FIRST DIVISION

[G.R. No. 107199. July 22, 2003]

CEBU CONTRACTORS CONSORTIUM CO., petitioner, vs. COURT OF APPEALS and

MAKATI LEASING & FINANCE CORPORATION, respondents.

DECISION

AZCUNA, J.:

The instant Petition for Review on Certiorari stems from a complaint for collection of a
sum of money with replevin[1] filed by respondent Makati Leasing and Finance Corporation
(MLFC) against petitioner Cebu Contractors Consortium Company (CCCC) before the
Regional Trial Court of Makati.[2]

MLFC alleges that on August 25, 1976 a lease agreement[3] relating to various
equipment was entered into between MLFC, as lessor, and CCCC, as lessee. The terms and
conditions of the lease were defined in said agreement and in two lease schedules of
payment.[4] To secure the lease rentals, a chattel mortgage, and a subsequent amendment
thereto, were executed in favor of MLFC over other various equipment owned by CCCC.[5]

On June 30, 1977, CCCC began defaulting on the lease rentals,[6] prompting MLFC to
send demand letters.[7] When the demand letters were not heeded, MLFC filed a complaint
for the payment of the rentals due and prayed that a writ of replevin be issued in order to
obtain possession of the equipment leased and to foreclose on the equipment mortgaged.[8]

For its part, CCCC alleges[9] that it had a contract with the then Ministry of Public
Highways[10] for the construction of the Iligan-Cagayan de Oro-Butuan Road. Being in need
of additional capital, it approached MLFC for the purpose of securing a loan. MLFC agreed
to extend financial assistance to CCCC but, instead of a customary loan covered by a
security, MLFC induced CCCC to adopt and apply a sale and lease back scheme. The
arrangement provided for the equipment of CCCC to be made to appear as sold to MLFC
and then leased back to CCCC which will then pay lease rentals to MLFC. The rentals will be
treated as installment payments to repurchase the equipment. It is CCCCs claim that the
arrangement is nothing more than an equitable mortgage.

Pursuant to the sale and lease back scheme, CCCC executed two deeds of sale over its
equipment in favor of MLFC, which were then leased back to CCCC. [11] To facilitate payment
of the rentals, MLFC required CCCC to execute a deed of assignment of its collectibles from
the Ministry of Public Highways.[12] In addition, CCCC was also required to execute a chattel
mortgage over its other properties as a security.

CCCCs position is that it is no longer indebted to MLFC because the total amounts
collected by the latter from the Ministry of Public Highways, by virtue of the deed of
assignment, and from the proceeds of the foreclosed chattels were more than enough to
cover CCCCs liabilities. Finally, CCCC submits that, in any event, the deed of assignment
itself already freed CCCC from its obligation to MLFC.

The trial court rendered a decision[13] upholding the lease agreement and finding CCCC
liable to MLFC for P1,067,861.79 in lease rentals plus 25% attorneys fees and P486,442.28
in litigation expenses.[14]On appeal[15] by CCCC, the appellate court affirmed the trial courts
decision but reduced the attorneys fees to 10% and totally eliminated the awarded
litigation expenses.[16] CCCC is now before this Court seeking to reverse the decision of the
Court of Appeals.[17]

CCCC presents the following assigned errors:

1|Page
 I. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN UPHOLDING THE SO-
CALLED SALE-LEASE BACK SCHEME OF THE PRIVATE RESPONDENT WHEN
THE SAME IS IN REALITY NOTHING BUT AN EQUITABLE MORTGAGE.

II. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN [NOT] HOLDING
THAT THE DEED OF ASSIGNMENT EXECUTED BY PETITIONER IN FAVOR OF
PRIVATE RESPONDENT FOR THE LATTER TO COLLECT FROM THE MINISTRY
OF HIGHWAYS COMPLETELY FREED PETITIONER OF ITS OBLIGATION TO THE
PRIVATE RESPONDENT.

III. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN FINDING

PETITIONER STILL LIABLE TO THE PRIVATE RESPONDENT DESPITE THE
FACT THAT PETITIONER HAD ALREADY OVER-PAID SAID RESPONDENT.

IV. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN NOT GRANTING
PETITIONERS CLAIM FOR DAMAGES AGAINST THE PRIVATE RESPONDENT.

With respect to the first assigned error, this Court finds in favor of CCCC.

It is clear that the transaction between CCCC and MLFC is what is popularly known as a
financial leasing or financing lease. Transactions of this sort are not new to the commercial
world and have been recognized as genuine or legitimate contracts, accorded with
statutory and administrative recognition.[18]

In Beltran v. PAIC Finance Corporation,[19] this Court had occasion to discuss the nature
of a financing lease:

A financing lease may be seen to be a contract sui generis, possessing some but not
necessarily all the elements of an ordinary or civil law lease. Thus, legal title to the
equipment leased is lodged in the financial lessor. The financial lessee is entitled to the
possession and use of the leased equipment. At the same time, the financial lessee is
obligated to make periodic payments denominated as lease rentals, which enable the
financial lessor to recover the purchase price of the equipment which had been paid to the
supplier thereof.

MLFCs own evidence discloses that it offers two types of financing lease: a direct lease
and a sale-lease back. A direct lease is one where the client buys equipment through a
financing company. MLFC would, in effect, initially purchase equipment that is needed by
the client and then lease it to the latter. In a sale-lease back, the client already has the
equipment but needs working capital. The client sells to MLFC equipment that it owns,
which will be leased back to him. The transaction between CCCC and MLFC involved the
second type of financing lease.[20]

CCCC argues that the sale and lease back scheme is nothing more than an equitable
mortgage and, consequently, asks for its reformation.

Section 3 (d) of Republic Act No. 5980,[21] otherwise known as the Financing Company
Act, defines Financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy percent (70%) of the purchase price or acquisition cost, including
any incidental expenses and a margin of profit over an obligatory period of not less than
two (2) years during which the lessee has the right to hold and use the leased property with
the right to expense the lease rentals paid to the lessor and bears the cost of repairs,

2|Page
maintenance, insurance and preservation thereof, but with no obligation or option on his part
to purchase the leased property from the owner-lessor at the end of the lease contract.[22]

The above definition was originally found in Section 1 (i) of the Revised Rules and
Regulations implementing the original Republic Act No. 5980. When Republic Act No. 8556
was enacted, amending Republic Act No. 5980, the definition was given a statutory nature.

In Investors Finance Corporation v. Court of Appeals,[23] the Court, applying the

definition of financial leasing, differentiated between a true financial leasing and an
ordinary loan with mortgage in the guise of a lease. It was explained that the definition
contemplates the extension of credit to assist a buyer in acquiring movable property which
he can use and eventually own. Thus, in a true financial leasing, a finance company
purchases on behalf of or at the instance of the lessee the equipment which the latter is
interested to buy but has insufficient funds for the purpose. The finance company therefore
leases the equipment to the lessee in consideration of the periodic payment by the lessee of
a fixed amount of rental. However, where the client already owns the equipment but needs
additional working capital and the finance company purchases such equipment with the
intention of leasing it back to him, the lease agreement is simulated to disguise the true
transaction that is a loan with security. In that instance, it is clear that the intention of the
parties was not to enable the client to acquire and use the equipment, but to extend to him
a loan.

Going back to the case at bar, MLFC admits that the transaction with CCCC involved the
purchase of already-owned equipment. Consequently, there can be no doubt that the
transaction between the parties is not one of financial leasing, as defined by law, but simply
a loan secured by a chattel mortgage over CCCCs equipment.

