank of
Buhi, Inc. v. Court of Appeals: 15
There is no question that the action of the Monetary Board
in this regard may be subject to judicial review. Thus, it has
been held that the Court's may interfere with the Central
Bank's exercise of discretion in determining whether or not a
distressed bank shall be supported or liquidated. Discretion
has its limits and has never been held to include
arbitrariness, discrimination or bad faith (Ramos v. Central
Bank of the Philippines, 41 SCRA 567 [1971]).
In truth, the Liquidator is the representative not only of the Central
Bank but also of the insolvent bank. Under 28A-29 of Rep. Act No. 265 he
acts in behalf of the bank "personally or through counsel as he may retain,
in all actions or proceedings or against the corporation" and he has
authority "to do whatever may be necessary for these purposes." This
authority includes the power to appeal from the decisions or final orders of
the court which he believes to be contrary to the interest of the bank.
Finally the Union contends that the notice of appeal and motion for
extension of time to file the record on appeal filed in behalf of the Central
Bank was not filed by the Office of the Solicitor General as counsel for the
Central Bank. This contention has no merit. On October 22, 1992, as
Assistant Solicitor General Cecilio O. Estoesta informed the trial court on
March 27, 1992, the OSG had previously authorized lawyers of the PDIC to
prepare and sign pleadings in the case. 16 Conformably thereto the Notice
of Appeal and the Motion for Additional Time to Submit Record on Appeal
filed were jointly signed by Solicitor Reynaldo I. Saludares in behalf of the
OSG and by lawyers of the PDIC. 17
WHEREFORE, in G.R. No. 109373 and G.R. No. 112991, the
decisions appealed from are AFFIRMED.
SO ORDERED.
||| (Pacific Banking Corp. Employees Organization v. Court of Appeals, G.R. No.
109373, 112991, [March 20, 1995], 312 PHIL 578-597)
FIRST DIVISION
[G.R. No. 105364. June 28, 2001.]
PHILIPPINE VETERANS BANK EMPLOYEES UNION-
N.U.B.E. and PERFECTO V. FERNANDEZ, petitioners, vs.
HONORABLE BENJAMIN VEGA, Presiding Judge of
Branch 39 of the REGIONAL TRIAL COURT of Manila,
the CENTRAL BANK OF THE PHILIPPINES and THE
LIQUIDATOR OF THE PHILIPPINE VETERANS BANK,
respondents.
SYNOPSIS
During the pendency of Case No. SP-32311, a petition for assistance in the
liquidation of the Philippine Veterans Bank (PVB). Republic Act No. 7169
providing for the rehabilitation of the bank, was passed into law. It was
approved by the President on January 2, 1992 and published in the Official
Gazette on February 24, 1992. Meanwhile, PVB filed a motion to terminate
liquidation proceedings with respondent judge in view of the passage of R.A. No.
7169. Another motion of the same character was filed by the liquidator, but
respondent judge continued with the proceedings. August 3, 1992, the PVB
opened its doors to the public and started regular banking operations.
The enactment of Republic Act No. 7169 has rendered the liquidation court
functus officio and respondent judge has been stripped of the authority to issue
orders involving acts of liquidation. Liquidation connotes a winding up or settling
with the creditors and debtors while rehabilitation connotes a reopening or
reorganization. Both are diametrically opposed to each other, such that both
cannot be undertaken at the same time.
KAPUNAN, J p:
201
May a liquidation court continue with liquidation proceedings of the Philippine
Veterans Bank (PVB) when Congress had mandated its rehabilitation and
reopening?
This is the sole issue raised in the instant Petition for Prohibition with Petition for
Preliminary Injunction and application for Ex Parte Temporary Restraining Order.
The antecedent facts of the case are as follows:
Sometime in 1985, the Central Bank of the Philippines (Central Bank, for
brevity) filed with Branch 39 of the Regional Trial Court of Manila a Petition for
Assistance in the Liquidation of the Philippine Veterans Bank, the same docketed
as Case No. SP-32311. Thereafter, the Philippine Veterans Bank Employees
Union-N.U.B.E., herein petitioner, represented by petitioner Perfecto V.
Fernandez, filed claims for accrued and unpaid employee wages and benefits
with said court in SP-32311. 1
After lengthy proceedings, partial payment of the sums due to the employees
were made. However, due to the piecemeal hearings on the benefits, many
remain unpaid. 2
On March 8, 1991, petitioners moved to disqualify the respondent judge from
hearing the above case on grounds of bias and hostility towards petitioners. 3
On January 2, 1992, the Congress enacted Republic Act No. 7169 providing for
the rehabilitation of the Philippine Veterans Bank. 4
Thereafter, petitioners filed with the labor tribunals their residual claims for
benefits and for reinstatement upon reopening of the bank. 5
Sometime in May 1992, the Central Bank issued a certificate of authority
allowing the PVB to reopen. 6
Despite the legislative mandate for rehabilitation and reopening of PVB,
respondent judge continued with the liquidation proceedings of the bank.
Moreover, petitioners learned that respondents were set to order the payment
and release of employee benefits upon motion of another lawyer, while
petitioners' claims have been frozen to their prejudice.
Hence, the instant petition.
Petitioners argue that with the passage of R.A. 7169, the liquidation court
became functus officio, and no longer had the authority to continue with
liquidation proceedings.
In a Resolution, dated June 8, 1992, the Supreme Court resolved to issue a
Temporary Restraining Order enjoining the trial court from further proceeding
with the case.
On June 22, 1992, MOP Security & Detective Agency (VOPSDA) and its 162
security guards filed a Motion for Intervention with prayer that they be excluded
from the operation of the Temporary Restraining Order issued by the Court. They
alleged that they had filed a motion before Branch 39 of the RTC of Manila, in
SP-No. 32311, praying that said court order PVB to pay their backwages and
salary differentials by authority of R.A. No 6727, Wage Orders No. NCR-01 and
NCR-01-A and Wage Orders No. NCR-02 and NCR-02-A; and, that said court, in
an Order dated June 5, 1992, approved therein movants' case and directed the
bank liquidator or PVB itself to pay the backwages and differentials in
accordance with the computation incorporated in the order. Said intervenors
likewise manifested that there was an error in the computation of the monetary
benefits due them. ASTcEa
On August 18, 1992, petitioners, pursuant to the Resolution of this court, dated
July 6, 1992, filed their Comment opposing the Motion for Leave to File
Intervention and for exclusion from the operation of the T.R.O. on the grounds
that the movants have no legal interest in the subject matter of the pending
action; that allowing intervention would only cause delay in the proceedings;
and that the motion to exclude the movants from the T.R.O. is without legal
basis and would render moot the relief sought in the petition.
On September 3, 1992, the PVB filed a Petition-In-Intervention praying for the
issuance of the writs of certiorari and prohibition under Rule 65 of the Rules of
Court in connection with the issuance by respondent judge of several orders
involving acts of liquidation of PVB even after the effectivity of R.A. No. 7169.
PVB further alleges that respondent judge clearly acted in excess of or without
jurisdiction when he issued the questioned orders.
We find for the petitioners.
Republic Act No. 7169 entitled "An Act To Rehabilitate The Philippine Veterans
Bank Created Under Republic Act No. 3518, Providing The Mechanisms Therefor,
And For Other Purposes," which was signed into law by President Corazon C.
Aquino on January 2, 1992 and which was published in the Official Gazette on
February 24, 1992, provides in part for the reopening of the Philippine Veterans
Bank together with all its branches within the period of three (3) years from the
date of the reopening of the head office. 7 The law likewise provides for the
creation of a rehabilitation committee in order to facilitate the implementation of
the provisions of the same. 8
Pursuant to said R.A. No. 7169, the Rehabilitation Committee submitted the
proposed Rehabilitation Plan of the PVB to the Monetary Board for its approval.
Meanwhile, PVB filed a Motion to Terminate Liquidation of Philippine Veterans
Bank dated March 13, 1992 with the respondent judge praying that the
liquidation proceedings be immediately terminated in view of the passage of R.A.
No. 7169.
202
On April 10, 1992, the Monetary Board issued Monetary Board Resolution No.
348 which approved the Rehabilitation Plan submitted by the Rehabilitation
Committee.
Thereafter, the Monetary Board issued a Certificate of Authority allowing PVB to
reopen.
While as a rule, laws take effect after fifteen (15) days following the completion
of their publication in the Official Gazette or in a newspaper of general
circulation in the Philippines, the legislature has the authority to provide for
exceptions, as indicated in the clause "unless otherwise provided."
In the case at bar, Section 10 of R.A. No. 7169 provides: CDAEHS

On June 3, 1992, the liquidator filed A Motion for the Termination of the
Liquidation Proceedings of the Philippine Veterans Bank with the respondent
judge.
As stated above, the Court, in a Resolution dated June 8, 1992, issued a
temporary restraining order in the instant case restraining respondent judge
from further proceeding with the liquidation of PVB.
Sec. 10. Effectivity. This Act shall take effect upon its
approval.
Hence, it is clear that the legislature intended to make the law effective
immediately upon its approval. It is undisputed that R.A. No. 7169 was signed
into law by President Corazon C. Aquino on January 2, 1992. Therefore, said law
became effective on said date.

On August 3, 1992, the Philippine Veterans Bank opened its doors to the public
and started regular banking operations.
Clearly, the enactment of Republic Act No. 7169, as well as the subsequent
developments has rendered the liquidation court functus officio. Consequently,
respondent judge has been stripped of the authority to issue orders involving
acts of liquidation.
Liquidation, in corporation law, connotes a winding up or settling with creditors
and debtors. 9 It is the winding up of a corporation so that assets are distributed
to those entitled to receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss.
Assuming for the sake of argument that publication is necessary for the
effectivity of R.A. No. 7169, then it became legally effective on February 24,
1992, the date when the same was published in the Official Gazette and not on
March 10, 1992, as erroneously claimed by respondents Central Bank and
Liquidator.
WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN DUE
COURSE and GRANTED. Respondent Judge is hereby PERMANENTLY ENJOINED
from further proceeding with Civil Case No. SP- 32311.
SO ORDERED.
||| (Philippine Veterans Bank Employees Union v. Vega, G.R. No. 105364, [June
28, 2001], 412 PHIL 449-455)

On the opposite end of the spectrum is rehabilitation which connotes a

reopening or reorganization. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation
to its former position of successful operation and solvency. 10

It is crystal clear that the concept of liquidation is diametrically opposed or

contrary to the concept of rehabilitation, such that both cannot be undertaken at
the same time. To allow the liquidation proceedings to continue would seriously
hinder the rehabilitation of the subject bank.

Anent the claim of respondents Central Bank and Liquidator of PVB that R.A. No.
7169 became effective only on March 10, 1992 or fifteen (15) days after its
publication in the Official Gazette; and, the contention of intervenors VOP
Security, et al., that the effectivity of said law is conditioned on the approval of a
rehabilitation plan by the Monetary Board, among others, the Court is of the
view that both contentions are bereft of merit.

203

FIRST DIVISION
[G.R. No. 170281. January 18, 2008.]
REPUBLIC OF THE PHILIPPINES, represented by the
ANTI-MONEY LAUNDERING COUNCIL, petitioner, vs.
GLASGOW CREDIT AND COLLECTION SERVICES, INC.
and CITYSTATE SAVINGS BANK, INC., respondents.
CORONA, J p:
This is a petition for review 1 of the order 2 dated October 27, 2005 of the
Regional Trial Court (RTC) of Manila, Branch 47, dismissing the complaint for
forfeiture 3 filed by the Republic of the Philippines, represented by the Anti-
Money Laundering Council (AMLC) against respondents Glasgow Credit and
Collection Services, Inc. (Glasgow) and Citystate Savings Bank, Inc. (CSBI).
On July 18, 2003, the Republic filed a complaint in the RTC Manila for civil
forfeiture of assets (with urgent plea for issuance of temporary restraining order
[TRO] and/or writ of preliminary injunction) against the bank deposits in account
number CA-005-10-000121-5 maintained by Glasgow in CSBI. The case, filed
pursuant to RA 9160 (the Anti-Money Laundering Act of 2001), as amended,
was docketed as Civil Case No. 03-107319.
Acting on the Republic's urgent plea for the issuance of a TRO, the executive
judge 4 of RTC Manila issued a 72-hour TRO dated July 21, 2003. The case was
thereafter raffled to Branch 47 and the hearing on the application for issuance of
a writ of preliminary injunction was set on August 4, 2003.
After hearing, the trial court (through then Presiding Judge Marivic T. Balisi-
Umali) issued an order granting the issuance of a writ of preliminary injunction.
The injunctive writ was issued on August 8, 2003.
Meanwhile, summons to Glasgow was returned "unserved" as it could no longer
be found at its last known address.
On October 8, 2003, the Republic filed a verified omnibus motion for (a)
issuance of alias summons and (b) leave of court to serve summons by
publication. In an order dated October 15, 2003, the trial court directed the
issuance of alias summons. However, no mention was made of the motion for
leave of court to serve summons by publication.
In an order dated January 30, 2004, the trial court archived the case allegedly
for failure of the Republic to serve the alias summons. The Republic filed an ex
parte omnibus motion to (a) reinstate the case and (b) resolve its pending
motion for leave of court to serve summons by publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the
case and directed the Republic to serve the alias summons on Glasgow and CSBI
within 15 days. However, it did not resolve the Republic's motion for leave of
court to serve summons by publication declaring: SITCcE
Until and unless a return is made on the alias summons, any
action on [the Republic's] motion for leave of court to serve
summons by publication would be untenable if not
premature.
On July 12, 2004, the Republic (through the Office of the Solicitor General
[OSG]) received a copy of the sheriff's return dated June 30, 2004 stating that
the alias summons was returned "unserved" as Glasgow was no longer holding
office at the given address since July 2002 and left no forwarding address.
Meanwhile, the Republic's motion for leave of court to serve summons by
publication remained unresolved. Thus, on August 11, 2005, the Republic filed a
manifestation and ex parte motion to resolve its motion for leave of court to
serve summons by publication.
On August 12, 2005, the OSG received a copy of Glasgow's "Motion to Dismiss
(By Way of Special Appearance)" dated August 11, 2005. It alleged that (1) the
court had no jurisdiction over its person as summons had not yet been served
on it; (2) the complaint was premature and stated no cause of action as there
was still no conviction for estafa or other criminal violations implicating Glasgow
and (3) there was failure to prosecute on the part of the Republic.
The Republic opposed Glasgow's motion to dismiss. It contended that its suit
was an action quasi in rem where jurisdiction over the person of the defendant
was not a prerequisite to confer jurisdiction on the court. It asserted that prior
conviction for unlawful activity was not a precondition to the filing of a civil
forfeiture case and that its complaint alleged ultimate facts sufficient to establish
a cause of action. It denied that it failed to prosecute the case.
204
On October 27, 2005, the trial court issued the assailed order. It dismissed the
case on the following grounds: (1) improper venue as it should have been filed
in the RTC of Pasig where CSBI, the depository bank of the account sought to be
forfeited, was located; (2) insufficiency of the complaint in form and substance
and (3) failure to prosecute. It lifted the writ of preliminary injunction and
directed CSBI to release to Glasgow or its authorized representative the funds in
CA-005-10-000121-5.
Raising questions of law, the Republic filed this petition.
On November 23, 2005, this Court issued a TRO restraining Glasgow and CSBI,
their agents, representatives and/or persons acting upon their orders from
implementing the assailed October 27, 2005 order. It restrained Glasgow from
removing, dissipating or disposing of the funds in account no. CA-005-10-
000121-5 and CSBI from allowing any transaction on the said account.
The petition essentially presents the following issue: whether the complaint for
civil forfeiture was correctly dismissed on grounds of improper venue,
insufficiency in form and substance and failure to prosecute.
The Court agrees with the Republic.
THE COMPLAINT WAS FILED
IN THE PROPER VENUE
In its assailed order, the trial court cited the grounds raised by Glasgow in
support of its motion to dismiss:
1. That this [c]ourt has no jurisdiction over the person of
Glasgow considering that no [s]ummons has been
served upon it, and it has not entered its
appearance voluntarily;
2. That the [c]omplaint for forfeiture is premature because
of the absence of a prior finding by any tribunal
that Glasgow was engaged in unlawful activity: [i]n
connection therewith[,] Glasgow argues that the
[c]omplaint states no cause of action; and
3. That there is failure to prosecute, in that, up to now,
summons has yet to be served upon Glasgow. 5
But inasmuch as Glasgow never questioned the venue of the Republic's
complaint for civil forfeiture against it, how could the trial court have dismissed
the complaint for improper venue? In Dacoycoy v. Intermediate Appellate Court
6 (reiterated in Rudolf Lietz Holdings, Inc. v. Registry of Deeds of Paraaque
City), 7 this Court ruled: DAHEaT
The motu proprio dismissal of petitioner's complaint by
[the] trial court on the ground of improper venue is
plain error. . . . (emphasis supplied)
At any rate, the trial court was a proper venue.
On November 15, 2005, this Court issued A.M. No. 05-11-04-SC, the Rule of
Procedure in Cases of Civil Forfeiture, Asset Preservation, and Freezing of
Monetary Instrument, Property, or Proceeds Representing, Involving, or Relating
to an Unlawful Activity or Money Laundering Offense under RA 9160, as
amended (Rule of Procedure in Cases of Civil Forfeiture). The order dismissing
the Republic's complaint for civil forfeiture of Glasgow's account in CSBI has not
yet attained finality on account of the pendency of this appeal. Thus, the Rule of
Procedure in Cases of Civil Forfeiture applies to the Republic's complaint. 8
Moreover, Glasgow itself judicially admitted that the Rule of Procedure in Cases
of Civil Forfeiture is "applicable to the instant case." 9
Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the Rule of
Procedure in Cases of Civil Forfeiture provides:
Sec. 3. Venue of cases cognizable by the regional trial court.
A petition for civil forfeiture shall be filed in any regional
trial court of the judicial region where the monetary
instrument, property or proceeds representing,
involving, or relating to an unlawful activity or to a
money laundering offense are located; provided,
however, that where all or any portion of the monetary
instrument, property or proceeds is located outside the
Philippines, the petition may be filed in the regional trial
court in Manila or of the judicial region where any portion of
the monetary instrument, property, or proceeds is located,
at the option of the petitioner. (emphasis supplied)
Under Section 3, Title II of the Rule of Procedure in Cases of Civil Forfeiture,
therefore, the venue of civil forfeiture cases is any RTC of the judicial region
where the monetary instrument, property or proceeds representing, involving, or
relating to an unlawful activity or to a money laundering offense are located.
Pasig City, where the account sought to be forfeited in this case is situated, is
within the National Capital Judicial Region (NCJR). Clearly, the complaint for civil
forfeiture of the account may be filed in any RTC of the NCJR. Since the RTC
Manila is one of the RTCs of the NCJR, 10 it was a proper venue of the Republic's
complaint for civil forfeiture of Glasgow's account.
THE COMPLAINT WAS SUFFICIENT
IN FORM AND SUBSTANCE
In the assailed order, the trial court evaluated the Republic's complaint to
determine its sufficiency in form and substance:
205
At the outset, this [c]ourt, before it proceeds, takes the
opportunity to examine the [c]omplaint and determine
whether it is sufficient in form and substance.
Before this [c]ourt is a [c]omplaint for Civil Forfeiture of
Assets filed by the [AMLC], represented by the Office of the
Solicitor General[,] against Glasgow and [CSBI] as
necessary party. The [c]omplaint principally alleges the
following:
(a) Glasgow is a corporation existing under the laws of the
Philippines, with principal office address at Unit
703, 7th Floor, Citystate Center [Building], No. 709
Shaw Boulevard[,] Pasig City;
(b) [CSBI] is a corporation existing under the laws of the
Philippines, with principal office at Citystate Center
Building, No. 709 Shaw Boulevard, Pasig City;
(c) Glasgow has funds in the amount of P21,301,430.28
deposited with [CSBI], under CA 005-10-000121-5;
(d) As events have proved, aforestated bank account is
related to the unlawful activities of Estafa and
violation of Securities Regulation Code;
(e) The deposit has been subject of Suspicious Transaction
Reports;
(f) After appropriate investigation, the AMLC issued
Resolutions No. 094 (dated July 10, 2002), 096
(dated July 12, 2002), 101 (dated July 23, 2002),
and 108 (dated August 2, 2002), directing the
issuance of freeze orders against the bank accounts
of Glasgow; TaDAIS
(g) Pursuant to said AMLC Resolutions, Freeze Orders Nos.
008-010, 011 and 013 were issued on different
dates, addressed to the concerned banks;
(h) The facts and circumstances plainly showing that
defendant Glasgow's bank account and deposit are
related to the unlawful activities of Estafa and
violation of Securities Regulation Code, as well as
to a money laundering offense [which] [has] been
summarized by the AMLC in its Resolution No. 094;
and
(i) Because defendant Glasgow's bank account and deposits
are related to the unlawful activities of Estafa and
violation of Securities Regulation Code, as well as
[to] money laundering offense as aforestated, and
being the subject of covered transaction reports
and eventual freeze orders, the same should
properly be forfeited in favor of the government in
accordance with Section 12, R.A. 9160, as
amended. 11
In a motion to dismiss for failure to state a cause of action, the focus is on the
sufficiency, not the veracity, of the material allegations. 12 The determination is
confined to the four corners of the complaint and nowhere else. 13
In a motion to dismiss a complaint based on lack of cause of
action, the question submitted to the court for determination
is the sufficiency of the allegations made in the complaint to
constitute a cause of action and not whether those
allegations of fact are true, for said motion must
hypothetically admit the truth of the facts alleged in the
complaint.
The test of the sufficiency of the facts alleged in the
complaint is whether or not, admitting the facts
alleged, the court could render a valid judgment upon
the same in accordance with the prayer of the
complaint. 14 (emphasis ours)
In this connection, Section 4, Title II of the Rule of Procedure in Cases of Civil
Forfeiture provides:
Sec. 4. Contents of the petition for civil forfeiture. The
petition for civil forfeiture shall be verified and contain the
following allegations:
(a) The name and address of the respondent;
(b) A description with reasonable particularity of
the monetary instrument, property, or proceeds,
and their location; and
(c) The acts or omissions prohibited by and the
specific provisions of the Anti-Money Laundering
Act, as amended, which are alleged to be the
206
 grounds relied upon for the forfeiture of the In relation thereto, Rule 12.2 of the Revised Implementing Rules and
monetary instrument, property, or proceeds; and Regulations of RA 9160, as amended, states:

[(d)] The reliefs prayed for. RULE 12

Forfeiture Provisions
Here, the verified complaint of the Republic contained the following allegations:
xxx xxx xxx
(a) the name and address of the primary defendant therein,
Glasgow; 15 Rule 12.2. When Civil Forfeiture May be Applied. When
there is a SUSPICIOUS TRANSACTION REPORT OR A
COVERED TRANSACTION REPORT DEEMED SUSPICIOUS
(b) a description of the proceeds of Glasgow's unlawful
AFTER INVESTIGATION BY THE AMLC, and the court has, in
activities with particularity, as well as the location
a petition filed for the purpose, ordered the seizure of any
thereof, account no. CA-005-10-000121-5 in the
monetary instrument or property, in whole or in part,
amount of P21,301,430.28 maintained with CSBI;
directly or indirectly, related to said report, the Revised
Rules of Court on civil forfeiture shall apply.
(c) the acts prohibited by and the specific provisions of RA
9160, as amended, constituting the grounds for the
RA 9160, as amended, and its implementing rules and regulations lay down two
forfeiture of the said proceeds. In particular,
conditions when applying for civil forfeiture:
suspicious transaction reports showed that Glasgow
engaged in unlawful activities of estafa and
violation of the Securities Regulation Code (under (1) when there is a suspicious transaction report or a
Section 3 (i) (9) and (13), RA 9160, as amended); covered transaction report deemed suspicious after
the proceeds of the unlawful activities were investigation by the AMLC and
transacted and deposited with CSBI in account no.
CA-005-10-000121-5 thereby making them appear
(2) the court has, in a petition filed for the purpose, ordered
to have originated from legitimate sources; as
the seizure of any monetary instrument or property,
such, Glasgow engaged in money laundering (under
in whole or in part, directly or indirectly, related to
Section 4, RA 9160, as amended); and the AMLC
said report.
subjected the account to freeze order and TcaAID

(d) the reliefs prayed for, namely, the issuance of a TRO or
writ of preliminary injunction and the forfeiture of
the account in favor of the government as well as
other reliefs just and equitable under the premises.
The form and substance of the Republic's complaint substantially conformed with
Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture.
Moreover, Section 12 (a) of RA 9160, as amended, provides:
SEC. 12. Forfeiture Provisions.
It is the preliminary seizure of the property in question which brings it within the
reach of the judicial process. 16 It is actually within the court's possession when
it is submitted to the process of the court. 17 The injunctive writ issued on
August 8, 2003 removed account no. CA-005-10-000121-5 from the effective
control of either Glasgow or CSBI or their representatives or agents and
subjected it to the process of the court.
Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by
several suspicious transaction reports and (2) placed under the control of the
trial court upon the issuance of the writ of preliminary injunction, the conditions
provided in Section 12 (a) of RA 9160, as amended, were satisfied. Hence, the
Republic, represented by the AMLC, properly instituted the complaint for civil
forfeiture.