When the true intention of the parties to a contract is not expressed in the instrument
purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or
accident, the remedy of the aggrieved party is to ask for reformation of the instrument
under Articles 1359 and 1362 of the Civil Code, to the end that their true agreement may be
expressed therein.[24] Under Article 1144 of the Civil Code, the prescriptive period for
actions based upon a written contract and for reformation of an instrument is ten
years.[25] The right of action for reformation accrued from the date of execution of the
contract of lease in 1976.[26] This was properly exercised by CCCC when it filed its answer
with counterclaim to MLFCs complaint in 1978 and asked for the reformation of the lease
contract.[27]

Moving on to the second assigned error, CCCC claims that it had assigned to MLFC its
collectibles from the Ministry of Public Highways, amounting to P2,469,142.50. The
assignment was duly approved by the Ministry of Public Highways. Consequently, CCCC
argues that MLFC should be barred from suing because the obligation had been transferred
to and assumed by the Ministry of Public Highways.

This Court finds that the execution of the deed of assignment in favor of MLFC did not
completely free CCCC from its obligations to MLFC under the lease agreement. On its face,
the deed speaks of an assignment. However, in light of the circumstances obtaining at the
time of the execution of said deed of assignment, this Court cannot regard the transaction
as an absolute conveyance. In the interpretation of contracts, if the terms are clear and
leave no doubt as to the intention of the contracting parties, the literal meaning of the
stipulations shall control. But when the words appear contrary to the evident intention of
the parties, the latter shall prevail over the former. In order to judge the intention of the
parties, their contemporaneous and subsequent acts shall principally be considered.[28]

The deed of assignment was dated August 27, 1976. CCCC, by its own evidence, [29] was
shown to have made partial payments on the obligation, apart from those obtained by
MLFC from the Ministry of Public Highways. These partial payments were made after the

3|Page
execution of the deed of assignment. Since subsequent payments were made by CCCC itself,
it follows that the execution of the deed of assignment did not extinguish its obligation.

In addition, the fact that a chattel mortgage was executed after the execution of the
deed of assignment further confirms the existence of CCCCs obligation under the lease
agreement. If indeed the deed of assignment extinguished the obligation, there was no
reason to execute a chattel mortgage. Evidently, the only conceivable reason for the
execution of a chattel mortgage was because the obligation under the lease agreement
subsisted.

In Citizens Surety and Insurance Co., Inc. v. Court of Appeals,[30] this Court was faced with
the same issue. Petitioner in that case, a surety company, issued two surety bonds in behalf
of respondent therein to guaranty the fulfillment of an obligation under a contract of sale
the latter had entered into with the Singer Sewing Machine Company. In consideration of
the bonds, two indemnity agreements were executed by said respondent followed by a
deed of assignment executed on the same date. After respondents failure to comply with its
obligation under the contract of sale, petitioner was compelled to pay under the surety
bonds. When respondent failed to reimburse it, petitioner filed a collection
suit. Respondent opposed the money claim, and asserted that the surety bonds and the
indemnity agreements had been extinguished by the execution of the deed of assignment.

The Court held therein that the deed of assignment cannot be regarded as an absolute
conveyance whereby the obligation under the surety bonds was automatically
extinguished. Respondents subsequent acts showed that the deed of assignment was
intended merely as a security for the issuance of the two bonds. The Court found that
partial payments were made after the execution of the deed of assignment to satisfy the
obligation under the two surety bonds. Moreover, a second real estate mortgage in favor of
petitioner was executed by respondent. These circumstances showed that no debt was
extinguished upon the execution of the deed of assignment, which was intended merely as
another security for the issuance of the surety bonds.

This Court now comes to the issue of overpayment. While the lease agreement is in
reality an equitable mortgage, the records show that the equipment have already been sold
by MLFC,[31] and that the proceeds from the sale were credited to CCCCs account.

The Court of Appeals ruled that CCCC is indebted to MLFC in the amount
of P1,048,655.00 and disregarded CCCCs own computation showing an alleged
overpayment. This Court agrees with this finding. CCCCs computation proved to be
incomplete and unreliable. Noticeably absent from the computation are the penalties
incurred by CCCC, when it defaulted on the lease rentals, which would have the effect of
substantially increasing CCCCs debt.[32] Moreover, the Court of Appeals computation is part
of the findings of fact made by the appellate court. Such findings and conclusions should
not be disturbed on appeal, in the absence of any showing that these are unfounded or
arbitrarily arrived at or that the Court of Appeals had failed to consider an important
evidence to the contrary.[33]

Finding that CCCC is still indebted to MLFC, the formers claim for damages must also
fail.

WHEREFORE, the decision appealed from is hereby AFFIRMED. No costs.

SO ORDERED.

4|Page
 FIRST DIVISION

PCI LEASING AND FINANCE, INC., G.R. No. 142618

Petitioner,

Present:

PUNO, C.J., Chairperson,

- versus - *SANDOVAL-GUTIERREZ,

CORONA,

AZCUNA, and

GARCIA, JJ.

GIRAFFE-X CREATIVE IMAGING, INC.,

Respondent. Promulgated:

July 12, 2007

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

DECISION

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as
amended by R.A. No. 8556 in relation to Articles 1484 and 1485 of the Civil Code, petitioner
PCI Leasing and Finance, Inc. (PCI LEASING, for short) has directly come to this
Court via this petition for review under Rule 45 of the Rules of Court to nullify and set aside
the Decision and Resolution dated December 28, 1998 and February 15, 2000, respectively,
of the Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-

5|Page
34266, a suit for a sum of money and/or personal property with prayer for a writ of
replevin, thereat instituted by the petitioner against the herein respondent, Giraffe-X
Creative Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered

into a Lease Agreement,[1] whereby the former leased out to the latter one (1) set of Silicon
High Impact Graphics and accessories worth P3,900,00.00 and one (1) unit of Oxberry
Cinescan 6400-10 worth P6,500,000.00. In connection with this agreement, the parties
subsequently signed two (2) separate documents, each denominated as Lease
Schedule.[2] Likewise forming parts of the basic lease agreement were two (2) separate
documents denominated Disclosure Statements of Loan/Credit Transaction (Single Payment
or Installment Plan)[3] that GIRAFFE also executed for each of the leased equipment. These
disclosure statements inter alia described GIRAFFE, vis--visthe two aforementioned
equipment, as the borrower who acknowledged the net proceeds of the loan, the net amount
to be financed, the financial charges, the total installment payments that it must pay monthly
for thirty-six (36) months, exclusive of the 36% per annum late payment charges. Thus, for
the Silicon High Impact Graphics, GIRAFFE agreed to pay P116,878.21 monthly, and
for Oxberry Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay
PCI LEASING for 36 months of the lease, exclusive of monetary penalties imposable, if
proper, is as indicated below:

P116,878.21 @ month (for the Silicon High

Impact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE

(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount
of P3,120,000.00 by way of guaranty deposit, a sort of performance and compliance bond
for the two equipment. Furthermore, the same agreement embodied a standard
acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or other
accounts due.

6|Page
 A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-
payment obligations. And following a three-month default, PCI LEASING, through one Atty.
Florecita R. Gonzales, addressed a formal pay-or-surrender-equipment type of demand
letter[4] dated February 24, 1998 to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the
instant case against GIRAFFE. In its complaint,[5] docketed in said court as Civil Case No. 98-
34266 and raffled to Branch 227[6] thereof, PCI LEASING prayed for the issuance of a writ of
replevin for the recovery of the leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING]

and against the defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the

subject properties;

b. Ordering the defendant to pay the balance of

rental/obligation in the total amount of P8,248,657.47
inclusive of interest and charges thereon;

c. Ordering defendant to pay plaintiff the expenses of litigation

and cost of suit. (Words in bracket added.)

Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of
replevin, paving the way for PCI LEASING to secure the seizure and delivery of the
equipment covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein

arguing that the seizure of the two (2) leased equipment stripped PCI LEASING of its cause
of action. Expounding on the point, GIRAFFE argues that, pursuant to Article 1484 of the
Civil Code on installment sales of personal property, PCI LEASING is barred from further
pursuing any claim arising from the lease agreement and the companion contract
documents, adding that the agreement between the parties is in reality a lease of movables
with option to buy. The given situation, GIRAFFE continues, squarely brings into applicable
play Articles 1484 and 1485 of the Civil Code, commonly referred to as the Recto Law. The
cited articles respectively provide:

7|Page
 ART. 1484. In a contract of sale of personal property the price of
which is payable in installments, the vendor may exercise any of the
following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or
more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void. (Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts

purporting to be leases of personal property with option to buy, when the
lessor has deprived the lessee of the possession or enjoyment of the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code
applies to its contractual relation with PCI LEASING because the lease agreement in
question, as supplemented by the schedules documents, is really a lease with option to
buy under the companion article, Article 1485. Consequently, so GIRAFFE argues, upon the
seizure of the leased equipment pursuant to the writ of replevin, which seizure is
equivalent to foreclosure, PCI LEASING has no further recourse against it. In brief, GIRAFFE
asserts in its Motion to Dismiss that the civil complaint filed by PCI LEASING is proscribed
by the application to the case of Articles 1484 and 1485, supra, of the Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract
with GIRAFFE is a straight lease without an option to buy. Prescinding therefrom, PCI
LEASING rejects the applicability to the suit of Article 1484 in relation to Article 1485
of the Civil Code, claiming that, under the terms and conditions of the basic agreement, the
relationship between the parties is one between an ordinary lessor and an ordinary lessee.

In a decision[7] dated December 28, 1998, the trial court granted GIRAFFEs motion
to dismiss mainly on the interplay of the following premises: 1) the lease agreement
package, as memorialized in the contract documents, is akin to the contract contemplated
in Article 1485 of the Civil Code, and 2) GIRAFFEs loss of possession of the leased

8|Page
equipment consequent to the enforcement of the writ of replevin is akin to foreclosure, the
condition precedent for application of Articles 1484 and 1485 [of the Civil
Code]. Accordingly, the trial court dismissed Civil Case No. Q-98-34266, disposing as
follows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having

relinquished any claim to the personal properties subject of replevin which
are now in the possession of the plaintiff [PCI LEASING], plaintiff is DEEMED
fully satisfied pursuant to the provisions of Articles 1484 and 1485 of the
New Civil Code. By virtue of said provisions, plaintiff is DEEMED estopped
from further action against the defendant, the plaintiff having recovered thru
(replevin) the personal property sought to be payable/leased on
installments, defendants being under protection of said RECTO LAW. In view
thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in its
resolution of February 15, 2000,[8] petitioner has directly come to this Court via this
petition for review raising the sole legal issue of whether or not the underlying Lease
Agreement, Lease Schedules and the Disclosure Statements that embody the financial
leasing arrangement between the parties are covered by and subject to the consequences
of Articles 1484 and 1485 of the New Civil Code.

As in the court below, petitioner contends that the financial leasing arrangement it
concluded with the respondent represents a straight lease covered by R.A. No.
5980, the Financing Company Act, as last amended by R.A. No. 8556, otherwise known
as Financing Company Act of 1998, and is outside the application and coverage of the Recto
Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or
regulatory legislation, merely providing a regulatory framework for the organization,
registration, and regulation of the operations of financing companies. As couched, it does
not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional financial
leasing and other financial leasing concepts. Thus, the relevancy of Article 18 of the Civil
Code which reads:

Article 18. - In matters which are governed by special laws, their

deficiency shall be supplied by the provisions of this [Civil] Code.

9|Page
 Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement
because such agreement, by definition, does not confer on the lessee the option to buy the
property subject of the financial lease. To the petitioner, the absence of an option-to-buy
stipulation in a financial leasing agreement, as understood under R.A. No. 8556, prevents
the application thereto of Articles 1484 and 1485 of the Civil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made
to appear as a financial leasing,[9] a term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract

under which the lessor purchases or acquires, at the instance of the lessee,
machinery, equipment, office machines, and other movable or immovable
property in consideration of the periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least seventy (70%) of the
purchase price or acquisition cost, including any incidental expenses and a
margin of profit over an obligatory period of not less than two (2) years
during which the lessee has the right to hold and use the leased property but
with no obligation or option on his part to purchase the leased property from
the owner-lessor at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the following mix:
the imperatives of equity, the contractual stipulations in question and the actuations of
parties vis--vis their contract, treated disguised transactions technically tagged as financing
lease, like here, as creating a different contractual relationship. Notable among the Courts
decisions because of its parallelism with this case is BA Finance Corporation v. Court of
Appeals[10] which involved a motor vehicle. Thereat, the Court has treated a purported
financial lease as actually a sale of a movable property on installments and prevented
recovery beyond the buyers arrearages. Wrote the Court in BA Finance:

The transaction involved is one of a "financial lease" or "financial

leasing," where a financing company would, in effect, initially purchase
a mobile equipment and turn around to lease it to a client who gets, in
addition, an option to purchase the property at the expiry of the lease
period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

10 | P a g e
 "'Financing companies,' are primarily organized for the
purpose of extending credit facilities to consumers either
by leasing of motor vehicles, and office machines and
equipment, and other movable property."

"'Credit' shall mean any loan, any contract to sell, or sale

or contract of sale of property or service, under which part or
all of the price is payable subsequent to the making of such sale
or contract; any rental-purchase contract; .;"

The foregoing provisions indicate no less than a mere financing

scheme extended by a financing company to a client in acquiring a motor
vehicle and allowing the latter to obtain the immediate possession and use
thereof pending full payment of the financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor
vehicle] was for thirty six (36) months at a "monthly rental" (P1,689.40), or
for a total amount of P60,821.28. The contract also contained [a] clause
[requiring the Lessee to give a guaranty deposit in the amount of P20,800.00]
xxx

After the private respondent had paid the sum of P41,670.59,

excluding the guaranty deposit of P20,800.00, he stopped further payments.
Putting the two sums together, the financing company had in its hands the
amount of P62,470.59 as against the total agreed "rentals" of P60,821.28 or
an excess of P1,649.31.

The respondent appellate court considered it only just and

equitable for the guaranty deposit made by the private respondent to be
applied to his arrearages and thereafter to hold the contract
terminated.Adopting the ratiocination of the court a quo, the appellate court
said:

xxx In view thereof, the guaranty deposit of P20,800.00

made by the defendant should and must be credited in his favor,
in the interest of fairness, justice and equity. The plaintiff
should not be allowed to unduly enrich itself at the
expense of the defendant. xxx This is even more
compelling in this case where although the transaction, on
its face, appear ostensibly, to be a contract of lease, it is
actually a financing agreement, with the plaintiff financing
the purchase of defendant's automobile . The Court is
constrained, in the interest of truth and justice, to go into this
aspect of the transaction between the plaintiff and the
defendant with all the facts and circumstances existing in

11 | P a g e
 this case, and which the court must consider in deciding the
case, if it is to decide the case according to all the facts. xxx.

xxx xxx xxx

Considering the factual findings of both the court a quo and the
appellate court, the only logical conclusion is that the private respondent
did opt, as he has claimed, to acquire the motor vehicle, justifying then
the application of the guarantee deposit to the balance still due and
obligating the petitioner to recognize it as an exercise of the option by
the private respondent. The result would thereby entitle said
respondent to the ownership and possession of the vehicle as the buyer
thereof. We, therefore, see no reversible error in the ultimate judgment of
the appellate court.[11] (Italics in the original; underscoring supplied and
words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,[12] the Court viewed and thus
declared a financial lease agreement as having been simulated to disguise a simple loan
with security, it appearing that the financing company purchased equipment already
owned by a capital-strapped client, with the intention of leasing it back to the latter.

In the present case, petitioner acquired the office equipment in question for their
subsequent lease to the respondent, with the latter undertaking to pay a monthly fixed
rental therefor in the total amount of P292,531.00, or a total of P10,531,116.00 for the
whole 36 months. As a measure of good faith, respondent made an up-front guarantee
deposit in the amount of P3,120,000.00. The basic agreement provides that in the event the
respondent fails to pay any rental due or is in a default situation, then the petitioner shall
have cumulative remedies, such as, but not limited to, the following:[13]

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty deposit

may be applied towards the payment of liquidated damages;

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it
not been cancelled, as additional penalty;

12 | P a g e
 5. Recovery of any and all amounts advanced by PCI LEASING
for GIRAFFEs account xxx;

6. Recover all expenses incurred in repossessing, removing,

repairing and storing the property; and,

7. Recover all damages suffered by PCI LEASING by reason of the

default.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be
forfeited in the event the respondent, for any reason, returns the equipment before the
expiration of the lease.

At bottom, respondent had paid the equivalent of about a years lease rentals, or a
total of P3,510,372.00, more or less. Throw in the guaranty deposit (P3,120,000.00) and
the respondent had made a total cash outlay of P6,630,372.00 in favor of the petitioner.
The replevin-seized leased equipment had, as alleged in the complaint, an
estimated residual value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was
instituted on May 4, 1998. Adding all cash advances thus made to the residual value of the
equipment, the total value which the petitioner had actually obtained by virtue of its lease
agreement with the respondent amounts
to P13,530,372.00 (P3,510,372.00 + P3,120,000.00 + P6,900.000.00 = P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment and the
Oxberry Cinescan was, as stated in no less than the petitioners letter to the respondent
dated November 11, 1996[14] approving in the latters favor a lease facility,
was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from the total
amount, i.e., P13,530,372.00, creditable to the respondent, it would clearly appear that
petitioner realized a gross income of P5,430,372.00 from its lease transaction with the
respondent. The amount of P5,430,372.00 is not yet a final figure as it does not include the
rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioners demand letter[15] fixed the amount of P8,248,657.47 as

representing the respondents rental balance which became due and demandable
consequent to the application of the acceleration and other clauses of the lease
agreement. Assuming, then, that the respondent may be compelled to pay P8,248,657.47,
then it would end up paying a total of P21,779,029.47 (P13,530,372.00 + P8,248,657.47
= P21,779,029.47) for its use - for a year and two months at the most - of the equipment. All
in all, for an investment of P8,100,000.00, the petitioner stands to make in a years time, out
of the transaction, a total of P21,779,029.47, or a net of P13,679,029.47, if we are to
believe its outlandish legal submission that the PCI LEASING-GIRAFFE Lease
Agreement was an honest-to-goodness straight lease.

13 | P a g e
 A financing arrangement has a purpose which is at once practical and salutary. R.A.
No. 8556 was, in fact, precisely enacted to regulate financing companies operations with
the end in view of strengthening their critical role in providing credit and services to small
and medium enterprises and to curtail acts and practices prejudicial to the public interest,
in general, and to their clienteles, in particular.[16] As a regulated activity, financing
arrangements are not meant to quench only the thirst for profit. They serve a higher
purpose, and R.A. No. 8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights
and obligations, as between each other, of the financial lessor and the lessee. In
determining the respective responsibilities of the parties to the agreement, courts,
therefore, must train a keen eye on the attendant facts and circumstances of the case in
order to ascertain the intention of the parties, in relation to the law and the written
agreement. Likewise, the public interest and policy involved should be considered. It may
not be amiss to state that, normally, financing contracts come in a standard prepared form,
unilaterally thought up and written by the financing companies requiring only the personal
circumstances and signature of the borrower or lessee; the rates and other important
covenants in these agreements are still largely imposed unilaterally by the financing
companies. In other words, these agreements are usually one-sided in favor of such
companies. A perusal of the lease agreement in question exposes the many remedies
available to the petitioner, while there are only the standard contractual prohibitions
against the respondent. This is characteristic of standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter[17] sent to the
respondent, petitioner fashioned its claim in the alternative: payment of the full amount
of P8,248,657.47, representing the unpaid balance for the entire 36-month lease
period or the surrender of the financed asset under pain of legal action. To quote the letter:

Demand is hereby made upon you to pay in full your outstanding

balance in the amount of P8,248,657.47 on or before March 04, 1998 OR to
surrender to us the one (1) set Silicon High Impact Graphics and one (1) unit
Oxberry Cinescan 6400-10

We trust you will give this matter your serious and preferential
attention. (Emphasis added).

Evidently, the letter did not make a demand for the payment of
the P8,248,657.47 AND the return of the equipment; only either one of the two was
required. The demand letter was prepared and signed by Atty. Florecita R. Gonzales,
presumably petitioners counsel. As such, the use of or instead of and in the letter could
hardly be treated as a simple typographical error, bearing in mind the nature of the
demand, the amount involved, and the fact that it was made by a lawyer. Certainly Atty.
Gonzales would have known that a world of difference exists between and and or in the
manner that the word was employed in the letter.

14 | P a g e
 A rule in statutory construction is that the word "or" is a disjunctive
term signifying dissociation and independence of one thing from other things
enumerated unless the context requires a different interpretation.[18]

In its elementary sense, "or", as used in a statute, is a disjunctive

article indicating an alternative. It often connects a series of words or
propositions indicating a choice of either. When "or" is used, the various
members of the enumeration are to be taken separately.[19]

The word "or" is a disjunctive term signifying disassociation and

independence of one thing from each of the other things enumerated.[20]

The demand could only be that the respondent need not return the equipment if it
paid the P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent
can keep possession of the equipment if it exercises its option to acquire the same by
paying the unpaid balance of the purchase price. Stated otherwise, if the respondent was
not minded to exercise its option of acquiring the equipment by returning them, then it
need not pay the outstanding balance. This is the logical import of the letter: that the
transaction in this case is a lease in name only. The so-called monthly rentals are in truth
monthly amortizations of the price of the leased office equipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE
lease agreement is in reality a lease with an option to purchase the equipment. This has
been made manifest by the actions of the petitioner itself, foremost of which is the
declarations made in its demand letter to the respondent. There could be no other
explanation than that if the respondent paid the balance, then it could keep the equipment
for its own; if not, then it should return them. This is clearly an option to purchase given to
the respondent. Being so, Article 1485 of the Civil Code should apply.

The present case reflects a situation where the financing company can withhold and
conceal - up to the last moment - its intention to sell the property subject of the finance
lease, in order that the provisions of the Recto Law may be circumvented. It may be, as
petitioner pointed out, that the basic lease agreement does not contain a purchase option
clause. The absence, however, does not necessarily argue against the idea that what the
parties are into is not a straight lease, but a lease with option to purchase. This Court has, to
be sure, long been aware of the practice of vendors of personal property of denominating a
contract of sale on installment as one of lease to prevent the ownership of the object of the
sale from passing to the vendee until and unless the price is fully paid. As this Court noted
in Vda. de Jose v. Barrueco:[21]

Sellers desirous of making conditional sales of their goods, but who

do not wish openly to make a bargain in that form, for one reason or
another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small
consideration at the end of term, provided the so-called rent has been
duly paid, or with stipulations that if the rent throughout the term is

15 | P a g e
 paid, title shall thereupon vest in the lessee. It is obvious that such
transactions are leases only in name. The so-called rent must necessarily
be regarded as payment of the price in installments since the due payment
of the agreed amount results, by the terms of the bargain, in the transfer of
title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili,[22] a lease
agreement was declared to be in fact a sale of personal property by installments. Said the
Court:

. . . There can hardly be any question that the so-called contracts of

lease on which the present action is based were veritable leases of personal
property with option to purchase, and as such come within the purview of
the above article [Art. 1454-A of the old Civil Code on sale of personal
property by installment]. xxx

Being leases of personal property with option to purchase as

contemplated in the above article, the contracts in question are subject to the
provision that when the lessor in such case has chosen to deprive the lessee
of the enjoyment of such personal property, he shall have no further action
against the lessee for the recovery of any unpaid balance owing by the latter,
agreement to the contrary being null and void.