(a) Civil Forfeiture. When there is a covered transaction

Whether or not there is truth in the allegation that account no. CA-005-10-
report made, and the court has, in a petition filed for the
000121-5 contains the proceeds of unlawful activities is an evidentiary matter
purpose ordered seizure of any monetary instrument or
that may be proven during trial. The complaint, however, did not even have to
property, in whole or in part, directly or indirectly, related to
show or allege that Glasgow had been implicated in a conviction for, or the
said report, the Revised Rules of Court on civil forfeiture
shall apply.
207
commission of, the unlawful activities of estafa and violation of the Securities
Regulation Code.
A criminal conviction for an unlawful activity is not a prerequisite for the
institution of a civil forfeiture proceeding. Stated otherwise, a finding of guilt for
an unlawful activity is not an essential element of civil forfeiture. TcSCEa
Section 6 of RA 9160, as amended, provides:
SEC. 6. Prosecution of Money Laundering.
(a) Any person may be charged with and convicted of both
the offense of money laundering and the unlawful activity as
herein defined.
(b) Any proceeding relating to the unlawful activity shall be
given precedence over the prosecution of any offense or
violation under this Act without prejudice to the freezing
and other remedies provided. (emphasis supplied)
Rule 6.1 of the Revised Implementing Rules and Regulations of RA 9160, as
amended, states:
Rule 6.1. Prosecution of Money Laundering
(a) Any person may be charged with and convicted of both
the offense of money laundering and the unlawful activity as
defined under Rule 3(i) of the AMLA.
(b) Any proceeding relating to the unlawful activity shall be
given precedence over the prosecution of any offense or
violation under the AMLA without prejudice to the
application ex-parte by the AMLC to the Court of Appeals for
a freeze order with respect to the monetary instrument or
property involved therein and resort to other remedies
provided under the AMLA, the Rules of Court and
other pertinent laws and rules. (emphasis supplied)
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 27. No prior charge, pendency or conviction necessary.
No prior criminal charge, pendency of or conviction
for an unlawful activity or money laundering offense is
necessary for the commencement or the resolution of a
petition for civil forfeiture. (emphasis supplied)
Thus, regardless of the absence, pendency or outcome of a criminal prosecution
for the unlawful activity or for money laundering, an action for civil forfeiture
may be separately and independently prosecuted and resolved.
THERE WAS NO FAILURE
TO PROSECUTE
The trial court faulted the Republic for its alleged failure to prosecute the case.
Nothing could be more erroneous.
Immediately after the complaint was filed, the trial court ordered its deputy
sheriff/process server to serve summons and notice of the hearing on the
application for issuance of TRO and/or writ of preliminary injunction. The
subpoena to Glasgow was, however, returned unserved as Glasgow "could no
longer be found at its given address" and had moved out of the building since
August 1, 2002.
Meanwhile, after due hearing, the trial court issued a writ of preliminary
injunction enjoining Glasgow from removing, dissipating or disposing of the
subject bank deposits and CSBI from allowing any transaction on, withdrawal,
transfer, removal, dissipation or disposition thereof.
As the summons on Glasgow was returned "unserved," and considering that its
whereabouts could not be ascertained despite diligent inquiry, the Republic filed
a verified omnibus motion for (a) issuance of alias summons and (b) leave of
court to serve summons by publication on October 8, 2003. While the trial court
issued an alias summons in its order dated October 15, 2003, it kept quiet on
the prayer for leave of court to serve summons by publication.
Subsequently, in an order dated January 30, 2004, the trial court archived the
case for failure of the Republic to cause the service of alias summons. The
Republic filed an ex parte omnibus motion to (a) reinstate the case and (b)
resolve its pending motion for leave of court to serve summons by publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the
case and directed the Republic to cause the service of the alias summons on
Glasgow and CSBI within 15 days. However, it deferred its action on the
Republic's motion for leave of court to serve summons by publication until a
return was made on the alias summons. aCIHAD
Meanwhile, the Republic continued to exert efforts to obtain information from
other government agencies on the whereabouts or current status of respondent
Glasgow if only to save on expenses of publication of summons. Its efforts,
however, proved futile. The records on file with the Securities and Exchange
Commission provided no information. Other inquiries yielded negative results.
208
On July 12, 2004, the Republic received a copy of the sheriff's return dated June
30, 2004 stating that the alias summons had been returned "unserved" as
Glasgow was no longer holding office at the given address since July 2002 and
left no forwarding address. Still, no action was taken by the trial court on the
Republic's motion for leave of court to serve summons by publication. Thus, on
August 11, 2005, the Republic filed a manifestation and ex parte motion to
resolve its motion for leave of court to serve summons by publication.
It was at that point that Glasgow filed a motion to dismiss by way of special
appearance which the Republic vigorously opposed. Strangely, to say the least,
the trial court issued the assailed order granting Glasgow's motion.
Given these circumstances, how could the Republic be faulted for failure to
prosecute the complaint for civil forfeiture? While there was admittedly a delay
in the proceeding, it could not be entirely or primarily ascribed to the Republic.
That Glasgow's whereabouts could not be ascertained was not only beyond the
Republic's control, it was also attributable to Glasgow which left its principal
office address without informing the Securities and Exchange Commission or any
official regulatory body (like the Bureau of Internal Revenue or the Department
of Trade and Industry) of its new address. Moreover, as early as October 8,
2003, the Republic was already seeking leave of court to serve summons by
publication.
In Marahay v. Melicor, 18 this Court ruled:
While a court can dismiss a case on the ground of non
prosequitur, the real test for the exercise of such power is
whether, under the circumstances, plaintiff is chargeable
with want of due diligence in failing to proceed with
reasonable promptitude. In the absence of a pattern or
scheme to delay the disposition of the case or a
wanton failure to observe the mandatory requirement
of the rules on the part of the plaintiff, as in the case
at bar, courts should decide to dispense with rather
than wield their authority to dismiss. (emphasis
supplied)
We see no pattern or scheme on the part of the Republic to delay the disposition
of the case or a wanton failure to observe the mandatory requirement of the
rules. The trial court should not have so eagerly wielded its power to dismiss the
Republic's complaint.
SERVICE OF SUMMONS
MAY BE BY PUBLICATION
In Republic v. Sandiganbayan, 19 this Court declared that the rule is settled that
forfeiture proceedings are actions in rem. While that case involved forfeiture
proceedings under RA 1379, the same principle applies in cases for civil
forfeiture under RA 9160, as amended, since both cases do not terminate in the
imposition of a penalty but merely in the forfeiture of the properties either
acquired illegally or related to unlawful activities in favor of the State.
As an action in rem, it is a proceeding against the thing itself instead of against
the person. 20 In actions in rem or quasi in rem, jurisdiction over the person of
the defendant is not a prerequisite to conferring jurisdiction on the court,
provided that the court acquires jurisdiction over the res. 21 Nonetheless,
summons must be served upon the defendant in order to satisfy the
requirements of due process. 22 For this purpose, service may be made by
publication as such mode of service is allowed in actions in rem and quasi in
rem. 23 cTDaEH
In this connection, Section 8, Title II of the Rule of Procedure in Cases of Civil
Forfeiture provides:
Sec. 8. Notice and manner of service. (a) The respondent
shall be given notice of the petition in the same manner as
service of summons under Rule 14 of the Rules of Court and
the following rules:
1. The notice shall be served on respondent personally, or by
any other means prescribed in Rule 14 of the Rules of Court;
2. The notice shall contain: (i) the title of the case; (ii) the
docket number; (iii) the cause of action; and (iv) the relief
prayed for; and
3. The notice shall likewise contain a proviso that, if no
comment or opposition is filed within the reglementary
period, the court shall hear the case ex parte and render
such judgment as may be warranted by the facts alleged in
the petition and its supporting evidence.
(b) Where the respondent is designated as an
unknown owner or whenever his whereabouts
are unknown and cannot be ascertained by
diligent inquiry, service may, by leave of
court, be effected upon him by publication of
the notice of the petition in a newspaper of
general circulation in such places and for such
time as the court may order. In the event that
the cost of publication exceeds the value or amount
of the property to be forfeited by ten percent,
publication shall not be required. (emphasis
supplied)
209
WHEREFORE, the petition is hereby GRANTED. The October 27, 2005 order of
the Regional Trial Court of Manila, Branch 47, in Civil Case No. 03-107319 is SET
ASIDE. The August 11, 2005 motion to dismiss of Glasgow Credit and Collection
Services, Inc. is DENIED. And the complaint for forfeiture of the Republic of the
Philippines, represented by the Anti-Money Laundering Council, is REINSTATED.
The case is hereby REMANDED to the Regional Trial Court of Manila, Branch 47
which shall forthwith proceed with the case pursuant to the provisions of A.M.
No. 05-11-04-SC. Pending final determination of the case, the November 23,
2005 temporary restraining order issued by this Court is hereby MAINTAINED.
IMPLEMENTING RULES AND REGULATIONS
OF REPUBLIC ACT NO. 7042
(FOREIGN INVESTMENT ACT OF 1991)
AS AMENDED BY REPUBLIC ACT NO. 81791
RULE I. DEFINITIONS
SECTION 1. DEFINITION OF TERMS. For purposes of these Rules and
Regulations:
a. Act shall refer to Republic Act No. 7042 entitled An Act to Promote Foreign
Investments, Prescribe the Procedures for Registering Enterprises Doing
Business in the Philippines, and for Other Purposes, also known as the Foreign
Investments Act of 1991, as amended by Republic Act No. 8179.
b. Philippine national shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation
Code of which 100% of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefits
of Philippine nationals; Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both corporations must be citizens
of the Philippines, in order that the corporation shall be considered a Philippine
national. The control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are
considered as non-Philippine nationals.
c. Foreign corporation shall mean one which is formed, organized or existing
under laws other than those of the Philippines.
Branch office of a foreign company carries out the business activities of the head
office and derives income from the host country.
Representative or liaison office deals directly with the clients of the parent
company but does not derive income from the host country and is fully
subsidized by its head office. It undertakes activities such as but not limited to
information dissemination and promotion of the companys products as well as
quality control of products.
d. Investment shall mean equity participation in any enterprise organized or
existing under the laws of the Philippines. It includes both original and additional
investments, whether made directly as in stock subscription, or indirectly
through the transfer of equity from one investor to another as in stock purchase.
Ownership of bonds (including income bonds), debentures, notes or other
evidences of indebtedness does not qualify as investment.
The purchase of stock options or stock warrants is not an investment until the
holder thereof exercises his option and actually acquires stock from the
corporation.
e. Foreign investment shall mean an equity investment made by a non-
Philippine national; Provided, however, that for purposes of determining foreign
ownership, peso investments made by non-Philippine nationals shall be
considered; Provided, further, that only foreign investments in the form of
foreign exchange and/or other assets actually transferred to the Philippines and
duly registered with the Central Bank (CB) and profits derived therefrom can be
repatriated; and Provided, finally, That, for purposes of Section 8 of the Act, and
Rule VIII, Section 6 of these Rules and Regulations, Existing Foreign Investment
shall mean an equity investment made by a non-Philippine national duly
registered with the SEC or the Bureau of Trade Regulation and Consumer
Protection (BTRCP) in the form of foreign exchange and/or other assets
transferred to the Philippines.
f. Doing business shall include soliciting orders, service contracts, opening
offices, whether liaison offices or branches; appointing representatives or
distributors, operating under full control of the foreign corporation, domiciled in
210
the Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to and in progressive prosecution of commercial gain or of the purpose
and object of the business organization. The following acts shall not be deemed
doing business in the Philippines:
(1) Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor;
(2) Having a nominee director or officer to represent its interests in such
corporation;
(3) Appointing a representative or distributor domiciled in the Philippines which
transacts business in the representatives or distributors own name and
account;
(4) The publication of a general advertisement through any print or broadcast
media;
(5) Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;
(6) Consignment by a foreign entity of equipment with a local company to be
used in the processing of products for export;
(7) Collecting information in the Philippines; and
(8) Performing services auxiliary to an existing isolated contract of sale which
are not on a continuing basis, such as installing in the Philippines machinery it
has manufactured or exported to the Philippines, servicing the same, training
domestic workers to operate it, and similar incidental services.
g. Export enterprise shall mean an enterprise wherein a manufacturer,
processor or service (including tourism) enterprise exports sixty percent (60%)
or more of its output, or wherein a trader purchases products domestically and
exports sixty percent (60%) or more of such purchases.
h. Exports shall mean the volume or the Philippine port F.O.B. peso value,
determined from invoices, bills of lading, inward letters of credit, loading
certificates, and other commercial documents, of products exported directly by
an export enterprise or the value of services including tourism sold by service-
oriented enterprises to non-resident foreigners or the net selling price of export
products sold by an export enterprise to another export enterprise that
subsequently exports the same; Provided, That sales of export products to
another export enterprise shall only be deemed exports when actually exported
by the latter, as evidenced by loading certificates or similar commercial
documents; and Provided, finally, that without actual exportation, the following
shall be considered constructively exported for purposes of the Act: (1) sales of
products to bonded manufacturing warehouses of export enterprises; (2) sales
of products to export processing zone enterprises; (3) sales of products to
export enterprises operating bonded trading warehouses supplying raw materials
used in the manufacture of export products; and (4) sales of products to foreign
military bases, diplomatic missions and other agencies and/or instrumentalities
granted tax immunities of locally manufactured, assembled or repacked products
whether paid for in foreign currency or pesos funded from inwardly remitted
foreign currency.
Sales of locally manufactured or assembled goods for household and personal
use to Filipinos abroad and other non-residents of the Philippines as well as
returning overseas Filipinos under the Internal Export Program of the
Government and paid for in convertible foreign currency inwardly remitted
through the Philippine banking system shall also be considered exports.
i. Output shall refer to the export enterprises total sales in a taxable year, The
term sales shall refer to value in case of heterogeneous products and volume in
case of homogeneous products.
Heterogeneous products shall refer to products of different kinds and
characteristics as well as to those of the same kind but with various categories
using different units of measurement.
Homogeneous products shall refer to products of the same kind or category
using a common unit of measurement.
j. Export ratio shall refer to:
(1) the percentage share of the volume or peso value of goods exported to the
total volume or value of goods sold in any taxable year if the export enterprise is
engaged in manufacturing or processing;
(2) the percentage share of the peso value of services sold to foreigners to total
earnings or receipts from the sale of its services from all sources in any taxable
year if the export enterprise is service-oriented; Value of services sold shall refer
to the peso value of all services rendered by an export enterprise to foreigners
that are paid for in foreign currency and/or pesos funded from inwardly remitted
foreign currency as properly documented by the export enterprise; or
(3) the percentage share of the volume or peso value of goods exported to the
total volume or value of goods purchased domestically in any taxable year if the
export enterprise is engaged in merchandise trading.
211
k. Domestic market enterprise shall mean an enterprise which produces
goods for sale, renders service, or otherwise engages in any business in
the Philippines.
l. Joint venture shall mean two or more entities, whether natural or juridical,
one of which must be a Philippine national, combining their property, money,
efforts, skills or knowledge to carry out a single business enterprise for profit,
which is duly registered with the SEC as a corporation or partnership.
m. Substantial partner shall mean an individual or a firm who owns enough
shares to be entitled to at least one (1) seat on the Board of Directors of a
corporation, or in the case of a partnership, any partner.
n. Dangerous drug as defined under Republic Act 6425 or the Dangerous
Drugs Act, as amended, refers to either:
(1) Prohibited drug which includes opium and its active components and
derivatives, such as heroin and morphine; coca leaf and its derivatives,
principally cocaine; alpha and beta eucaine; hallucinogen drugs, such as
mescaline, lysergic and diethylamide (LSD) and other substances producing
similar effects; Indian hemp and its derivatives; all preparations made from any
of the foregoing; and other drugs and chemical preparations whether natural or
synthetic, with the physiological effects of a narcotic or hallucinogenic drug; or
(2) Regulated drug which includes, unless authorized by the Department of
Health (DOH) and in accordance with the Dangerous Drugs Board, self-inducing
sedatives, such as secobarbital, phenobarbital, pentobarbital, barbital,
amobarbital or any other drug which contains a salt or a derivative of salt of
barbituric acid; any salt, isomer, or salt of an isomer, of amphetamine such as
benzedrine or dexedrine, or any drug which produces a physiological action
similar to amphetamine; and hypnotic drugs, such as methaqualone, nitrazepam
or any other compound producing similar physiological effects.
o. Advanced technology refers to a higher degree or form of technology than
what is domestically available and needed for the development of certain
industries as subject to guidelines of the Department of Science and Technology
(DOST). Its introduction into the country through foreign investments under the
terms and conditions of the Act must be linked to its appropriateness and
adaptability to local conditions with a view towards eventual transfer and
applicability including the upgrading of the indigenous technology available.
p. Paid-in equity capital shall mean the total investment in a business that
has been paid-in in a corporation or partnership or invested in a single
proprietorship, which may be in cash or in property. It shall also refer to inward
remittance or assigned capital in the case of foreign corporations.
q. Foreign Investment Negative List (FINL) or Negative List shall mean a
list of areas of economic activity whose foreign ownership is limited to a
maximum of forty percent (40%) of the outstanding capital stock in the case of
a corporation or capital in the case of partnership.
r. NEDA Board shall refer to the body constituted as such under Executive
Order No. 230 entitled Reorganizing the National Economic and Development
Authority and in which reside the powers and functions of the Authority.
s. NEDA shall refer to the NEDA Secretariat, which is the body constituted as
such under Executive Order No. 230 and which serves as the research and
technical support arm and the Secretariat of the NEDA Board.
t. SEC shall refer to the Securities and Exchange Commission.
u. BTRCP shall refer to the Bureau of Trade Regulation and Consumer Protection
as represented by the provincial offices of the Department of Trade and Industry
(DTI).
v. BOI shall refer to the Board of Investments.
w. Technology Transfer Board shall refer to the Bureau of Patents.
Trademarks and Technology Transfer (BPTTT).
x. Former naturalborn Filipinos shall mean those who have lost Philippine
citizenship but were previously citizens of the Philippines falling in either of the
following categories: (a) from birth without having to perform any act to acquire
or perfect their Philippine citizenship; or (b) by having elected Philippine
citizenship upon reaching the age of majority, if born before January 17, 1973,
of Filipino mothers.
y. Transferee of private land shall mean a person to whom the ownership
rights of private land is transferred through either voluntary or involuntary sale,
devise or donation. Involuntary sales shall include sales on tax delinquency,
foreclosures and executions of judgment.
z. Direct employees shall mean Filipino personnel hired and engaged under
the control and supervision of the applicant investor/employer in the production
of goods or performance of services. Excluded from this definition are personnel
hired as casual, seasonal, learner, apprentice or any employee of subcontractor
or those under fixed term employment.
aa. Start of commercial operations shall mean the date when a
particular enterprise actually begins production of the product for
commercial purposes or commercial harvest in the case of agricultural
activities. In the case of service oriented activities, the date when the
enterprise begins catering or servicing its clients on a commercial basis.
In the case of export traders and service exporters, the date when the
initial export shipment in commercial quantity has been made or initial
212
performance of service as borne out by the appropriate supporting
documents.
RULE II. SCOPE
SECTION 1. COVERAGE. The Act covers all investment areas or areas of
economic activity except banking and other financial institutions which are
governed and regulated by the General Banking Act and other laws under the
supervision of the CB.
RULE III. BASIC GUIDELINES
SECTION 1. The Act covers restrictions pertaining to foreign equity participation
only. All other regulations governing foreign investments remain in force.
SECTION 2. MONITORING OF COMPLIANCE WITH EQUITY PARTICIPATION
REQUIREMENTS. The SEC or BTRCP, as applicable, shall monitor the compliance
with the equity requirements of the Act.
RULE IV. REGISTRATION OF INVESTMENTS
OF NON-PHILIPPINE NATIONALS
SECTION 1. QUALIFICATIONS.
a. Any non-Philippine national may do business or invest in a domestic
enterprise up to one hundred percent (100%) of its capital provided:
(1) it is investing in a domestic market enterprise in areas outside the FINL; or
(2) it is investing in an export enterprise whose products and services do not fall
within Lists A and B (except for defense-related activities, which may be
approved pursuant to Section 8(b)(1) of the Act) of the FINL.
Provided further that, as required by existing laws, the country or state of the
applicant must also allow Filipino citizens and corporations to do business
therein.
b. Non-Philippine national qualified to do business per paragraph (a) above, but
who will engage in more than one investment area, one or more of which is in
the FINL, may be registered under the Act. However, said non-Philippine national
will not be allowed to engage in the investment areas which are in the FINL.
c. Existing enterprises, which are non-Philippine nationals at the time of
effectivity of the Act and which intend to increase the percentage of foreign
equity participation under the Act, beyond that previously authorized by SEC,
shall be governed by the qualifications in item (a) above. Thus, existing
enterprises shall be allowed to increase the percentage share of foreign equity
participation beyond current equity holdings only if their existing investment
area is not in the FINL. Similarly, existing enterprises engaged in more than one
(1) investment area shall be allowed to increase percentage of foreign equity
participation if none of the investment areas they are engaged in is in the FINL.
Existing foreign corporations shall be allowed to increase capital even if their
existing investment area is in the FINL.
Transfer of ownership from one foreign company to another shall be allowed
even if the enterprise is engaged in an area in the FINL as long as there is no
increase in the percentage share of foreign equity.
SECTION 2. APPLICATION FOR REGISTRATION.
a. Filing of Application. Applications for registration shall be filed with the SEC in
the case of foreign corporations and domestic corporations or partnerships which
are non-Philippine nationals. In the case of single proprietorships, applications
for Metro Manila shall be filed with the BTRCP or the DTI-National Capital Region.
In the provinces, applications may be filed with the extension offices of the SEC
for corporations/partnerships and the provincial offices of the DTI for sole
proprietorships.
b. Pre-Processing of Documents. Pre-processing of documents shall be under
taken to assist the investor in determining the completeness of his documents.
All applications are considered officially accepted only upon submission of
complete documents to either the SEC or BTRCP. Applications for clearances
from the Department of National Defense (DND) or Philippine National Police
(PNP) for defense-related activities, or the DOST for investments involving
advanced technology shall be decided upon by said agencies within fifteen (15)
working days.
c. Approval. Within fifteen (15) working days from official acceptance of an
application, the SEC or BTRCP shall act on the same. Otherwise, the application
shall be considered as automatically approved if it is not acted upon within said
period for a cause not attributable to the applicant.
SECTION 3. REGISTRATION WITH THE SEC.
a. Existing Requirements. As required by laws and regulations, an application
form together with the following documents shall be submitted to the SEC:
(1) In the case of a new domestic corporation or a partnership:
(i) Articles of Incorporation/Partnership
(ii) Name Verification Slip
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(iii) Bank Certificate of Deposit
(iv) ACR/ICR, SIRV (Special Investors Resident Visa), Visa #13 of the alien
subscribers
(v) Proof of Inward Remittance (for non-resident aliens)
(2) In the case of a foreign corporation:
(i) Name verification slip
(ii) Certified Copy of Board Resolution authorizing the establishment of an office
in the Philippines; designating the resident agent to whom summons and other
legal processes may be served in behalf of the foreign corporation; and
stipulating that in the absence of such agent or upon cessation of its business in
the Philippines, the SEC shall receive any summons or legal processes as if the
same is made upon the corporation at its home office.
(iii) Financial statements for the immediately preceding year at the time of filing
of the application, certified by an independent Certified Public Accountant of the
home country.
(iv) Certified copies of the Articles of Incorporation/Partnership with an English
translation thereof if in a foreign language.
(v) Proof of inward remittance such as bank certificate of inward remittance or
credit advices.
For representative offices, the amount remitted initially should be at least
US$30,000.
If the paid-in equity/capital is in kind, additional requirements shall be submitted
to the SEC pursuant to its existing rules and regulations.
All documents executed abroad should be authenticated by the Philippine
Embassy or Consular Office.
(3) In the case of an existing corporation intending to increase foreign equity
participation, all documents required of the proposed transaction under
applicable laws, rules and regulations shall be submitted.
b. Additional Requirements. As required by the Act, the following shall also be
submitted to SEC:
(1) For enterprises wishing to engage in defense-related activities, clearance
from the DND or PNP.
(2) For small and medium-sized domestic market enterprises with paid-in equity
capital less than the equivalent of US$200,000 but not less than the
equivalent of US$100,000, a certificate from the DOST that the investment
involves advanced technology, or a certificate from the appropriate
Department of Labor and Employment (DOLE) Regional Office that the
enterprise has issued an undertaking to employ at least 50 direct
employees shall be submitted.
The DOLE, through its Regional Offices, shall validate and monitor
compliance by the investor to the undertaking that it will hire at least
50 direct employees within six (6) months from the start of commercial
operations. Non-satisfaction of the undertaking shall be reported by the
DOLE Regional Office to the SEC, which shall cause the investor to
satisfy the appropriate higher investment requirement, with penalty for
failure to satisfy the undertaking.
(3) For former natural born Filipinos wishing to engage in investment
areas allowed to them under this Act, the following documents are
required:
(i) Copy of birth certificate
(i.1) Certified by the local civil registrar or the National Statistics Office
(NSO); or
(i.2) For those born abroad, certificate of birth from the appropriate
government agency of the country where the birth is recorded showing
the father or mother to be a Filipino at the time of birth or if the
citizenship of the parents is not indicated, additional proof that the
parent/s is a Filipino citizen or has not lost his/her Filipino citizenship
at the time of the applicant investors birth;
(ii) Those born before 17 January 1973 of Filipino mothers must
additionally submit all of the following: certified true copies of his/her
sworn statement of election of Filipino citizenship, oath of allegiance
from the civil registrar where the documents were filed and/or
forwarded, and identification certificate issued by the Bureau of
Immigration;
(iii) In case of loss and/or destruction of the record of birth or non-
registration of birth
(iii.1) Certificate of non-availability of birth certificate on account of
loss and/or destruction of birth record from the local civil registrar
and/or appropriate government agency if birth was registered abroad;
(iii.2) Copy of birth certificate of mother or father certified by the local
civil registrar or the NSO; and
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(iii.3) Affidavit of two (2) disinterested persons attesting to their
personal knowledge that at the time of the applicants birth, the child
was born of a Filipino mother or father.
Any document executed or issued abroad must be authenticated by the
Philippine Embassy or consulate having jurisdiction over the place of
execution or issuance of the document.
c. Application Fee. A reasonable application fee to be determined by the SEC
shall be collected from each applicant.
d. SEC Action. Upon fulfillment of all SEC requirements and favorable evaluation
by the SEC, the Certificate of Registration under the Act for domestic
corporations and partnerships, or license to do business in the case of a foreign
corporation, shall be issued by the SEC. In case of disapproval, the SEC shall
also inform the applicant in writing of the reasons for the disapproval of the
registration.
SECTION 4. REGISTRATION WITH THE BTRCP DEPARTMENT OF TRADE AND
INDUSTRY.
a. Existing Requirements. As required by existing laws and regulations, BTRCP
Form No. 17 and accompanying documents shall be submitted to BTRCP.
All documents executed abroad should be authenticated by the Philippine
Embassy or Consular Office.
b. Additional Requirements. The additional requirements for corporations and
partnerships provided under Sec. 3 (b) hereof shall be complied with.
c. Application Fee. A reasonable application fee to be determined by BTRCP shall
be collected from each applicant.
d. BTRCP-DTI Action. Upon fulfillment of all BTRCP-DTI requirements and
favorable evaluation by DTI, the Certificate of Registration for Sole
Proprietorship shall be issued by DTI. In case of disapproval, DTI shall also
inform the applicant in writing of the reasons for the disapproval of the
registration
SECTION 5. REGISTRATION OF NON-PHILIPPINE NATIONALS INTENDING TO
ENGAGE IN THE SAME LINE OF BUSINESS AS THEIR EXISTING JOINT VENTURE.
a. During the transitory period, any applicant who has an investment in an
existing joint venture, in which he or his majority shareholder in the existing
joint venture is a substantial partner, shall be registered with the SEC or BTRCP
in the same line of business if the Filipino partners representing the majority of
the Filipino equity in the existing joint venture certify under oath that they are
not capable and willing to make the investment needed for the domestic market
activities, which is being proposed to be undertaken by the applicant.
b. If the Filipino partners are willing and able to make the needed investment,
the SEC shall not register the applicant, in which case, both joint venture
partners may agree to undertake the expansion. Both partners are then required
to place the balance of their agreed upon investment shares within six (6)
months from the date of the agreement. The Filipino partner(s) shall not be
compelled to make additional investment for the proposed expansion of
domestic market activities if such will result in a higher Filipino equity share. If
the Filipino partner(s) fails(fail) to infuse said capital within said period, per the
report of the non-Philippine national applicant to the SEC, the SEC or BTRCP
shall then allow the registration of said non-Philippine national applicant as a
separate enterprise under the Act.
RULE V. REGISTRATION WITH THE CENTRAL BANK
SECTION 1. CB REQUIREMENTS. Enterprises seeking to remit foreign exchange
abroad for purposes of remittance of profits and dividends and capital
repatriation in connection with the foreign investment made pursuant to the Act
shall be deemed registered with the CB after SEC or BTRCP registration. For this
purpose, CB rules and regulations covering procedures for registration of foreign
investments shall be observed.
RULE VI. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES
SECTION 1. ALLOWABLE FOREIGN EQUITY PARTICIPATION. Foreign equity
participation in export enterprises shall be allowed up to one hundred percent
(100%) provided that the products and services of such enterprises do not fall
within Lists A and B of the FINL.
SECTION 2. REGISTRATION OF EXPORT ENTERPRISES. Export enterprises shall
be deemed registered with the BOI pursuant to Section 6 of the Act upon
registration with the SEC or BTRCP.
Enterprises registered under the Act seeking to avail of incentives under EO 226
must apply for registration with the BOI. Rules and regulations on EO 226 shall
be observed for this purpose.
Within ten (10) working days from the issuance of the certificate of registration,
the SEC or BTRCP shall transmit to BOI copies of the Certificate of Registration
together with the application from duly accomplished by the export enterprises.
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SECTION 3. SUBMISSION OF REPORTS. All duly-registered export enterprises
under this Rule shall submit to the BOI a duly accomplished form within six (6)
months after the end of each taxable year.
Failure of export enterprises to submit the required reports within the prescribed
period of time or the submission of fraudulent reports shall be a ground for the
SEC or BTRCP to impose appropriate sanctions as provided for under Rule XVIII,
Section 1, of these Rules and Regulations.
SECTION 4. MONITORING OF COMPLIANCE WITH THE EXPORT REQUIREMENT.
Upon receipt of the reports submitted by the export enterprise, the BOI shall
determine compliance of the enterprise with the export requirement. If the
enterprise fails to comply with the export requirement, the BOI shall advise the
SEC or BTRCP of said failure. The SEC or BTRCP shall require the firm to
immediately increase its export to at least sixty percent (60%) of total sales. If
the firm fails to comply with the order of the SEC or BTRCP without any
justifiable reason, it shall be penalized in accordance with the provisions of Rule
XVIII, Section 1, of these Implementing Rules and Regulations. The BOI, in
consultation with the SEC or BTRCP shall issue guidelines for this purpose.
RULE VII. FOREIGN INVESTMENTS IN DOMESTIC MARKET
ENTERPRISES
Philippine nationals. The description and guidelines governing Lists A and B are
provided for in Rules IX and X hereof, respectively.
SECTION 2. FORMULATION. The NEDA shall be responsible for the formulation of
the Regular FINL, following the process and criteria provided in Section 8 of the
Act and in Rules IX and X hereof.
SECTION 3. APPROVAL. The NEDA shall submit the proposed Regular FINL to the
President for approval and promulgation. The NEDA shall submit the first Regular
FINL and subsequent proposed Regular FINLs to the President at least forty
five (45) days before the scheduled date of publication.
SECTION 4. PUBLICATION. The NEDA shall publish the first Regular Negative List
not later than sixty (60) days before the end of the transitory period.
Subsequent Negative Lists shall be published not later than fifteen (15)
days before the end of the effectivity of the current Negative List.
SECTION 5. EFFECTIVITY. The first Regular Negative List shall become
immediately effective at the end of the transitory period. Subsequent Regular
FINLs shall become effective fifteen (15) days after publication in a newspaper
of general circulation in the Philippines. Except for List A, each Regular FINL shall
remain in force for two (2) years from the date of its effectivity.

SECTION 1. ALLOWABLE FOREIGN EQUITY PARTICIPATION. Foreign equity

SECTION 6. COVERAGE OF OPERATION. Each Regular FINL shall apply only to
participation in domestic market enterprises shall be allowed up to one hundred
new foreign investments and shall not affect existing foreign investments at the
percent (100%) unless such participation is prohibited or limited by existing laws
time of its publication.
or the FINL.

RULE IX. GUIDELINES FOR LIST A OF THE REGULAR FOREIGN

SECTION 2. CHANGE OF STATUS FROM DOMESTIC MARKET ENTERPRISE TO
INVESTMENT NEGATIVE LIST
EXPORT ENTERPRISE. A domestic market enterprise may change its status
to an export enterprise any time by notifying the SEC or BTRCP.
SECTION 1. COVERAGE. List A of the FINL shall consist of the areas of activities
reserved to Philippine nationals were foreign equity participation in any domestic
Section 2 of Rule VI shall apply for any change of status from domestic to export
or export enterprise engaged in any activity listed therein shall be limited to a
enterprise. Such application shall be supported by relevant reports as
maximum of forty percent (40%) as prescribed by the Constitution and other
evidence that the applicant enterprise has exported sixty percent
specific laws.
(60%) or more of its output.

The NEDA shall make an enumeration of said activities reserved to Philippine

The new export enterprise shall be subject to the reportorial requirements
nationals by the Constitution and other specific laws.
and shall be monitored for its compliance with the export requirement
under Sections 3 and 4, respectively, of Rule VI of these Rules and
Regulations. SECTION 2. AMENDMENTS. Amendments to List A may be made by the NEDA
any time to reflect changes made by law regarding the extent of foreign equity
participation in any specific area of economic activity.
RULE VIII. THE REGULAR FOREIGN INVESTMENT NEGATIVE
LIST
RULE X. GUIDELINES FOR LIST B OF THE REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
SECTION 1. DESCRIPTION. The Regular FINL shall have two (2) component
lists: A and B which shall contain areas of economic activities reserved to
SECTION 1. COVERAGE. List B shall consist of the following:

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a. Activities where foreign ownership is limited pursuant to law such as defense
or law enforcement-related, requiring prior clearance and authorization from the
DND or PNP, to engage in such activity as the manufacture, repair, storage
and/or distribution of firearms, ammunition, armored vests and other bullet
proof attires, lethal weapons, military ordnance, explosives, pyrotechnics and
similar materials.
However, the manufacture and repair of said items may be specifically
authorized by the Secretary of National Defense or Chief of the PNP, to non-
Philippine nationals, provided a substantial percentage of output as determined
by said agencies is exported.
Compliance with the export requirement shall be monitored by the DND or PNP,
as the case may be.
b. Activities which have negative implications on public health and morals, such
as the manufacture and distribution of dangerous drugs; all forms of gambling;
sauna and steam bathhouses and massage clinics.
c. Small and medium-sized domestic market enterprises with paid-in equity
capital of less than US$200,000, or its equivalent; However, small and
medium-sized domestic market enterprises which involve advanced
technology or which issue an undertaking to employ at least fifty (50)
direct employees are allowed a minimum paid-in capital of US$100,000,
or its equivalent.
SECTION 2. PROCESS FOR DETERMINATION OF LIST B.
a. Activities (a) and (b) above shall be determined upon recommendation of the
Secretary of National Defense, Chief of the PNP, Secretaries of Health or
Education, Culture and Sports and endorsed by the NEDA or upon
recommendation motu propio of NEDA, approved and promulgated by the
President. List B shall be submitted for Presidential action together with List A.
The NEDA shall inform said agencies of the deadline for the submission of their
recommendations.
b. Enterprises which are covered by Section 1 (c) above are automatically
reserved to Philippine nationals.
SECTION 3. AMENDMENTS. Amendments to List B shall be made only after two
years, upon the recommendation of the Secretary of National Defense, Chief of
the PNP, Secretaries of Health and Education, Culture and Sports, endorsed by
the NEDA, or upon recommendation motu propio of NEDA, approved and
promulgated by the President. List B shall be submitted for Presidential action
together with List A.
RULE XI. INVESTMENT RIGHTS OF FORMER NATURAL BORN
FILIPINOS
SECTION 1. Former natural born citizens of the Philippines shall have
the same investment rights of a Philippine citizen in Cooperatives under
RA 6938, Rural Banks under RA 7353, Thrift Banks and Private
Development Banks under RA 7906, Financing Companies under RA
5980, and activities listed under List B including defense related
activities, if specifically authorized by the Secretary of National
Defense.
RULE XII. RIGHTS OF FORMER NATURAL BORN FILIPINOS TO
OWN PRIVATE LAND
SECTION 1. Any natural born citizen who has lost his Philippine
citizenship and who has the legal capacity to enter into a contract under
Philippine laws may be a transferee of a private land up to a maximum
area of 5,000 square meters in the case of urban land or three (3)
hectares in the case of rural land to be used by him for business or
other purposes.
SECTION 2. In case where both spouses are qualified under the law, one
of them may avail of the said privilege. However, if both shall avail of
the privilege, the total area acquired shall not exceed the maximum
allowed.
SECTION 3. In case the transferee already owns urban or rural land for
business or other purposes, he shall still be entitled to be a transferee
of additional urban or rural land for business or other purposes which
when added to those already owned by him shall not exceed the
maximum areas allowed.
SECTION 4. A transferee may acquire not more than two (2) lots which
should be situated in different municipalities or cities anywhere in the
Philippines. The total land area acquired shall not exceed 5,000 square
meters in the case of urban land or three (3) hectares in the case of
rural land for use by him for business or other purposes. A transferee
who has already acquired urban land shall be disqualified from
acquiring rural land and vice versa. However, if the transferee has
disposed of his urban land, he may still acquire rural land and vice
versa, provided that the same shall be used for business or other
purposes.
SECTION 5. Land acquired under this Act shall be primarily, directly and
actually used by the transferee in the performance or conduct of his
business or commercial activities in the broad areas of agriculture,
industry and services, including the lease of land, but excluding the
buying and selling thereof. A transferee shall use his land to engage in
activities that are not included in the Negative List or in those areas
wherein investment rights have been granted to him under this Act.
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SECTION 6. REGISTRATION OF LAND. The Register of Deeds in the
province or city where the land is located shall register the land in the
name of the transferee only upon presentation of proof by the
transferee that it will be used for any of the purposes mentioned in
Section 5 above, i.e., certification of business registration issued by the
DTI and affidavit that the land shall be used for business purposes.
The provisions of BP 185 (An Act to Implement Section 15 of Article XIV
of the Constitution and for Other Purposes Pertaining to the Ownership
of Private Lands for Residential Purposes by Former Natural Born
Filipinos) and its implementing rules and regulations shall be adopted,
where applicable, in the implementation of this Act through a circular to
be issued by the Laud Registration Authority.
The Register of Deeds shall also ensure that the limits prescribed by law
are observed.
RULE XIII. TRANSITORY PROVISIONS
SECTION 1. Prior to the effectivity of these Implementing Rules and Regulations,
the provisions of Book II of EO 226 and its implementing rules and regulations
shall govern the registration of foreign investments without incentives.
SECTION 2. There shall be a transitory period of thirty-six (36) months after
issuance of these Implementing Rules and Regulations to implement this Act.
SECTION 3. During the transitory period, the Transitory FINL described in Rule
XIV, Section 1 hereof shall take effect.
RULE XIV. TRANSITORY FOREIGN INVESTMENT NEGATIVE LIST
SECTION 1. DESCRIPTION. The Transitory FINL shall consist of the following:
a. List A
All investment areas in which foreign ownership is limited by mandate of the
Constitution and specific laws.
b. List B
(1) Manufacture, repair, storage and/or distribution of firearms, ammunition,
armored vests and other bullet proof attires, lethal weapons, military ordnance,
explosives, pyrotechnics and similar materials required by law to be licensed by
and under the continuing regulation of the DND or the PNP, as the case may be.
However, the manufacture or repair of these items may be specifically
authorized by the Secretary of National Defense or the Chief of the PNP to non-
Philippine nationals, provided a substantial percentage of output, as determined
by the said agencies, is exported.
The extent of foreign equity ownership allowed shall be specified in the said
authority/clearance.
Compliance with the export requirement shall be monitored by the DND or PNP,
as the case may be.
(2) Manufacture and distribution of dangerous drugs; all forms of gambling;
sauna and steam bath houses, massage clinics and other like activities regulated
by law because of risks they may pose to public health and morals.
(3) Small and medium-sized domestic market enterprises with paid-in equity
capital of less than the equivalent of US$500,000, unless they involve advanced
technology as determined by the DOST; and
(4) Export enterprises which utilize raw materials from depleting natural
resources, and with paid-in equity capital of less than the equivalent of
US$500,000.
c. List C
(1) Import and wholesale activities not integrated with the production or
manufacture of goods.
Import and wholesale activities which are considered to be not integrated with
production or manufacture of goods are those carried out separately from or
independently of any production activity.
(2) Services requiring a license or specific authorization, and subject to
continuing regulation by national government agencies other than the BOI and
SEC which at the time of effectivity of the Act are restricted to Philippine
nationals by existing administrative regulations and practice of the regulatory
agencies concerned: Provided, That after effectivity of the Act, no other services
shall be additionally subjected to such restrictions on nationality of ownership by
the corresponding regulatory agencies through administrative regulations, and
such restrictions once removed shall not be reimposed except through legislation
or inclusion in the regular Negative List.
(3) Enterprises owned in the majority by non-Philippine nations which, as of the
date of effectivity of the Act, have subsisting and operatively in force technology
transfer and/or brand name licensing agreements with Philippine nationals for
the assembly, processing or manufacture of goods for the domestic market:
Provided, That, the said licensing agreements are duly registered with the BPTTT
and/or the CB as of the date of effectivity of the Act.
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The types of agreements covered by the Act are the following:
(i) Licensing agreements involving the right to use industrial property rights,
such as patents or trademarks/ service marks;
(ii) Know-how agreements for the grant of a license to use know-how; and
(iii) Franchise agreements involving the use of the franchisors system.
Expired license agreements with notification or application for renewal with
BPTTT as of the date of effectivity of the Act are deemed operatively in force.
If the licensing agreement expires and/or is rendered inoperative during the
transitory period, the foreign licensor and/or its affiliates may invest in the same
line of business covered by the agreement.
SECTION 2. FORMULATION OF THE TRANSITORY FOREIGN INVESTMENT
NEGATIVE LIST.
a. NEDA, in consultation with relevant agencies, shall enumerate, as
appropriate, the areas of investment covered in this Transitory FINL.
b. The Transitory FINL shall be published in full at the same time as, or prior to,
the publication of these Implementing Rules and Regulations to implement the
Act.
c. The areas of investment contained in List C above shall be reserved to
Philippine nationals only during the transitory period. Their inclusion in the
regular Negative List will require determination by the NEDA following the
procedures and criteria for formulating List C.
RULE XV. OPTIONS FOR EXISTING
BOI-REGISTERED ENTERPRISES
SECTION 1. Existing enterprise which have been issued Certificates of Authority
to do Business or to Accept Permissible Investments under Book II of EO 226,
Book II of PD 1789 and RA 5455, whose activities are included in the Transitory
FINL or in subsequent Negative Lists, are allowed to continue to undertake the
same activities which they have been authorized to do subject to the same
terms and conditions stipulated in their certificates of registration.
Those whose activities have been previously authorized under Book II of EO
226, Book II of PD 1789 and RA 5455, and whose activities are not in the
Transitory FINL or in subsequent Negative Lists may opt to be governed by the
provisions of the Act. Said enterprises shall be considered automatically
registered with the SEC upon surrender of their certificates of authority to the
BOI. The SEC shall issue a new certificate of authority upon advise of the BOI.
SECTION 2. Existing enterprises with more than forty percent (40%) foreign
equity which have availed of incentives under any of the investment incentives
laws implemented by the BOI may opt to be governed by the Act. In such cases,
said enterprises shall be required to surrender their certificates of registration,
which shall be deemed as an express waiver of their privilege to apply for and
avail of incentives under the incentives law under which they were previously
registered. Subject to BOI rules and regulations, said enterprises may be
required to refund all capital equipment incentives availed of.
RULE XVI. CONSISTENT GOVERNMENT ACTION
SECTION 1. No agency, instrumentality or political subdivision of the
Government shall take any action in conflict with or which will nullify the
provisions of the Act, or any certificate or authority granted hereunder.
RULE XVII. COMPLIANCE WITH ENVIRONMENTAL
STANDARDS
SECTION 1. All industrial enterprises, regardless of nationality or ownership,
shall comply with existing rules and regulations, and applicable environmental
standards set by the Department of Environment and Natural Resources (DENR)
to protect and conserve the environment.
The DENR shall provide the SEC with a list of environmentally critical
activities/projects and areas. Necessary clearances may be secured after
registration with the SEC.
RULE XVIII. ADMINISTRATIVE SANCTIONS
SECTION 1. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES. Non-compliance
by any duly-registered export enterprise with Rule VI, Sections 3 and 4 above
shall be subject to the following sanctions:
a. For late submission of the required annual report
1st violation written warning
2nd violation basic fine of P1,000.00 and a daily fine of P50.00
3rd violation basic fine of P2,000.00 and a daily fine of P100.00
Subsequent violations basic fine of P5,000.00
b. For the submission of fraudulent reports
FINE
Partnership/Corporation
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1st violation P100,000.00 P50,000.00
2nd violation P150,000.00 P70,000.00
fine in an amount not exceeding of
3rd violation 1% of total paid-in capital but not more P100,000.00
than P5 million 3rd violation a fine of P200,000.00

Subsequent violations: Cancellation of registration granted under the Act

SECTION 2. COMPLIANCE WITH ENVIRONMENTAL STANDARDS. Any industrial

The President and/or official/personnel of the partnership/corporation enterprise, regardless of nationality of ownership which fails to comply with
responsible for the submission of fraudulent reports shall be subject to the existing rules and regulations to protect and conserve the environment and
following sanctions: meet applicable environmental standards shall be subject to the sanctions as
may be provided for in the rules and regulations of the DENR.
1st violation a fine of P50,000.00
2nd violation a fine of P100,000.00 SECTION 3. HEARING OF VIOLATIONS OF THE ACT. The SEC or BTRCP shall
3rd violation a fine of P200,000.00 adopt their respective rules and regulations for the purpose of conducting
hearings and investigations involving violations of the provisions of the Act and
these Implementing Rules and Regulations.
c. For non-submission of the required reports within twelve (12) months after
the taxable year, cancellation of the certificate of registration granted under the
Act. SECTION 4. OTHER GROUNDS FOR CANCELLATION. The following are other
grounds for the cancellation of the certificate of registration granted under the
Act:
d. For failure of any duly-registered export enterprise to comply, without
justifiable reason, with the SEC or BTRCP order to increase its export to at least
sixty percent (60%) of total sales a. Failure of a non-Philippine national intending to engage in the same line of
business as an existing joint venture, in which he or his majority shareholder is
a substantial partner, to disclose such fact and the names and addresses of the
FINE partners in the existing joint venture in his application for registration with the
Partnership/Corporation SEC; or

1st violation P100,000.00 P50,000.00

b. Commission of any other fraudulent act.
2nd violation P150,000.00 P70,000.00
fine in an amount not exceeding of 1% of
SECTION 5. OTHER VIOLATIONS. Any other violations of the Act and these
3rd violation total paid-in capital but not more than P5 P100,000.00
million Implementing Rules and Regulations shall be penalized in accordance with
Section 14 of the Act.

Subsequent violations: Cancellation of registration granted under the Act

SECOND DIVISION
The President and/or official/personnel of the partnership/ corporation
responsible in the failure to comply with the said SEC or BTRCP order shall be
subject to the following sanctions: [G.R. No. 113074. January 22, 1997.]

ALFRED HAHN, petitioner, vs. COURT OF APPEALS and

1st violation a fine of P50,000.00 BAYERISCHE MOTOREN WERKE AKTIENGESELLSCHAFT
(BMW), respondents.

2nd violation a fine of P100,000.00

MENDOZA, J p:
220
This is a petition for review of the decision 1 of the Court of Appeals dismissing a
complaint for specific performance which petitioner had filed against private
respondent on the ground that the Regional Trial Court of Quezon City did not
acquire jurisdiction over private respondent, a nonresident foreign corporation,
and of the appellate court's order denying petitioner's motion for
reconsideration.
The following are the facts:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name and
style "Hahn-Manila". On the other hand, private respondent Bayerische Motoren
Werke Aktiengesellschaft (BMW) is a nonresident foreign corporation existing
under the laws of the former Federal Republic of Germany, with principal office
at Munich, Germany.
On March 7, 1967, petitioner executed in favor of private respondent a "Deed of
Assignment with Special Power of Attorney," which reads in full as follows:
WHEREAS, the ASSIGNOR is the present owner and holder
of the BMW trademark and device in the Philippines which
ASSIGNOR uses and has been using on the products
manufactured by ASSIGNEE, and for which ASSIGNOR is the
authorized exclusive Dealer of the ASSIGNEE in the
Philippines, the same being evidenced by certificate of
registration issued by the Director of Patents on 12
December 1963 and is referred to as Trademark No. 10625;
WHEREAS, the ASSIGNOR has agreed to transfer and
consequently record said transfer of the said BMW
trademark and device in favor of the ASSIGNEE herein with
the Philippines Patent Office;
NOW THEREFORE, in view of the foregoing and in
consideration of the stipulations hereunder stated, the
ASSIGNOR hereby affirms the said assignment and transfer
in favor of the ASSIGNEE under the following terms and
conditions:
1. The ASSIGNEE shall take appropriate steps against any
user other than ASSIGNOR or infringer of the BMW
trademark in the Philippines, for such purpose, the
ASSIGNOR shall inform the ASSIGNEE immediately of all
such use or infringement of the said trademark which comes
to his knowledge and upon such information the ASSIGNOR
shall automatically act as Attorney-In-Fact of the ASSIGNEE
for such case, with full power, authority and responsibility to
prosecute unilaterally or in concert with ASSIGNEE, any such
infringer of the subject mark and for purposes hereof the
ASSIGNOR is hereby named and constituted as ASSIGNEE's
Attorney-In-Fact, but any such suit without ASSIGNEE's
consent will exclusively be the responsibility and for the
account of the ASSIGNOR;
2. That the ASSIGNOR and the ASSIGNEE shall continue
business relations as has been usual in the past without a
formal contract, and for that purpose, the dealership of
ASSIGNOR shall cover the ASSIGNEE s complete production
program with the only limitation that, for the present. in
view of ASSIGNEE's limited production, the latter shall not
be able to supply automobiles to ASSIGNOR.
Per the agreement, the parties "continue[d] business relations as has been usual
in the past without a formal contract." But on February 16, 1993, in a meeting
with a BMW representative and the president of Columbia Motors Corporation
(CMC), Jose Alvarez, petitioner was informed that BMW was arranging to grant
the exclusive dealership of BMW cars and products to CMC, which had expressed
interest in acquiring the same. On February 24, 1993, petitioner received
confirmation of the information from BMW which, in a letter, expressed
dissatisfaction with various aspects of petitioner's business, mentioning among
other things, decline in sales, deteriorating services, and inadequate showroom
and warehouse facilities, and petitioner's alleged failure to comply with the
standards for an exclusive BMW dealer. 2 Nonetheless, BMW expressed
willingness to continue business relations with the petitioner on the basis of a
"standard BMW importer" contract, otherwise, it said, if this was not acceptable
to petitioner, BMW would have no alternative but to terminate petitioner's
exclusive dealership effective June 30, 1993. cdasia
Petitioner protested, claiming that the termination of his exclusive dealership
would be a breach of the Deed of Assignment. 3 Hahn insisted that as long as
the assignment of its trademark and device subsisted, he remained BMW's
exclusive dealer in the Philippines because the assignment was made in
consideration of the exclusive dealership. In the same letter petitioner explained
that the decline in sales was due to lower prices offered for BMW cars in the
United States and the fact that few customers returned for repairs and servicing
because of the durability of BMW parts and the efficiency of petitioner's service.
Because of Hahn's insistence on the former business relations, BMW withdrew on
March 26, 1993 its offer of a "standard importer contract" and terminated the
exclusive dealer relationship effective June 30, 1993. 4 At a conference of BMW
Regional Importers held on April 26, 1993 in Singapore, Hahn was surprised to
find Alvarez among those invited from the Asian region. On April 29, 1993, BMW
proposed that Hahn and CMC jointly import and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint
for specific performance and damages against BMW to compel it to continue the
exclusive dealership. Later he filed an amended complaint to include an
application for temporary restraining order and for writs of preliminary,
221
mandatory and prohibitory injunction to enjoin BMW from terminating his
exclusive dealership. Hahn's amended complaint alleged in pertinent parts:
2. Defendant [BMW] is a foreign corporation doing business
in the Philippines with principal offices at Munich, Germany.
It may be served with summons and other court processes
through the Secretary of the Department of Trade and
Industry of the Philippines. . . .
....
5. On March 7, 1967, Plaintiff executed in favor of
defendant BMW a Deed of Assignment with Special Power of
Attorney covering the trademark and in consideration thereof,
under its first whereas clause, Plaintiff was duly acknowledged as
the "exclusive Dealer of the Assignee in the Philippines" . . .
....
8. From the time the trademark "BMW & DEVICE" was first
used by the Plaintiff in the Philippines up to the present, Plaintiff,
through its firm name "HAHN MANILA" and without any monetary
contribution from defendant BMW, established BMW's goodwill and
market presence in the Philippines. Pursuant thereto, Plaintiff has
invested a lot of money and resources in order to single-handedly
compete against other motorcycle and car companies .... Moreover,
Plaintiff has built buildings and other infrastructures such as service
centers and showrooms to maintain and promote the car and
products of defendant BMW.
....
10. In a letter dated February 24, 1993, defendant BMW
advised Plaintiff that it was willing to maintain with Plaintiff a
relationship but only "on the basis of a standard BMW importer
contract as adjusted to reflect the particular situation in the
Philippines" subject to certain conditions, otherwise, defendant
BMW would terminate Plaintiff's exclusive dealership and any
relationship for cause effective June 30, 1993. . . .
....
15. The actuations of defendant BMW are in breach of the
assignment agreement between itself and plaintiff since the
consideration for the assignment of the BMW trademark is the
continuance of the exclusive dealership agreement. It thus, follows
that the exclusive dealership should continue for so long as
defendant BMW enjoys the use and ownership of the trademark
assigned to it by Plaintiff.
The case was docketed as Civil Case No. Q-93-15933 and raffled to Branch 104
of the Quezon City Regional Trial Court, which on June 14, 1993 issued a
temporary restraining order. Summons and copies of the complaint and
amended complaint were thereafter served on the private respondent through
the Department of Trade and Industry, pursuant to Rule 14, 14 of the Rules of
Court. The order, summons and copies of the complaint and amended complaint
were later sent by the DTI to BMW via registered mail on June 15, 1993 5 and
received by the latter on June 24, 1993.
On June 17, 1993, without proof of service on BMW, the hearing on the
application for the writ of preliminary injunction proceeded ex parte, with
petitioner Hahn testifying. On June 30, 1993, the trial court issued an order
granting the writ of preliminary injunction upon the filing of a bond of
P100,000.00. On July 13, 1993, following the posting of the required bond, a
writ of preliminary injunction was issued.
On July 1, 1993, BMW moved to dismiss the case, contending that the trial court
did not acquire jurisdiction over it through the service of summons on the
Department of Trade and Industry, because it (BMW) was a foreign corporation
and it was not doing business in the Philippines. It contended that the execution
of the Deed of Assignment was an isolated transaction; that Hahn was not its
agent because the latter undertook to assemble and sell BMW cars and products
without the participation of BMW and sold other products; and that Hahn was an
indentor or middleman transacting business in his own name and for his own
account.
Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing
business in the Philippines through him as its agent, as shown by the fact that
BMW invoices and order forms were used to document his transactions; that he
gave warranties as exclusive BMW dealer; that BMW officials periodically
inspected standards of service rendered by him; and that he was described in
service booklets and international publications of BMW as a "BMW Importer" or
"BMW Trading Company" in the Philippines.
The trial court 6 deferred resolution of the Motion to dismiss until after trial on
the merits for the reason that the grounds advanced by BMW in its motion did
not seem to be indubitable.
Without seeking reconsideration of the aforementioned order, BMW filed a
petition for certiorari with the Court of Appeals alleging that:
I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR
OTHERWISE INJUDICIOUSLY IN PROCEEDINGS LEADING
TOWARD THE ISSUANCE OF THE WRIT OF PRELIMINARY
INJUNCTION, AND IN PRESCRIBING THE TERMS FOR THE
ISSUANCE THEREOF.
222
 II. THE RESPONDENT JUDGE PATENTLY ERRED IN
DEFERRING RESOLUTION OF THE MOTION TO DISMISS ON
THE GROUND OF LACK OF JURISDICTION, AND THEREBY
FAILING TO IMMEDIATELY DISMISS THE CASE A QUO.
motion to dismiss and (2) in finding that private respondent BMW is not doing
business in the Philippines and, for this reason, dismissing petitioner's case.
Petitioner's appeal is well taken. Rule 14, 14 provides:

BMW asked for the immediate issuance of a temporary restraining order

14. Service upon foreign corporations. If the defendant
and, after hearing, for a writ of preliminary injunction to enjoin the trial
is a foreign corporation, or a nonresident joint stock
court from proceeding further in Civil Case No. Q-93-15933. Private
company or association, doing business in the Philippines,
respondent pointed out that, unless the trial court's order was set aside, it
service may be made on its resident agent designated in
would be forced to submit to the jurisdiction of the court by filing its answer
accordance with law for that purpose, or, if there be no such
or to accept judgment in default, when the very question was whether the
agent, on the government official designated by law to that
court had jurisdiction over it.
effect, or on any of its officers or agents within the
Philippines. (Emphasis added)
The Court of Appeals enjoined the trial court from hearing petitioner's complaint.
On December 20, 1993, it rendered judgment finding the trial court guilty of
What acts are considered "doing business in the Philippines" are enumerated in
grave abuse of discretion in deferring resolution of the motion to dismiss. It
3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) as follows: 7
stated:

d) the phrase "doing business" shall include soliciting orders,

Going by the pleadings already filed with the respondent
service contracts, opening offices, whether called "liaison"
court before it came out with its questioned order of July 26,
offices or branches, appointing representatives or
1993, we rule and so hold that petitioner's (BMW) motion to
distributors domiciled in the Philippines or who in any
dismiss could be resolved then and there, and that the
calendar year stay in the country for a period or periods
respondent judge's deferment of his action thereon until
totalling one hundred eighty (180) days or more;
after trial on the merit constitutes to our mind grave abuse
participating in the management, supervision or control of
of discretion.
any domestic business. firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity
. . . [T]here is not much appreciable disagreement as of commercial dealings or arrangements and contemplate to
regards the factual matters relating to the motion to that extent the performance of acts or works, or the
dismiss. What truly divide (sic) the parties and to which they exercise of some of the functions normally incident to, and
greatly differ is the legal conclusions they respectively draw in progressive prosecution of, commercial gain or of the
from such facts, (sic) with Hahn maintaining that on the purpose and object of the business organization: Provided,
basis thereof, BMW is doing business in the Philippines while however, That the phrase "doing business" shall not be
the latter asserts that it is not. deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor. nor
Then, after stating that any ruling which the trial court might make on the
having, a nominee director or officer to represent its
motion to dismiss would anyway be elevated to it on appeal, the Court of
interests in such corporation. nor appointing a
Appeals itself resolved the motion. It ruled that BMW was not doing business in
representative or distributor domiciled in the Philippines
the country and, therefore, jurisdiction over it could not be acquired through
which transacts business in its own name and for its own
service of summons on the DTI pursuant to Rule 14, Section 14. The court
account. (Emphasis supplied)
upheld private respondent's contention that Hahn acted in his own name and for
his own account and independently of BMW, based on Alfred Hahn's allegations
that he had invested his own money and resources in establishing BMW's
goodwill in the Philippines and on BMW's claim that Hahn sold products other
than those of BMW. It held that petitioner was a mere indentor or broker and not
Thus, the phrase includes "appointing representatives or distributors in the
an agent through whom private respondent BMW transacted business in the
Philippines" but not when the representative or distributor "transacts business in
Philippines. Consequently, the Court of Appeals dismissed petitioner's complaint
its name and for its own account." In addition, Section 1(f)(1) of the Rules and
against BMW.
Regulations implementing (IRR) the Omnibus Investment Code of 1987 (E.O.
No. 226) provided:
Hence, this appeal. Petitioner contends that the Court of Appeals erred (1) in
finding that the trial court gravely abused its discretion in deferring action on the
223
 (f) "doing business" shall be any act or combination of acts,
enumerated in Article 44 of the Code. In particular, "doing
business" includes:
(1) . . . A foreign firm which does business through
middlemen acting in their own names, such as indentors,
commercial brokers or commission merchants, shall not be
deemed doing business in the Philippines. But such
indentors, commercial brokers or commission merchants
shall be the ones deemed to be doing business in the
Philippines.
The question is whether petitioner Alfred Hahn is the agent or distributor in the
Philippines of private respondent BMW. If he is, BMW may be considered doing
business in the Philippines and the trial court acquired jurisdiction over it (BMW)
by virtue of the service of summons on the Department of Trade and Industry.
Otherwise, if Hahn is not the agent of BMW but an independent dealer, albeit of
BMW cars and products, BMW, a foreign corporation, is not considered doing
business in the Philippines within the meaning of the Foreign Investments Act of
1991 and the IRR, and the trial court did not acquire jurisdiction over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own name and
for his own account and not as agent or distributor in the Philippines of BMW on
the ground that "he alone had contacts with individuals or entities interested in
acquiring BMW vehicles. Independence characterizes Hahn's undertakings for
which reason he is to be considered, under governing statutes, as doing
business." (p. 13) In support of this conclusion, the appellate court cited the
following allegations in Hahn's amended complaint:
8. From the time the trademark "BMW & DEVICE" was first
used by the Plaintiff in the Philippines up to the present,
Plaintiff, through its firm name "HAHN MANILA" and without
any monetary contributions from defendant BMW,
established BMW's goodwill and market presence in the
Philippines. Pursuant thereto, Plaintiff invested a lot of
money and resources in order to single-handedly compete
against other motorcycle and car companies . . . Moreover,
Plaintiff has built buildings and other infrastructures such as
service centers and showrooms to maintain and promote the
car and products of defendant BMW.
As the above quoted allegations of the amended complaint show, however, there
is nothing to support the appellate court's finding that Hahn solicited orders
alone and for his own account and without "interference from, let alone direction
of, BMW." (p. 13) To the contrary, Hahn claimed he took orders for BMW cars
and transmitted them to BMW. Upon receipt of the orders, BMW fixed the down
payment and pricing charges, notified Hahn of the scheduled production month
for the orders, and reconfirmed the orders by signing and returning to Hahn the
acceptance sheets. Payment was made by the buyer directly to BMW. Title to
cars purchased passed directly to the buyer and Hahn never paid for the
purchase price of BMW cars sold in the Philippines. Hahn was credited with a
commission equal to 14% of the purchase price upon the invoicing of a vehicle
order by BMW. Upon confirmation in writing that the vehicles had been
registered in the Philippines and serviced by him, Hahn received an additional
3% of the full purchase price. Hahn performed after-sale services, including,
warranty services. for which he received reimbursement from BMW. All orders
were on invoices and forms of BMW. 8
These allegations were substantially admitted by BMW which, in its petition for
certiorari before the Court of Appeals, stated: 9
9.4. As soon as the vehicles are fully manufactured and full
payment of the purchase prices are made, the vehicles are
shipped to the Philippines. (The payments may be made by
the purchasers or third-persons or even by Hahn.) The bills
of lading are made up in the name of the purchasers, but
Hahn-Manila is therein indicated as the person to be
notified.
9.5. It is Hahn who picks up the vehicles from the Philippine
ports, for purposes of conducting pre-delivery inspections.
Thereafter, he delivers the vehicles to the purchasers.
9.6. As soon as BMW invoices the vehicle ordered, Hahn is
credited with a commission of fourteen percent (14%) of the
full purchase price thereof, and as soon as he confirms in
writing, that the vehicles have been registered in the
Philippines and have been serviced by him, he will receive
an additional three percent (3%) of the full purchase prices
as commission.
Contrary to the appellate court's conclusion, this arrangement shows an agency.
An agent receives a commission upon the successful conclusion of a sale. On the
other hand, a broker earns his pay merely by bringing the buyer and the seller
together, even if no sale is eventually made.
As to the service centers and showrooms which he said he had put up at his own
expense, Hahn said that he had to follow BMW specifications as exclusive dealer
of BMW in the Philippines. According to Hahn, BMW periodically inspected the
service centers to see to it that BMW standards were maintained. Indeed, it
would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to
maintain BMW standards that BMW was terminating Hahn's dealership.
The fact that Hahn invested his own money to put up these service centers and
showrooms does not necessarily prove that he is not an agent of BMW. For as
already noted, there are facts in the record which suggest that BMW exercised
control over Hahn's activities as a dealer and made regular inspections of Hahn's
premises to enforce compliance with BMW standards and specifications. 10 For
example, in its letter to Hahn dated February 23, 1996, BMW stated:
224
 In the last years we have pointed out to you in several
discussions and letters that we have to tackle the Philippine
market more professionally and that we are through your
present activities not adequately prepared to cope with the
forthcoming, challenges. 11
In effect, BMW was holding Hahn accountable to it under the 1967 Agreement.
This case fits into the mould of Communications Materials, Inc. v. Court of
Appeals 12 in which the foreign corporation entered into a "Representative
Agreement" and a "Licensing Agreement" with a domestic corporation, by virtue
of which the latter was appointed "exclusive representative" in the Philippines for
a stipulated commission. Pursuant to these contracts, the domestic corporation
sold products exported by the foreign corporation and put up a service center for
the products sold locally. This Court held that these acts constituted doing
business in the Philippines. The arrangement showed that the foreign
corporation's purpose was to penetrate the Philippine market and establish its
presence in the Philippines.
In addition, BMW held out private respondent Hahn as its exclusive distributor in
the Philippines. even as it announced in the Asian region that Hahn was the
"official BMW agent" in the Philippines. 13
The Court of Appeals also found that petitioner Alfred Hahn dealt in other
products, and not exclusively in BMW products, and, on this basis, ruled that
Hahn was not an agent of BMW. (p. 14) This finding is based entirely on
allegations of BMW in its motion to dismiss filed in the trial court and in its
petition for certiorari before the Court of Appeals. 14 But this allegation was
denied by Hahn 15 and therefore the Court of Appeals should not have cited it
as if it were the fact.
Indeed this is not the only factual issue raised, which should have indicated to
the Court of Appeals the necessity of affirming the trial court's order deferring
resolution of BMW's motion to dismiss. Petitioner alleged that whether or not he
is considered an agent of BMW, the fact is that BMW did business in the
Philippines because it sold cars directly to Philippine buyers. 16 This was denied
by BMW, which claimed that Hahn was not its agent and that, while it was true
that it had sold cars to Philippine buyers, this was done without solicitation on its
part. 17
It is not true then that the question whether BMW is doing business could have
been resolved simply by considering the parties' pleadings. There are genuine
issues of facts which can only be determined on the basis of evidence duly
presented. BMW cannot short circuit the process on the plea that to compel it to
go to trial would be to deny its right not to submit to the jurisdiction of the trial
court which precisely it denies. Rule 16, 3 authorizes courts to defer the
resolution of a motion to dismiss until after the trial if the ground on which the
motion is based does not appear to be indubitable. Here the record of the case
bristles with factual issues and it is not at all clear whether some allegations
correspond to the proof. lexlib
Anyway, private respondent need not apprehend that by responding to the
summons it would be waiving its objection to the trial court's jurisdiction. It is
now settled that for purposes of having summons served on a foreign
corporation in accordance with Rule 14, 14, it is sufficient that it be alleged in
the complaint that the foreign corporation is doing business in the Philippines.
The court need not go beyond the allegations of the complaint in order to
determine whether it has jurisdiction. 18 A determination that the foreign
corporation is doing business is only tentative and is made only for the purpose
of enabling the local court to acquire jurisdiction over the foreign corporation
through service of summons pursuant to Rule 14, 4. Such determination does
not foreclose a contrary finding should evidence later show that it is not
transacting business in the country. As this Court has explained:
This is not to say, however, that the petitioner's right to
question the jurisdiction of the court over its person is now
to be deemed a foreclosed matter. If it is true, as Signetics
claims, that its only involvement in the Philippines was
through a passive investment in Sigfil, which it even later
disposed of, and that TEAM Pacific is not its agent, then it
cannot really be said to be doing business in the Philippines.
It is a defense, however, that requires the contravention of
the allegations of the complaint, as well as a full ventilation,
in effect, of the main merits of the case, which should not
thus be within the province of a mere motion to dismiss. So,
also, the issue posed by the petitioner as to whether a
foreign corporation which has done business in the country,
but which has ceased to do business at the time of the filing,
of a complaint, can still be made to answer for a cause of
action which accrued while it was doing, business, is another
matter that would yet have to await the reception and
admission of evidence. Since these points have seasonably
been raised by the petitioner, there should be no real cause
for what may understandably be its apprehension, i.e., that
by its participation during, the trial on the merits, it may,
absent an invocation of separate or independent reliefs of its
own, be considered to have voluntarily submitted itself to
the court's jurisdiction. 19
Far from committing an abuse of discretion, the trial court properly deferred
resolution of the motion to dismiss and thus avoided prematurely deciding a
question which requires a factual basis, with the same result if it had denied the
motion and conditionally assumed jurisdiction. It is the Court of Appeals which,
by ruling that BMW is not doing business on the basis merely of uncertain
allegations in the pleadings, disposed of the whole case with finality and thereby
deprived petitioner of his right to be heard on his cause of action. Nor was there
justification for nullifying the writ of preliminary injunction issued by the trial
court. Although the injunction was issued ex parte, the fact is that BMW was
subsequently heard on its defense by filing a motion to dismiss.
225
WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is
REMANDED to the trial court for further proceedings.
SO ORDERED.
||| (Hahn v. Court of Appeals, G.R. No. 113074, [January 22, 1997], 334 PHIL
491-50
EN BANC
[G.R. No. 176579. June 28, 2011.]
WILSON P. GAMBOA, petitioner, vs. FINANCE
SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND
COMMISSIONER RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST
PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN
MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS
CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD,
petitioners-in-intervention.
CARPIO, J p:
The Case
This is an original petition for prohibition, injunction, declaratory relief and
declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of the
Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine
Long Distance Telephone Company (PLDT), are as follows: 1
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications
business. In 1969, General Telephone and Electronics Corporation (GTE), an
American company and a major PLDT stockholder, sold 26 percent of the
outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc.
(PHI) was incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of
PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of
PTIC held by PHI were sequestered by the Presidential Commission on Good
Government (PCGG). The 111,415 PTIC shares, which represent about 46.125
percent of the outstanding capital stock of PTIC, were later declared by this
Court to be owned by the Republic of the Philippines. 2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54 percent of the outstanding capital stock of PTIC. On
20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, through a public bidding to be
conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax)
and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of
P25.6 billion or US$510 million. TAESDH
Thereafter, First Pacific announced that it would exercise its right of first refusal
as a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid
price of Parallax. However, First Pacific failed to do so by the 1 February 2007
deadline set by IPC and instead, yielded its right to PTIC itself which was then
given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007,
First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, with the Philippine Government for the price of
P25,217,556,000 or US$510,580,189. The sale was completed on 28 February
2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of
46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or
about 6.3 percent of the outstanding common shares of PLDT. With the sale,
First Pacific's common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47 percent. This violates Section 11, Article
XII of the 1987 Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40 percent. 3
226
On the other hand, public respondents Finance Secretary Margarito B. Teves,
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege
the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the
business of investment holdings. PTIC held 26,034,263 PLDT common shares, or
13.847 percent of the total PLDT outstanding common shares. PHI, on the other
hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares
or 46.125 percent of the outstanding capital stock of PTIC by virtue of three
Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In
1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and
subsequently declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to
the Republic of the Philippines in accordance with this Court's decision 4 which
became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which
represent 6.4 percent of the outstanding common shares of stock of PLDT, and
designated the Inter-Agency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing entity. An invitation to
bid was published in seven different newspapers from 13 to 24 November 2006.
On 20 November 2006, a pre-bid conference was held, and the original deadline
for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The
extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged
as the highest bidder with a bid of P25,217,556,000. The government notified
First Pacific, the majority owner of PTIC shares, of the bidding results and gave
First Pacific until 1 February 2007 to exercise its right of first refusal in
accordance with PTIC's Articles of Incorporation. First Pacific announced its
intention to match Parallax's bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then impending
sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among
those who attended the public hearing. The HR Committee Report No. 2270
concluded that: (a) the auction of the government's 111,415 PTIC shares bore
due diligence, transparency and conformity with existing legal procedures; and
(b) First Pacific's intended acquisition of the government's 111,415 PTIC
shares resulting in First Pacific's 100% ownership of PTIC will not
violate the 40 percent constitutional limit on foreign ownership of a
public utility since PTIC holds only 13.847 percent of the total
outstanding common shares of PLDT. 5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC
conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent of
the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares
was already owned by First Pacific and its affiliates); (b) Parallax offered the
highest bid amounting to P25,217,556,000; (c) pursuant to the right of first
refusal in favor of PTIC and its shareholders granted in PTIC's Articles of
Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by
matching the highest bid offered for PTIC shares on 13 February 2007; and (d)
on 28 February 2007, the sale was consummated when MPAH paid IPC
P25,217,556,000 and the government delivered the certificates for the 111,415
PTIC shares. Respondent Pangilinan denies the other allegations of facts of
petitioner. HcaDIA
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the 111,415
PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC
shares would result in an increase in First Pacific's common shareholdings in
PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT
DoCoMo's common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent
constitutional limit. 6 Petitioner asserts:
If and when the sale is completed, First Pacific's equity in
PLDT will go up from 30.7 percent to 37.0 percent of its
common or voting-stockholdings, . . . . Hence, the
consummation of the sale will put the two largest foreign
investors in PLDT First Pacific and Japan's NTT DoCoMo,
which is the world's largest wireless telecommunications
firm, owning 51.56 percent of PLDT common equity. . . .
With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five
percent of common equity, will collectively own 81.47
percent of PLDT's common equity. . . .
. . . as the annual disclosure reports, also referred to as
Form 20-K reports . . . which PLDT submitted to the New
York Stock Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign entities breached
the constitutional limit of 40 percent ownership as early as
2003. . . ." 7
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional
limit on foreign ownership of a public utility; (2) whether public respondents
committed grave abuse of discretion in allowing the sale of the 111,415 PTIC
shares to First Pacific; and (3) whether the sale of common shares to foreigners
in excess of 40 percent of the entire subscribed common capital stock violates
the constitutional limit on foreign ownership of a public utility. 8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for
Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention. caIACE
227
Petitioners-in-intervention "join petitioner Wilson Gamboa . . . in seeking, among
others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC
shares to First Pacific or assignee." Petitioners-in-intervention claim that, as
PLDT subscribers, they have a "stake in the outcome of the controversy . . .
where the Philippine Government is completing the sale of government owned
assets in [PLDT], unquestionably a public utility, in violation of the nationality
restrictions of the Philippine Constitution."
The Issue
This Court is not a trier of facts. Factual questions such as those raised by
petitioner, 9 which indisputably demand a thorough examination of the evidence
of the parties, are generally beyond this Court's jurisdiction. Adhering to this
well-settled principle, the Court shall confine the resolution of the instant
controversy solely on the threshold and purely legal issue of whether the
term "capital" in Section 11, Article XII of the Constitution refers to the total
common shares only or to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction
of this court, which however is not exclusive but is concurrent with the Regional
Trial Court and the Court of Appeals. The actions for declaratory relief, 10
injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have
been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition, 11
the Court shall nevertheless refrain from discussing the grounds in support of
the petition for prohibition since on 28 February 2007, the questioned sale was
consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy, the Court treats the petition for
declaratory relief as one for mandamus. 12
In Salvacion v. Central Bank of the Philippines, 13 the Court treated the petition
for declaratory relief as one for mandamus considering the grave injustice that
would result in the interpretation of a banking law. In that case, which involved
the crime of rape committed by a foreign tourist against a Filipino minor and the
execution of the final judgment in the civil case for damages on the tourist's
dollar deposit with a local bank, the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits from attachment,
garnishment or any other order or process of any court, inapplicable due to the
peculiar circumstances of the case. The Court held that "injustice would result
especially to a citizen aggrieved by a foreign guest like accused . . . " that would
"negate Article 10 of the 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.'" The Court therefore required respondents
Central Bank of the Philippines, the local bank, and the accused to comply with
the writ of execution issued in the civil case for damages and to release the
dollar deposit of the accused to satisfy the judgment. ICHcTD
In Alliance of Government Workers v. Minister of Labor, 14 the Court similarly
brushed aside the procedural infirmity of the petition for declaratory relief and
treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees,
from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled
corporations included among the four 'employers' under Presidential Decree No.
851 which are required to pay their employees . . . a thirteenth (13th) month
pay . . .?" The Constitutional principle involved therein affected all government
employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory
relief as one for mandamus if the issue involved has far-reaching implications.
As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a
petition for declaratory relief. 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. 15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term
"capital" in Section 11, Article XII of the Constitution. He prays that this Court
declare that the term "capital" refers to common shares only, and that such
shares constitute "the sole basis in determining foreign equity in a public utility."
Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second
class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national economy. Indeed, if ever
there is a legal issue that has far-reaching implications to the entire nation, and
228
to future generations of Filipinos, it is the threshhold legal issue presented in this
case. CAIHTE
The Court first encountered the issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution in the case of Fernandez v. Cojuangco,
docketed as G.R. No. 157360. 16 That case involved the same public utility
(PLDT) and substantially the same private respondents. Despite the importance
and novelty of the constitutional issue raised therein and despite the fact that
the petition involved a purely legal question, the Court declined to resolve the
case on the merits, and instead denied the same for disregarding the hierarchy
of courts. 17 There, petitioner Fernandez assailed on a pure question of law the
Regional Trial Court's Decision of 21 February 2003 via a petition for review
under Rule 45. The Court's Resolution, denying the petition, became final on 21
December 2004.
The instant petition therefore presents the Court with another opportunity to
finally settle this purely legal issue which is of transcendental importance to
the national economy and a fundamental requirement to a faithful adherence to
our Constitution. The Court must forthwith seize such opportunity, not only for
the benefit of the litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos." 18 Besides,
in the light of vague and confusing positions taken by government agencies on
this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on the
extent of their participation in the capital of public utilities and other nationalized
businesses.
Despite its far-reaching implications to the national economy, this purely legal
issue has remained unresolved for over 75 years since the 1935 Constitution.
There is no reason for this Court to evade this ever recurring fundamental issue
and delay again defining the term "capital," which appears not only in Section
11, Article XII of the Constitution, but also in Section 2, Article XII on co-
production and joint venture agreements for the development of our natural
resources, 19 in Section 7, Article XII on ownership of private lands, 20 in
Section 10, Article XII on the reservation of certain investments to Filipino
citizens, 21 in Section 4 (2), Article XIV on the ownership of educational
institutions, 22 and in Section 11 (2), Article XVI on the ownership of advertising
companies. 23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the
right to question the subject sale, which he claims to violate the nationality
requirement prescribed in Section 11, Article XII of the Constitution. If the sale
indeed violates the Constitution, then there is a possibility that PLDT's franchise
could be revoked, a dire consequence directly affecting petitioner's interest as a
stockholder. DCIEac
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal
issue in this case, involving the national economy and the economic welfare of
the Filipino people, far outweighs any perceived impediment in the legal
personality of the petitioner to bring this action.
In Chavez v. PCGG, 24 the Court upheld the right of a citizen to bring a suit on
matters of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the
issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public
duty, the people are regarded as the real parties in
interest; and because it is sufficient that petitioner is
a citizen and as such is interested in the execution of
the laws, he need not show that he has any legal or
special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their right
to be informed on matters of public concern, a right then
recognized in Section 6, Article IV of the 1973 Constitution,
in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or
otherwise effectively promulgated. In ruling for the
petitioners' legal standing, the Court declared that the right
they sought to be enforced 'is a public right recognized by
no less than the fundamental law of the land.'
Legaspi v. Civil Service Commission, while reiterating
Taada, further declared that 'when a mandamus
proceeding involves the assertion of a public right, the
requirement of personal interest is satisfied by the
mere fact that petitioner is a citizen and, therefore,
part of the general 'public' which possesses the right.'
Further, in Albano v. Reyes, we said that while expenditure
of public funds may not have been involved under the
questioned contract for the development, management and
operation of the Manila International Container Terminal,
'public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the
economic development of the country and the
magnitude of the financial consideration involved.' We
concluded that, as a consequence, the disclosure provision
in the Constitution would constitute sufficient authority for
upholding the petitioner's standing. (Emphasis supplied)
DIHETS
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the requisite locus standi.
229
 Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11.No franchise, certificate, or any other form
of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or associations organized under the
laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in
public utilities by the general public. The participation of
foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such
corporation or association must be citizens of the
Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
Section 5.No franchise, certificate, or any other form
of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of the
capital of which is owned by such citizens, nor shall
such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration,
or repeal by the National Assembly when the public interest
so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of
foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in the
capital thereof. (Emphasis supplied) THAICD
The foregoing provision in the 1973 Constitution reproduced Section 8, Article
XIV of the 1935 Constitution, viz.:
Section 8.No franchise, certificate, or any other form
of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or other entities organized under
the laws of the Philippines sixty per centum of the
capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period
than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition
that it shall be subject to amendment, alteration, or repeal
by the Congress when the public interest so requires.
(Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986
Constitutional Commission, reminds us that the Filipinization provision in the
1987 Constitution is one of the products of the spirit of nationalism which
gripped the 1935 Constitutional Convention. 25 The 1987 Constitution
"provides for the Filipinization of public utilities by requiring that any form of
authorization for the operation of public utilities should be granted only to
'citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens.' The provision is [an express] recognition of
the sensitive and vital position of public utilities both in the national
economy and for national security." 26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest. 27 This specific
provision explicitly reserves to Filipino citizens control of public utilities,
pursuant to an overriding economic goal of the 1987 Constitution: to
"conserve and develop our patrimony" 28 and ensure "a self-reliant and
independent national economy effectively controlled by Filipinos." 29
Any citizen or juridical entity desiring to operate a public utility must therefore
meet the minimum nationality requirement prescribed in Section 11, Article XII
of the Constitution. Hence, for a corporation to be granted authority to operate a
public utility, at least 60 percent of its "capital" must be owned by Filipino
citizens.
The crux of the controversy is the definition of the term "capital." Does the
term "capital" in Section 11, Article XII of the Constitution refer to common
shares or to the total outstanding capital stock (combined total of common and
non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic
public utilities refers only to common shares because such shares are entitled to
vote and it is through voting that control over a corporation is exercised.
Petitioner posits that the term "capital" in Section 11, Article XII of the
Constitution refers to "the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT,
can vote and elect members of the board of directors." It is undisputed that
PLDT's non-voting preferred shares are held mostly by Filipino citizens. 30 This
arose from Presidential Decree No. 217, 31 issued on 16 June 1973 by then
President Ferdinand Marcos, requiring every applicant of a PLDT telephone line
230
to subscribe to non-voting preferred shares to pay for the investment cost of
installing the telephone line. 32
Petitioners-in-intervention basically reiterate petitioner's arguments and adopt
petitioner's definition of the term "capital." 33 Petitioners-in-intervention allege
that "the approximate foreign ownership of common capital stock of PLDT . . .
already amounts to at least 63.54% of the total outstanding common stock,"
which means that foreigners exercise significant control over PLDT, patently
violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.
Respondents, on the other hand, do not offer any definition of the term "capital"
in Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazareno's Memorandum, consisting of 73 pages,
harps mainly on the procedural infirmities of the petition and the supposed
violation of the due process rights of the "affected foreign common
shareholders." Respondent Nazareno does not deny petitioner's allegation of
foreigners' dominating the common shareholdings of PLDT. Nazareno stressed
mainly that the petition "seeks to divest foreign common shareholders
purportedly exceeding 40% of the total common shareholdings in PLDT
of their ownership over their shares." Thus, "the foreign natural and juridical
PLDT shareholders must be impleaded in this suit so that they can be heard." 34
Essentially, Nazareno invokes denial of due process on behalf of the foreign
common shareholders.
While Nazareno does not introduce any definition of the term "capital," he states
that "among the factual assertions that need to be established to
counter petitioner's allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and
common shares in "controlling interest" in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public
utilities." 35
Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in
Section 11, Article XII of the Constitution. Neither does he refute petitioner's
claim of foreigners holding more than 40 percent of PLDT's common shares.
Instead, respondent Pangilinan focuses on the procedural flaws of the petition
and the alleged violation of the due process rights of foreigners. Respondent
Pangilinan emphasizes in his Memorandum (1) the absence of this Court's
jurisdiction over the petition; (2) petitioner's lack of standing; (3) mootness of
the petition; (4) non-availability of declaratory relief; and (5) the denial of due
process rights. Moreover, respondent Pangilinan alleges that the issue should be
whether "owners of shares in PLDT as well as owners of shares in companies
holding shares in PLDT may be required to relinquish their shares in PLDT and in
those companies without any law requiring them to surrender their shares and
also without notice and trial."
Respondent Pangilinan further asserts that "Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of
the utility company as a condition for keeping their shares in the utility
company." According to him, "Section 11 does not authorize taking one
person's property (the shareholder's stock in the utility company) on the basis of
another party's alleged failure to satisfy a requirement that is a condition only
for that other party's retention of another piece of property (the utility company
being at least 60% Filipino-owned to keep its franchise)." 36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe
Barin, is likewise silent on the definition of the term "capital." In its
Memorandum 37 dated 24 September 2007, the OSG also limits its discussion
on the supposed procedural defects of the petition, i.e., lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction.
The OSG does not present any definition or interpretation of the term "capital" in
Section 11, Article XII of the Constitution. The OSG contends that "the petition
actually partakes of a collateral attack on PLDT's franchise as a public utility,"
which in effect requires a "full-blown trial where all the parties in interest are
given their day in court." 38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive
Officer of the Philippine Stock Exchange (PSE), does not also define the term
"capital" and seeks the dismissal of the petition on the following grounds: (1)
failure to state a cause of action against Lim; (2) the PSE allegedly implemented
its rules and required all listed companies, including PLDT, to make proper and
timely disclosures; and (3) the reliefs prayed for in the petition would adversely
impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed
to be a stockholder of record of PLDT, contended that the term "capital" in the
1987 Constitution refers to shares entitled to vote or the common shares.
Fernandez explained thus: DHATcE
The forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being
exercised. . . .
Obviously, the intent of the framers of the Constitution in
imposing limitations and restrictions on fully nationalized
and partially nationalized activities is for Filipino nationals to
be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Court's ruling upholding
respondents' arguments were to be given credence, it would
be possible for the ownership structure of a public utility
231
corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks.
Following the Trial Court's ruling adopting respondents'
arguments, the common shares can be owned entirely by
foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders,
control the public utility corporation.
xxx xxx xxx
Thus, the 40% foreign ownership limitation should be
interpreted to apply to both the beneficial ownership and the
controlling interest.
xxx xxx xxx
Clearly, therefore, the forty percent (40%) foreign equity
limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e.,
common shares. Furthermore, ownership of record of shares
will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens.
Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners
which would gain entry to petitioner PLDT by the acquisition
of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements
between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section
11, Article XII of the Constitution. EIDATc
Parenthetically, the Opinions dated February 15, 1988 and
April 14, 1987 cited by the Trial Court to support the
proposition that the meaning of the word "capital" as used in
Section 11, Article XII of the Constitution allegedly refers to
the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is
classified, whether as common or preferred, cannot stand in
the face of a clear legislative policy as stated in the FIA
which took effect in 1991 or way after said opinions were
rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as
between the law and an opinion rendered by an
administrative agency, the law indubitably prevails.
Moreover, said Opinions are merely advisory and cannot
prevail over the clear intent of the framers of the
Constitution.
In the same vein, the SEC's construction of Section 11,
Article XII of the Constitution is at best merely advisory for
it is the courts that finally determine what a law means. 39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V.
Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-
Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert
F. Del Rosario, and Orlando B. Vea, argued that the term "capital" in Section 11,
Article XII of the Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:
16.The Constitution applies its foreign ownership limitation
on the corporation's "capital," without distinction as to
classes of shares. . . .
In this connection, the Corporation Code which was
already in force at the time the present (1987) Constitution
was drafted defined outstanding capital stock as follows:
Section 137.Outstanding capital stock defined.
The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued
under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
Section 137 of the Corporation Code also does not
distinguish between common and preferred shares, nor
exclude either class of shares, in determining the
outstanding capital stock (the "capital") of a corporation.
Consequently, petitioner's suggestion to reckon PLDT's
foreign equity only on the basis of PLDT's outstanding
common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in
common use.
xxx xxx xxx
17.But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing in
the Record of the Constitutional Commission (Vol. III)
which petitioner misleadingly cited in the Petition . . .
which supports petitioner's view that only common shares
should form the basis for computing a public utility's foreign
equity. AaITCS
xxx xxx xxx
232
 18.In addition, the SEC the government agency primarily
responsible for implementing the Corporation Code, and
which also has the responsibility of ensuring compliance with
the Constitution's foreign equity restrictions as regards
nationalized activities . . . has categorically ruled that
both common and preferred shares are properly considered
in determining outstanding capital stock and the nationality
composition thereof. 40
We agree with petitioner and petitioners-in-intervention. The term "capital" in
Section 11, Article XII of the Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, 41 and not to the total outstanding capital stock comprising both
common and non-voting preferred shares.
The Corporation Code of the Philippines 42 classifies shares as common or
preferred, thus:
Sec. 6.Classification of shares. The shares of stock of
stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may
have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series
of shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or have
no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue
no-par value shares of stock.
Preferred shares of stock issued by any corporation may be
given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board
of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for
its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends. TcCEDS
A corporation may, furthermore, classify its shares for the
purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation
and stated in the certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide for non-voting
shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following
matters:
1.Amendment of the articles of incorporation;
2.Adoption and amendment of by-laws;
3.Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4.Incurring, creating or increasing bonded
indebtedness;
5.Increase or decrease of capital stock;
6.Merger or consolidation of the corporation with
another corporation or other corporations;
7.Investment of corporate funds in another
corporation or business in accordance with this
Code; and caIETS
8.Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,
the vote necessary to approve a particular corporate act as
233
 provided in this Code shall be deemed to refer only to stocks In teaching law, we are always faced with this question:
with voting rights. "Where do we base the equity requirement, is it on
the authorized capital stock, on the subscribed
capital stock, or on the paid-up capital stock of a
Indisputably, one of the rights of a stockholder is the right to participate in the
corporation"? Will the Committee please enlighten
control or management of the corporation. 43 This is exercised through his vote
me on this? ITESAc
in the election of directors because it is the board of directors that controls or
manages the corporation. 44 In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have MR. VILLEGAS.
the same voting rights as common shares. However, preferred shareholders are
often excluded from any control, that is, deprived of the right to vote in the
We have just had a long discussion with the members of the
election of directors and on other matters, on the theory that the preferred
team from the UP Law Center who provided us a
shareholders are merely investors in the corporation for income in the same
draft. The phrase that is contained here which
manner as bondholders. 45 In fact, under the Corporation Code only preferred
we adopted from the UP draft is "60 percent
or redeemable shares can be deprived of the right to vote. 46 Common shares
of voting stock."
cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid. 47 MR. NOLLEDO.