In choosing, through replevin, to deprive the respondent of possession of the leased

equipment, the petitioner waived its right to bring an action to recover unpaid rentals on
the said leased items. Paragraph (3), Article 1484 in relation to Article 1485 of the Civil
Code, which we are hereunder re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of

which is payable in installments, the vendor may exercise any of the
following remedies:

xxx xxx xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.

16 | P a g e
ART. 1485. The preceding article shall be applied to contracts purporting to be
leases of personal property with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,[23] the

remedies provided for in Article 1484 of the Civil Code are alternative, not cumulative. The
exercise of one bars the exercise of the others. This limitation applies to contracts
purporting to be leases of personal property with option to buy by virtue of the same
Article 1485. The condition that the lessor has deprived the lessee of possession or
enjoyment of the thing for the purpose of applying Article 1485 was fulfilled in this case by
the filing by petitioner of the complaint for a sum of money with prayer for replevin to
recover possession of the office equipment.[24] By virtue of the writ of seizure issued by the
trial court, the petitioner has effectively deprived respondent of their use, a situation
which, by force of the Recto Law, in turn precludes the former from maintaining an action
for recovery of accrued rentals or the recovery of the balance of the purchase price plus
interest.[25]

The imperatives of honest dealings given prominence in the Civil Code under the
heading: Human Relations, provide another reason why we must hold the petitioner to its
word as embodied in its demand letter. Else, we would witness a situation where even if
the respondent surrendered the equipment voluntarily, the petitioner can still sue upon its
claim. This would be most unfair for the respondent. We cannot allow the petitioner to
renege on its word. Yet more than that, the very word or as used in the letter
conveys distinctly its intention not to claim both the unpaid balance and the equipment. It is
not difficult to discern why: if we add up the amounts paid by the respondent, the residual
value of the property recovered, and the amount claimed by the petitioner as sued upon
herein (for a total of P21,779,029.47), then it would end up making an instant killing out
of the transaction at the expense of its client, the respondent. The Recto Law was precisely
enacted to prevent this kind of aberration. Moreover, due to
considerations of equity, public policy and justice, we cannot allow this to

happen. Not only to the respondent, but those similarly situated who may fall prey to a
similar scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision
is AFFIRMED.

Costs against petitioner.

SO ORDERED.

17 | P a g e
18 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G. R. No. 91378 June 9, 1992

FIRST MALAYAN LEASING AND FINANCE CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, CRISOSTOMO B. VITUG and ESTATE OF VICENTE
TRINIDAD, Represented by Widow GLORIA D. TRINIDAD, respondents.

GRIÑO-AQUINO. J.:

This case brings to the fore the importance of motor vehicle registration in determining
who should be liable for the death or injuries suffered by passengers or third persons as a
consequence of the operation of a motor vehicle.

On June 26, 1984, Crisostomo B. Vitug filed Civil Case No. 84-25186 in the Regional Trial
Court of Manila. Branch XLIII, against the defendant. First Malayan Leasing and Finance
Corporation (FMLFC for short), to recover damages for physical injuries, loss of personal
effects, and the wreck of his car as a result of a three-vehicle collision on December 14,
1983. involving his car, another car, and an Isuzu cargo truck registered in the name of
FMLFC and driven by one Crispin Sicat.

The evidence shows that while Vitug's car was at a full stop at the intersection of New York
Street and Epifanio delos Santos Avenue (EDSA) in Cubao, Quezon City, northward-bound,
the on-coming Isuzu cargo truck bumped, a Ford Granada car behind him with such force
that the Ford car was thrown on top of Vitug's car crushing its roof. The cargo truck
thereafter struck Vitug's car in the rear causing the gas tank to explode and setting the car
ablaze.

Stunned by the impact. Vitug was fortunately extricated from his car by solicitous
bystanders before the vehicle exploded. However, two of his passengers were burned to
death. Vitug's car, valued at P70,000, was a total loss.

When he regained consciousness in the hospital, Vitug discovered that he had lost various
personal articles valued at P48,950, namely a necklace with a diamond pendant, a GP
watch, a pair of Christian Dior eyeglasses. a gold Cross pen and a pair of Bally shoes. Vitug
also suffered injuries producing recurring pains in his neck and back. Upon his physician's
advice, he received further medical treatment in the United States which cost him
US$2,373.64 for his first trip, and US$5,596.64 for the second.

At the time of the accident on December 14, 1983, the Isuzu cargo truck was registered in
the name of the First Malayan Leasing and Finance Corporation (FMLFC).

However, FMLFC denied any liability, alleging that it was not the owner of the truck.
neither the employer of the driver Crispin Sicat, because it had sold the truck to Vicente
Trinidad on September 24. 1980, after the latter had paid all his monthly amortizations
under the financing lease agreement between FMLFC and Trinidad.

On FMLFC's motion, the lower court granted FMLFC's leave to file a third-party complaint
against Trinidad and admitted the third-party complaint filed therewith.

19 | P a g e
Answering the third-party complaint the Estate of Vicente Trinidad admitted that the truck
was operated by the deceased during his lifetime. Nevertheless it raised the defense that
the estate of Vicente Trinidad was no longer existing because the same had long been
settled and partitioned extra judicially by his heirs.

On August 25, 1986, the trial court rendered a decision sentencing FMLFC to pay Vitug the
sum of P133,950 with interest at the legal rate from the filing of the complaint until fully
paid, plus the sum of P10,000 as attorneys fees and costs.

FMLFC appealed in due time to the Court of Appeals which rendered a decision on
November 27, 1989 modifying the appealed judgment by ordering the third-party
defendant-appellee (Estate of Vicente Trinidad) to indemnify the appellant, FMLFC, for
whatever amount the latter may pay Vitug under the judgment. In all other respects, the
trial court's decision was affirmed.

FMLFC has filed this petition for review on certiorari praying that the decision of the
appellate court be reversed and set aside.

On February 14, 1990, the Court dismissed the petition for insufficiency in form and
substance, having failed to comply with the Rules of Court and Circular 1-88 requiring the
submission of (1) proof of service of the petition on the adverse party, and (2) a certified
true copy of the decision of the Court of Appeals. Moreover, the petition was filed late on
February 1, 1990, the due date being January 27, 1990.

The petitioner filed a motion for reconsideration. On April 16, 1990. we granted the same
and reinstated the petition. Without giving it due course, we required the respondents to
comment.

After deliberating on the petition, the comments of the private respondents and the
petitioner's reply thereto, we find the petition to be bereft of merit, hence, resolved to deny
it.

In the first place, the factual finding of the trial court and the Court of Appeals that the
Isuzu vehicle which figured in the mishap was still registered in the name of FMLFC at the
time of the accident is not reviewable by this Court in a petition for certiorari under Rule 45
of Rules of Court.

This Court has consistently ruled that regardless of who the actual owner of a motor
vehicle might be, the registered owner is the operator of the same with respect to the
public and third persons, and as such, directly and primarily responsible for the
consequences of its operation. In contemplation of law, the owner/operator of record is the
employer of the driver, the actual operator and employer being considered merely as his
agent (MYC-Agro-Industrial Corporation vs. Vda. de Caldo, 132 SCRA 10. citing Vargas vs.
Langcay. 6 SCRA 174; Tamayo vs. Aquino. 105 Phil. 949).