Considering that common shares have voting rights which translate to control, That must be based on the subscribed capital stock, because
as opposed to preferred shares which usually have no voting rights, the term unless declared delinquent, unpaid capital stock
"capital" in Section 11, Article XII of the Constitution refers only to common shall be entitled to vote.
shares. However, if the preferred shares also have the right to vote in the
election of directors, then the term "capital" shall include such preferred shares MR. VILLEGAS.
because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to That is right.
shares of stock that can vote in the election of directors.
MR. NOLLEDO.
This interpretation is consistent with the intent of the framers of the Constitution
to place in the hands of Filipino citizens the control and management of public Thank you.
utilities. As revealed in the deliberations of the Constitutional Commission,
"capital" refers to the voting stock or controlling interest of a corporation, to
wit: With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent
equity invests in another corporation which is
MR. NOLLEDO. permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in MR. VILLEGAS.
Section 3, 60-40 in Section 9 and 2/3-1/3 in
Section 15.
Yes, that is the understanding of the Committee.

MR. VILLEGAS.
MR. NOLLEDO.

That is right.
Therefore, we need additional Filipino capital?

MR. NOLLEDO.
MR. VILLEGAS.

Yes. 48
234
 xxx xxx xxx
MR. AZCUNA.
May I be clarified as to that portion that was accepted by the
Committee.
MR. VILLEGAS.
The portion accepted by the Committee is the deletion of the
phrase "voting stock or controlling interest."
ESTAIH
MR. AZCUNA.
Hence, without the Davide amendment, the committee
Thus, 60 percent of the "capital" assumes, or should result in, "controlling
report would read: "corporations or associations at
interest" in the corporation. Reinforcing this interpretation of the term "capital,"
least sixty percent of whose CAPITAL is owned by
as referring to controlling interest or shares entitled to vote, is the definition of a
such citizens."
"Philippine national" in the Foreign Investments Act of 1991, 50 to wit:
MR. VILLEGAS.
Yes.
MR. AZCUNA.
So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
MR. VILLEGAS.
That is right.
MR. AZCUNA.
But the control can be with the foreigners even if they
are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation
where the corporation is controlled by
foreigners despite being the minority because
they have the voting capital. That is the
anomaly that would result here.
MR. BENGZON.
No, the reason we eliminated the word "stock" as
stated in the 1973 and 1935 Constitutions is
that according to Commissioner Rodrigo,
there are associations that do not have stocks.
That is why we say "CAPITAL."
MR. AZCUNA.
We should not eliminate the phrase "controlling
interest."
MR. BENGZON.
In the case of stock corporations, it is assumed. 49
(Emphasis supplied)
SEC. 3.Definitions. As used in this Act:
a.The term "Philippine national" shall mean a citizen of the
Philippines; or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines
under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos or a trustee of funds for pension
or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines,
in order that the corporation, shall be considered a
"Philippine national." (Emphasis supplied) TDcHCa
235
In explaining the definition of a "Philippine national," the Implementing Rules
and Regulations of the Foreign Investments Act of 1991 provide:
b."Philippine national" shall mean a citizen of the Philippines
or a domestic partnership or association wholly owned by
the citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding
and entitled to vote is owned and held by citizens of
the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine
nationals; Provided, that where a corporation its non-Filipino
stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent [60%] of
the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine national. The
control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to
vote are considered.
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or
transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals. ITaESD
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]."
Under Section 10, Article XII of the Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5)
Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine
Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of
the Constitution is also used in the same context in numerous laws
reserving certain areas of investments to Filipino citizens.
To construe broadly the term "capital" as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes
the intent and letter of the Constitution that the "State shall develop a self-
reliant and independent national economy effectively controlled by Filipinos."
A broad definition unjustifiably disregards who owns the all-important voting
stock, which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term
"capital." Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with
both classes of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term "capital," such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the
total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy effectively
controlled by Filipinos. HCEaDI
The example given is not theoretical but can be found in the real world, and in
fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDT's Articles of Incorporation expressly state that "the
holders of Serial Preferred Stock shall not be entitled to vote at any
meeting of the stockholders for the election of directors or for any other
236
purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders." 51
On the other hand, holders of common shares are granted the exclusive right to
vote in the election of directors. PLDT's Articles of Incorporation 52 state that
"each holder of Common Capital Stock shall have one vote in respect of each
share of such stock held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the exclusive right
to vote for the election of directors and for all other purposes." 53
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional
mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required
for the State's grant of authority to operate a public utility. The undisputed fact
that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and
earn only 1/70 of the dividends that PLDT common shares earn, grossly violates
the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and
In short, only holders of common shares can vote in the election of directors,
earn less than 60 percent of the dividends, of PLDT. This directly
meaning only common shareholders exercise control over PLDT. Conversely,
contravenes the express command in Section 11, Article XII of the Constitution
holders of preferred shares, who have no voting rights in the election of
that "[n]o franchise, certificate, or any other form of authorization for the
directors, do not have any control over PLDT. In fact, under PLDT's Articles of
operation of a public utility shall be granted except to . . . corporations . . .
Incorporation, holders of common shares have voting rights for all purposes,
organized under the laws of the Philippines, at least sixty per centum of
while holders of preferred shares have no voting right for any purpose
whose capital is owned by such citizens . . . ." IaCHTS
whatsoever.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which
It must be stressed, and respondents do not dispute, that foreigners hold a
class of shares exercises the sole right to vote in the election of directors, and
majority of the common shares of PLDT. In fact, based on PLDT's 2010 General
thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT's
Information Sheet (GIS), 54 which is a document required to be submitted
common shares, constituting a minority of the voting stock, and thus do not
annually to the Securities and Exchange Commission, 55 foreigners hold
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos,
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622
have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares. 56 In other words, foreigners hold 64.27% of the total number
common shares earn; 63 (5) preferred shares have twice the par value of
of PLDT's common shares, while Filipinos hold only 35.73%. Since holding a
common shares; and (6) preferred shares constitute 77.85% of the authorized
majority of the common shares equates to control, it is clear that foreigners
capital stock of PLDT and common shares only 22.15%. This kind of ownership
exercise control over PLDT. Such amount of control unmistakably exceeds the
and control of a public utility is a mockery of the Constitution.
allowable 40 percent limit on foreign ownership of public utilities expressly
mandated in Section 11, Article XII of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share, 64 while PLDT preferred
Moreover, the Dividend Declarations of PLDT for 2009, 57 as submitted to the
shares with a par value of P10.00 per share have a current stock market value
SEC, shows that per share the SIP 58 preferred shares earn a pittance in
ranging from only P10.92 to P11.06 per share, 65 is a glaring confirmation by
dividends compared to the common shares. PLDT declared dividends for the
the market that control and beneficial ownership of PLDT rest with the common
common shares at P70.00 per share, while the declared dividends for the
shares, not with the preferred shares.
preferred shares amounted to a measly P1.00 per share. 59 So the preferred
shares not only cannot vote in the election of directors, they also have very little
and obviously negligible dividend earning capacity compared to common shares. Indisputably, construing the term "capital" in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the abject
surrender of our telecommunications industry to foreigners, amounting to a
As shown in PLDT's 2010 GIS, 60 as submitted to the SEC, the par value of PLDT
clear abdication of the State's constitutional duty to limit control of public
common shares is P5.00 per share, whereas the par value of preferred shares is
utilities to Filipino citizens. Such an interpretation certainly runs counter to the
P10.00 per share. In other words, preferred shares have twice the par value of
constitutional provision reserving certain areas of investment to Filipino citizens,
common shares but cannot elect directors and have only 1/70 of the dividends
such as the exploitation of natural resources as well as the ownership of land,
of common shares. Moreover, 99.44% of the preferred shares are owned by
educational institutions and advertising businesses. The Court should never open
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.
to foreign control what the Constitution has expressly reserved to Filipinos for
61 Worse, preferred shares constitute 77.85% of the authorized capital stock of
that would be a betrayal of the Constitution and of the national interest. The
PLDT while common shares constitute only 22.15%. 62 This undeniably shows
Court must perform its solemn duty to defend and uphold the intent and letter
that beneficial interest in PLDT is not with the non-voting preferred shares but
of the Constitution to ensure, in the words of the Constitution, "a self-reliant and
with the common shares, blatantly violating the constitutional requirement of 60
independent national economy effectively controlled by Filipinos."
percent Filipino control and Filipino beneficial ownership in a public utility.

237
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of investment, such as
the development of natural resources and ownership of land, educational
institutions and advertising business, is self-executing. There is no need for
legislation to implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was explained in
Manila Prince Hotel v. GSIS, 66 thus:
. . . Hence, unless it is expressly provided that a legislative
act is necessary to enforce a constitutional mandate, the
presumption now is that all provisions of the constitution are
self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature
would have the power to ignore and practically nullify the
mandate of the fundamental law. This can be cataclysmic.
That is why the prevailing view is, as it has always been,
that
. . . in case of doubt, the Constitution should be
considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution
should be considered self-executing, as a
contrary rule would give the legislature
discretion to determine when, or whether,
they shall be effective. These provisions would
be subordinated to the will of the lawmaking body,
which could make them entirely meaningless by
simply refusing to pass the needed implementing
statute. (Emphasis supplied) TAaEIc
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice
Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution
as self-executing, rather than as requiring future legislation
for their enforcement. The reason is not difficult to discern.
For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the
sovereign people can be easily ignored and nullified
by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give
breath to constitutional rights but congressional
inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the
Bill of Rights on arrests, searches and seizures, the rights of
a person under custodial investigation, the rights of an
accused, and the privilege against self-incrimination. It is
recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the
fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional
provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)
Thus, in numerous cases, 67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987
Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo, 68 this
Court ruled:
. . . As the Constitution is silent as to the effects or
consequences of a sale by a citizen of his land to an alien,
and as both the citizen and the alien have violated the law,
none of them should have a recourse against the other, and
it should only be the State that should be allowed to
intervene and determine what is to be done with the
property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of
public policy, entirely beyond the scope of judicial authority.
(Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G.R. No. L-
5996, June 27, 1956.) While the legislature has not
definitely decided what policy should be followed in
cases of violations against the constitutional
prohibition, courts of justice cannot go beyond by
declaring the disposition to be null and void as
violative of the Constitution. . . . (Emphasis supplied)
IScaAE
To treat Section 11, Article XII of the Constitution as not self-executing would
mean that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the "capital" of which is owned by Filipinos,
was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment,
like the operation by corporations of public utilities, the exploitation by
corporations of mineral resources, the ownership by corporations of real estate,
and the ownership of educational institutions. All the legislatures that convened
since 1935 also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control the national
economy, Filipinos or foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and adjudicative
functions." 69 Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to perform
the same. Under its adjudicative or quasi-judicial functions, the SEC can be also
be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.
238
Under Section 17 (4) 70 of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any corporation
where "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality
requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, can direct the SEC to
perform its statutory duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5 (m) of the Securities Regulation Code, 71 the SEC is vested EN BANC
with the "power and function" to "suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by law." [G.R. No. 176579. October 9, 2012.]
The SEC is mandated under Section 5 (d) of the same Code with the "power and
function" to "investigate . . . the activities of persons to ensure
compliance" with the laws and regulations that SEC administers or enforces. HEIRS OF WILSON P. GAMBOA, * petitioners, vs.
The GIS that all corporations are required to submit to SEC annually should put FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
the SEC on guard against violations of the nationality requirement prescribed in UNDERSECRETARY JOHN P. SEVILLA, AND
the Constitution and existing laws. This Court can compel the SEC, in a petition COMMISSIONER RICARDO ABCEDE OF THE
for declaratory relief that is treated as a petition for mandamus as in the present PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
case, to hear and decide a possible violation of Section 11, Article XII of the (PCGG) IN THEIR CAPACITIES AS CHAIR AND
Constitution in view of the ownership structure of PLDT's voting shares, as MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
admitted by respondents and as stated in PLDT's 2010 GIS that PLDT submitted COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST
to SEC. PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS, INC., CHAIRMAN
MANUEL V. PANGILINAN OF PHILIPPINE LONG
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" DISTANCE TELEPHONE COMPANY (PLDT) IN HIS
in Section 11, Article XII of the 1987 Constitution refers only to shares of stock CAPACITY AS MANAGING DIRECTOR OF FIRST
entitled to vote in the election of directors, and thus in the present case only to PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
common shares, and not to the total outstanding capital stock (common and NAZARENO OF PHILIPPINE LONG DISTANCE
non-voting preferred shares). Respondent Chairperson of the Securities and TELEPHONE COMPANY, CHAIR FE BARIN OF THE
Exchange Commission is DIRECTED to apply this definition of the term "capital" SECURITIES AND EXCHANGE COMMISSION, and
in determining the extent of allowable foreign ownership in respondent Philippine PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
Long Distance Telephone Company, and if there is a violation of Section 11, EXCHANGE, respondents.
Article XII of the Constitution, to impose the appropriate sanctions under the
law. aDSTIC
PABLITO V. SANIDAD and ARNO V. SANIDAD,
SO ORDERED. petitioners-in-Intervention.

||| (Gamboa v. Teves, G.R. No. 176579, [June 28, 2011], 668 PHIL 1-118)

RESOLUTION

CARPIO, J p:

239
This resolves the motions for reconsideration of the 28 June 2011 Decision filed
by (1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V.
Pangilinan (Pangilinan), 2 (3) Napoleon L. Nazareno (Nazareno), 3 and (4) the
Securities and Exchange Commission (SEC) 4 (collectively, movants).
The Office of the Solicitor General (OSG) initially filed a motion for
reconsideration on behalf of the SEC, 5 assailing the 28 June 2011 Decision.
However, it subsequently filed a Consolidated Comment on behalf of the State, 6
declaring expressly that it agrees with the Court's definition of the term "capital"
in Section 11, Article XII of the Constitution. During the Oral Arguments on 26
June 2012, the OSG reiterated its position consistent with the Court's 28 June
2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of
the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will
determine whether Filipinos are masters, or second-class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have
effective control of the Philippine national economy. Indeed, if ever there is a
legal issue that has far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshold legal issue presented in this case.
TcDAHS
Contrary to Pangilinan's narrow view, the serious economic consequences
resulting in the interpretation of the term "capital" in Section 11, Article XII of
the Constitution undoubtedly demand an immediate adjudication of this issue.
Simply put, the far-reaching implications of this issue justify the
treatment of the petition as one for mandamus. 7
In Luzon Stevedoring Corp. v. Anti-Dummy Board, 8 the Court deemed it wise
and expedient to resolve the case although the petition for declaratory relief
could be outrightly dismissed for being procedurally defective. There, appellant
admittedly had already committed a breach of the Public Service Act in relation
to the Anti-Dummy Law since it had been employing non-American aliens long
before the decision in a prior similar case. However, the main issue in Luzon
Stevedoring was of transcendental importance, involving the exercise or
enjoyment of rights, franchises, privileges, properties and businesses which only
Filipinos and qualified corporations could exercise or enjoy under the
Constitution and the statutes. Moreover, the same issue could be raised by
appellant in an appropriate action. Thus, in Luzon Stevedoring the Court deemed
it necessary to finally dispose of the case for the guidance of all concerned,
despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed
procedural defect of the petition and the pivotal legal issue involved, resemble
those in Luzon Stevedoring. Consequently, in the interest of substantial justice
and faithful adherence to the Constitution, we opted to resolve this case for the
guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the
Constitution has long been settled and defined to refer to the total outstanding
shares of stock, whether voting or non-voting. In fact, movants claim that the
SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and various statutes,
has consistently adopted this particular definition in its numerous opinions.
Movants point out that with the 28 June 2011 Decision, the Court in effect
introduced a "new" definition or "midstream redefinition" 9 of the term "capital"
in Section 11, Article XII of the Constitution. HCaIDS
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not
interpreted or defined the term "capital" found in various economic provisions of
the 1935, 1973 and 1987 Constitutions. There has never been a judicial
precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to
claim that the Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of stock,
whether voting or non-voting. To repeat, until the present case there has never
been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place,
conflicting and inconsistent. There is no basis whatsoever to the claim that the
SEC and the DOJ have consistently and uniformly adopted a definition of the
term "capital" contrary to the definition that this Court adopted in its 28 June
2011 Decision.
In DOJ Opinion No. 130, s. 1985, 10 dated 7 October 1985, the scope of the
term "capital" in Section 9, Article XIV of the 1973 Constitution was raised, that
is, whether the term "capital" includes "both preferred and common stocks." The
issue was raised in relation to a stock-swap transaction between a Filipino and a
Japanese corporation, both stockholders of a domestic corporation that owned
lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that
the resulting ownership structure of the corporation would be unconstitutional
240
because 60% of the voting stock would be owned by Japanese while Filipinos
would own only 40% of the voting stock, although when the non-voting stock is
added, Filipinos would own 60% of the combined voting and non-voting stock.
This ownership structure is remarkably similar to the current ownership
structure of PLDT. Minister Mendoza ruled:
xxx xxx xxx
Thus, the Filipino group still owns sixty (60%) of the
entire subscribed capital stock (common and preferred)
while the Japanese investors control sixty percent (60%)
of the common (voting) shares.
It is your position that . . . since Section 9, Article XIV
of the Constitution uses the word "capital," which is
construed "to include both preferred and common
shares" and "that where the law does not distinguish,
the courts shall not distinguish."
xxx xxx xxx
In light of the foregoing jurisprudence, it is my opinion
that the stock-swap transaction in question may not
be constitutionally upheld. While it may be ordinary
corporate practice to classify corporate shares into common
voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional
purpose should be eschewed. Thus, the resultant equity
arrangement which would place ownership of 60% 11
of the common (voting) shares in the Japanese group,
while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would
amount to circumvention of the principle of control by
Philippine stockholders that is implicit in the 60%
Philippine nationality requirement in the Constitution.
(Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term
"capital" in Section 9, Article XIV of the 1973 Constitution includes "both
preferred and common stocks" treated as the same class of shares
regardless of differences in voting rights and privileges. Minister Mendoza
stressed that the 60-40 ownership requirement in favor of Filipino citizens in
the Constitution is not complied with unless the corporation "satisfies the
criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to
Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G.
Umali-Paco applied the Voting Control Test, that is, using only the voting stock
to determine whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test,
MLRC is deemed as a Philippine national because: (1) sixty
percent (60%) of its outstanding capital stock entitled
to vote is owned by a Philippine national, the Trustee; and
(2) at least sixty percent (60%) of the ERF will accrue to the
benefit of Philippine nationals. Still pursuant to the
Control Test, MLRC's investment in 60% of BFDC's
outstanding capital stock entitled to vote shall be
deemed as of Philippine nationality, thereby qualifying
BFDC to own private land. EcICSA
Further, under, and for purposes of, the FIA, MLRC and BFDC
are both Philippine nationals, considering that: (1) sixty
percent (60%) of their respective outstanding capital
stock entitled to vote is owned by a Philippine national
(i.e., by the Trustee, in the case of MLRC; and by MLRC, in
the case of BFDC); and (2) at least 60% of their respective
board of directors are Filipino citizens. (Boldfacing and
italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court's
interpretation of the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. At the same time,
these opinions highlight the conflicting, contradictory, and inconsistent positions
taken by the DOJ and the SEC on the definition of the term "capital" found in the
economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC
rules and regulations because only the SEC en banc can adopt rules and
regulations. As expressly provided in Section 4.6 of the Securities Regulation
Code, 12 the SEC cannot delegate to any of its individual Commissioner or staff
the power to adopt any rule or regulation. Further, under Section 5.1 of the
same Code, it is the SEC as a collegial body, and not any of its legal
officers, that is empowered to issue opinions and approve rules and
regulations. Thus:
4.6. The Commission may, for purposes of efficiency,
delegate any of its functions to any department or office
of the Commission, an individual Commissioner or staff
member of the Commission except its review or appellate
authority and its power to adopt, alter and
supplement any rule or regulation.
The Commission may review upon its own initiative or
upon the petition of any interested party any action of any
241
 department or office, individual Commissioner, or staff COMMISSIONER GAITE:
member of the Commission.
Yes, Your Honor, we have delegated it to the General
SEC. 5. Powers and Functions of the Commission. 5.1. Counsel.
The Commission shall act with transparency and shall
have the powers and functions provided by this Code,
JUSTICE CARPIO:
Presidential Decree No. 902-A, the Corporation Code, the
Investment Houses Law, the Financing Company Act and
other existing laws. Pursuant thereto the Commission shall It can be delegated. What cannot be delegated by the
have, among others, the following powers and functions: Commission En Banc to a commissioner or an
DcTAIH individual employee of the Commission?

xxx xxx xxx COMMISSIONER GAITE:

(g) Prepare, approve, amend or repeal rules, Novel opinions that [have] to be decided by the En Banc . . .
regulations and orders, and issue opinions and
provide guidance on and supervise compliance with JUSTICE CARPIO:
such rules, regulations and orders;

What cannot be delegated, among others, is the power to

xxx xxx xxx (Emphasis supplied) adopt or amend rules and regulations, correct?

Thus, the act of the individual Commissioners or legal officers of the SEC in COMMISSIONER GAITE:
issuing opinions that have the effect of SEC rules or regulations is ultra vires.
Under Sections 4.6 and 5.1 (g) of the Code, only the SEC en banc can "issue
opinions" that have the force and effect of rules or regulations. Section 4.6 of That's correct, Your Honor.
the Code bars the SEC en banc from delegating to any individual Commissioner
or staff the power to adopt rules or regulations. In short, any opinion of JUSTICE CARPIO:
individual Commissioners or SEC legal officers does not constitute a rule
or regulation of the SEC.
So, you combine the two (2), the SEC officer, if
delegated that power, can issue an opinion
The SEC admits during the Oral Arguments that only the SEC en banc, and not but that opinion does not constitute a rule or
any of its individual commissioners or legal staff, is empowered to issue opinions regulation, correct?
which have the same binding effect as SEC rules and regulations, thus:
COMMISSIONER GAITE:
JUSTICE CARPIO:
Correct, Your Honor.
So, under the law, it is the Commission En Banc that can
issue an SEC Opinion, correct?
JUSTICE CARPIO:

COMMISSIONER GAITE: 13
So, all of these opinions that you mentioned they are
not rules and regulations, correct? cDAISC
That's correct, Your Honor.
COMMISSIONER GAITE:
JUSTICE CARPIO:
They are not rules and regulations.
Can the Commission En Banc delegate this function to an
SEC officer? SECIcT