We believe that it is immaterial whether or not the driver was actually

employed by the operator of record. It is even not necessary to prove who
the actual owner of the vehicle and the employer of the driver is. Granting
that, in this case, the father of the driver is the actual owner and that he is the
actual employer, following the well-settled principle that the operator of
record continues to be the operator of the vehicle in contemplation of law, as
regards the public and third persons, and as such is responsible for the
consequences incident to its operation we must hold and consider such
owner-operator of record as the employer, in contemplation of law, of the
driver. And, to give effect to this policy of law as enunciated in the above
cited decisions of this Court, we must now extend the same and consider the
actual operator and employer as the agent of the operator of record." (Vargas

20 | P a g e
 vs. Langcay, 6 SCRA 178; citing Montoya vs. Ignacio, G.R. No. L-5868, Dec. 29,
1953; Timbol vs. Osias, G.R. No. L-7547, April 30, 1955; Vda. de Medina vs.
Cresencia, G.R. No. L-8194, July 11, 1956; Necesito vs. Paras, G.R. No. L10605,
June 30, 1955.)

. . . Were the registered owner allowed to evade responsibility by proving

who the supposed transferee or owner is, it would be easy for him by
collusion with others or otherwise, to escape said responsibility and transfer
the same to an indefinite person, or to one who possesses no property with
which to respond financially for the damage or injury done (Erezo vs. Jepte,
102 Phil 103.)

. . . The registered owner or operator of record is the one liable for damages
caused by a vehicle regardless of any alleged sale or lease made thereon."
(MYC-Agro- Industrial Corp. vs. Vda. de Caldo, 132 SCRA 11.)

In order for a transfer of ownership of a motor vehicle to be valid against third persons. it
must be recorded in the Land Transportation Office. For, although valid between the
parties, the sale cannot affect third persons who rely on the public registration of the motor
vehicle as conclusive evidence of ownership. In law, FMLFC was the owner and operator of
the Izusu cargo truck, hence, fully liable to third parties injured by its operation due to the
fault or negligence of the driver thereof.

WHEREFORE, the petition for review is DENIED for lack of merit. Costs against the
petitioner.

SO ORDERED.

21 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 98275 November 13, 1992

BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS, REGIONAL TRIAL COURT OF ANGELES CITY, BRANCH LVI,
CARLOS OCAMPO, INOCENCIO TURLA, SPOUSES MOISES AGAPITO and SOCORRO M.
AGAPITO and NICOLAS CRUZ, respondents.

MELO, J.:

The question of petitioner's responsibility for damages when on March 6, 1983, an accident
occurred involving petitioner's Isuzu ten-wheeler truck then driven by an employee of Lino
Castro is the thrust of the petition for review on certiorari now before Us considering that
neither the driver nor Lino Castro appears to be connected with petitioner.

On October 13, 1988, the disputed decision in the suit below was rendered by the court of
origin in this manner:

1. Ordering Rock B.A. and Rogelio Villar y Amare jointly and severally to pay
the plaintiffs as follows:

a) To the plaintiff Carlos Ocampo — P121,650.00;

b) To the plaintiff Moises Ocampo — P298,500.00

c) To the plaintiff Nicolas Cruz — P154,740.00

d) To the plaintiff Inocencio Turla, Sr. — 48,000.00

2. Dismissing the case against Lino Castro

3. Dismissing the third-party complaint against STRONGHOLD

4. Dismissing all the counterclaim of the defendants and third-party

defendants.

5. Ordering ROCK to reimburse B.A. the total amount of P622,890.00 which

the latter is adjudged to pay to the plaintiffs. (p. 46, Rollo)

Respondent Court of Appeals affirmed the appealed disposition in toto through Justice
Rasul, with Justices De Pano, Jr. and Imperial concurring, on practically the same grounds
arrived at by the court a quo (p. 28, Rollo). Efforts exerted towards re-evaluation of the
adverse were futile (p. 37, Rollo). Hence, the instant petition.

The lower court ascertained after due trial that Rogelio Villar y Amare, the driver of the
Isuzu truck, was at fault when the mishap occurred in as much as he was found guilty
beyond reasonable doubt of reckless imprudence resulting in triple homicide with multiple
physical injuries with damage to property in a decision rendered on February 16, 1984 by
the Presiding Judge of Branch 6 of the Regional Trial Court stationed at Malolos, Bulacan.

22 | P a g e
Petitioner was adjudged liable for damages in as much as the truck was registered in its
name during the incident in question, following the doctrine laid down by this Court
in Perez vs. Gutierrez (53 SCRA 149 [1973]) and Erezo, et al. vs. Jepte (102 Phil. 103 [1957]).
In the same breadth, Rock Component Philippines, Inc. was ordered to reimburse
petitioner for any amount that the latter may be adjudged liable to pay herein private
respondents as expressly stipulated in the contract of lease between petitioner and Rock
Component Philippines, Inc. Moreover, the trial court applied Article 2194 of the new Civil
Code on solidary accountability of join tortfeasors insofar as the liability of the driver,
herein petitioner and Rock Component Philippines was concerned (pp. 6-7, Decision; pp.
44-45, Rollo).

To the question of whether petitioner can be held responsible to the victim albeit the truck
was leased to Rock Component Philippines when the incident occurred, the appellate court
answered in the affirmative on the basis of the jurisprudential dogmas which, as aforesaid,
were relied upon by the trial court although respondent court was quick to add
the caveat embodied in the lease covenant between petitioner and Rock Component
Philippines relative to the latter's duty to reimburse any amount which may be adjudged
against petitioner (pp. 32-33, Rollo).

Petitioner asseverates that it should not have been haled to court and ordered to respond
for the damage in the manner arrived at by both the trial and appellate courts since
paragraph 5 of the complaint lodged by the plaintiffs below would indicate that petitioner
was not the employer of the negligent driver who was under the control an supervision of
Lino Castro at the time of the accident, apart from the fact that the Isuzu truck was in the
physical possession of Rock Component Philippines by virtue of the lease agreement.

Aside from casting clouds of doubt on the propriety of invoking

the Perez and Erezo doctrines, petitioner continue to persist with the idea that the
pronouncements of this Court in Duavit vs. Court of Appeals (173 SCRA 490 [1989])
and Duquillo vs. Bayot (67 Phil 131 [1939]) dovetail with the factual and legal scenario of
the case at hand. Furthermore, petitioner assumes, given the so-called hiatus on the basis
for the award of damages as decreed by the lower and appellate courts, that Article 2180 of
the new Civil Code on vicarious liability will divest petitioner of any responsibility absent
as there is any employer-employee relationship between petitioner and the driver.

Contrary to petitioner's expectations, the recourse instituted from the rebuffs it

encountered may not constitute a sufficient foundation for reversal of the impugned
judgment of respondent court. Petitioner is of the impression that
the Perez and Erezo cases are inapplicable due to the variance of the generative facts in said
cases as against those obtaining in the controversy at bar. A contrario, the lesson imparted
by Justice Labrador in Erezo is still good law, thus:

. . . In previous decisions, We already have held that the registered owner of a

certificate of public convenience is liable to the public for the injuries or
damages suffered by passengers or third persons caused by the operation of
said vehicle, even though the same had been transferred to a third person.
(Montoya vs. Ignacio, 94 Phil., 182 50 Off. Gaz., 108; Roque vs. Malibay
Transit, Inc., G.R. No. L-8561, November 18, 1955; Vda. de Medina vs.
Cresencia, 99 Phil., 506, 52 Off. Gaz., [10], 4606.) The principle upon which
this doctrine is based is that in dealing with vehicles registered under the
Public Service Law, the public has the right to assume or presumed that the
registered owner is the actual owner thereof, for it would be difficult with the
public to enforce the actions that they may have for injuries caused to them
by the vehicles being negligently operated if the public should be required to
prove who actual the owner is. How would the public or third persons know
against whom to enforce their rights in case of subsequent transfer of the
vehicles? We do not imply by this doctrine, however, that the registered

23 | P a g e
 owner may not recover whatever amount he had paid by virtue of his liability
to third persons from the person to whom he had actually sold, assigned or
conveyed the vehicle.