242
 JUSTICE CARPIO: MR. NOLLEDO.

If they are not rules and regulations, they apply only to that In Sections 3, 9 and 15, the Committee stated local
particular situation and will not constitute a or Filipino equity and foreign equity;
precedent, correct? namely, 60-40 in Section 3, 60-40 in
Section 9, and 2/3-1/3 in Section 15.
COMMISSIONER GAITE:
MR. VILLEGAS.
Yes, Your Honor. 14 (Emphasis supplied)
That is right.
Significantly, the SEC en banc, which is the collegial body statutorily empowered
to issue rules and opinions on behalf of the SEC, has adopted even the MR. NOLLEDO.
Grandfather Rule in determining compliance with the 60-40 ownership
requirement in favor of Filipino citizens mandated by the Constitution for certain
In teaching law, we are always faced with the
economic activities. This prevailing SEC ruling, which the SEC correctly adopted
question: 'Where do we base the equity
to thwart any circumvention of the required Filipino "ownership and control,"
requirement, is it on the authorized capital
is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated
stock, on the subscribed capital stock, or
Mines, Corp. v. McArthur Mining, Inc., et al., 15 to wit:
on the paid-up capital stock of a
corporation'? Will the Committee please
The avowed purpose of the Constitution is to place in the enlighten me on this?
hands of Filipinos the exploitation of our natural resources.
Necessarily, therefore, the Rule interpreting the
MR. VILLEGAS.
constitutional provision should not diminish that right
through the legal fiction of corporate ownership and
control. But the constitutional provision, as interpreted and We have just had a long discussion with the
practiced via the 1967 SEC Rules, has favored foreigners members of the team from the UP Law
contrary to the command of the Constitution. Hence, the Center who provided us a draft. The
Grandfather Rule must be applied to accurately phrase that is contained here which we
determine the actual participation, both direct and adopted from the UP draft is '60 percent of
indirect, of foreigners in a corporation engaged in a voting stock.'
nationalized activity or business.
MR. NOLLEDO.
Compliance with the constitutional limitation(s) on engaging
in nationalized activities must be determined by ascertaining That must be based on the subscribed capital stock,
if 60% of the investing corporation's outstanding capital because unless declared delinquent,
stock is owned by "Filipino citizens", or as interpreted, by unpaid capital stock shall be entitled to
natural or individual Filipino citizens. If such investing vote.
corporation is in turn owned to some extent by another
investing corporation, the same process must be observed.
One must not stop until the citizenships of the individual or MR. VILLEGAS.
natural stockholders of layer after layer of investing
corporations have been established, the very essence of the That is right.
Grandfather Rule. EScHDA
MR. NOLLEDO.
Lastly, it was the intent of the framers of the 1987
Constitution to adopt the Grandfather Rule. In one of
the discussions on what is now Article XII of the present Thank you. With respect to an investment by one
Constitution, the framers made the following exchange: corporation in another corporation, say, a
corporation with 60-40 percent equity
invests in another corporation which is
243
 permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS.
Yes, that is the understanding of the Committee.
MR. NOLLEDO.
Therefore, we need additional Filipino capital?
MR. VILLEGAS.
Yes. (Boldfacing and underscoring supplied;
italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage
in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. Thus,
in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipino-
owned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied) ADEaHT
Both the Voting Control Test and the Beneficial Ownership Test must be
applied to determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in
various opinions which respondents relied upon, is merely preliminary and an
opinion only of such officers. To repeat, any such opinion does not constitute an
SEC rule or regulation. In fact, many of these opinions contain a disclaimer
which expressly states: ". . . the foregoing opinion is based solely on facts
disclosed in your query and relevant only to the particular issue raised therein
and shall not be used in the nature of a standing rule binding upon the
Commission in other cases whether of similar or dissimilar
circumstances." 16 Thus, the opinions clearly make a caveat that they do not
constitute binding precedents on any one, not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the
law are neither conclusive nor controlling and thus, do not bind the Court. It is
hornbook doctrine that any interpretation of the law that administrative or
quasi-judicial agencies make is only preliminary, never conclusive on the Court.
The power to make a final interpretation of the law, in this case the term
"capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court,
not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals 17 and Philippine Long
Distance Telephone Company v. National Telecommunications Commission 18 in
arguing that the Court has already defined the term "capital" in Section 11,
Article XII of the 1987 Constitution. 19
The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals 20 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission, 21 the Court
did not define the term "capital" as found in Section 11, Article XII of the 1987
Constitution. In fact, these two cases never mentioned, discussed or cited
Section 11, Article XII of the Constitution or any of its economic
provisions, and thus cannot serve as precedent in the interpretation of
Section 11, Article XII of the Constitution. These two cases dealt solely with
the determination of the correct regulatory fees under Section 40 (e) and (f) of
the Public Service Act, to wit: SEIDAC
(e) For annual reimbursement of the expenses incurred by
the Commission in the supervision of other public services
and/or in the regulation or fixing of their rates, twenty
centavos for each one hundred pesos or fraction thereof,
of the capital stock subscribed or paid, or if no shares
have been issued, of the capital invested, or of the
property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty
centavos for each one hundred pesos or fraction thereof,
of the increased capital. (Emphasis supplied)
The Court's interpretation in these two cases of the terms "capital stock
subscribed or paid," "capital stock" and "capital" does not pertain to, and cannot
control, the definition of the term "capital" as used in Section 11, Article XII of
the Constitution, or any of the economic provisions of the Constitution where the
term "capital" is found. The definition of the term "capital" found in the
Constitution must not be taken out of context. A careful reading of these two
cases reveals that the terms "capital stock subscribed or paid," "capital stock"
and "capital" were defined solely to determine the basis for computing the
supervision and regulation fees under Section 40 (e) and (f) of the Public
Service Act.
III.
244
 Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of
the land, embodies the ideals that the Constitution intends to achieve. 22 The
Preamble reads:
We, the sovereign Filipino people, imploring the aid of
Almighty God, in order to build a just and humane society,
and establish a Government that shall embody our ideals
and aspirations, promote the common good, conserve and
develop our patrimony, and secure to ourselves and our
posterity, the blessings of independence and democracy
under the rule of law and a regime of truth, justice,
freedom, love, equality, and peace, do ordain and
promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution
declares as State policy the development of a national economy "effectively
controlled" by Filipinos: DHIcET
Section 19. The State shall develop a self-reliant and
independent national economy effectively controlled by
Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution
decrees:
Section 10. The Congress shall, upon recommendation of
the economic and planning agency, when the national
interest dictates, reserve to citizens of the Philippines or
to corporations or associations at least sixty per centum of
whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises
whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering
the national economy and patrimony, the State shall give
preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign
investments within its national jurisdiction and in accordance
with its national goals and priorities. 23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5)
Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine
Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521. ATCaDE
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other
form of authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State
shall encourage equity participation in public utilities by
the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis
supplied)
This provision, which mandates the Filipinization of public utilities, requires that
any form of authorization for the operation of public utilities shall be granted
only to "citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens." "The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security." 24
The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In
the case of corporations or associations, at least 60 percent of their "capital"
must be owned by Filipino citizens. In other words, under Section 11,
Article XII of the 1987 Constitution, to own and operate a public utility a
corporation's capital must at least be 60 percent owned by Philippine
nationals. IcDCaT
245
 IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987
Constitution, Congress enacted Republic Act No. 7042 or the Foreign
Investments Act of 1991 (FIA), as amended, which defined a "Philippine
national" as follows:
SEC. 3. Definitions. As used in this Act:
a. The term "Philippine national" shall mean a citizen of the
Philippines; or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines
under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos or a trustee of funds for pension
or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines,
in order that the corporation, shall be considered a
"Philippine national." (Boldfacing, italicization and
underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as
a Philippine citizen, or a domestic corporation at least "60% of the capital
stock outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such
term as provided in its predecessor statute, Executive Order No. 226 or the
Omnibus Investments Code of 1987, 25 which was issued by then President
Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the
Philippines or a diplomatic partnership or association
wholly-owned by citizens of the Philippines; or a
corporation organized under the laws of the
Philippines of which at least sixty per cent (60%) of
the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement
or separation benefits, where the trustee is a Philippine
national and at least sixty per cent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders
own stock in a registered enterprise, at least sixty per
cent (60%) of the capital stock outstanding and entitled to
vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent
(60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring
supplied) aDCIHE
Under Article 48 (3) 26 of the Omnibus Investments Code of 1987, "no
corporation . . . which is not a 'Philippine national' . . . shall do business . . .
in the Philippines . . . without first securing from the Board of Investments a
written certificate to the effect that such business or economic activity . . .
would not conflict with the Constitution or laws of the Philippines." 27 Thus,
a "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. This means, of course, that only a "Philippine
national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as
provided in Article 14 of the Omnibus Investments Code of 1981, 28 to wit:
Article 14. "Philippine national" shall mean a citizen of the
Philippines; or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which
at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at
least sixty per cent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent (60%) of the
capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the
Philippines and at least sixty per cent (60%) of the members
of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall
be considered a Philippine national. (Boldfacing, italicization
and underscoring supplied)
246
 Under Article 69 (3) of the Omnibus Investments Code of 1981, "no
corporation . . . which is not a 'Philippine national' . . . shall do business . . .
in the Philippines . . . without first securing a written certificate from the
Board of Investments to the effect that such business or economic
activity . . . would not conflict with the Constitution or laws of the
Philippines." 29 Thus, a "non-Philippine national" cannot own and operate a
reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or
the Investment Incentives Act, which took effect on 16 September 1967,
contained a similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the
Philippines; or a partnership or association wholly owned
by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which
at least sixty per cent of the capital stock
outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation
benefits, where the trustee is a Philippine National and at
least sixty per cent of the fund will accrue to the benefit of
Philippine Nationals: Provided, That where a corporation
and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent of the capital stock
outstanding and entitled to vote of both corporations must
be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of
Directors of both corporations must be citizens of the
Philippines in order that the corporation shall be
considered a Philippine National. (Boldfacing, italicization
and underscoring supplied) IEHDAT
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations
Act, which took effect on 30 September 1968, if the investment in a domestic
enterprise by non-Philippine nationals exceeds 30% of its outstanding capital
stock, such enterprise must obtain prior approval from the Board of Investments
before accepting such investment. Such approval shall not be granted if the
investment "would conflict with existing constitutional provisions and laws
regulating the degree of required ownership by Philippine nationals in the
enterprise." 31 A "non-Philippine national" cannot own and operate a reserved
economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine
national" as a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote" is
owned by Filipino citizens. A domestic corporation is a "Philippine national" only
if at least 60% of its voting stock is owned by Filipino citizens. This definition of
a "Philippine national" is crucial in the present case because the FIA reiterates
and clarifies Section 11, Article XII of the 1987 Constitution, which limits the
ownership and operation of public utilities to Filipino citizens or to corporations
or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines,
irrespective of the nature of business and area of investment. The FIA spells out
the procedures by which non-Philippine nationals can invest in the Philippines.
Among the key features of this law is the concept of a negative list or the
Foreign Investments Negative List. 32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to
Philippine Nationals [Foreign Investment Negative List].
The Foreign Investment Negative List shall have two [2]
component lists: A and B:
a. List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate of the
Constitution and specific laws.
b. List B shall contain the areas of activities and
enterprises regulated pursuant to law: SEcADa
1. which are defense-related activities, requiring prior
clearance and authorization from the Department of
National Defense [DND] to engage in such activity, such
as the manufacture, repair, storage and/or distribution of
firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically
authorized, with a substantial export component, to a
non-Philippine national by the Secretary of National
Defense; or
2. which have implications on public health and morals,
such as the manufacture and distribution of dangerous
drugs; all forms of gambling; nightclubs, bars, beer
houses, dance halls, sauna and steam bathhouses and
massage clinics. (Boldfacing, underscoring and italicization
supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of
activities reserved to Philippine nationals by mandate of the
Constitution and specific laws," where foreign equity participation in
any enterprise shall be limited to the maximum percentage expressly
prescribed by the Constitution and other specific laws. In short, to own
and operate a public utility in the Philippines one must be a "Philippine
national" as defined in the FIA. The FIA is abundant notice to foreign
247
investors to what extent they can invest in public utilities in the
Philippines.
To repeat, among the areas of investment covered by the Foreign Investment
Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least
60% owned by Filipino citizens. In other words, Negative List A of the FIA
reserves the ownership and operation of public utilities only to
"Philippine nationals," defined in Section 3 (a) of the FIA as "(1) a citizen
of the Philippines; . . . or (3) a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or (4) a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and
at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." ASDCaI
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the
adoption of the Omnibus Investments Code of 1981, to the enactment of the
Omnibus Investments Code of 1987, and to the passage of the present Foreign
Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and
consistent: it means a Filipino citizen, or a domestic corporation at least
60% of the voting stock is owned by Filipinos. Likewise, these same
statutes have uniformly and consistently required that only "Philippine
nationals" could own and operate public utilities in the Philippines. The
following exchange during the Oral Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the
Foreign Investments Act of 1991, . . .? And the FIA
of 1991 took effect in 1991, correct? That's over
twenty (20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states
that []only Philippine nationals can own and
operate public utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a
"Philippine national" either as a citizen of the
Philippines, or if it is a corporation at least sixty
percent (60%) of the voting stock is owned by
citizens of the Philippines, correct? aIcTCS
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of
the Foreign Investments Act of 1991, the Omnibus
Investments Act of 1987, the same provisions
apply: . . . only Philippine nationals can own and
operate a public utility and the Philippine national, if
it is a corporation, . . . sixty percent (60%) of the
capital stock of that corporation must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987,
under the Omnibus Investments Act of 1981, the
same rules apply: . . . only a Philippine national can
own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%)
of its . . . voting stock, must be owned by citizens
of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
248
 And even prior to that, under [the] 1967 Investments
Incentives Act and the Foreign Company Act of
1968, the same rules applied, correct? ITCHSa
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, . . ., the law has been
very consistent only a Philippine national
can own and operate a public utility, and a
Philippine national, if it is a corporation, . . . at
least sixty percent (60%) of the voting stock
must be owned by citizens of the Philippines,
correct?
COMMISSIONER GAITE:
Correct, Your Honor. 33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3 (a) and 8 of
the FIA which categorically prescribe that certain economic activities, like the
ownership and operation of public utilities, are reserved to corporations "at least
sixty percent (60%) of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines." Foreign Investment Negative List
A refers to "activities reserved to Philippine nationals by mandate of the
Constitution and specific laws." The FIA is the basic statute regulating
foreign investments in the Philippines. Government agencies tasked with
regulating or monitoring foreign investments, as well as counsels of foreign
investors, should start with the FIA in determining to what extent a particular
foreign investment is allowed in the Philippines. Foreign investors and their
counsels who ignore the FIA do so at their own peril. Foreign investors and their
counsels who rely on opinions of SEC legal officers that obviously contradict the
FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3 (a) of the
FIA in determining whether a particular corporation is qualified to own and
operate a nationalized or partially nationalized business in the Philippines. This
shows that SEC legal officers are not only aware of, but also rely on and invoke,
the provisions of the FIA in ascertaining the eligibility of a corporation to engage
in partially nationalized industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F.
How;
2. Opinion of 14 April 1993, addressed to Director Angeles T.
Wong of the Philippine Overseas Employment
Administration;
3. Opinion of 23 November 1993, addressed to Messrs.
Dominador Almeda and Renato S. Calma; acADIT
4. Opinion of 7 December 1993, addressed to Roco Bunag
Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta
Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo
G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby
Rose J. Yusi and Rudyard S. Arbolado.
The SEC legal officers' occasional but blatant disregard of the definition of
the term "Philippine national" in the FIA signifies their lack of integrity and
competence in resolving issues on the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA
should be limited and interpreted to refer to corporations seeking to avail of tax
and fiscal incentives under investment incentives laws and cannot be equated
with the term "capital" in Section 11, Article XII of the 1987 Constitution.
Pangilinan similarly contends that the FIA and its predecessor statutes do not
apply to "companies which have not registered and obtained special incentives
under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal
incentives to any enterprise. Tax and fiscal incentives to investments are granted
separately under the Omnibus Investments Code of 1987, not under the FIA. In
fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus
Investments Code of 1987, which articles previously regulated foreign
investments in nationalized or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or
partially nationalized industries. There is nothing in the FIA, or even in the
Omnibus Investments Code of 1987 or its predecessor statutes, that states,
expressly or impliedly, that the FIA or its predecessor statutes do not apply to
enterprises not availing of tax and fiscal incentives under the Code. The FIA and
its predecessor statutes apply to investments in all domestic enterprises,
whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is
quite obvious mere non-availment of tax and fiscal incentives by a
249
non-Philippine national cannot exempt it from Section 11, Article XII of
the Constitution regulating foreign investments in public utilities. In fact,
the Board of Investments' Primer on Investment Policies in the Philippines,
34 which is given out to foreign investors, provides: SDIACc
PART III.FOREIGN INVESTMENTS WITHOUT
INCENTIVES.
Investors who do not seek incentives and/or whose
chosen activities do not qualify for incentives, (i.e., the
activity is not listed in the IPP, and they are not exporting
at least 70% of their production) may go ahead and make
the investments without seeking incentives. They only
have to be guided by the Foreign Investments
Negative List (FINL).
The FINL clearly defines investment areas requiring at
least 60% Filipino ownership. All other areas outside of
this list are fully open to foreign investors. (Emphasis
supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership
required by the Constitution to engage in certain economic activities applies not
only to voting control of the corporation, but also to the beneficial ownership
of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-
owned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is held by "a trustee of funds for pension or other
employee retirement or separation benefits," the trustee is a Philippine
national if "at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals." Likewise, Section 1 (b) of the Implementing Rules
of the FIA provides that "for stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership
applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock 35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of
incorporation. 36
The Corporation Code allows denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right to vote in specific corporate
matters. Thus, common shares have the right to vote in the election of directors,
while preferred shares may be denied such right. Nonetheless, preferred shares,
even if denied the right to vote in the election of directors, are entitled to vote
on the following corporate matters: (1) amendment of articles of incorporation;
(2) increase and decrease of capital stock; (3) incurring, creating or increasing
bonded indebtedness; (4) sale, lease, mortgage or other disposition of
substantially all corporate assets; (5) investment of funds in another business or
corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of by-laws; (7)
merger and consolidation; and (8) dissolution of corporation. 37 HESAIT
Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific corporate matters
mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common shares and at least 60
percent of the preferred non-voting shares must be owned by Filipinos.
Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the
60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the ownership and
operation of public utilities shall be reserved exclusively to corporations at least
60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares,
regardless of differences in voting rights, privileges and restrictions, guarantees
effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino citizens.
This addresses and extinguishes Pangilinan's worry that foreigners, owning most
of the non-voting shares, will exercise greater control over fundamental
corporate matters requiring two-thirds or majority vote of all shareholders.
250
 VI. That is right.
Intent of the framers of the Constitution
MR. NOLLEDO.
While Justice Velasco quoted in his Dissenting Opinion 38 a portion of the
deliberations of the Constitutional Commission to support his claim that the term Thank you.
"capital" refers to the total outstanding shares of stock, whether voting or non-
voting, the following excerpts of the deliberations reveal otherwise. It is clear With respect to an investment by one corporation in another
from the following exchange that the term "capital" refers to controlling corporation, say, a corporation with 60-40 percent
interest of a corporation, thus: TcIAHS equity invests in another corporation which is
permitted by the Corporation Code, does the
MR. NOLLEDO. Committee adopt the grandfather rule?

In Sections 3, 9 and 15, the Committee stated local or MR. VILLEGAS.

Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9 and 2/3-1/3 in Yes, that is the understanding of the Committee.
Section 15.

MR. NOLLEDO.
MR. VILLEGAS.

Therefore, we need additional Filipino capital? cDTCIA

That is right.

MR. VILLEGAS.
MR. NOLLEDO.

Yes. 39
In teaching law, we are always faced with this question:
"Where do we base the equity requirement, is it on
the authorized capital stock, on the subscribed xxx xxx xxx
capital stock, or on the paid-up capital stock of a
corporation"? Will the Committee please enlighten MR. AZCUNA.
me on this?

May I be clarified as to that portion that was accepted by the

MR. VILLEGAS. Committee.

We have just had a long discussion with the members of the
team from the UP Law Center who provided us a
draft. The phrase that is contained here which
we adopted from the UP draft is "60 percent
of voting stock."
MR. VILLEGAS.
The portion accepted by the Committee is the deletion of the
phrase "voting stock or controlling interest."

MR. NOLLEDO. MR. AZCUNA.

That must be based on the subscribed capital stock, because Hence, without the Davide amendment, the committee
unless declared delinquent, unpaid capital stock report would read: "corporations or associations at
shall be entitled to vote. least sixty percent of whose CAPITAL is owned by
such citizens."

MR. VILLEGAS.
MR. VILLEGAS.

251
 Yes.
MR. AZCUNA.
So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
MR. VILLEGAS.
That is right.
MR. AZCUNA.
But the control can be with the foreigners even if they
are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation
where the corporation is controlled by
foreigners despite being the minority because
they have the voting capital. That is the
anomaly that would result here. TAHcCI
MR. BENGZON.
No, the reason we eliminated the word "stock" as
stated in the 1973 and 1935 Constitutions is
that according to Commissioner Rodrigo,
there are associations that do not have stocks.
That is why we say "CAPITAL."
MR. AZCUNA.
We should not eliminate the phrase "controlling
interest."
MR. BENGZON.
In the case of stock corporations, it is assumed. 40
(Boldfacing and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a
"controlling interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the
60-40 ownership requirement in favor of Filipino citizens prescribed in Section
11, Article XII of the Constitution. However, this did not change the intent of the
framers of the Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the
battle-cry of the nationalists in the Convention." 41 The same battle-cry resulted
in the nationalization of the public utilities. 42 This is also the same intent of the
framers of the 1987 Constitution who adopted the exact formulation embodied
in the 1935 and 1973 Constitutions on foreign equity limitations in partially
nationalized industries.
The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the
Court's interpretation of the term "capital." In its Consolidated Comment, the
OSG explains that the deletion of the phrase "controlling interest" and
replacement of the word "stock" with the term "capital" were intended
specifically to extend the scope of the entities qualified to operate public utilities
to include associations without stocks. The framers' omission of the phrase
"controlling interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Court's declaration that
the Constitution reserved exclusively to Philippine nationals the ownership and
operation of public utilities consistent with the State's policy to "develop a self-
reliant and independent national economy effectively controlled by
Filipinos." cDTIAC
As we held in our 28 June 2011 Decision, to construe broadly the term "capital"
as the total outstanding capital stock, treated as a single class regardless of the
actual classification of shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos." We illustrated the glaring
anomaly which would result in defining the term "capital" as the total
outstanding capital stock of a corporation, treated as a single class of shares
regardless of the actual classification of shares, to wit:
Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having
a par value of one peso (P1.00) per share. Under the broad
definition of the term "capital," such corporation would be
considered compliant with the 40 percent constitutional limit
on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously
absurd.
In the example given, only the foreigners holding the
common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise
control over the public utility. On the other hand, the
252
 Filipinos, holding more than 99.999 percent of the equity,
cannot vote in the election of directors and hence, have no
control over the public utility. This starkly circumvents the
intent of the framers of the Constitution, as well as the clear
language of the Constitution, to place the control of public
utilities in the hands of Filipinos. . . .
Further, even if foreigners who own more than forty percent of the voting shares
elect an all-Filipino board of directors, this situation does not guarantee Filipino
control and does not in any way cure the violation of the Constitution. The
independence of the Filipino board members so elected by such foreign
shareholders is highly doubtful. As the OSG pointed out, quoting Justice George
Sutherland's words in Humphrey's Executor v. US, 44 ". . . it is quite evident
that one who holds his office only during the pleasure of another cannot be
depended upon to maintain an attitude of independence against the latter's will."
Allowing foreign shareholders to elect a controlling majority of the board, even if
all the directors are Filipinos, grossly circumvents the letter and intent of the
Constitution and defeats the very purpose of our nationalization laws. TICAcD
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the
executive and managing officers of such corporation or
association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a
question on the intent of the framers of the Constitution to limit foreign
ownership, and assure majority Filipino ownership and control of public utilities.
The OSG argued, "while the delegates disagreed as to the percentage threshold
to adopt, . . . the records show they clearly understood that Filipino control of
the public utility corporation can only be and is obtained only through the
election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the
Constitutional Commission on 23 August 1986 was the extent of majority Filipino
control of public utilities. This is evident from the following exchange:
THE PRESIDENT.
Commissioner Jamir is recognized.
MR. JAMIR.
Madam President, my proposed amendment on lines 20 and
21 is to delete the phrase "two thirds of whose
voting stock or controlling interest," and instead
substitute the words "SIXTY PERCENT OF WHOSE
CAPITAL" so that the sentence will read: "No
franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or associations organized under
the laws of the Philippines at least SIXTY PERCENT
OF WHOSE CAPITAL is owned by such citizens."
SEcTHA
xxx xxx xxx
THE PRESIDENT:
Will Commissioner Jamir first explain?
MR. JAMIR.
Yes, in this Article on National Economy and Patrimony,
there were two previous sections in which we fixed
the Filipino equity to 60 percent as against 40
percent for foreigners. It is only in this Section 15
with respect to public utilities that the committee
proposal was increased to two-thirds. I think it
would be better to harmonize this provision by
providing that even in the case of public utilities,
the minimum equity for Filipino citizens should be
60 percent.
MR. ROMULO.
Madam President.
THE PRESIDENT.
Commissioner Romulo is recognized.
MR. ROMULO.
My reason for supporting the amendment is based on the
discussions I have had with representatives of the
Filipino majority owners of the international record
carriers, and the subsequent memoranda they
submitted to me. . . .
253
 Their second point is that under the Corporation Code, the
management and control of a corporation is vested
in the board of directors, not in the officers but in
the board of directors. The officers are only agents
of the board. And they believe that with 60 percent
of the equity, the Filipino majority stockholders
undeniably control the board. Only on important
corporate acts can the 40-percent foreign equity
exercise a veto, . . . . DcHSEa
xxx xxx xxx 45
MS. ROSARIO BRAID.
Madam President.
THE PRESIDENT.
Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID.
Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine
Chamber of Communications on why they would
like to maintain the present equity, I am referring
to the 66 2/3. They would prefer to have a 75-25
ratio but would settle for 66 2/3. . . .
xxx xxx xxx
THE PRESIDENT.
Just to clarify, would Commissioner Rosario Braid support
the proposal of two-thirds rather than the 60
percent?
MS. ROSARIO BRAID.
I have added a clause that will put management in the
hands of Filipino citizens.
xxx xxx xxx 46
While they had differing views on the percentage of Filipino ownership of capital,
it is clear that the framers of the Constitution intended public utilities to be
majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the
inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he participation of foreign investors in the governing body
of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines." In other words, the last sentence
of Section 11, Article XII of the Constitution mandates that (1) the participation
of foreign investors in the governing body of the corporation or association shall
be limited to their proportionate share in the capital of such entity; and (2) all
officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens
specifically to prevent management contracts, which were designed primarily to
circumvent the Filipinization of public utilities, and to assure Filipino control of
public utilities, thus:
MS. ROSARIO BRAID.
. . . They also like to suggest that we amend this provision
by adding a phrase which states: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES." I
have with me their position paper.
THE PRESIDENT.
The Commissioner may proceed. TDcHCa
MS. ROSARIO BRAID.
The three major international record carriers in the
Philippines, which Commissioner Romulo mentioned
Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable are
40-percent owned by foreign multinational
companies and 60-percent owned by their
respective Filipino partners. All three, however, also
have management contracts with these foreign
companies Philcom with RCA, ETPI with Cable
and Wireless PLC, and GMCR with ITT. Up to the
present time, the general managers of these
carriers are foreigners. While the foreigners in
these common carriers are only minority owners,
the foreign multinationals are the ones managing
and controlling their operations by virtue of their
management contracts and by virtue of their
254
 strength in the governing bodies of these carriers. This will prevent management contracts and assure
47 control by Filipino citizens. Will the committee
assure us that this amendment will insure that past
activities such as management contracts will no
xxx xxx xxx
longer be possible under this amendment?

MR. OPLE.
xxx xxx xxx

I think a number of us have agreed to ask Commissioner

FR. BERNAS.
Rosario Braid to propose an amendment with
respect to the operating management of public
utilities, and in this amendment, we are associated Madam President.
with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this
THE PRESIDENT.
amendment now.

Commissioner Bernas is recognized.

Thank you.

FR. BERNAS.
MS. ROSARIO BRAID.

Will the committee accept a reformulation of the first part?

Madam President. ADCSEa

MR. BENGZON.
THE PRESIDENT.

Let us hear it.

This is still on Section 15.

FR. BERNAS.
MS. ROSARIO BRAID.

The reformulation will be essentially the formula of the 1973

Yes.
Constitution which reads: "THE PARTICIPATION OF
FOREIGN INVESTORS IN THE GOVERNING BODY OF
MR. VILLEGAS. ANY PUBLIC UTILITY ENTERPRISE SHALL BE
LIMITED TO THEIR PROPORTIONATE SHARE IN THE
CAPITAL THEREOF AND . . ."
Yes, Madam President.

MR. VILLEGAS.
xxx xxx xxx

"ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

MS. ROSARIO BRAID.
CORPORATIONS AND ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."
Madam President, I propose a new section to read: 'THE
MANAGEMENT BODY OF EVERY CORPORATION OR
MR. BENGZON.
ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES."
Will Commissioner Bernas read the whole thing again?

FR. BERNAS.

255
"THE PARTICIPATION OF FOREIGN INVESTORS IN THE MR. RAMA.
GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR
The body is now ready to vote, Madam President.
PROPORTIONATE SHARE IN THE CAPITAL
THEREOF . . ." I do not have the rest of the copy.
CDaSAE VOTING

MR. BENGZON. xxx xxx xxx

"AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF The results show 29 votes in favor and none against; so the
SUCH CORPORATIONS OR ASSOCIATIONS MUST BE proposed amendment is approved.
CITIZENS OF THE PHILIPPINES." Is that correct?
xxx xxx xxx
MR. VILLEGAS.
THE PRESIDENT.
Yes.
All right. Can we proceed now to vote on Section 15?
MR. BENGZON.
MR. RAMA.
Madam President, I think that was said in a more elegant
language. We accept the amendment. Is that all Yes, Madam President.
right with Commissioner Rosario Braid?

THE PRESIDENT.
MS. ROSARIO BRAID.

Will the chairman of the committee please read Section 15?

Yes.

MR. VILLEGAS.
xxx xxx xxx

The entire Section 15, as amended, reads: "No franchise,

MR. DE LOS REYES. certificate, or any other form of authorization for
the operation of a public utility shall be granted
The governing body refers to the board of directors and except to citizens of the Philippines or to
trustees. corporations or associations organized under the
laws of the Philippines at least 60 PERCENT OF
WHOSE CAPITAL is owned by such citizens." May I
MR. VILLEGAS.
request Commissioner Bengzon to please continue
reading. SCHcaT
That is right.
MR. BENGZON.
MR. BENGZON.
"THE PARTICIPATION OF FOREIGN INVESTORS IN THE
Yes, the governing body refers to the board of directors. GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF
MR. REGALADO.
AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR
It is accepted.
256
 ASSOCIATIONS MUST BE CITIZENS OF THE
PHILIPPINES."
MR. VILLEGAS.
"NOR SHALL SUCH FRANCHISE, CERTIFICATE OR
AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR
FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE
YEARS. Neither shall any such franchise or right be
granted except under the condition that it shall be
subject to amendment, alteration, or repeal by
Congress when the common good so requires. The
State shall encourage equity participation in public
utilities by the general public."
VOTING
xxx xxx xxx
The results show 29 votes in favor and 4 against; Section
15, as amended, is approved. 48 (Emphasis
supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly
the provision on the limited participation of foreign investors in the governing
body of public utilities, is a reiteration of the last sentence of Section 5, Article
XIV of the 1973 Constitution, 49 signifying its importance in reserving ownership
and control of public utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1)
foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus foreigners
control PLDT; (2) Filipinos own only 35.73% of PLDT's common shares,
constituting a minority of the voting stock, and thus Filipinos do not control
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights;
(4) preferred shares earn only 1/70 of the dividends that common shares earn;
50 (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%. cSTCDA
Despite the foregoing facts, the Court did not decide, and in fact refrained from
ruling on the question of whether PLDT violated the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the 1987
Constitution. Such question indisputably calls for a presentation and
determination of evidence through a hearing, which is generally outside the
province of the Court's jurisdiction, but well within the SEC's statutory powers.
Thus, for obvious reasons, the Court limited its decision on the purely legal and
threshold issue on the definition of the term "capital" in Section 11, Article XII of
the Constitution and directed the SEC to apply such definition in determining the
exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxx xxx xxx
5. For the Honorable Court to issue a declaratory relief that
ownership of common or voting shares is the sole basis in
determining foreign equity in a public utility and that any
other government rulings, opinions, and regulations
inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the
1987 Constitution;
6. For the Honorable Court to declare null and void all sales
of common stocks to foreigners in excess of 40 percent of
the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and
Exchange Commission and Philippine Stock Exchange to
require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real
beneficial owners.
Other relief(s) just and equitable are likewise prayed for.
(Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the
SEC to perform its statutory duty to investigate whether "the required
percentage of ownership of the capital stock to be owned by citizens of the
Philippines has been complied with [by PLDT] as required by . . . the
Constitution." 51 Such plea clearly negates SEC's argument that it was not
impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has
ample powers to order the SEC's compliance with its directive contained in the
28 June 2011 Decision in view of the far-reaching implications of this case. In
Domingo v. Scheer, 52 the Court dispensed with the amendment of the
pleadings to implead the Bureau of Customs considering (1) the unique
257
backdrop of the case; (2) the utmost need to avoid further delays; and (3) the
issue of public interest involved. The Court held: aIcDCH
The Court may be curing the defect in this case by adding
the BOC as party-petitioner. The petition should not be
dismissed because the second action would only be a
repetition of the first. In Salvador, et al. v. Court of Appeals,
et al., we held that this Court has full powers, apart from
that power and authority which is inherent, to amend the
processes, pleadings, proceedings and decisions by
substituting as party-plaintiff the real party-in-interest. The
Court has the power to avoid delay in the disposition
of this case, to order its amendment as to implead the
BOC as party-respondent. Indeed, it may no longer be
necessary to do so taking into account the unique
backdrop in this case, involving as it does an issue of
public interest. After all, the Office of the Solicitor General
has represented the petitioner in the instant proceedings, as
well as in the appellate court, and maintained the validity of
the deportation order and of the BOC's Omnibus Resolution.
It cannot, thus, be claimed by the State that the BOC was
not afforded its day in court, simply because only the
petitioner, the Chairperson of the BOC, was the respondent
in the CA, and the petitioner in the instant recourse. In
Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or
pleadings, their forms or contents. Their sole
purpose is to facilitate the application of
justice to the rival claims of contending
parties. They were created, not to hinder and
delay, but to facilitate and promote, the
administration of justice. They do not constitute the
thing itself, which courts are always striving to
secure to litigants. They are designed as the means
best adapted to obtain that thing. In other words,
they are a means to an end. When they lose the
character of the one and become the other, the
administration of justice is at fault and courts are
correspondingly remiss in the performance of their
obvious duty. 53 (Emphasis supplied)
In any event, the SEC has expressly manifested 54 that it will abide by
the Court's decision and defer to the Court's definition of the term
"capital" in Section 11, Article XII of the Constitution. Further, the SEC
entered its special appearance in this case and argued during the Oral
Arguments, indicating its submission to the Court's jurisdiction. It is
clear, therefore, that there exists no legal impediment against the
proper and immediate implementation of the Court's directive to the
SEC. DEcTIS
PLDT is an indispensable party only insofar as the other issues, particularly the
factual questions, are concerned. In other words, PLDT must be impleaded in
order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares
to First Pacific violates the constitutional limit on foreign ownership of PLDT; (2)
whether the sale of common shares to foreigners exceeded the 40 percent limit
on foreign equity in PLDT; and (3) whether the total percentage of the PLDT
common shares with voting rights complies with the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution for the ownership
and operation of PLDT. These issues indisputably call for an examination of the
parties' respective evidence, and thus are clearly within the jurisdiction of the
SEC. In short, PLDT must be impleaded, and must necessarily be heard, in the
proceedings before the SEC where the factual issues will be thoroughly threshed
out and resolved.
Notably, the foregoing issues were left untouched by the Court. The
Court did not rule on the factual issues raised by Gamboa, except the single and
purely legal issue on the definition of the term "capital" in Section 11, Article XII
of the Constitution. The Court confined the resolution of the instant case to this
threshold legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the
fundamental legal issue in this case even without the participation of PLDT since
defining the term "capital" in Section 11, Article XII of the Constitution does not,
in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this case.
55 In fact, the Court, by treating the petition as one for mandamus, 56 merely
directed the SEC to apply the Court's definition of the term "capital" in Section
11, Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the
Court's ruling is addressed not to PLDT but solely to the SEC, which is
the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution.
Since the Court limited its resolution on the purely legal issue on the definition
of the term "capital" in Section 11, Article XII of the 1987 Constitution, and
directed the SEC to investigate any violation by PLDT of the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution, 57 there is no
deprivation of PLDT's property or denial of PLDT's right to due process, contrary
to Pangilinan and Nazareno's misimpression. Due process will be afforded to
PLDT when it presents proof to the SEC that it complies, as it claims here, with
Section 11, Article XII of the Constitution. AHaDSI
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our
economy, as it may result in a sudden flight of existing foreign investors to
"friendlier" countries and simultaneously deterring new foreign investors to our
country. In particular, the PSE claims that the 28 June 2011 Decision may result
258
in the following: (1) loss of more than P630 billion in foreign investments in PSE-
listed shares; (2) massive decrease in foreign trading transactions; (3) lower
PSE Composite Index; and (4) local investors not investing in PSE-listed shares.
58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared
movants' apprehension. Without providing specific details, he pointed out the
depressing state of the Philippine economy compared to our neighboring
countries which boast of growing economies. Further, Dr. Villegas explained that
the solution to our economic woes is for the government to "take-over" strategic
industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have
additional information on whether this high FDI 59
countries in East Asia have allowed foreigners . . .
control [of] their public utilities, so that we can
compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these
neighbors of ours find an industry strategic, their
solution is not to "Filipinize" or "Vietnamize" or
"Singaporize." Their solution is to make sure
that those industries are in the hands of state
enterprises. So, in these countries,
nationalization means the government takes
over. And because their governments are
competent and honest enough to the public,
that is the solution. . . . 60 (Emphasis supplied)
cEAaIS
If government ownership of public utilities is the solution, then foreign
investments in our public utilities serve no purpose. Obviously, there can never
be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is
to make sure that those industries are in the hands of state enterprises." Dr.
Villegas's argument that foreign investments in telecommunication companies
like PLDT are badly needed to save our ailing economy contradicts his own
theory that the solution is for government to take over these companies. Dr.
Villegas is barking up the wrong tree since State ownership of public utilities and
foreign investments in such industries are diametrically opposed concepts, which
cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as
argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas,
taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions
limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and
operation of public utilities to Filipino citizens, or corporations or associations at
least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas's
claim, the Philippines appears to be more liberal in allowing foreign investors to
own 40 percent of public utilities, unlike in other Asian countries whose
governments own and operate such industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning
period of the application and imposition of appropriate sanctions against PLDT if
found violating Section 11, Article XII of the Constitution.
As discussed, the Court has directed the SEC to investigate and determine
whether PLDT violated Section 11, Article XII of the Constitution. Thus, there is
no dispute that it is only after the SEC has determined PLDT's violation, if any
exists at the time of the commencement of the administrative case or
investigation, that the SEC may impose the statutory sanctions against PLDT. In
other words, once the 28 June 2011 Decision becomes final, the SEC shall
impose the appropriate sanctions only if it finds after due hearing that, at the
start of the administrative case or investigation, there is an existing violation of
Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public
utilities that fail to comply with the nationality requirement under Section 11,
Article XII and the FIA can cure their deficiencies prior to the start of the
administrative case or investigation. 61 CTAIHc
XII.
Final Word
The Constitution expressly declares as State policy the development of an
economy "effectively controlled" by Filipinos. Consistent with such State
policy, the Constitution explicitly reserves the ownership and operation of public
utilities to Philippine nationals, who are defined in the Foreign Investments Act
of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos. The FIA's implementing
rules explain that "[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights is essential." In effect, the FIA clarifies,
reiterates and confirms the interpretation that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to
vote in the election of directors, coupled with full beneficial ownership of stocks,
translates to effective control of a corporation.
259
Any other construction of the term "capital" in Section 11, Article XII of the ||| (Heirs of Gamboa v. Teves, G.R. No. 176579 (Resolution), [October 9,
Constitution contravenes the letter and intent of the Constitution. Any other 2012], 696 PHIL 276-485)
meaning of the term "capital" openly invites alien domination of economic
activities reserved exclusively to Philippine nationals. Therefore, respondents'
interpretation will ultimately result in handing over effective control of our
national economy to foreigners in patent violation of the Constitution, making
Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited
under the Parity Amendment, which gave Americans the same rights as Filipinos
in the exploitation of natural resources, and in the ownership and control of
public utilities, in the Philippines. To do this the 1935 Constitution, which
contained the same 60 percent Filipino ownership and control requirement as
the present 1987 Constitution, had to be amended to give Americans parity
rights with Filipinos. There was bitter opposition to the Parity Amendment 62
and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one of
the American-controlled public utilities that became Filipino-controlled when the
controlling American stockholders divested in anticipation of the expiration of the
Parity Amendment on 3 July 1974. 63 No economic suicide happened when
control of public utilities and mining corporations passed to Filipinos' hands upon
expiration of the Parity Amendment. AHSEaD

Movants' interpretation of the term "capital" would bring us back to the same
evils spawned by the Parity Amendment, effectively giving foreigners parity
rights with Filipinos, but this time even without any amendment to the
present Constitution. Worse, movants' interpretation opens up our national
economy to effective control not only by Americans but also by all
foreigners, be they Indonesians, Malaysians or Chinese, even in the
absence of reciprocal treaty arrangements. At least the Parity Amendment,
as implemented by the Laurel-Langley Agreement, gave the capital-starved
Filipinos theoretical parity the same rights as Americans to exploit natural
resources, and to own and control public utilities, in the United States of
America. Here, movants' interpretation would effectively mean a unilateral
opening up of our national economy to all foreigners, without any reciprocal
arrangements. That would mean that Indonesians, Malaysians and Chinese
nationals could effectively control our mining companies and public utilities while
Filipinos, even if they have the capital, could not control similar corporations in
these countries.
THIRD DIVISION

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino
ownership and control requirement for public utilities like PLDT. Any deviation [G.R. No. 195580. April 21, 2014.]
from this requirement necessitates an amendment to the Constitution as
exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the NARRA NICKEL MINING AND DEVELOPMENT CORP.,
Constitution. TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC., petitioners, vs. REDMONT
CONSOLIDATED MINES CORP., respondent.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No
further pleadings shall be entertained.