Under the same principle the registered owner of any vehicle, even if not used
for a public service, should primarily responsible to the public or to the third
persons for injuries caused the latter while the vehicle is being driven on the
highways or streets. The members of the Court are in agreement that the
defendant-appellant should be held liable to plaintiff-appellee for the injuries
occasioned to the latter because of the negligence of the driver, even if the
defendant-appellant was no longer an owner of the vehicle at the time of the
damage because he had previously sold it to another. What is the legal basis
for his (defendants-appellant's) liability?

There is a presumption that the owner of the guilty vehicle is the defendant-
appellant as he is the registered owner in the Motor Vehicle Office. Should he
not be allowed to prove the truth, that he had sold it to another and thus shift
the responsibility for the injury to the real and the actual owner? The
defendants hold the affirmative of this proposition; the trial court hold the
negative.

The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that the
vehicle may be used or operated upon any public highway unless the same is
properly registered. It has been stated that the system of licensing and the
requirement that each machine must carry a registration number,
conspicuously displayed, is one of the precautions taken to reduce the danger
of injury of pedestrians and other travelers from the careless management of
automobiles, and to furnish a means of ascertaining the identity of persons
violating the laws and ordinances, regulating the speed and operation of
machines upon the highways (2 R. C. L. 1176). Not only are vehicles to be
registered and that no motor vehicles are to be used or operated without
being properly registered from the current year, furnish the Motor Vehicle
Office a report showing the name and address of each purchaser of motor
vehicle during the previous month and the manufacturer's serial number and
motor number. (Section 5[c], Act No. 3992, as amended.)

Registration is required not to make said registration the operative act by

which ownership in vehicles is transferred, as in land registration cases,
because the administrative proceeding of registration does not bear any
essential relation to the contract of sale between the parties (Chinchilla vs.
Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of
the vehicle upon any public highway (section 5[a], Act No. 3992, as
amended). the main aim of motor vehicle registration is to identify the owner
so that if any accident happens, or that any damage or injury is caused by the
vehicle on the public highways, responsibility therefor can be fixed on a
definite individual, the registered owner. Instances are numerous where
vehicles running on public highways caused accidents or injuries to
pedestrians or other vehicles without positive identification of the owner or
drivers, or with very scant means of identification. It is to forestall these
circumstances, so inconvenient or prejudicial to the public, that the motor
vehicle registration is primarily obtained, in the interest of the
determinations of persons responsible for damages or injuries caused on
public highways.

One of the principle purposes of motor vehicles legislation is

identification of the vehicle and of the operator, in case of
accident; and another is that the knowledge that means of

24 | P a g e
 detection are always available my act as a deterrent from lax
observance of the law and of the rules of conservative and safe
operation. Whatever purpose there may be in these statutes, it
is subordinate at the last to the primary purpose of rendering it
certain that the violator of the law or of the rules of safety shall
not escape because of lack of means to discover him. The
purpose of the statute is thwarted, and the displayed number
becomes a "share and delusion," if courts would entertain such
defenses as that put forward by appellee in this case. No
responsible person or corporation could be held liable for the
most outrageous acts of negligence, if they should be allowed
to pace a "middleman" between them and the public, and
escape liability by the manner in which they recompense their
servants. (King vs. Breham Automobile Co., Inc. 145 S. W. 278,
279.)

With the above policy in mind, the question that defendant-appellant poses
is: should not the registered owner be allowed at the trial to prove who the
actual and real owner is, and in accordance with such proof escape or evade
responsibility and lay the same on the person actually owning the vehicle?
We hold with the trial court that the law does not allow him to do so; the law,
with its aim and policy in mind, does not relieve him directly of the
responsibility that the law fixes and places upon him as an incident or
consequence of registration. Were a registered owner allowed to evade
responsibility by proving who the supposed transferee or owner is, it would
be easy for him, by collusion with others or otherwise, to escape said
responsibility and transfer the same to an indefinite person, or to one who
possesses no property with which to respond financially for the damage or
injury done. A victim of recklessness on the public highways is usually
without means to discover or Identify the person actually causing the injury
or damage. He has no means other then by a recourse to the registration in
the Motor Vehicles Office to determine who is the owner. The protection that
the law aims to extend to him would become illusory were the registered
owner given the opportunity to escape liability by disproving his ownership.
If the policy of the law is to be enforced and carried out, the registered owner
should not be allowed to prove the contrary to the prejudice of the person
injured, that is, to prove that a third person or another has become the
owner, so that he may thereby be relieved of the responsibility to the injured
person.

The above policy and application of the law may appear quite harsh and
would seem to conflict with truth and justice. We do not think it is so. A
registered owner who has already sold or transferred a vehicle has the
recourse to a third-party complaint, in the same action brought against him
to recover for the damage or injury done, against the vendee or transferee of
the vehicle. The inconvenience of the suit is no justification for relieving him
of liability; said inconvenience is the price he pays for failure to comply with
the registration that the law demands and requires.

In synthesis, we hold that the registered owner, the defendant-appellant

herein, is primarily responsible for the damage caused to the vehicle of the
plaintiff-appellee, but he (defendant-appellant) has a right to be indemnified
by the real or actual owner of the amount that he may be required to pay as
damage for the injury caused to the plaintiff-appellant.

25 | P a g e
If the foregoing words of wisdom were applied in solving the circumstance whereof the
vehicle had been alienated or sold to another, there certainly can be no serious exception
against utilizing the same rationale to the antecedents of this case where the subject vehicle
was merely leased by petitioner to Rock Component Philippines, Inc., with petitioner
retaining ownership over the vehicle.

Petitioner's reliance on the ruling of this Court in Duavit vs. Court of Appeals and in Duquillo
vs. Bayot (supra) is legally unpalatable for the purpose of the present discourse. The
vehicles adverted to in the two cases shared a common thread, so to speak, in that the jeep
and the truck were driven in reckless fashion without the consent or knowledge of the
respective owners. Cognizant of the inculpatory testimony spewed by defendant Sabiniano
when he admitted that he took the jeep from the garage of defendant Dauvit without the
consent or authority of the latter, Justice Gutierrez, Jr. in Duavit remarked;

. . . Herein petitioner does not deny ownership of the vehicle involved in the
mishap but completely denies having employed the driver Sabiniano or even
having authorized the latter to drive his jeep. The jeep was virtually stolen
from the petitioner's garage. To hold, therefore, the petitioner liable for the
accident caused by the negligence of Sabiniano who was neither his driver
nor employee would be absurd as it would be like holding liable the owner of
a stolen vehicle for an accident caused by the person who stole such vehicle.
In this regard, we cannot ignore the many cases of vehicles forcibly taken
from their owners at gunpoint or stolen from garages and parking areas and
the instances of service station attendants or mechanics of auto repair shops
using, without the owner's consent, vehicles entrusted to them for servicing
or repair.(at p. 496.)

In the Duquillo case, the defendant therein cannot, according to Justice Diaz, be held liable
for anything because of circumstances which indicated that the truck was driven without
the consent or knowledge of the owner thereof.

Consequently, there is no need for Us to discuss the matter of imputed negligence because
petitioner merely presumed, erroneously, however, that judgment was rendered against it
on the basis of such doctrine embodied under Article 2180 of the new Civil Code.

WHEREFORE, the petition is hereby DISMISSED and decision under review AFFIRMED
without special pronouncement as to costs.