SO ORDERED. DECISION
260
VELASCO, JR., J p:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by
Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and
Development, Inc. (Tesoro), and McArthur Mining, Inc. (McArthur), which seeks
to reverse the October 1, 2010 Decision 1 and the February 15, 2011 Resolution
of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
(Redmont), a domestic corporation organized and existing under Philippine laws,
took interest in mining and exploring certain areas of the province of Palawan.
After inquiring with the Department of Environment and Natural Resources
(DENR), it learned that the areas where it wanted to undertake exploration and
mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc.
(SMMI), filed an application for an MPSA and Exploration Permit (EP) with the
Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of
Environment and Natural Resources (DENR). Subsequently, SMMI was issued
MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan.
The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC)
and, on November 6, 2006, assigned to petitioner McArthur. 2
Petitioner Narra acquired its MPSA from Alpha Resources and Development
Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
which previously filed an application for an MPSA with the MGB, Region IV-B,
DENR on January 6, 1992. Through the said application, the DENR issued MPSA-
IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San
Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed,
transferred and/or assigned its rights and interests over the MPSA application in
favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled
as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays
Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI
subsequently conveyed, transferred and assigned its rights and interest over the
said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the
DENR three (3) separate petitions for the denial of petitioners' applications for
MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12. CSHEAI
In the petitions, Redmont alleged that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc.
(MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind
petitioners' filing of the MPSAs over the areas covered by applications since it
knows that it can only participate in mining activities through corporations which
are deemed Filipino citizens. Redmont argued that given that petitioners' capital
stocks were mostly owned by MBMI, they were likewise disqualified from
engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens.
In their Answers, petitioners averred that they were qualified persons under
Section 3 (aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of
1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes
of this Act, the following terms, whether in singular or plural,
shall mean:
xxx xxx xxx
(aq) "Qualified person" means any citizen of the
Philippines with capacity to contract, or a corporation,
partnership, association, or cooperative organized or
authorized for the purpose of engaging in mining, with
technical and financial capability to undertake mineral
resources development and duly registered in accordance
with law at least sixty per cent (60%) of the capital of
which is owned by citizens of the Philippines: Provided,
That a legally organized foreign-owned corporation shall
be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance
agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial
because they also applied for Financial or Technical Assistance Agreements
(FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations.
Nevertheless, they claimed that the issue on nationality should not be
raised since McArthur, Tesoro and Narra are in fact Philippine Nationals
as 60% of their capital is owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997
shares of Narra), 3 40% of the shares of MMC (which owns 5,997 shares of
McArthur) 4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares
of Tesoro), 5 the shares of MBMI will not make it the owner of at least 60% of
the capital stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test,"
embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991.
They also claimed that the POA of DENR did not have jurisdiction over the issues
in Redmont's petition since they are not enumerated in Sec. 77 of RA 7942.
Finally, they stressed that Redmont has no personality to sue them because it
has no pending claim or application over the areas applied for by petitioners.
261
On December 14, 2007, the POA issued a Resolution disqualifying petitioners
from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified
applicants to engage in mining activities. On the other hand,
[Redmont] having filed its own applications for an EPA over
the areas earlier covered by the MPSA application of
respondents may be considered if and when they are
qualified under the law. The violation of the requirements for
the issuance and/or grant of permits over mining areas is
clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued
under the premises is in order and open the areas covered
to other qualified applicants.
xxx xxx xxx
WHEREFORE, the Panel of Arbitrators finds the Respondents,
McArthur Mining, Inc., Tesoro Mining and Development, Inc.,
and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations.
Their Mineral Production Sharing Agreement (MPSA) are
hereby . . . DECLARED NULL AND VOID. 6
The POA considered petitioners as foreign corporations being "effectively
controlled" by MBMI, a 100% Canadian company and declared their MPSAs null
and void. In the same Resolution, it gave due course to Redmont's EPAs.
Thereafter, on February 7, 2008, the POA issued an Order 7 denying the Motion
for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a
joint Notice of Appeal 8 and Memorandum of Appeal 9 with the Mines
Adjudication Board (MAB) while Narra separately filed its Notice of Appeal 10
and Memorandum of Appeal. 11
In their respective memorandum, petitioners emphasized that they are qualified
persons under the law. Also, through a letter, they informed the MAB that they
had their individual MPSA applications converted to FTAAs. McArthur's FTAA was
denominated as AFTA-IVB-09 12 on May 2007, while Tesoro's MPSA application
was converted to AFTA-IVB-08 13 on May 28, 2007, and Narra's FTAA was
converted to AFTA-IVB-07 14 on March 30, 2006. DHESca
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont
filed a Complaint 15 with the Securities and Exchange Commission (SEC),
seeking the revocation of the certificates for registration of petitioners on the
ground that they are foreign-owned or controlled corporations engaged in
mining in violation of Philippine laws. Thereafter, Redmont filed on September 1,
2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying
for the suspension of the proceedings on the appeals filed by McArthur, Tesoro
and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial
Court of Quezon City, Branch 92 (RTC) a Complaint 16 for injunction with
application for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed
for the deferral of the MAB proceedings pending the resolution of the Complaint
before the SEC.
But before the RTC can resolve Redmont's Complaint and applications for
injunctive reliefs, the MAB issued an Order on September 10, 2008, finding the
appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines
Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of
Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of
the Appellants. The Petition filed by Redmont Consolidated
Mines Corporation on 02 January 2007 is hereby ordered
DISMISSED. 17
Belatedly, on September 16, 2008, the RTC issued an Order 18 granting
Redmont's application for a TRO and setting the case for hearing the prayer for
the issuance of a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration
19 of the September 10, 2008 Order of the MAB. Subsequently, it filed a
Supplemental Motion for Reconsideration 20 on September 29, 2008.
Before the MAB could resolve Redmont's Motion for Reconsideration and
Supplemental Motion for Reconsideration, Redmont filed before the RTC a
Supplemental Complaint 21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order 22 granting the issuance of a writ
of preliminary injunction enjoining the MAB from finally disposing of the appeals
of petitioners and from resolving Redmont's Motion for Reconsideration and
Supplement Motion for Reconsideration of the MAB's September 10, 2008
Resolution.
262
On July 1, 2009, however, the MAB issued a second Order denying Redmont's
Motion for Reconsideration and Supplemental Motion for Reconsideration and
resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the
Orders issued by the MAB. On October 1, 2010, the CA rendered a Decision, the
dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The
assailed Orders, dated September 10, 2008 and July 1, 2009
of the Mining Adjudication Board are reversed and set aside.
The findings of the Panel of Arbitrators of the Department of
Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is
upheld and, therefore, the rejection of their applications for
Mineral Product Sharing Agreement should be recommended
to the Secretary of the DENR.
With respect to the applications of respondents McArthur,
Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications
to FTAA, the matter for its rejection or approval is left for
determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED. 23
In a Resolution dated February 15, 2011, the CA denied the Motion for
Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to
the nationality of petitioners when it realized that petitioners had a common
major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to
the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No.
020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the exploitation of
natural resources, the CA used the "grandfather rule" to determine the
nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of
shares corresponding to such percentage shall be
counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the
shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be recorded as belonging
to aliens. 24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate
structures and their corresponding common shareholders. Using the grandfather
rule, the CA discovered that MBMI in effect owned majority of the common
stocks of the petitioners as well as at least 60% equity interest of other majority
shareholders of petitioners through joint venture agreements. The CA found that
through a "web of corporate layering, it is clear that one common controlling
investor in all mining corporations involved . . . is MBMI." 25 Thus, it concluded
that petitioners McArthur, Tesoro and Narra are also in partnership with, or
privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of
petitioners into FTAA applications suspicious in nature and, as a consequence, it
recommended the rejection of petitioners' MPSA applications by the Secretary of
the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA
pointed out that the POA has jurisdiction over them and that it also has the
power to determine the of nationality of petitioners as a prerequisite of the
Constitution prior the conferring of rights to "co-production, joint venture or
production-sharing agreements" of the state to mining rights. However, it also
stated that the POA's jurisdiction is limited only to the resolution of the dispute
and not on the approval or rejection of the MPSAs. It stipulated that only the
Secretary of the DENR is vested with the power to approve or reject applications
for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007
Resolution which considered petitioners McArthur, Tesoro and Narra as foreign
corporations. Nevertheless, the CA determined that the POA's declaration that
the MPSAs of McArthur, Tesoro and Narra are void is highly improper. cCaEDA
While the petition was pending with the CA, Redmont filed with the Office of the
President (OP) a petition dated May 7, 2010 seeking the cancellation of
petitioners' FTAAs. The OP rendered a Decision 26 on April 6, 2011, wherein it
canceled and revoked petitioners' FTAAs for violating and circumventing the
"Constitution . . .[,] the Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584." 27 The OP, in affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the
abovementioned laws and failed to submit evidence to negate them. The
Decision further quoted the December 14, 2007 Order of the POA focusing on
the alleged misrepresentation and claims made by petitioners of being domestic
or Filipino corporations and the admitted continued mining operation of PMDC
using their locally secured Small Scale Mining Permit inside the area earlier
applied for an MPSA application which was eventually transferred to Narra. It
263
also agreed with the POA's estimation that the filing of the FTAA applications by
petitioners is a clear admission that they are "not capable of conducting a large
scale mining operation and that they need the financial and technical assistance
of a foreign entity in their operation, that is why they sought the participation of
MBMI Resources, Inc." 28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during
the pendency of the case only demonstrate the violations
and lack of qualification of the respondent corporations to
engage in mining. The filing of the FTAA application
conversion which is allowed foreign corporation of the earlier
MPSA is an admission that indeed the respondent is not
Filipino but rather of foreign nationality who is disqualified
under the laws. Corporate documents of MBMI Resources,
Inc. furnished its stockholders in their head office in Canada
suggest that they are conducting operation only through
their local counterparts. 29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution 30 dated July 6, 2011. Petitioners then filed a Petition for Review on
Certiorari of the OP's Decision and Resolution with the CA, docketed as CA-G.R.
SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed
the Decision and Resolution of the OP. Thereafter, petitioners appealed the same
CA decision to this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the
CA. Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the
case for mootness despite the fact that the subject matter
of the controversy, the MPSA Applications, have already
been converted into FTAA applications and that the same
have already been granted.
II.
The Court of Appeals erred when it did not dismiss the
case for lack of jurisdiction considering that the Panel of
Arbitrators has no jurisdiction to determine the nationality
of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the
case on account of Redmont's willful forum shopping.
IV.
The Court of Appeals' ruling that Narra, Tesoro and
McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the
express mandate of the Foreign Investments Act of 1991,
as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions
to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the
conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is
based on mere conjectures and surmises without any
shred of evidence to show the same. 31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as
moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present
a justiciable controversy by virtue of supervening events, so that a declaration
thereon would be of no practical use or value." 32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground of mootness." 33
The "mootness" principle, however, does accept certain exceptions and the mere
raising of an issue of "mootness" will not deter the courts from trying a case
when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the
Court provided four instances where courts can decide an otherwise moot case,
thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and
paramount public interest is involved;
3.) When constitutional issue raised requires formulation of
controlling principles to guide the bench, the bar,
and the public; and caTIDE
264
 4.) The case is capable of repetition yet evading review. 34
All of the exceptions stated above are present in the instant case. We of this
Court note that a grave violation of the Constitution, specifically Section 2 of
Article XII, is being committed by a foreign corporation right under our country's
nose through a myriad of corporate layering under different, allegedly, Filipino
corporations. The intricate corporate layering utilized by the Canadian company,
MBMI, is of exceptional character and involves paramount public interest since it
undeniably affects the exploitation of our Country's natural resources. The
corresponding actions of petitioners during the lifetime and existence of the
instant case raise questions as what principle is to be applied to cases with
similar issues. No definite ruling on such principle has been pronounced by the
Court; hence, the disposition of the issues or errors in the instant case will serve
as a guide "to the bench, the bar and the public." 35 Finally, the instant case is
capable of repetition yet evading review, since the Canadian company, MBMI,
can keep on utilizing dummy Filipino corporations through various schemes of
corporate layering and conversion of applications to skirt the constitutional
prohibition against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by
petitioners since both involve the conversion of MPSA applications to FTAA
applications. Petitioners propound that the CA erred in ruling against them since
the questioned MPSA applications were already converted into FTAA
applications; thus, the issue on the prohibition relating to MPSA applications of
foreign mining corporations is academic. Also, petitioners would want us to
correct the CA's finding which deemed the aforementioned conversions of
applications as suspicious in nature, since it is based on mere conjectures and
surmises and not supported with evidence.
We disagree.
The CA's analysis of the actions of petitioners after the case was filed against
them by respondent is on point. The changing of applications by petitioners from
one type to another just because a case was filed against them, in truth, would
raise not a few sceptics' eyebrows. What is the reason for such conversion? Did
the said conversion not stem from the case challenging their citizenship and to
have the case dismissed against them for being "moot"? It is quite obvious that
it is petitioners' strategy to have the case dismissed against them for being
"moot."
Consider the history of this case and how petitioners responded to every action
done by the court or appropriate government agency: on January 2, 2007,
Redmont filed three separate petitions for denial of the MPSA applications of
petitioners before the POA. On June 15, 2007, petitioners filed a conversion of
their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution,
observed this suspect change of applications while the case was pending before
it and held:
The filing of the Financial or Technical Assistance Agreement
application is a clear admission that the respondents are not
capable of conducting a large scale mining operation and
that they need the financial and technical assistance of a
foreign entity in their operation that is why they sought the
participation of MBMI Resources, Inc. The participation of
MBMI in the corporation only proves the fact that it is the
Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit
and interest of the same and not the Filipino stockholders
who only have a less substantial financial stake in the
corporation.
xxx xxx xxx
. . . The filing of the FTAA application on June 15, 2007,
during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign
corporation of the earlier MPSA is an admission that
indeed the respondent is not Filipino but rather of
foreign nationality who is disqualified under the laws.
Corporate documents of MBMI Resources, Inc. furnished its
stockholders in their head office in Canada suggest that they
are conducting operation only through their local
counterparts. 36
On October 1, 2010, the CA rendered a Decision which partially granted the
petition, reversing and setting aside the September 10, 2008 and July 1, 2009
Orders of the MAB. In the said Decision, the CA upheld the findings of the POA
of the DENR that the herein petitioners are in fact foreign corporations thus a
recommendation of the rejection of their MPSA applications were recommended
to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for
the determination of the Secretary of the DENR and the President of the
Republic of the Philippines. 37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed
for the dismissal of the petition asserting that on April 5, 2010, then President
Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB,
which rendered the petition moot and academic. However, the CA, in a
Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses." 38 Standing firm on its Decision, the CA
affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5,
2011, petitioners elevated the case to us via a Petition for Review on Certiorari
under Rule 45, questioning the Decision of the CA. Interestingly, the OP
rendered a Decision dated April 6, 2011, a day after this petition for review was
filed, cancelling and revoking the FTAAs, quoting the Order of the POA and
stating that petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations. The OP
265
Decision also based the cancellation on the misrepresentation of facts and the
violation of the "Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584." 39 On July 6, 2011, the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to
the Court the fact of the OP's Decision and Resolution. In their Reply, petitioners
chose to ignore the OP Decision and continued to reuse their old arguments
claiming that they were granted FTAAs and, thus, the case was moot. Petitioners
filed a Manifestation and Submission dated October 19, 2012, 40 wherein they
asserted that the present petition is moot since, in a remarkable turn of events,
MBMI was able to sell/assign all its shares/interest in the "holding companies" to
DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making
their respective corporations fully-Filipino owned.
Shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered
in the name of a corporation or partnership at least 60% of
the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned
by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000
shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
Again, it is quite evident that petitioners have been trying to have this case
corporations or partnerships at least 60% of the capital of which is owned by
dismissed for being "moot." Their final act, wherein MBMI was able to allegedly
Filipino citizens shall be considered as of Philippine nationality," pertains to the
sell/assign all its shares and interest in the petitioner "holding companies" to
control test or the liberal rule. On the other hand, the second part of the DOJ
DMCI, only proves that they were in fact not Filipino corporations from the start.
Opinion which provides, "if the percentage of the Filipino ownership in the
The recent divesting of interest by MBMI will not change the stand of this Court
corporation or partnership is less than 60%, only the number of shares
with respect to the nationality of petitioners prior the suspicious change in their
corresponding to such percentage shall be counted as Philippine nationality,"
corporate structures. The new documents filed by petitioners are factual
pertains to the stricter, more stringent grandfather rule. TaEIcS
evidence that this Court has no power to verify.

Prior to this recent change of events, petitioners were constant in advocating the
The only thing clear and proved in this Court is the fact that the OP declared
application of the "control test" under RA 7042, as amended by RA 8179,
that petitioner corporations have violated several mining laws and made
otherwise known as the Foreign Investments Act (FIA), rather than using the
misrepresentations and falsehood in their applications for FTAA which lead to the
stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA
revocation of the said FTAAs, demonstrating that petitioners are not beyond
provides:
going against or around the law using shifty actions and strategies. Thus, in this
instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP SECTION 3. Definitions. As used in this Act:
Decision.
a.) The term Philippine national shall mean a citizen of the
Grandfather test Philippines; or a domestic partnership or association wholly
owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least
The main issue in this case is centered on the issue of petitioners' nationality,
sixty percent (60%) of the capital stock outstanding and
whether Filipino or foreign. In their previous petitions, they had been adamant in
entitled to vote is wholly owned by Filipinos or a trustee of
insisting that they were Filipino corporations, until they submitted their
funds for pension or other employee retirement or
Manifestation and Submission dated October 19, 2012 where they stated the
separation benefits, where the trustee is a Philippine
alleged change of corporate ownership to reflect their Filipino ownership. Thus,
national and at least sixty percent (60%) of the fund will
there is a need to determine the nationality of petitioner corporations.
accrue to the benefit of Philippine nationals: Provided, That
were a corporation and its non-Filipino stockholders
Basically, there are two acknowledged tests in determining the nationality of a own stocks in a Securities and Exchange Commission
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ (SEC) registered enterprise, at least sixty percent
Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which (60%) of the capital stock outstanding and entitled to
implemented the requirement of the Constitution and other laws pertaining to vote of each of both corporations must be owned and
the controlling interests in enterprises engaged in the exploitation of natural held by citizens of the Philippines and at least sixty
resources owned by Filipino citizens, provides: percent (60%) of the members of the Board of

266
 Directors, in order that the corporation shall be
considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant
case since the definition of a "Philippine National" under Sec. 3 of the FIA does
not provide for it. They further claim that the grandfather rule "has been
abandoned and is no longer the applicable rule." 41 They also opined that the
last portion of Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and unambiguous
wordings of the statute preclude the court from construing it and prevent the
court's use of discretion in applying the law. They said that the plain, literal
meaning of the statute meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is
used to circumvent the Constitution and pertinent laws, then it becomes illegal.
Further, the pronouncement of petitioners that the grandfather rule has already
been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals,
coal, petroleum and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna,
and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be
under the full control and supervision of the State. The
State may directly undertake such activities, or it may
enter into co-production, joint venture or production-
sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum
of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five
years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law.
xxx xxx xxx
The President may enter into agreements with Foreign-
owned corporations involving either technical or financial
assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by
law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the
State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into
different types of agreements for the exploration, development, and utilization of
natural resources with entities who are deemed Filipino due to 60 percent
ownership of capital is pertinent to this case, since the issues are centered on
the utilization of our country's natural resources or specifically, mining. Thus,
there is a need to ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only allowed corporations or
associations "at least 60 percent of such capital is owned by such citizens." The
deliberations in the Records of the 1986 Constitutional Commission shed light on
how a citizenship of a corporation will be determined:
Mr. BENNAGEN:
Did I hear right that the Chairman's interpretation of an
independent national economy is freedom from
undue foreign control? What is the meaning of
undue foreign control?
MR. VILLEGAS:
Undue foreign control is foreign control which sacrifices
national sovereignty and the welfare of the Filipino
in the economic sphere.
MR. BENNAGEN:
Why does it have to be qualified still with the word
"undue"? Why not simply freedom from foreign
control? I think that is the meaning of
independence, because as phrased, it still allows for
foreign control.
MR. VILLEGAS:
It will now depend on the interpretation because if, for
example, we retain the 60/40 possibility in the
cultivation of natural resources, 40 percent involves
some control; not total control, but some control.
MR. BENNAGEN:
In any case, I think in due time we will propose some
amendments.
MR. VILLEGAS:
267
Yes. But we will be open to improvement of the
phraseology.
Mr. BENNAGEN:
Yes.
Thank you, Mr. Vice-President.
xxx xxx xxx
MR. NOLLEDO:
In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS:
That is right.
MR. NOLLEDO:
In teaching law, we are always faced with the question:
'Where do we base the equity requirement, is it on
the authorized capital stock, on the subscribed
capital stock, or on the paid-up capital stock of a
corporation'? Will the Committee please enlighten
me on this?
MR. VILLEGAS:
We have just had a long discussion with the members of the
team from the UP Law Center who provided us with
a draft. The phrase that is contained here which we
adopted from the UP draft is '60 percent of the
voting stock.'
MR. NOLLEDO:
That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital
stock shall be entitled to vote.
MR. VILLEGAS:
That is right.
MR. NOLLEDO:
Thank you.
With respect to an investment by one corporation in
another corporation, say, a corporation with
60-40 percent equity invests in another
corporation which is permitted by the
Corporation Code, does the Committee adopt
the grandfather rule?
MR. VILLEGAS:
Yes, that is the understanding of the Committee.
MR. NOLLEDO:
Therefore, we need additional Filipino capital?
MR. VILLEGAS:
Yes. 42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply
the grandfather rule in cases where corporate layering is present. Elementary in
statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to
the provisions under Art. XII of the Constitution on National Economy and
Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the
honorable framers of our Constitution,the grandfather rule prevails and must be
applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of
calculating the Filipino interest in a corporation for purposes,
among others, of determining compliance with nationality
requirements (the 'Investee Corporation'). Such manner of
computation is necessary since the shares in the Investee
Corporation may be owned both by individual stockholders
('Investing Individuals') and by corporations and
partnerships ('Investing Corporation'). The said rules thus
provide for the determination of nationality depending on
the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
268
Under the above-quoted SEC Rules, there are two cases in
determining the nationality of the Investee Corporation. The
first case is the 'liberal rule', later coined by the SEC as the
Control Test in its 30 May 1990 Opinion, and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which
states, '(s)hares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality.'
Under the liberal Control Test, there is no need to further
trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is
considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule
Proper and pertains to the portion in said Paragraph 7 of the
1967 SEC Rules which states, "but if the percentage of
Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality."
Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered")
to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must
first be traced to the level of the Investing Corporation and
added to the shares directly owned in the Investee
Corporation . . . .
xxx xxx xxx
In other words, based on the said SEC Rule and DOJ
Opinion, the Grandfather Rule or the second part of the
SEC Rule applies only when the 60-40 Filipino-foreign
equity ownership is in doubt (i.e., in cases where the
joint venture corporation with Filipino and foreign
stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is
either 60-40% Filipino-alien or the 59% less Filipino).
Stated differently, where the 60-40 Filipino-foreign
equity ownership is not in doubt, the Grandfather Rule
will not apply. (emphasis supplied) CTacSE
After a scrutiny of the evidence extant on record, the Court finds that this case
calls for the application of the grandfather rule since, as ruled by the POA and
affirmed by the OP, doubt prevails and persists in the corporate ownership of
petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino
equity ownership of petitioners Narra, McArthur and Tesoro, since their common
investor, the 100% Canadian corporation MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of
Filipinos are less than 60%. 43
The assertion of petitioners that "doubt" only exists when the stockholdings are
less than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners
quoted in their petition, only made an example of an instance where "doubt" as
to the ownership of the corporation exists. It would be ludicrous to limit the
application of the said word only to the instances where the stockholdings of
non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly
strive to have "60% Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective articles of incorporation
that they have less than 60% Filipino stockholders since the applications will be
denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme
employed by stockholders to circumvent the law, creating a cloud of doubt in the
Court's mind. To determine, therefore, the actual participation, direct or indirect,
of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of
petitioners' corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC,
which acquired its application from SMMI. McArthur has a capital stock of ten
million pesos (PhP10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP1,000) per share, subscribed to by the following: 44
Nationality Number of Amount Amount
Shares Subscribed
Filipino 5,997 PhP5,997,000.00 P
Canadian 3,998 PhP3,998,000.00 PhP
Filipino 1 PhP1,000.00
Filipino 1 PhP1,000.00
Filipino 1 PhP1,000.00
American 1 PhP1,000.00
Canadian 1 PhP1,000.00
269
 between the Company and Olympic for purposes of
Total 10,000 PhP10,000,000.00 developing the Olympic Properties. The Company
====== ============ holds directly and indirectly an initial 60% interest
in the joint venture. Under certain circumstances
and upon achieving certain milestones, the
Company may earn up to a 100% interest, subject to
Interestingly, looking at the corporate structure of MMC, we take a 2.5% net revenue royalty. 47 (emphasis supplied)
note that it has a similar structure and composition as McArthur. In fact, it
would seem that MBMI is also a major investor and "controls" 45 MBMI and Thus, as demonstrated in this first corporation, McArthur, when it is
also, similar nominal shareholders were present, i.e., Fernando B. Esguerra "grandfathered," company layering was utilized by MBMI to gain control over
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and McArthur. It is apparent that MBMI has more than 60% or more equity interest
Kenneth Cawkell (Cawkell): in McArthur, making the latter a foreign corporation.
Madridejos Mining Corporation
me Nationality Number of Amount AmountTesoro
Paid Mining and Development, Inc.
Shares Subscribed
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of
s& Filipino 6,663 PhP6,663,000.00 ten million pesos (PhP10,000,000) divided into ten thousand (10,000) common
Corp. shares at PhP1,000 per share, as demonstrated below:
es, Canadian 3,331 PhP3,331,000.00

n Filipino 1 PhP1,000.00 Nationality Number of Amount Amou

Filipino 1 PhP1,000.00 Shares Subscribed

Filipino 1 PhP1,000.00 Filipino 5,997 PhP5,997,000.00

Filipino 1 PhP1,000.00
Canadian 3,998 PhP3,998,000.00 P
son American 1 PhP1,000.00
kell Canadian 1 PhP1,000.00 Filipino 1 PhP1,000.00
Filipino 1 PhP1,000.00
Total 10,000 PhP10,000,000.00
====== ============== Filipino
============== 1 PhP1,000.00

American 1 PhP1,000.00
Canadian 1 PhP1,000.00

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any Total 10,000 PhP10,000,000.00 P
amount with respect to the number of shares they subscribed to in the ===== ============== ===
corporation, which is quite absurd since Olympic is the major stockholder in (em
MMC. MBMI's 2006 Annual Report sheds light on why Olympic failed to pay any
amount with respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Philippine
companies, wherein it holds directly and indirectly a 60% effective equity Except for the name "Sara Marie Mining, Inc.," the table above shows exactly
interest in the Olympic Properties. 46 Quoting the said Annual report: the same figures as the corporate structure of petitioner McArthur, down to the
last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra,
Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of
On September 9, 2004, the Company and Olympic Mines Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving
& Development Corporation ("Olympic") entered into a deeper, we scrutinize SMMI's corporate structure:
series of agreements including a Property Purchase and
Development Agreement (the Transaction Documents)
with respect to three nickel laterite properties in Palawan, Nationality Number of Amount Amoun
Philippines (the "Olympic Properties"). The Transaction Shares Subscribed
Documents effectively establish a joint venture
270
& Filipino 6,663 PhP6,663,000.00 Canadian 3,998 PhP3,996,000.00 PhP1,1
orp.
s, Canadian 3,331 PhP3,331,000.00 Filipino 1 PhP1,000.00 Ph

Filipino 1 PhP1,000.00 Filipino 1 PhP1,000.00 Ph

Filipino 1 PhP1,000.00
Filipino 1 PhP1,000.00 Ph
Filipino 1 PhP1,000.00
Filipino 1 PhP1,000.00 Filipino 1 PhP1,000.00 Ph

n American 1 PhP1,000.00 Filipino 1 PhP1,000.00 Ph

l Canadian 1 PhP1,000.00 American 1 PhP1,000.00 Ph

Total 10,000 PhP10,000,000.00 Canadian 1 PhP1,000.00 Ph
====== =============
Total 10,000 PhP10,000,000.00 PhP2,8
====== ============= ======

After subsequently studying SMMI's corporate structure, it is not farfetched for

us to spot the glaring similarity between SMMI and MMC's corporate structure. Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and
Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Esguerra, is present in this corporate structure.
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures
under the headings "Nationality," "Number of Shares," "Amount Subscribed,"
Patricia Louise Mining & Development Corporation
and "Amount Paid" are exactly the same except for the amount paid by MBMI
which now reflects the amount of two million seven hundred ninety four
thousand pesos (PhP2,794,000). Oddly, the total value of the amount paid is two Using the grandfather method, we further look and examine PLMDC's corporate
million eight hundred nine thousand nine hundred pesos (PhP2,809,900). structure:

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic's Nationality Number of Amount Amount P
participation in SMMI's corporate structure, it is clear that MBMI is in control of Shares Subscribed
Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner
Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the Filipino 6,596 PhP6,596,000.00
exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation

Canadian 3,396 PhP3,396,000.00 PhP2

Moving on to the last petitioner, Narra, which is the transferee and assignee of Filipino 1 PhP1,000.00 P
PLMDC's MPSA application, whose corporate structure's arrangement is similar to
that of the first two petitioners discussed. The capital stock of Narra is ten Filipino 1 PhP1,000.00 P
million pesos (PhP10,000,000), which is divided into ten thousand common
shares (10,000) at one thousand pesos (PhP1,000) per share, shown as follows: Filipino 1 PhP1,000.00 P
ACHEaI
Filipino 1 PhP1,000.00 P
Filipino 1 PhP1,000.00 P
Name Nationality Number of Amount Amount Paid
Filipino 1 PhP1,000.00 P
Shares Subscribed
American 1 PhP1,000.00 P
Canadian 1 PhP1,000.00 P
ise Filipino 5,997 PhP5,997,000.00

Total 10,000 PhP10,000,000.00 PhP2
nt
====== ============= ====

271

Yet again, the usual players in petitioners' corporate structures are present.
Similarly, the amount of money paid by the 2nd tier majority stock holder, in this
case, Palawan Alpha South Resources and Development Corp. (PASRDC), is
zero.
Studying MBMI's Summary of Significant Accounting Policies dated October 31,
2005 explains the reason behind the intricate corporate layering that MBMI
immersed itself in:
JOINT VENTURES The Company's ownership
interests in various mining
ventures engaged in the
acquisition, exploration
and development of
mineral properties in the
Philippines is described as
follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property,
and the ownership and interests therein, are as follows:
Olympic-Philippines (the "Olympic Group"
Sara Marie Mining Properties Ltd. ("Sara Marie")
33.3%
Tesoro Mining & Development, Inc. (Tesoro)
60.0%
Pursuant to the Olympic joint venture agreement the
Company holds directly and indirectly an effective
equity interest in the Olympic Property of 60.0%.
Pursuant to a shareholders' agreement, the Company
exercises joint control over the companies in the
Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and
the ownership interests therein, are as follows:
Alpha-Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia")
34.0%
Narra Nickel Mining & Development Corporation
(Narra) 60.4%
Under a joint venture agreement the Company holds
directly and indirectly an effective equity interest in
the Alpha Property of 60.4%. Pursuant to a
shareholders' agreement, the Company exercises
joint control over the companies in the Alpha Group.
48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners
McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners' corporate owners, namely: MMI, SMMI
and PLMDC. Going further and adding to the picture, MBMI's Summary of
Significant Accounting Policies statement regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups
involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the
"layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and
among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests
are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA's use of the exception of the res inter alios acta or
the "admission by co-partner or agent" rule and "admission by privies" under
the Rules of Court in the instant case, by pointing out that statements made by
MBMI should not be admitted in this case since it is not a party to the case and
that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent. The act or
declaration of a partner or agent of the party within the
scope of his authority and during the existence of the
partnership or agency, may be given in evidence against
such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same
rule applies to the act or declaration of a joint owner, joint
debtor, or other person jointly interested with the party.
272
 Sec. 31. Admission by privies. Where one derives title to
property from another, the act, declaration, or omission of
the latter, while holding the title, in relation to the property,
is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case,
"the partnership relation must be shown, and that proof of the fact must be
made by evidence other than the admission itself." 49 Thus, petitioners assert
that the CA erred in finding that a partnership relationship exists between them
and MBMI because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by
stating that "by entering into a joint venture, MBMI have a joint interest" with
Narra, Tesoro and McArthur. They challenged the conclusion of the CA which
pertains to the close characteristics of "partnerships" and "joint venture
agreements." Further, they asserted that before this particular partnership can
be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP3,000). Being that there is no
evidence of written agreement to form a partnership between petitioners and
MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to
contribute money, property, or industry to a common fund with the intention of
dividing the profits among themselves. 50 On the other hand, joint ventures
have been deemed to be "akin" to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Thus: IEDHAT
Accordingly, culled from the incidents and records of this case, it can be
assumed that the relationships entered between and among petitioners and
MBMI are no simple "joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements; consequently,
corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among
petitioners and MBMI was executed to circumvent the legal prohibition against
corporations entering into partnerships, then the relationship created should be
deemed as "partnerships," and the laws on partnership should be applied. Thus,
a joint venture agreement between and among corporations may be seen as
similar to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are
considered to be partnerships, then the CA is justified in applying Sec. 29, Rule
130 of the Rules by stating that "by entering into a joint venture, MBMI have a
joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators' jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the
instant case. The POA has jurisdiction to settle disputes over rights to mining
areas which definitely involve the petitions filed by Redmont against petitioners
Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is
asserting the right of Filipinos over mining areas in the Philippines against
alleged foreign-owned mining corporations. Such claim constitutes a "dispute"
found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by
the parties for the decision, the panel shall have exclusive
and original jurisdiction to hear and decide the following:

[T]he relations of the parties to a joint venture and the

(a) Disputes involving rights to mining areas
nature of their association are so similar and closely akin to
a partnership that it is ordinarily held that their rights,
duties, and liabilities are to be tested by rules which are (b) Disputes involving mineral agreements or permits
closely analogous to and substantially the same, if not
exactly the same, as those which govern partnership. In
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53
fact, it has been said that the trend in the law has been to
blur the distinctions between a partnership and a joint
venture, very little law being found applicable to one that The phrase "disputes involving rights to mining areas" refers
does not apply to the other. 51 to any adverse claim, protest, or opposition to an application
for mineral agreement. The POA therefore has the
jurisdiction to resolve any adverse claim, protest, or
Though some claim that partnerships and joint ventures are totally different
opposition to a pending application for a mineral agreement
animals, there are very few rules that differentiate one from the other; thus,
filed with the concerned Regional Office of the MGB. This is
joint ventures are deemed "akin" or similar to a partnership. In fact, in joint
clear from Secs. 38 and 41 of the DENR AO 96-40, which
venture agreements, rules and legal incidents governing partnerships are
provide:
applied. 52

Sec. 38.

273
 xxx xxx xxx
Within thirty (30) calendar days from the last date
of publication/posting/radio announcements, the
authorized officer(s) of the concerned office(s) shall
issue a certification(s) that the
publication/posting/radio announcement have been
complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty
(30) calendar days from the last date of
publication/posting/radio announcement,
with the concerned Regional Office or through
any concerned PENRO or CENRO for filing in
the concerned Regional Office for purposes of
its resolution by the Panel of Arbitrators
pursuant to the provisions of this Act and
these implementing rules and regulations.
Upon final resolution of any adverse claim,
protest or opposition, the Panel of Arbitrators
shall likewise issue a certification to that
effect within five (5) working days from the
date of finality of resolution thereof. Where
there is no adverse claim, protest or
opposition, the Panel of Arbitrators shall
likewise issue a Certification to that effect
within five working days therefrom.
xxx xxx xxx
No Mineral Agreement shall be approved
unless the requirements under this Section
are fully complied with and any adverse
claim/protest/opposition is finally resolved by
the Panel of Arbitrators.
Sec. 41.
endorse the same to the secretary for
consideration/approval within fifteen working
days from receipt of such endorsement.
In case of Mineral Agreement applications in areas
with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification
issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and
endorsed by the Director to the Secretary for
consideration/approval within fifteen days from
receipt of such endorsement. (emphasis supplied)
ACcDEa
It has been made clear from the aforecited provisions that
the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of
mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further elucidated
by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse
Claims/Conflicts/Oppositions. Notwithstanding
the provisions of Sections 28, 43 and 57 above,
any adverse claim, protest or opposition
specified in said sections may also be filed
directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.

xxx xxx xxx

xxx xxx xxx

The Regional Director or concerned Regional

Within fifteen (15) working days from the
Director shall also cause the posting of the
receipt of the Certification issued by the Panel
application on the bulletin boards of the Bureau,
of Arbitrators as provided in Section 38
concerned Regional office(s) and in the concerned
hereof, the concerned Regional Director shall
province(s) and municipality(ies), copy furnished
initially evaluate the Mineral Agreement
the barangays where the proposed contract area is
applications in areas outside Mineral
located once a week for two (2) consecutive weeks
reservations. He/She shall thereafter endorse
in a language generally understood in the locality.
his/her findings to the Bureau for further
After forty-five (45) days from the last date of
evaluation by the Director within fifteen (15)
publication/posting has been made and no adverse
working days from receipt of forwarded
claim, protest or opposition was filed within the said
documents. Thereafter, the Director shall
274
 forty-five (45) days, the concerned offices shall
issue a certification that publication/posting has
been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On
the other hand, if there be any adverse claim,
protest or opposition, the same shall be filed
within forty-five (45) days from the last date
of publication/posting, with the Regional
Offices concerned, or through the
Department's Community Environment and
Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of
Arbitrators. However previously published valid
and subsisting mining claims are exempted from
posted/posting required under this Section.
No mineral agreement shall be approved
unless the requirements under this section are
fully complied with and any
opposition/adverse claim is dealt with in
writing by the Director and resolved by the
Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that
the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of
mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further elucidated
by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse
Claims/Conflicts/Oppositions. Notwithstanding
the provisions of Sections 28, 43 and 57 above, any
adverse claim, protest or opposition specified in
said sections may also be filed directly with the
Panel of Arbitrators within the concerned periods for
filing such claim, protest or opposition as specified
in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement
Application.
xxx xxx xxx
The Regional Director or concerned Regional
Director shall also cause the posting of the
application on the bulletin boards of the Bureau,
concerned Regional office(s) and in the concerned
province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is
located once a week for two (2) consecutive weeks
in a language generally understood in the locality.
After forty-five (45) days from the last date of
publication/posting has been made and no adverse
claim, protest or opposition was filed within the said
forty-five (45) days, the concerned offices shall
issue a certification that publication/posting has
been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On
the other hand, if there be any adverse claim,
protest or opposition, the same shall be filed
within forty-five (45) days from the last date
of publication/posting, with the Regional
offices concerned, or through the
Department's Community Environment and
Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of
Arbitrators. However, previously published valid
and subsisting mining claims are exempted from
posted/posting required under this Section.
No mineral agreement shall be approved
unless the requirements under this section are
fully complied with and any
opposition/adverse claim is dealt with in
writing by the Director and resolved by the
Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the
POA to resolve any adverse claim, opposition, or protest
relative to mining rights under Sec. 77(a) of RA 7942 is
confined only to adverse claims, conflicts and oppositions
relating to applications for the grant of mineral rights.
POA's jurisdiction is confined only to resolutions of
such adverse claims, conflicts and oppositions and it
has no authority to approve or reject said
applications. Such power is vested in the DENR
Secretary upon recommendation of the MGB Director.
Clearly, POA's jurisdiction over "disputes involving
rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis
ours)
275
Accordingly, as we enunciated in Celestial, the POA unquestionably has
jurisdiction to resolve disputes over MPSA applications subject of Redmont's
petitions. However, said jurisdiction does not include either the approval or
rejection of the MPSA applications, which is vested only upon the Secretary of
the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners' MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular
courts, not the POA, that has jurisdiction over the MPSA applications of
petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force
at the time of the commencement of the action. 54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization Act of 1980"
reads:
Sec. 19. Jurisdiction in Civil Cases. Regional Trial Courts
shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is
incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA
7942:
Section 77. Panel of Arbitrators.
. . . Within thirty (30) days, after the submission of the case
by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the
following:
(c) Disputes involving rights to mining areas SEIcHa
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all
disputes involving rights to mining areas. One such dispute is an MPSA
application to which an adverse claim, protest or opposition is filed by another
interested applicant. In the case at bar, the dispute arose or originated from
MPSA applications where petitioners are asserting their rights to mining areas
subject of their respective MPSA applications. Since respondent filed 3 separate
petitions for the denial of said applications, then a controversy has developed
between the parties and it is POA's jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners
filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA
applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the
doctrine of primary jurisdiction. Euro-med Laboratories v. Province of Batangas
55 elucidates:
The doctrine of primary jurisdiction holds that if a case is
such that its determination requires the expertise,
specialized training and knowledge of an administrative
body, relief must first be obtained in an administrative
proceeding before resort to the courts is had even if the
matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system
via a resort to the CA and to this Court as a last recourse.
Selling of MBMI's shares to DMCI
As stated before, petitioners' Manifestation and Submission dated October 19,
2012 would want us to declare the instant petition moot and academic due to
the transfer and conveyance of all the shareholdings and interests of MBMI to
DMCI, a corporation duly organized and existing under Philippine laws and is at
least 60% Philippine-owned. 56 Petitioners reasoned that they now cannot be
considered as foreign-owned; the transfer of their shares supposedly cured the
"defect" of their previous nationality. They claimed that their current FTAA
contract with the State should stand since "even wholly-owned foreign
corporations can enter into an FTAA with the State." 57 Petitioners stress that
there should no longer be any issue left as regards their qualification to enter
into FTAA contracts since they are qualified to engage in mining activities in the
Philippines. Thus, whether the "grandfather rule" or the "control test" is used,
the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the
instant case and said fact should be disregarded. The manifestation can no
longer be considered by us since it is being tackled in G.R. No. 202877 pending
before this Court. Thus, the question of whether petitioners, allegedly a
Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI,
are allowed to enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether
or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of
the 1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."
276
WHEREFORE, premises considered, the instant petition is DENIED. The
assailed Court of Appeals Decision dated October 1, 2010 and Resolution dated
February 15, 2011 are hereby AFFIRMED.
SO ORDERED.
||| (Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines
Corp., G.R. No. 195580, [April 21, 2014])
SPECIAL THIRD DIVISION
[G.R. No. 195580. January 28, 2015.]
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
TESORO MINING AND DEVELOPMENT, INC., and
McARTHUR MINING, INC., petitioners, vs. REDMONT
CONSOLIDATED MINES CORP., respondent.
RESOLUTION
VELASCO, JR., J p:
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision,
which denied the Petition for Review on Certiorari under Rule 45 jointly
interposed by petitioners Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining, Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that
petitioners, being foreign corporations, are not entitled to Mineral Production
Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with
approval the appellate court's finding that there was doubt as to petitioners'
nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),
effectively owns 60% of the common stocks of the petitioners by owning equity
interest of petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-
movants argued, in the main, that the Court's Decision was not in accord with
law and logic. In its September 2, 2014 Comment, on the other hand,
respondent Redmont Consolidated Mines Corp. (Redmont) countered that
petitioners' motion for reconsideration is nothing but a rehash of their
arguments and should, thus, be denied outright for being pro-forma. Petitioners
have interposed on September 30, 2014 their Reply to the respondent's
Comment.
After considering the parties' positions, as articulated in their respective
submissions, We resolve to deny the motion for reconsideration.
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a
substantive issue, which, as argued, has supposedly been rendered moot by the
fact that petitioners' applications for MPSAs had already been converted to an
application for a Financial Technical Assistance Agreement (FTAA), as petitioners
have in fact been granted an FTAA. Further, the nationality issue, so petitioners
presently claim, had been rendered moribund by the fact that MBMI had already
divested itself and sold all its shareholdings in the petitioners, as well as in their
corporate stockholders, to a Filipino corporation DMCI Mining Corporation
(DMCI).
As a counterpoint, respondent Redmont avers that the present case has not
been rendered moot by the supposed issuance of an FTAA in petitioners' favor as
this FTAA was subsequently revoked by the Office of the President (OP) and is
currently a subject of a petition pending in the Court's First Division. Redmont
likewise contends that the supposed sale of MBMI's interest in the petitioners
and in their "holding companies" is a question of fact that is outside the Court's
province to verify in a Rule 45 certiorari proceedings. In any case, assuming that
the controversy has been rendered moot, Redmont claims that its resolution on
the merits is still justified by the fact that petitioners have violated a
constitutional provision, the violation is capable of repetition yet evading review,
and the present case involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA
application to one for FTAAs and the issuance by the OP of an FTAA in
petitioners' favor are irrelevant. The OP itself has already cancelled and revoked
the FTAA thus issued to petitioners. Petitioners curiously have omitted this
critical fact in their motion for reconsideration. Furthermore, the supposed sale
by MBMI of its shares in the petitioner-corporations and in their holding
companies is not only a question of fact that this Court is without authority to
verify, it also does not negate any violation of the Constitutional provisions
previously committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered
moot by these two events. As this Court has time and again declared, the "moot
and academic" principle is not a magical formula that automatically dissuades
courts in resolving a case. 1 The Court may still take cognizance of an otherwise
moot and academic case, if it finds that (a) there is a grave violation of the
Constitution; (b) the situation is of exceptional character and paramount public
277
interest is involved; (c) the constitutional issue raised requires formulation of associations at least sixty per centum of whose capital is owned by such
controlling principles to guide the bench, the bar, and the public; and (d) the [Filipino] citizens" may enjoy certain rights and privileges, like the exploration
case is capable of repetition yet evading review. 2 The Court's April 21, 2014 and development of natural resources.
Decision explained in some detail that all four (4) of the foregoing circumstances
are present in the case. If only to stress a point, we will do so again.
The application of the Grandfather Rule in the
present case does not eschew the Control Test.
First, allowing the issuance of MPSAs to applicants that are owned and controlled
by a 100% foreign-owned corporation, albeit through an intricate web of
Clearly, petitioners have misread, and failed to appreciate the clear import of,
corporate layering involving alleged Filipino corporations, is tantamount to
the Court's April 21, 2014 Decision. Nowhere in that disposition did the Court
permitting a blatant violation of Section 2, Article XII of the Constitution. The
foreclose the application of the Control Test in determining which corporations
Court simply cannot allow this breach and inhibit itself from resolving the
may be considered as Philippine nationals. Instead, to borrow Justice Leonen's
controversy on the facile pretext that the case had already been rendered
term, the Court used the Grandfather Rule as a "supplement" to the Control Test
academic.
so that the intent underlying the averted Sec. 2, Art. XII of the Constitution be
given effect. The following excerpts of the April 21, 2014 Decision cannot be
Second, the elaborate corporate layering resorted to by petitioners so as to clearer:
make it appear that there is compliance with the minimum Filipino ownership in
the Constitution is deftly exceptional in character. More importantly, the case is
In ending, the "control test" is still the prevailing mode
of paramount public interest, as the corporate layering employed by petitioners
of determining whether or not a corporation is a
was evidently designed to circumvent the constitutional caveat allowing only
Filipino corporation, within the ambit of Sec. 2, Art. XII of
Filipino citizens and corporations 60%-owned by Filipino citizens to explore,
the 1987 Constitution, entitled to undertake the exploration,
develop, and use the country's natural resources.
development and utilization of the natural resources of the
Philippines. When in the mind of the Court, there is
Third, the facts of the case, involving as they do a web of corporate layering doubt, based on the attendant facts and
intended to go around the Filipino ownership requirement in the Constitution and circumstances of the case, in the 60-40 Filipino equity
pertinent laws, require the establishment of a definite principle that will ensure ownership in the corporation, then it may apply the
that the Constitutional provision reserving to Filipino citizens or "corporations at "grandfather rule." (emphasis supplied)
least sixty per centum of whose capital is owned by such citizens" be effectively
enforced and complied with. The case, therefore, is an opportunity to establish a
With that, the use of the Grandfather Rule as a "supplement" to the Control Test
controlling principle that will "guide the bench, the bar, and the public."
is not proscribed by the Constitution or the Philippine Mining Act of 1995.

Lastly, the petitioners' actions during the lifetime and existence of the instant
The Grandfather Rule implements the intent of
case that gave rise to the present controversy are capable of repetition yet
the Filipinization provisions of the Constitution.
evading review because, as shown by petitioners' actions, foreign corporations
can easily utilize dummy Filipino corporations through various schemes and
stratagems to skirt the constitutional prohibition against foreign mining in To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
Philippine soil. development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is owned
by such citizens." Similarly, Section 3 (aq) of the Philippine Mining Act of 1995
II.
considers a "corporation . . . registered in accordance with law at least sixty per
The application of the Grandfather Rule is justified by the cent of the capital of which is owned by citizens of the Philippines" as a person
circumstances of the case to determine the nationality of qualified to undertake a mining operation. Consistent with this objective, the
petitioners. Grandfather Rule was originally conceived to look into the citizenship of the
individuals who ultimately own and control the shares of stock of a corporation
for purposes of determining compliance with the constitutional requirement of
To petitioners, the Court's application of the Grandfather Rule to determine their
Filipino ownership. It cannot, therefore, be denied that the framers of the
nationality is erroneous and allegedly without basis in the Constitution, the
Constitution have not foreclosed the Grandfather Rule as a tool in verifying the
Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995, 3 and
nationality of corporations for purposes of ascertaining their right to participate
the Rules issued by the Securities and Exchange Commission (SEC). These laws
in nationalized or partly nationalized activities. The following excerpts from the
and rules supposedly espouse the application of the Control Test in verifying the
Record of the 1986 Constitutional Commission suggest as much:
Philippine nationality of corporate entities for purposes of determining
compliance with Sec. 2, Art. XII of the Constitution that only "corporations or

278
 MR. NOLLEDO:
In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS:
That is right.
xxx xxx xxx
MR. NOLLEDO:
Thank you.
With respect to an investment by one corporation in
another corporation, say, a corporation with 60-40
percent equity invests in another corporation which
is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS:
Yes, that is the understanding of the Committee.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the
method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, provided
for under the Constitution and other nationalization laws, is computed, in
cases where corporate shareholders are present, by attributing the
nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder." 4 Thus, to arrive
at the actual Filipino ownership and control in a corporation, both the direct and
indirect shareholdings in the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine
the ultimate ownership in a corporation is observed by the Bureau of Internal
Revenue (BIR) in applying Section 127 (B) 5 of the National Internal Revenue
Code on taxes imposed on closely held corporations, in relation to Section 96 of
the Corporation Code 6 on close corporations. Thus, in BIR Ruling No. 148-10,
Commissioner Kim Henares held:
In the case of a multi-tiered corporation, the stock
attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches
the individual stockholders. This is in consonance with
the "grandfather rule" adopted in the Philippines
under Section 96 of the Corporation Code (Batas
Pambansa Blg. 68) which provides that notwithstanding the
fact that all the issued stock of a corporation are held by not
more than twenty persons, among others, a corporation is
nonetheless not to be deemed a close corporation when at
least two thirds of its voting stock or voting rights is owned
or controlled by another corporation which is not a close
corporation. 7
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31),
the SEC applied the Grandfather Rule even if the corporation engaged in mining
operation passes the 60-40 requirement of the Control Test, viz.:
You allege that the structure of MML's ownership in
PHILSAGA is as follows: (1) MML owns 40% equity in MEDC,
while the 60% is ostensibly owned by Philippine individual
citizens who are actually MML's controlled nominees; (2)
MEDC, in turn, owns 60% equity in MOHC, while MML owns
the remaining 40%; (3) Lastly, MOHC owns 60% of
PHILSAGA, while MML owns the remaining 40%. You provide
the following figure to illustrate this structure:
xxx xxx xxx
We note that the Constitution and the statute use the
concept "Philippine citizens." Article III, Section 1 of the
Constitution provides who are Philippine citizens: . . . This
enumeration is exhaustive. In other words, there can be no
other Philippine citizens other than those falling within the
enumeration provided by the Constitution. Obviously, only
natural persons are susceptible of citizenship. Thus, for
purposes of the Constitutional and statutory restrictions on
foreign participation in the exploitation of mineral resources,
a corporation investing in a mining joint venture can never
be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in] . . . Pedro R.
Palting, vs. San Jose Petroleum, [Inc.]. The Court held that
a corporation investing in another corporation engaged in a
nationalized activity cannot be considered as a citizen for
purposes of the Constitutional provision restricting foreign
exploitation of natural resources:
xxx xxx xxx
Accordingly, we opine that we must look into the citizenship
of the individual stockholders, i.e., natural persons, of that
279
 investor-corporation in order to determine if the
Constitutional and statutory restrictions are complied with. If
the shares of stock of the immediate investor corporation is
in turn held and controlled by another corporation, then we
must look into the citizenship of the individual stockholders
of the latter corporation. In other words, if there are
layers of intervening corporations investing in a
mining joint venture, we must delve into the
citizenship of the individual stockholders of each
corporation. This is the strict application of the grandfather
rule, which the Commission has been consistently applying
prior to the 1990s.
Indeed, the framers of the Constitution intended for
the "grandfather rule" to apply in case a 60%-40%
Filipino-Foreign equity corporation invests in another
corporation engaging in an activity where the
Constitution restricts foreign participation.
xxx xxx xxx
Accordingly, under the structure you represented, the joint
mining venture is 87.04% foreign owned, while it is only
12.96% owned by Philippine citizens. Thus, the
constitutional requirement of 60% ownership by Philippine
citizens is violated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v.
McArthur Mining, Inc., et al., 8 the SEC en banc applied the Grandfather Rule
despite the fact that the subject corporations ostensibly have satisfied the 60-40
Filipino equity requirement. The SEC en banc held that to attain the
Constitutional objective of reserving to Filipinos the utilization of
natural resources, one should not stop where the percentage of the
capital stock is 60%. Thus:
[D]oubt, we believe, exists in the instant case
because the foreign investor, MBMI, provided
practically all the funds of the remaining appellee-
corporations. The records disclose that: (1) Olympic Mines
and Development Corporation ("OMDC"), a domestic
corporation, and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of
Madridejos; however, OMDC paid nothing for this
subscription while MBMI paid P2,803,900.00 out of its total
subscription cost of P3,331,000.00; (2) Palawan Alpha South
Resource Development Corp. ("Palawan Alpha"), also a
domestic corporation, and MBMI subscribed to 6,596 and
3,996 shares, respectively, out of the authorized capital
stock of Patricia Louise; however, Palawan Alpha paid
nothing for this subscription while MBMI paid P2,796,000.00
out of its total subscription cost of P3,996,000.00; (3) OMDC
and MBMI subscribed to 6,663 and 3,331 shares,
respectively, out of the authorized capital stock of Sara
Marie; however, OMDC paid nothing for this subscription
while MBMI paid P2,794,000.00 out of its total subscription
cost of P3,331,000.00; and (4) Falcon Ridge Resources
Management Corp. ("Falcon Ridge"), another domestic
corporation, and MBMI subscribed to 5,997 and 3,998
shares, respectively, out of the authorized capital stock of
San Juanico; however, Falcon Ridge paid nothing for this
subscription while MBMI paid P2,500,000.00 out of its total
subscription cost of P3,998,000.00. Thus, pursuant to the
afore-quoted DOJ Opinion, the Grandfather Rule must be
used.
xxx xxx xxx
The avowed purpose of the Constitution is to place in
the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule
interpreting the constitutional provision should not
diminish that right through the legal fiction of
corporate ownership and control. But the constitutional
provision, as interpreted and practiced via the 1967 SEC
Rules, has favored foreigners contrary to the command of
the Constitution. Hence, the Grandfather Rule must be
applied to accurately determine the actual
participation, both direct and indirect, of foreigners in
a corporation engaged in a nationalized activity or
business.
The method employed in the Grandfather Rule of attributing the shareholdings of
a given corporate shareholder to the second or even the subsequent tier of
ownership hews with the rule that the "beneficial ownership" of corporations
engaged in nationalized activities must reside in the hands of Filipino citizens.
Thus, even if the 60-40 Filipino equity requirement appears to have been
satisfied, the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977,
stated that an agreement that may distort the actual economic or
beneficial ownership of a mining corporation may be struck down as
violative of the constitutional requirement, viz.:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by
foreigners enter into a mining service contract with a foreign
company granting the latter a share of not more than 40%
from the proceeds of the operations?
xxx xxx xxx
280
 By law, a mining lease may be granted only to a
Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital
of which is owned by Filipino citizens and
possessing . . . . The sixty percent Philippine equity
requirement in mineral resource exploitation . . . is
intended to insure, among other purposes, the
conservation of indigenous natural resources, for
Filipino posterity . . . . I think it is implicit in this
provision, even if it refers merely to ownership of stock in
the corporation holding the mining concession, that
beneficial ownership of the right to dispose, exploit,
utilize, and develop natural resources shall pertain to
Filipino citizens, and that the nationality requirement
is not satisfied unless Filipinos, are the principal
beneficiaries in the exploitation of the country's
natural resources. This criterion of beneficial ownership is
tacitly adopted in Section 44 of P.D. No. 463, above-quoted,
which limits the service fee in service contracts to 40% of
the proceeds of the operation, thereby implying that the 60-
40 benefit-sharing ration is derived from the 60-40 equity
requirement in the Constitution.
xxx xxx xxx
Equity, while the remaining thirty percent (30%) of the
capital stock is owned by a foreign corporation.
xxx xxx xxx
This Department has had the occasion to rule in several
opinions that it is implicit in the constitutional provisions,
even if it refers merely to ownership of stock in the
corporation holding the land or natural resource concession,
that the nationality requirement is not satisfied unless
it meets the criterion of beneficial ownership, i.e.,
Filipinos are the principal beneficiaries in the
exploration of natural resources (Op. No. 144, s. 1977;
Op. No. 130, s. 1985), and that in applying the same
"the primordial consideration is situs of control,
whether in a stock or non-stock corporation" (Op. No.
178, s. 1974). As stated in the Register of Deeds vs. Ung
Sui Si Temple (97 Phil. 58), obviously to insure that
corporations and associations allowed to acquire agricultural
land or to exploit natural resources "shall be controlled by
Filipinos." Accordingly, any arrangement which attempts
to defeat the constitutional purpose should be
eschewed (Op. No. 130, s. 1985).

We are informed that in the registration of corporations with

It is obvious that while payments to a service contractor
the [SEC], compliance with the sixty per centum
may be justified as a service fee, and therefore, properly
requirement is being monitored by SEC under the
deductible from gross proceeds, the service contract
"Grandfather Rule" a method by which the percentage of
could be employed as a means of going about or
Filipino equity in corporations engaged in nationalized and/or
circumventing the constitutional limit on foreign
partly nationalized areas of activities provided for under the
equity participation and the obvious constitutional
Constitution and other national laws is accurately computed,
policy to insure that Filipinos retain beneficial
and the diminution if said equity prevented (SEC Memo, S.
ownership of our mineral resources. Thus, every service
1976). The "Grandfather Rule" is applied specifically in
contract scheme has to be evaluated in its entirety, on a
cases where the corporation has corporate
case to case basis, to determine reasonableness of the total
stockholders with alien stockholdings, otherwise, if
"service fee" . . . like the options available to the contractor
the rule is not applied, the presence of such corporate
to become equity participant in the Philippine entity holding
stockholders could diminish the effective control of
the concession, or to acquire rights in the processing and
Filipinos.
marketing stages. . . . (emphasis supplied)

Applying the "Grandfather Rule" in the instant case, the

The "beneficial ownership" requirement was subsequently used in tandem with
result is as follows: . . . the total foreign equity in the
the "situs of control" to determine the nationality of a corporation in DOJ Opinion
investing corporation is 58% while the Filipino equity is only
No. 84, S. of 1988, through the Grandfather Rule, despite the fact that both the
42%, in the investing corporation, subject of your query, is
investee and investor corporations purportedly satisfy the 60-40 Filipino equity
disqualified from investing in real estate, which is a
requirement: 9
nationalized activity, as it does not meet the 60%-40%
Filipino-Foreign equity requirement under the Constitution.
This refers to your request for opinion on whether or not
there may be an investment in real estate by a domestic
This pairing of the concepts "beneficial ownership" and the "situs of control" in
corporation (the investing corporation) seventy percent
determining what constitutes "capital" has been adopted by this Court in Heirs
(70%) of the capital stock of which is owned by another
domestic corporation with at least 60%-40% Filipino-Foreign
281
of Gamboa v. Teves. 10 In its October 9, 2012 Resolution, the Court clarified, In its Rehabilitation Plan, among the material financial
thus: commitments made by respondent Bayantel is that its
shareholders shall relinquish the agreed-upon amount of
common stock[s] as payment to Unsecured Creditors as per
This is consistent with Section 3 of the FIA which provides
the Term Sheet. Evidently, the parties intend to convert
that where 100% of the capital stock is held by "a trustee of
the unsustainable portion of respondent's debt into
funds for pension or other employee retirement or
common stocks, which have voting rights. If we
separation benefits," the trustee is a Philippine national if "at
indulge petitioners on their proposal, the Omnibus
least sixty percent (60%) of the fund will accrue to the
Creditors which are foreign corporations, shall have
benefit of Philippine nationals." Likewise, Section 1(b) of the
control over 77.7% of Bayantel, a public utility
Implementing Rules of the FIA provides that "for stocks to
company. This is precisely the scenario proscribed by
be deemed owned and held by Philippine citizens or
the Filipinization provision of the Constitution.
Philippine nationals, mere legal title is not enough to meet
Therefore, the Court of Appeals acted correctly in sustaining
the required Filipino equity. Full beneficial ownership of
the 40% debt-to-equity ceiling on conversion. (emphasis
the stocks, coupled with appropriate voting rights, is
supplied)
essential." (emphasis supplied)

As shown by the quoted legislative enactments, administrative rulings, opinions,

In emphasizing the twin requirements of "beneficial ownership" and "control" in
and this Court's decisions, the Grandfather Rule not only finds basis, but more
determining compliance with the required Filipino equity in Gamboa, the en banc
importantly, it implements the Filipino equity requirement, in the Constitution.
Court explicitly cited with approval the SEC en banc's application in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather
Rule, to wit: Application of the Grandfather
Rule with the Control Test.
Significantly, the SEC en banc, which is the collegial body
statutorily empowered to issue rules and opinions on behalf Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule
of SEC, has adopted the Grandfather Rule in determining in determining compliance with the minimum Filipino equity requirement vis--
compliance with the 60-40 ownership requirement in favor vis the Control Test. This confusion springs from the erroneous assumption that
of Filipino citizens mandated by the Constitution for certain the use of one method forecloses the use of the other.
economic activities. This prevailing SEC ruling, which
the SEC correctly adopted to thwart any
As exemplified by the above rulings, opinions, decisions and this Court's April
circumvention of the required Filipino "ownership and
21, 2014 Decision, the Control Test can be, as it has been, applied jointly with
control," is laid down in the 25 March 2010 SEC en banc
the Grandfather Rule to determine the observance of foreign ownership
ruling in Redmont Consolidated Mines, Corp. v. McArthur
restriction in nationalized economic activities. The Control Test and the
Mining, Inc., et al. . . . (emphasis supplied)
Grandfather Rule are not, as it were, incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather, these
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel methods can, if appropriate, be used cumulatively in the determination
Communications, Inc., 11 denied the foreign creditors' proposal to convert part of the ownership and control of corporations engaged in fully or partly
of Bayantel's debts to common shares of the company at a rate of 77.7%. nationalized activities, as the mining operation involved in this case or the
Supposedly, the conversion of the debts to common shares by the operation of public utilities as in Gamboa or Bayantel.
foreign creditors would be done, both directly and indirectly, in order to
meet the control test principle under the FIA. Under the proposed
The Grandfather Rule, standing alone, should not be used to determine the
structure, the foreign creditors would own 40% of the outstanding capital stock
Filipino ownership and control in a corporation, as it could result in an otherwise
of the telecommunications company on a direct basis, while the remaining 40%
foreign corporation rendered qualified to perform nationalized or partly
of shares would be registered to a holding company that shall retain, on a direct
nationalized activities. Hence, it is only when the Control Test is first
basis, the other 60% equity reserved for Filipino citizens. Nonetheless, the
complied with that the Grandfather Rule may be applied. Put in another
Court found the proposal non-compliant with the Constitutional
manner, if the subject corporation's Filipino equity falls below the threshold 60%,
requirement of Filipino ownership as the proposed structure would give
the corporation is immediately considered foreign-owned, in which case, the
more than 60% of the ownership of the common shares of Bayantel to the
need to resort to the Grandfather Rule disappears.
foreign corporations, viz.:

On the other hand, a corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino corporation if
282
there is no doubt as to who has the "beneficial ownership" and
"control" of the corporation. In that instance, there is no need for a
dissection or further inquiry on the ownership of the corporate shareholders in
both the investing and investee corporation or the application of the
Grandfather Rule. 12 As a corollary rule, even if the 60-40 Filipino to foreign
equity ratio is apparently met by the subject or investee corporation, a resort
to the Grandfather Rule is necessary if doubt exists as to the locus of
the "beneficial ownership" and "control." In this case, a further
investigation as to the nationality of the personalities with the beneficial
ownership and control of the corporate shareholders in both the investing and
investee corporations is necessary.
As explained in the April 21, 2012 Decision, the "doubt" that demands the
application of the Grandfather Rule in addition to or in tandem with the Control
Test is not confined to, or more bluntly, does not refer to the fact that the
apparent Filipino ownership of the corporation's equity falls below the 60%
threshold. Rather, "doubt" refers to various indicia that the "beneficial
ownership" and "control" of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. As provided in DOJ
Opinion No. 165, Series of 1984, which applied the pertinent provisions of the
Anti-Dummy Law in relation to the minimum Filipino equity requirement in the
Constitution, "significant indicators of the dummy status" have been recognized
in view of reports "that some Filipino investors or businessmen are being utilized
or [are] allowing themselves to be used as dummies by foreign investors"
specifically in joint ventures for national resource exploitation. These indicators
are:
1. That the foreign investors provide practically all the funds
for the joint investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically
all the technological support for the joint venture;
3. That the foreign investors, while being minority
stockholders, manage the company and prepare all
economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of
Registration of Linear Works Realty Development Corporation, 13 the SEC held
that when foreigners contribute more capital to an enterprise, doubt
exists as to the actual control and ownership of the subject corporation
even if the 60% Filipino equity threshold is met. Hence, the SEC in that
one ordered a further investigation, viz.:
. . . The [SEC Enforcement and Prosecution Department
(EPD)] maintained that the basis for determining the level of
foreign participation is the number of shares subscribed,
regardless of the par value. Applying such an interpretation,
the EPD rules that the foreign equity participation in
Linearworks Realty Development Corporation amounts to
26.41% of the corporation's capital stock since the amount
of shares subscribed by foreign nationals is 1,795 only out of
the 6,795 shares. Thus, the subject corporation is
compliant with the 40% limit on foreign equity
participation. Accordingly, the EPD dismissed the
complaint, and did not pursue any investigation against the
subject corporation.
xxx xxx xxx
. . . [I]n this respect we find no error in the assailed order
made by the EPD. The EPD did not err when it did not take
into account the par value of shares in determining
compliance with the constitutional and statutory restrictions
on foreign equity.
However, we are aware that some unscrupulous
individuals employ schemes to circumvent the
constitutional and statutory restrictions on foreign
equity. In the present case, the fact that the shares of
the Japanese nationals have a greater par value but
only have similar rights to those held by Philippine
citizens having much lower par value, is highly
suspicious. This is because a reasonable investor would
expect to have greater control and economic rights
than other investors who invested less capital than
him. Thus, it is reasonable to suspect that there may be
secret arrangements between the corporation and the
stockholders wherein the Japanese nationals who
subscribed to the shares with greater par value
actually have greater control and economic rights
contrary to the equality of shares based on the articles of
incorporation.
With this in mind, we find it proper for the EPD to
investigate the subject corporation. The EPD is advised to
avail of the Commission's subpoena powers in order to
gather sufficient evidence, and file the necessary complaint.
As will be discussed, even if at first glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present case that gives
rise to a reasonable suspicion that the Filipino shareholders do not actually have
the requisite number of control and beneficial ownership in petitioners Narra,
Tesoro, and McArthur. Hence, a further investigation and dissection of the extent
of the ownership of the corporate shareholders through the Grandfather Rule is
justified.
Parenthetically, it is advanced that the application of the Grandfather Rule is
impractical as tracing the shareholdings to the point when natural persons hold
283
 rights to the stocks may very well lead to an investigation ad infinitum. Suffice it Total 10,000 P10,000,000.00 P2,7
to say in this regard that, while the Grandfather Rule was originally intended to
trace the shareholdings to the point where natural persons hold the shares, the ======= ============ ======
SEC had already set up a limit as to the number of corporate layers the
attribution of the nationality of the corporate shareholders may be applied.

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic)
In a 1977 internal memorandum, the SEC suggested applying the Grandfather
holds 66.63% of Sara Marie's shares while the same Canadian company MBMI
Rule on two (2) levels of corporate relations for publicly-held corporations or
holds 33.31% of Sara Marie's shares. Nonetheless, it is admitted that Olympic
where the shares are traded in the stock exchanges, and to three (3) levels for
did not pay a single peso for its shares. On the contrary, MBMI paid for 99% of
closely held corporations or the shares of which are not traded in the stock
the paid-up capital of Sara Marie.
exchanges. 14 These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc. 15 that the application of the Grandfather Rule cannot go
beyond the level of what is reasonable.

Name Nationality Number Amount Amount

A doubt exists as to the extent of control and
beneficial ownership of MBMI over the petitioners of Shares Subscribed
and their investing corporate stockholders.

Filipino 6,663 P6,663,000.00

In the Decision subject of this recourse, the Court applied the Grandfather Rule
to determine the matter of true ownership and control over the petitioners as
Development Corp. 17
doubt exists as to the actual extent of the participation of MBMI in the equity of
the petitioners and their investing corporations. MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,7
Filipino 1 P1,000.00
We considered the following membership and control structures and like
Fernando B. Esguerra Filipino 1 P1,000.00
nuances:
Filipino 1 P1,000.00
Tesoro Emmanuel G. Hernando Filipino 1 P1,000.00
American 1 P1,000.00
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds
Canadian 1 P1,000.00
59.97% of the 10,000 common shares of petitioner Tesoro while the Canadian-
owned company, MBMI, holds 39.98% of its shares.
Total 10,000 P10,000,000.00 P2,8
Name Nationality Number Amount Amount Paid
======= ============ =====
of Shares Subscribed
The fact that MBMI had practically provided all the funds in Sara Marie
and Tesoro creates serious doubt as to the true extent of its (MBMI)
Mining, Inc. Filipino 5,997 P5,997,000.00
control and ownership over both Sara Marie and Tesoro since, as observed
urces, Inc. 16 Canadian 3,998 P3,998,000.00 by the SEC, "a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital than him." The
lazar Filipino 1 P1,000.00
application of the Grandfather Rule is clearly called for, and as shown below, the
. Esguerra Filipino 1 P1,000.00 Filipinos' control and economic benefits in petitioner Tesoro (through Sara Marie)
fall below the threshold 60%, viz.:
Agcaoili Filipino 1 P1,000.00
Mason American 1 P1,000.00 Filipino participation in petitioner Tesoro: 40.01%
awkel Canadian 1 P1,000.00

(Filipino equity in Sara Marie) x 59.97 (Sara Marie's share in Tesoro) =
284
 ======= ============ ======

(shares of individual Filipino shareholders [SHs] in Tesoro)

In turn, 66.63% of Madridejos' shares were held by Olympic while 33.31% of its
shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up
capital of Madridejos and it was MBMI that provided 99.79% of the paid-up
Foreign participation in petitioner Tesoro: 59.99%
capital of Madridejos.

(Foreign equity in Sara Marie) x 59.97 (Sara Marie's share in Tesoro) Name Nationality Number Amount Amount
of Shares Subscribed

(MBMI's direct participation in Tesoro) + .02% (shares of foreign individual SHs in Tesoro)
Filipino 6,663 P6,663,000.00
Development Corp. 19
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,8
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner Tesoro does Filipino 1 P1,000.00
not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art.
Fernando
XII of the Constitution. Hence, the appellate court's observation that B. aEsguerra
Tesoro is Filipino 1 P1,000.00
foreign corporation not entitled to an MPSA is apt. Filipino 1 P1,000.00
Emmanuel G. Hernando Filipino 1 P1,000.00
McArthur
American 1 P1,000.00
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% Canadian 1 P1,000.00
of its 10,000 common shares is owned by supposedly Filipino Madridejos Mining

Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI.
Total 10,000 P10,000,000.00 P2,8

Name Nationality Number Amount Amount Paid ======= ============ ======

of Shares Subscribed

Again, the fact that MBMI had practically provided all the funds in
Mining Filipino 5,997 P5,997,000.00
Madridejos and McArthur creates serious doubt as to the true extent of
n its control and ownership of MBMI over both Madridejos and McArthur.
The application of the Grandfather Rule is clearly called for, and as will be shown
urces, Inc. 18 Canadian 3,998 P3,998,000.00 below, MBMI, along with the other foreign shareholders, breached the maximum
alazar Filipino 1 P1,000.00 limit of 40% ownership in petitioner McArthur, rendering the petitioner
disqualified to an MPSA:
B. Esguerra Filipino 1 P1,000.00
Agcaoili Filipino 1 P1,000.00 Filipino participation in petitioner McArthur: 40.01%
Mason American 1 P1,000.00
awkel Canadian 1 P1,000.00
(Filipino equity in Madridejos) x 59.97 (Madridejos' share in McArthur) =

Total 10,000 P10,000,000.00
(shares of individual Filipino SHs in McArthur) =

285
 ======= ============ ====

Foreign participation in petitioner McArthur: 59.99%

(Foreign equity in Madridejos) x 59.97 (Madridejos' share in McArthur)
(MBMI's direct participation in McArthur) + .02% (shares of foreign individual SHs in McArthur)
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI
contributed 99.75% of PLMDC's paid-up capital. This fact creates serious
doubt as to the true extent of MBMI's control and ownership over both
PLMDC and Narra since "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than
him." Thus, the application of the Grandfather Rule is justified. And as will be
shown, it is clear that the Filipino ownership in petitioner Narra falls below the
limit prescribed in both the Constitution and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner
McArthur, as compared to 59.99% foreign ownership of its shares, it is clear that
petitioner McArthur does not comply with the minimum Filipino equity (Filipino equity in PLMDC) x 59.97 (PLMDC's share in Narra) =
requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate
court did not err in holding that petitioner McArthur is a foreign corporation not
entitled to an MPSA. (shares of individual Filipino SHs in McArthur) =

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining Foreign participation in petitioner Narra: 60.36%
& Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its
shares.
(Foreign equity in PLMDC) x 59.97 (PLMDC's share in Narra)
Name Nationality Number Amount
of Shares Subscribed (MBMI's direct participation in Narra) + .02% (shares of foreign individual SHs in McArthur)

Mining Filipino 5,997 P5,997,000.00

ent Corp.
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64%
es, Inc. 20 Canadian 3,996 P3,996,000.00 Filipino ownership of its shares, it is clear that petitioner Narra does not comply
with the minimum Filipino equity requirement imposed in Section 2, Article XII
doza, Jr. Filipino 1 P1,000.00
of the Constitution. Hence, the appellate court did not err in holding that
ndez Filipino 1 P1,000.00 petitioner McArthur is a foreign corporation not entitled to an MPSA.
ocalan Filipino 1 P1,000.00
It must be noted that the foregoing determination and computation of
on American 1 P1,000.00 petitioners' Filipino equity composition was based on their common
urdy Canadian 1 P1,000.00 shareholdings, not preferred or redeemable shares. Section 6 of the
Corporation Code of the Philippines explicitly provides that "no share may be
aoili Filipino 1 P1,000.00 deprived of voting rights except those classified as 'preferred' or 'redeemable'
bin Filipino 1 P1,000.00 shares." Further, as Justice Leonen puts it, there is "no indication that any of the
shares . . . do not have voting rights, [thus] it must be assumed that all such
shares have voting rights." 22 It cannot therefore be gainsaid that the foregoing
Total 10,000 P10,000,000.00 computation hewed with the pronouncements of Gamboa, as implemented by

286
SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8) 23 Section
2 of which states:
Section 2. All covered corporations shall, at all times,
observe the constitutional or statutory requirement. For
purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH
(a) the total outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote
in the election of directors.
In fact, there is no indication that herein petitioners issued any other class of
shares besides the 10,000 common shares. Neither is it suggested that the
common shares were further divided into voting or non-voting common shares.
Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer
to the 10,000 common shares of each of the petitioners, and there is no need to
separately apply the 60-40 ratio to any segment or part of the said common
shares.
The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the same
mining areas, filed petitions for the denial of petitioners' applications, it should
be clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that
petitioners are foreign corporations not entitled to MPSA is but a necessary
incident of its disposition of the mining dispute presented before it, which is
whether the petitioners are entitled to MPSAs.
Indeed, as the POA has jurisdiction to entertain "disputes involving rights to
mining areas," it necessarily follows that the POA likewise wields the authority to
pass upon the nationality issue involving petitioners, since the resolution of this
issue is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.
WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No
further pleadings shall be entertained. Let entry of judgment be made in due
course.

III. SO ORDERED.
In mining disputes, the POA has jurisdiction to pass upon the
nationality of applications for MPSAs ||| (Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines
Corp., G.R. No. 195580 (Resolution), [January 28, 2015])
Petitioners also scoffed at this Court's decision to uphold the jurisdiction of the
Panel of Arbitrators (POA) of the Department of Environment and Natural
Resources (DENR) since the POA's determination of petitioners' nationalities is
supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax
Mining Ltd. 24 and Philex Mining Corp. v. Zaldivia. 25

The April 21, 2014 Decision did not dilute, much less overturn, this Court's
pronouncements in either Gonzales or Philex Mining that POA's jurisdiction "is
limited only to mining disputes which raise questions of fact," and not judicial
questions cognizable by regular courts of justice. However, to properly recognize
and give effect to the jurisdiction vested in the POA by Section 77 of the
Philippine Mining Act of 1995, 26 and in parallel with this Court's ruling in
Celestial Nickel Mining Exploration Corporation v. Macroasia Corp., 27 the Court
has recognized in its Decision that in resolving disputes "involving rights to
mining areas" and "involving mineral agreements or permits," the POA has
jurisdiction to make a preliminary finding of the required nationality of the
corporate applicant in order to determine its right to a mining area or a mineral
agreement.
Republic Act No. 9285 April 2, 2004
There is certainly nothing novel or aberrant in this approach. In ejectment and
unlawful detainer cases, where the subject of inquiry is possession de facto, the AN ACT TO INSTITUTIONALIZE THE USE OF AN ALTERNATIVE
jurisdiction of the municipal trial courts to make a preliminary adjudication DISPUTE RESOLUTION SYSTEM IN THE PHILIPPINES AND TO
regarding ownership of the real property involved is allowed, but only for ESTABLISH THE OFFICE FOR ALTERNATIVE DISPUTE
purposes of ruling on the determinative issue of material possession. RESOLUTION, AND FOR OTHER PURPOSES

287
Be it enacted by the Senate and House of Representatives of the (d) "Arbitration" means a voluntary dispute resolution process in
Philippines in Congress assembled: which one or more arbitrators, appointed in accordance with the
agreement of the parties, or rules promulgated pursuant to this Act,
resolve a dispute by rendering an award;
CHAPTER 1 - GENERAL PROVISIONS

(e) "Arbitrator" means the person appointed to render an award,

SECTION 1. Title. - This act shall be known as the "Alternative Dispute
alone or with others, in a dispute that is the subject of an arbitration
Resolution Act of 2004."
agreement;

SEC. 2. Declaration of Policy. - it is hereby declared the policy of the

(f) "Award" means any partial or final decision by an arbitrator in
State to actively promote party autonomy in the resolution of disputes or
resolving the issue in a controversy;
the freedom of the party to make their own arrangements to resolve their
disputes. Towards this end, the State shall encourage and actively
promote the use of Alternative Dispute Resolution (ADR) as an important (g) "Commercial Arbitration" An arbitration is "commercial if it
means to achieve speedy and impartial justice and declog court dockets. covers matter arising from all relationships of a commercial nature,
As such, the State shall provide means for the use of ADR as an efficient whether contractual or not;
tool and an alternative procedure for the resolution of appropriate cases.
Likewise, the State shall enlist active private sector participation in the
(h) "Confidential information" means any information, relative to
settlement of disputes through ADR. This Act shall be without prejudice
the subject of mediation or arbitration, expressly intended by the
to the adoption by the Supreme Court of any ADR system, such as
source not to be disclosed, or obtained under circumstances that
mediation, conciliation, arbitration, or any combination thereof as a
would create a reasonable expectation on behalf of the source that
means of achieving speedy and efficient means of resolving cases
the information shall not be disclosed. It shall include (1)
pending before all courts in the Philippines which shall be governed by
communication, oral or written, made in a dispute resolution
such rules as the Supreme Court may approve from time to time.
proceedings, including any memoranda, notes or work product of
the neutral party or non-party participant, as defined in this Act; (2)
SEC. 3. Definition of Terms. - For purposes of this Act, the term: an oral or written statement made or which occurs during mediation
or for purposes of considering, conducting, participating, initiating,
continuing of reconvening mediation or retaining a mediator; and
(a) "Alternative Dispute Resolution System" means any process or
(3) pleadings, motions manifestations, witness statements, reports
procedure used to resolve a dispute or controversy, other than by
filed or submitted in an arbitration or for expert evaluation;
adjudication of a presiding judge of a court or an officer of a
government agency, as defined in this Act, in which a neutral third
party participates to assist in the resolution of issues, which (i) "Convention Award" means a foreign arbitral award made in a
includes arbitration, mediation, conciliation, early neutral Convention State;
evaluation, mini-trial, or any combination thereof;
(j) "Convention State" means a State that is a member of the New
(b) "ADR Provider" means institutions or persons accredited as York Convention;
mediator, conciliator, arbitrator, neutral evaluator, or any person
exercising similar functions in any Alternative Dispute Resolution
(k) "Court" as referred to in Article 6 of the Model Law shall mean a
system. This is without prejudice to the rights of the parties to
Regional Trial Court;
choose nonaccredited individuals to act as mediator, conciliator,
arbitrator, or neutral evaluator of their dispute.
(l) "Court-Annexed Mediation" means any mediation process
conducted under the auspices of the court, after such court has
Whenever reffered to in this Act, the term "ADR practitioners" shall
acquired jurisdiction of the dispute;
refer to individuals acting as mediator, conciliator, arbitrator or
neutral evaluator;
(m) "Court-Referred Mediation" means mediation ordered by a court
to be conducted in accordance with the Agreement of the Parties
(c) "Authenticate" means to sign, execute or adopt a symbol, or
when as action is prematurely commenced in violation of such
encrypt a record in whole or in part, intended to identity the
agreement;
authenticating party and to adopt, accept or establish the
authenticity of a record or term;
288
(n) "Early Neutral Evaluation" means an ADR process wherein
parties and their lawyers are brought together early in a pre-trial
phase to present summaries of their cases and receive a nonbinding
assessment by an experienced, neutral person, with expertise in the
subject in the substance of the dispute;
(o) "Government Agency" means any government entity, office or
officer, other than a court, that is vested by law with quasi-judicial
power to resolve or adjudicate dispute involving the government, its
agencies and instrumentalities, or private persons;
(p) "International Party" shall mean an entity whose place of
business is outside the Philippines. It shall not include a domestic
subsidiary of such international party or a coventurer in a joint
venture with a party which has its place of business in the
Philippines.
The term foreigner arbitrator shall mean a person who is not a
national of the Philippines.
(q) "Mediation" means a voluntary process in which a mediator,
selected by the disputing parties, facilitates communication and
negotiation, and assist the parties in reaching a voluntary
agreement regarding a dispute.
(r) "Mediator" means a person who conducts mediation;
(s) "Mediation Party" means a person who participates in a
mediation and whose consent is necessary to resolve the dispute;
(t) "Mediation-Arbitration" or Med-Arb is a step dispute resolution
process involving both mediation and arbitration;
(u) "Mini-Trial" means a structured dispute resolution method in
which the merits of a case are argued before a panel comprising
senior decision makers with or without the presence of a neutral
third person after which the parties seek a negotiated settlement;
(v) "Model Law" means the Model Law on International Commercial
Arbitration adopted by the United Nations Commission on
International Trade Law on 21 June 1985;
(w) "New York Convention" means the United Nations Convention
on the Recognition and Enforcement of Foreign Arbitral Awards
approved in 1958 and ratified by the Philippine Senate under Senate
Resolution No. 71;
(x) "Non-Convention Award" means a foreign arbitral award made in
a State which is not a Convention State;
(y) "Non-Convention State" means a State that is not a member of
the New York Convention.
(z) "Non-Party Participant" means a person, other than a party or
mediator, who participates in a mediation proceeding as a witness,
resource person or expert;
(aa) "Proceeding" means a judicial, administrative, or other
adjudicative process, including related pre-hearing motions,
conferences and discovery;
(bb) "Record" means an information written on a tangible medium
or stored in an electronic or other similar medium, retrievable form;
and
(cc) "Roster" means a list of persons qualified to provide ADR
services as neutrals or to serve as arbitrators.
SEC. 4. Electronic Signatures in Global and E-Commerce Act. - The
provisions of the Electronic Signatures in Global and E-Commerce Act,
and its implementing Rules and Regulations shall apply to proceeding
contemplated in this Act.
SEC. 5. Liability of ADR Provider and Practitioner. - The ADR
providers and practitioners shall have the same civil liability for the Acts
done in the performance of then duties as that of public officers as
provided in Section 38 (1), Chapter 9, Book of the Administrative Code of
1987.
SEC. 6. Exception to the Application of this Act. - The provisions of
this Act shall not apply to resolution or settlement of the following: (a)
labor disputes covered by Presidential Decree No. 442, otherwise known
as the Labor Code of the Philippines, as amended and its Implementing
Rules and Regulations; (b) the civil status of persons; (c) the validity of a
marriage; (d) any ground for legal separation; (e) the jurisdiction of
courts; (f) future legitime; (g) criminal liability; and (h) those which by
law cannot be compromised.
CHAPTER 2 - MEDIATION
SEC. 7. Scope. - The provisions of this Chapter shall cover voluntary
mediation, whether ad hoc or institutional, other than court-annexed. The
term "mediation' shall include conciliation.
289
SEC. 8. Application and Interpretation. - In applying construing the
provisions of this Chapter, consideration must be given to the need to
promote candor or parties and mediators through confidentiality of the
mediation process, the policy of fostering prompt, economical, and
amicable resolution of disputes in accordance with the principles of
integrity of determination by the parties, and the policy that the decision-
making authority in the mediation process rests with the parties.
SEC. 9. Confidentiality of Information. - Information obtained
through mediation proceedings shall be subject to the following principles
and guidelines:
(a) Information obtained through mediation shall be privileged and
confidential.
(b) A party, a mediator, or a nonparty participant may refuse to
disclose and may prevent any other person from disclosing a
mediation communication.
(c) Confidential Information shall not be subject to discovery and
shall be inadmissible if any adversarial proceeding, whether judicial
or quasi-judicial, However, evidence or information that is otherwise
admissible or subject to discovery does not become inadmissible or
protected from discovery solely by reason of its use in a mediation.
(d) In such an adversarial proceeding, the following persons
involved or previously involved in a mediation may not be compelled
to disclose confidential information obtained during mediation: (1)
the parties to the dispute; (2) the mediator or mediators; (3) the
counsel for the parties; (4) the nonparty participants; (5) any
persons hired or engaged in connection with the mediation as
secretary, stenographer, clerk or assistant; and (6) any other person
who obtains or possesses confidential information by reason of
his/her profession.
(e) The protections of this Act shall continue to apply even of a
mediator is found to have failed to act impartially.
(f) a mediator may not be called to testify to provide information
gathered in mediation. A mediator who is wrongfully subpoenaed
shall be reimbursed the full cost of his attorney's fees and related
expenses.
SEC. 10. Waiver of Confidentiality. - A privilege arising from the
confidentiality of information may be waived in a record, or orally during
a proceeding by the mediator and the mediation parties.
A privilege arising from the confidentiality of information may likewise be
waived by a nonparty participant if the information is provided by such
nonparty participant.
A person who discloses confidential information shall be precluded from
asserting the privilege under Section 9 of this Chapter to bar disclosure of
the rest of the information necessary to a complete understanding of the
previously disclosed information. If a person suffers loss or damages in a
judicial proceeding against the person who made the disclosure.
A person who discloses or makes a representation about a mediation is
preclude from asserting the privilege under Section 9, to the extent that
the communication prejudices another person in the proceeding and it is
necessary for the person prejudiced to respond to the representation of
disclosure.
SEC. 11. Exceptions to Privilege. -
(a) There is no privilege against disclosure under Section 9 if
mediation communication is:
(1) in an agreement evidenced by a record authenticated
by all parties to the agreement;
(2) available to the public or that is made during a session
of a mediation which is open, or is required by law to be
open, to the public;
(3) a threat or statement of a plan to inflict bodily injury or
commit a crime of violence;
(4) internationally used to plan a crime, attempt to
commit, or commit a crime, or conceal an ongoing crime or
criminal activity;
(5) sought or offered to prove or disprove abuse, neglect,
abandonment, or exploitation in a proceeding in which a
public agency is protecting the interest of an individual
protected by law; but this exception does not apply where
a child protection matter is referred to mediation by a court
or a public agency participates in the child protection
mediation;
(6) sought or offered to prove or disprove a claim or
complaint of professional misconduct or malpractice filed
against mediator in a proceeding; or
290
 (7) sought or offered to prove or disprove a claim of
complaint of professional misconduct of malpractice filed
against a party, nonparty participant, or representative of a
party based on conduct occurring during a mediation.
(b) There is no privilege under Section 9 if a court or administrative
agency, finds, after a hearing in camera, that the party seeking
discovery of the proponent of the evidence has shown that the
evidence is not otherwise available, that there is a need for the
evidence that substantially outweighs the interest in protecting
confidentiality, and the mediation communication is sought or
offered in:
(1) a court proceeding involving a crime or felony; or
(2) a proceeding to prove a claim or defense that under the
law is sufficient to reform or avoid a liability on a contract
arising out of the mediation.
(c) A mediator may not be compelled to provide evidence of a
mediation communication or testify in such proceeding.
(d) If a mediation communication is not privileged under an
exception in subsection (a) or (b), only the portion of the
communication necessary for the application of the exception for
nondisclosure may be admitted. The admission of particular
evidence for the limited purpose of an exception does not render
that evidence, or any other mediation communication, admissible
for any other purpose.
SEC. 12. Prohibited Mediator Reports. - A mediator may not make a
report, assessment, evaluation, recommendation, finding, or other
communication regarding a mediation to a court or agency or other
authority that make a ruling on a dispute that is the subject of a
mediation, except:
(a) Where the mediation occurred or has terminated, or where a
settlement was reached.
(b) As permitted to be disclosed under Section 13 of this Chapter.
SEC. 13. Mediator's Disclosure and Conflict of Interest. - The
mediation shall be guided by the following operative principles:
(a) Before accepting a mediation, an individual who is requested to
serve as a mediator shall:
(1) make an inquiry that is reasonable under the
circumstances to determinate whether there are any
known facts that a reasonable individual would consider
likely to affect the impartiality of the mediator, including a
financial or personal interest in the outcome of the
mediation and any existing or past relationship with a party
or foreseeable participant in the mediation; and
(2) disclosure to the mediation parties any such fact known
or learned as soon as is practical before accepting a
mediation.
(b) If a mediation learns any fact described in paragraph (a) (1) of
this section after accepting a mediation, the mediator shall disclose
it as soon as practicable.
At the request of a mediation party, an individual who is requested to
serve as mediator shall disclose his/her qualifications to mediate a
dispute.
This Act does not require that a mediator shall have special qualifications
by background or profession unless the special qualifications of a
mediator are required in the mediation agreement or by the mediation
parties.
SEC. 14. Participation in Mediation. - Except as otherwise provided in
this Act, a party may designate a lawyer or any other person to provide
assistance in the mediation. A lawyer of this right shall be made in
writing by the party waiving it. A waiver of participation or legal
representation may be rescinded at any time.
SEC. 15. Place of Mediation. - The parties are free to agree on the
place of mediation. Failing such agreement, the place of mediation shall
be any place convenient and appropriate to all parties.
SEC. 16. Effect of Agreement to Submit Dispute to Mediation
Under Institutional Rules. - An agreement to submit a dispute to
mediation by any institution shall include an agreement to be bound by
the internal mediation and administrative policies of such institution.
Further, an agreement to submit a dispute to mediation under
international mediation rule shall be deemed to include an agreement to
have such rules govern the mediation of the dispute and for the mediator,
the parties, their respective counsel, and nonparty participants to abide
by such rules.
In case of conflict between the institutional mediation rules and the
provisions of this Act, the latter shall prevail.
291
SEC. 17. Enforcement of Mediated Settlement Agreement. - The
mediation shall be guided by the following operative principles:
(a) A settlement agreement following successful mediation shall be
prepared by the parties with the assistance of their respective
counsel, if any, and by the mediator.
The parties and their respective counsels shall endeavor to make
the terms and condition thereof complete and make adequate
provisions for the contingency of breach to avoid conflicting
interpretations of the agreement.
(b) The parties and their respective counsels, if any, shall sign the
settlement agreement. The mediator shall certify that he/she
explained the contents of the settlement agreement to the parties in
a language known to them.
(c) If the parties so desire, they may deposit such settlement
agreement with the appropriate Clerk of a Regional Trial Court of
the place where one of the parties resides. Where there is a need to
enforce the settlement agreement, a petition may be filed by any of
the parties with the same court, in which case, the court shall
proceed summarily to hear the petition, in accordance with such
rules of procedure as may be promulgated by the Supreme Court.
(d) The parties may agree in the settlement agreement that the
mediator shall become a sole arbitrator for the dispute and shall
treat the settlement agreement as an arbitral award which shall be
subject to enforcement under Republic Act No. 876, otherwise
known as the Arbitration Law, notwithstanding the provisions of
Executive Order No. 1008 for mediated dispute outside of the CIAC.
CHAPTER 3 - OTHER ADR FORMS
SEC. 18. Referral of Dispute to other ADR Forms. - The parties may
agree to refer one or more or all issues arising in a dispute or during its
pendency to other forms of ADR such as but not limited to (a) the
evaluation of a third person or (b) a mini-trial, (c) mediation-arbitration,
or a combination thereof.
For purposes of this Act, the use of other ADR forms shall be governed by
Chapter 2 of this Act except where it is combined with arbitration in
which case it shall likewise be governed by Chapter 5 of this Act.
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial
Arbitration. - International commercial arbitration shall be governed by
the Model Law on International Commercial Arbitration (the "Model Law")
adopted by the United Nations Commission on International Trade Law on
June 21, 1985 (United Nations Document A/40/17) and recommended
approved on December 11, 1985, copy of which is hereto attached as
Appendix "A".
SEC. 20. Interpretation of Model Law. - In interpreting the Model
Law, regard shall be had to its international origin and to the need for
uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United
Nations Commission on International Trade Law dated March 25, 1985
entitled, "International Commercial Arbitration: Analytical Commentary
on Draft Trade identified by reference number A/CN. 9/264."
SEC. 21. Commercial Arbitration. - An arbitration is "commercial" if it
covers matters arising from all relationships of a commercial nature,
whether contractual or not. Relationships of a transactions: any trade
transaction for the supply or exchange of goods or services; distribution
agreements; construction of works; commercial representation or
agency; factoring; leasing, consulting; engineering; licensing;
investment; financing; banking; insurance; joint venture and other forms
of industrial or business cooperation; carriage of goods or passengers by
air, sea, rail or road.
SEC. 22. Legal Representation in International Arbitration. - In
international arbitration conducted in the Philippines, a party may be
presented by any person of his choice. Provided, that such
representative, unless admitted to the practice of law in the Philippines,
shall not be authorized to appear as counsel in any Philippine court, or
any other quasi-judicial body whether or not such appearance is in
relation to the arbitration in which he appears.
SEC. 23. Confidential of Arbitration Proceedings. - The arbitration
proceedings, including the records, evidence and the arbitral award, shall
be considered confidential and shall not be published except (1) with the
consent of the parties, or (2) for the limited purpose of disclosing to the
court of relevant documents in cases where resort to the court is allowed
herein. Provided, however, that the court in which the action or the
appeal is pending may issue a protective order to prevent or prohibit
disclosure of documents or information containing secret processes,
developments, research and other information where it is shown that the
applicant shall be materially prejudiced by an authorized disclosure
thereof.
SEC. 24. Referral to Arbitration. - A court before which an action is
brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.
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SEC. 25. Interpretation of the Act. - In interpreting the Act, the court
shall have due regard to the policy of the law in favor of arbitration.
Where action is commenced by or against multiple parties, one or more
of whom are parties who are bound by the arbitration agreement
although the civil action may continue as to those who are not bound by
such arbitration agreement.
SEC. 26. Meaning of "Appointing Authority.". - "Appointing
Authority" as used in the Model Law shall mean the person or institution
named in the arbitration agreement as the appointing authority; or the
regular arbitration arbitration institution under whose rules the arbitration
is agreed to be conducted. Where the parties have agreed to submit their
dispute to institutional arbitration rules, and unless they have agreed to a
different procedure, they shall be deemed to have agreed to procedure
under such arbitration rules for the selection and appointment of
arbitrators. In ad hoc arbitration, the default appointment of an arbitrator
shall be made by the National President of the Integrated Bar of the
Philippines (IBP) or his duly authorized representative.
SEC. 27. What Functions May be Performed by Appointing
Authority. - The functions referred to in Articles 11(3), 11(4), 13(3) and
14(1) of the Model Law shall be performed by the Appointing Authority,
unless the latter shall fail or refuse to act within thirty (30) days from
receipt of the request in which case the applicant may renew the
application with the Court.
SEC. 28. Grant of Interim Measure of Protection. -
(a) It is not incompatible with an arbitration agreement for a party
to request, before constitution of the tribunal, from a Court an
interim measure of protection and for the Court to grant such
measure. After constitution of the arbitral tribunal and during
arbitral proceedings, a request for an interim measure of protection
or modification thereof, may be made with the arbitral tribunal or to
the extent that the arbitral tribunal has no power to act or is unable
to act effectively, the request may be made with the Court. The
arbitral tribunal is deemed constituted when the sole arbitrator or
the third arbitrator who has been nominated, has accepted the
nomination and written communication of said nomination and
acceptance has been received by the party making request.
(b) The following rules on interim or provisional relief shall be
observed:
(1) Any party may request that provision relief be granted
against the adverse party:
(2) Such relief may be granted:
(i) to prevent irreparable loss or injury:
(ii) to provide security for the performance of any
obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or
omission.
(3) The order granting provisional relief may be
conditioned upon the provision of security or any act or
omission specified in the order.
(4) Interim or provisional relief is requested by written
application transmitted by reasonable means to the Court
or arbitral tribunal as the case may be and the party
against whom the relief is sought, describing in appropriate
detail the precise relief, the party against whom the relief is
requested, the grounds for the relief, and evidence
supporting the request.
(5) The order shall be binding upon the parties.
(6) Either party may apply with the Court for assistance in
Implementing or enforcing an interim measure ordered by
an arbitral tribunal.
(7) A party who does not comply with the order shall be
liable for all damages resulting from noncompliance,
including all expenses, and reasonable attorney's fees, paid
in obtaining the order's judicial enforcement.
SEC. 29. Further Authority for Arbitrator to Grant Interim
Measure of Protection. - Unless otherwise agreed by the parties, the
arbitral tribunal may, at the request of a party, order any party to take
such interim measures of protection as the arbitral tribunal may consider
necessary in respect of the subject matter of the dispute following the
rules in Section 28, paragraph 2. Such interim measures may include but
shall not be limited to preliminary injuction directed against a party,
appointment of receivers or detention, preservation, inspection of
property that is the subject of the dispute in arbitration. Either party may
apply with the Court for assistance in implementing or enforcing an
interim measures ordered by an arbitral tribunal.
SEC. 30. Place of Arbitration. - The parties are free to agree on the
place of arbitration. Failing such agreement, the place of arbitration shall
be in Metro Manila, unless the arbitral tribunal, having regard to the
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circumstances of the case, including the convenience of the parties shall
decide on a different place of arbitration.
The arbitral tribunal may, unless otherwise agreed by the parties, meet at
any place it considers appropriate for consultation among its members,
for hearing witnesses, experts, or the parties, or for inspection of goods,
other property or documents.
SEC. 31. Language of the Arbitration. - The parties are free to agree
on the language or languages to be used in the arbitral proceedings.
Failing such agreement, the language to be used shall be English in
international arbitration, and English or Filipino for domestic arbitration,
unless the arbitral tribunal shall determine a different or another
language or languages to be used in the proceedings. This agreement or
determination, unless otherwise specified therein, shall apply to any
written statement by a party, any hearing and any award, decision or
other communication by the arbitral tribunal.
The arbitral tribunal may order that any documentary evidence shall be
accompanied by a translation into the language or languages agreed
upon by the parties or determined in accordance with paragraph 1 of this
section.
CHAPTER 5 - DOMESTIC ARBITRATION
SEC. 32. Law Governing Domestic Arbitration. - Domestic arbitration
shall continue to be governed by Republic Act No. 876, otherwise known
as "The Arbitration Law" as amended by this Chapter. The term "domestic
arbitration" as used herein shall mean an arbitration that is not
international as defined in Article (3) of the Model Law.
SEC. 33. Applicability to Domestic Arbitration. - Article 8, 10, 11,
12, 13, 14, 18 and 19 and 29 to 32 of the Model Law and Section 22 to
31 of the preceding Chapter 4 shall apply to domestic arbitration.
CHAPTER 6 - ARBITRATION OF CONSTRUCTION DISPUTES
SEC. 34. Arbitration of Construction Disputes: Governing Law. -
The arbitration of construction disputes shall be governed by Executive
Order No. 1008, otherwise known as the Constitution Industry Arbitration
Law.
SEC. 35. Coverage of the Law. - Construction disputes which fall within
the original and exclusive jurisdiction of the Construction Industry
Arbitration Commission (the "Commission") shall include those between
or among parties to, or who are otherwise bound by, an arbitration
agreement, directly or by reference whether such parties are project
owner, contractor, subcontractor, quantity surveyor, bondsman or issuer
of an insurance policy in a construction project.
The Commission shall continue to exercise original and exclusive
jurisdiction over construction disputes although the arbitration is
"commercial" pursuant to Section 21 of this Act.
SEC. 36. Authority to Act as Mediator or Arbitrator. - By written
agreement of the parties to a dispute, an arbitrator may act as mediator
and a mediator may act as arbitrator. The parties may also agree in
writing that, following a successful mediation, the mediator shall issue
the settlement agreement in the form of an arbitral award.
SEC. 37. Appointment of Foreign Arbitrator. - The Construction
Industry Arbitration Commission (CIAC) shall promulgate rules to allow
for the appointment of a foreign arbitrator or coarbitrator or chairman of
a tribunal a person who has not been previously accredited by CIAC:
Provided, That:
(a) the dispute is a construction dispute in which one party is an
international party
(b) the person to be appointed agreed to abide by the arbitration
rules and policies of CIAC;
(c) he/she is either coarbitrator upon the nomination of the
international party; or he/she is the common choice of the two
CIAC-accredited arbitrators first appointed one of whom was
nominated by the international party; and
(d) the foreign arbitrator shall be of different nationality from the
international party.
SEC. 38. Applicability to Construction Arbitration. - The provisions
of Sections 17 (d) of Chapter 2, and Section 28 and 29 of this Act shall
apply to arbitration of construction disputes covered by this Chapter.
SEC. 39. Court to Dismiss Case Involving a Construction Dispute. -
A regional trial court which a construction dispute is filed shall, upon
becoming aware, not later than the pretrial conference, that the parties
had entered into an arbitration to be conducted by the CIAC, unless both
parties, assisted by their respective counsel, shall submit to the regional
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trial court a written agreement exclusive for the Court, rather than the
CIAC, to resolve the dispute.
CHAPTER 7 - JUDICIAL REVIEW OF ARBITRAL AWARDS
A. DOMESTIC AWARDS
SEC. 40. Confirmation of Award. - The confirmation of a domestic
arbitral award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same
manner as final and executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial
court in accordance with the Rules of Procedure to be promulgated by the
Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to
be executory as provided under E.O. No. 1008.
SEC. 41. Vacation Award. - A party to a domestic arbitration may
question the arbitral award with the appropriate regional trial court in
accordance with the rules of procedure to be promulgated by the
Supreme Court only on those grounds enumerated in Section 25 of
Republic Act No. 876. Any other ground raised against a domestic arbitral
award shall be disregarded by the regional trial court.
B. FOREIGN ARBITRAL AWARDS
SEC. 42. Application of the New York Convention. - The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by the said Convention.
The recognition and enforcement of such arbitral awards shall be filled
with regional trial court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide
that the party relying on the award or applying for its enforcement shall
file with the court the original or authenticated copy of the award and the
arbitration agreement. If the award or agreement is not made in any of
the official languages, the party shall supply a duly certified translation
thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration
award was made is a party to the New York Convention.
If the application for rejection or suspension of enforcement of an award
has been made, the regional trial court may, if it considers it proper,
vacate its decision and may also, on the application of the party claiming
recognition or enforcement of the award, order the party to provide
appropriate security.
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards
Not Covered by the New York Convention. - The recognition and
enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, grounds of comity
and reciprocity, recognize and enforce a nonconvention award as a
convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment. - A foreign
arbitral award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not a judgment
of a foreign court.
A foreign arbitral award, when confirmed by the regional trial court, shall
be enforced as a foreign arbitral award and not as a judgment of a
foreign court.
A foreign arbitral award, when confirmed by the regional trial court, shall
be enforced in the same manner as final and executory decisions of
courts of law of the Philippines.
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a foreign
arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedural rules
to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the regional trial court.
SEC. 46. Appeal from Court Decisions on Arbitral Awards. - A
decision of the regional trial court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules of procedure to be promulgated
by the Supreme Court.
The losing party who appeals from the judgment of the court confirming
an arbitral award shall required by the appealant court to post
counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.
SEC. 47. Venue and Jurisdiction. - Proceedings for recognition and
enforcement of an arbitration agreement or for vacation, setting aside,
correction or modification of an arbitral award, and any application with a
court for arbitration assistance and supervision shall be deemed as
special proceedings and shall be filled with the regional trial court (i)
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where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties. - In a special proceeding for
recognition and enforcement of an arbitral award, the Court shall send
notice to the parties at their address of record in the arbitration, or if any
party cannot be served notice at such address, at such party's last known
address. The notice shall be sent at least fifteen (15) days before the
date set for the initial hearing of the application.
CHAPTER 8 - MISCELLANEOUS PROVISIONS
SEC. 49. Office for Alternative Dispute Resolution. - There is hereby
established the Office for Alternative Dispute Resolution as an attached
agency to the Department of Justice (DOJ) which shall have a Secretariat
to be headed by an executive director. The executive director shall be
appointed by the President of the Philippines.
The objective of the office are:
(a) to promote, develop and expand the use of ADR in the private
and public sectors; and
To assist the government to monitor, study and evaluate the use by the
public and the private sector of ADR, and recommend to Congress
needful statutory changes to develop. Strengthen and improve ADR
practices in accordance with world standards.
SEC. 50. Powers and Functions of the Office for Alternative
Dispute Resolution. - The Office for Alternative Dispute Resolution shall
have the following powers and functions:
(a) To formulate standards for the training of the ADR practitioners
and service providers;
(b) To certify that such ADR practitioners and ADR service providers
have undergone the professional training provided by the office;
(c) To coordinate the development, implementation, monitoring, and
evaluation of government ADR programs;
(d) To charge fees for their services; and
(e) To perform such acts as may be necessary to carry into effect
the provisions of this Act.
SEC. 51. Appropriations. - The amount necessary to carry out the
provisions of this Act shall be included in the General Appropriations Act
of the year following its enactment into law and thereafter.
SEC. 52. Implementing Rules and Regulations (IRR). - Within one
(1) month after the approval of this Act, the secretary of justice shall
convene a committee that shall formulate the appropriate rules and
regulations necessary for the implementation of this Act. The committee,
composed of representatives from:
(a) the Department of Justice;
(b) the Department of Trade and Industry;
(c) the Department of the Interior and Local Government;
(d) the president of the Integrated Bar of the Philippines;
(e) A representative from the arbitration profession; and
(f) A representative from the mediation profession; and
(g) A representative from the ADR organizations
shall within three (3) months after convening, submit the IRR to the Joint
Congressional Oversight Committee for review and approval. The
Oversight Committee shall be composed of the chairman of the Senate
Committee on Justice and Human Rights, chairman of the House
Committee on Justice, and one (1) member each from the majority and
minority of both Houses.
The Joint Oversight Committee shall become functus officio upon
approval of the IRR.
SEC. 53. Applicability of the Katarungan Pambarangay. - This Act
shall not be interpreted to repeal, amend or modify the jurisdiction of the
Katarungan Pambarangay under Republic Act No. 7160, otherwise known
as the Local Government Code of 1991.
SEC. 54. Repealing Clause. - All laws, decrees, executive orders, rules
and regulations which are inconsistent with the provisions of this Act are
hereby repealed, amended or modified accordingly.
SEC. 55. Separability Clause. - If for any reason or reasons, any
portion or provision of this Act shall be held unconstitutional or invalid, all
other parts or provisions not affected shall thereby continue to remain in
full force and effect.
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SEC. 56. Effectivity. - This act shall take effect fifteen days (15) after
its publication in at least two (2) national newspapers of general
circulation.

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