SO ORDERED.

26 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 162267 July 4, 2008

PCI LEASING AND FINANCE, INC., petitioner,

vs.
UCPB GENERAL INSURANCE CO., INC., respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
seeking a reversal of the Decision1 of the Court of Appeals (CA) dated December 12, 2003
affirming with modification the Decision of the Regional Trial Court (RTC) of Makati City
which ordered petitioner and Renato Gonzaga (Gonzaga) to pay, jointly and severally,
respondent the amount of P244,500.00 plus interest; and the CA Resolution2 dated
February 18, 2004 denying petitioner's Motion for Reconsideration.

The facts, as found by the CA, are undisputed:

On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer car with Plate Number
PHD-206 owned by United Coconut Planters Bank was traversing the Laurel
Highway, Barangay Balintawak, Lipa City. The car was insured with plantiff-appellee
[UCPB General Insurance Inc.], then driven by Flaviano Isaac with Conrado
Geronimo, the Asst. Manager of said bank, was hit and bumped by an 18-wheeler
Fuso Tanker Truck with Plate No. PJE-737 and Trailer Plate No. NVM-133, owned by
defendants-appellants PCI Leasing & Finance, Inc. allegedly leased to and operated
by defendant-appellant Superior Gas & Equitable Co., Inc. (SUGECO) and driven by
its employee, defendant appellant Renato Gonzaga.

The impact caused heavy damage to the Mitsubishi Lancer car resulting in an
explosion of the rear part of the car. The driver and passenger suffered physical
injuries. However, the driver defendant-appellant Gonzaga continued on its [sic]
way to its [sic] destination and did not bother to bring his victims to the hospital.

Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing

the insurance coverage of the damaged car.

As the 18-wheeler truck is registered under the name of PCI Leasing, repeated
demands were made by plaintiff-appellee for the payment of the aforesaid amounts.
However, no payment was made. Thus, plaintiff-appellee filed the instant case on
March 13, 1991.3

PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held
liable for the collision, since the driver of the truck, Gonzaga, was not its employee, but that
of its co-defendant Superior Gas & Equitable Co., Inc. (SUGECO).4 In fact, it was SUGECO,
and not petitioner, that was the actual operator of the truck, pursuant to a Contract of
Lease signed by petitioner and SUGECO.5 Petitioner, however, admitted that it was the
owner of the truck in question.6

27 | P a g e
After trial, the RTC rendered its Decision dated April 15, 1999,7 the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of

plaintiff UCPB General Insurance [respondent], ordering the defendants PCI Leasing
and Finance, Inc., [petitioner] and Renato Gonzaga, to pay jointly and severally the
former the following amounts: the principal amount of P244,500.00 with 12%
interest as of the filing of this complaint until the same is paid; P50,000.00 as
attorney's fees; and P20,000.00 as costs of suit.

SO ORDERED.8

Aggrieved by the decision of the trial court, petitioner appealed to the CA.

In its Decision dated December 12, 2003, the CA affirmed the RTC's decision, with certain
modifications, as follows:

WHEREFORE, the appealed decision dated April 15, 1999 is hereby AFFIRMED with
modification that the award of attorney's fees is hereby deleted and the rate of
interest shall be six percent (6%) per annum computed from the time of the filing of
the complaint in the trial court until the finality of the judgment. If the adjudged
principal and the interest remain unpaid thereafter, the interest rate shall be twelve
percent (12%) per annum computed from the time the judgment becomes final and
executory until it is fully satisfied.

SO ORDERED.9

Petitioner filed a Motion for Reconsideration which the CA denied in its Resolution dated
February 18, 2004.

Hence, herein Petition for Review.

The issues raised by petitioner are purely legal:

Whether petitioner, as registered owner of a motor vehicle that figured in a quasi-

delict may be held liable, jointly and severally, with the driver thereof, for the
damages caused to third parties.

Whether petitioner, as a financing company, is absolved from liability by the

enactment of Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998.

Anent the first issue, the CA found petitioner liable for the damage caused by the collision
since under the Public Service Act, if the property covered by a franchise is transferred or
leased to another without obtaining the requisite approval, the transfer is not binding on
the Public Service Commission and, in contemplation of law, the grantee continues to be
responsible under the franchise in relation to the operation of the vehicle, such as damage
or injury to third parties due to collisions.10

Petitioner claims that the CA's reliance on the Public Service Act is misplaced, since the said
law applies only to cases involving common carriers, or those which have franchises to
operate as public utilities. In contrast, the case before this Court involves a private
commercial vehicle for business use, which is not offered for service to the general public.11

Petitioner's contention has partial merit, as indeed, the vehicles involved in the case at bar
are not common carriers, which makes the Public Service Act inapplicable.

28 | P a g e
However, the registered owner of the vehicle driven by a negligent driver may still be held
liable under applicable jurisprudence involving laws on compulsory motor vehicle
registration and the liabilities of employers for quasi-delicts under the Civil Code.

The principle of holding the registered owner of a vehicle liable for quasi-delicts resulting
from its use is well-established in jurisprudence. Erezo v. Jepte,12 with Justice Labrador
as ponente, wisely explained the reason behind this principle, thus:

Registration is required not to make said registration the operative act by which
ownership in vehicles is transferred, as in land registration cases, because the
administrative proceeding of registration does not bear any essential relation to the
contract of sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39 Phil.
888), but to permit the use and operation of the vehicle upon any public highway
(section 5 [a], Act No. 3992, as amended.) The main aim of motor vehicle
registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways, responsibility
therefor can be fixed on a definite individual, the registered owner. Instances are
numerous where vehicles running on public highways caused accidents or injuries
to pedestrians or other vehicles without positive identification of the owner or
drivers, or with very scant means of identification. It is to forestall these
circumstances, so inconvenient or prejudicial to the public, that the motor vehicle
registration is primarily ordained, in the interest of the determination of persons
responsible for damages or injuries caused on public highways.

"'One of the principal purposes of motor vehicles legislation is identification

of the vehicle and of the operator, in case of accident; and another is that the
knowledge that means of detection are always available may act as a
deterrent from lax observance of the law and of the rules of conservative and
safe operation. Whatever purpose there may be in these statutes, it is
subordinate at the last to the primary purpose of rendering it certain that the
violator of the law or of the rules of safety shall not escape because of lack of
means to discover him.' The purpose of the statute is thwarted, and the
displayed number becomes a 'snare and delusion,' if courts would entertain
such defenses as that put forward by appellee in this case. No responsible
person or corporation could be held liable for the most outrageous acts of
negligence, if they should be allowed to place a 'middleman' between them
and the public, and escape liability by the manner in which they recompense
their servants." (King vs. Brenham Automobile Co., 145 S.W. 278, 279.)

With the above policy in mind, the question that defendant-appellant poses is:
should not the registered owner be allowed at the trial to prove who the actual and
real owner is, and in accordance with such proof escape or evade responsibility and
lay the same on the person actually owning the vehicle? We hold with the trial court
that the law does not allow him to do so; the law, with its aim and policy in mind,
does not relieve him directly of the responsibility that the law fixes and places upon
him as an incident or consequence of registration. Were a registered owner allowed
to evade responsibility by proving who the supposed transferee or owner is, it
would be easy for him, by collusion with others or otherwise, to escape said
responsibility and transfer the same to an indefinite person, or to one who
possesses no property with which to respond financially for the damage or injury
done. A victim of recklessness on the public highways is usually without means to
discover or identify the person actually causing the injury or damage. He has no
means other than by a recourse to the registration in the Motor Vehicles Office to
determine who is the owner. The protection that the law aims to extend to him
would become illusory were the registered owner given the opportunity to escape
liability by disproving his ownership. If the policy of the law is to be enforced and

29 | P a g e
 carried out, the registered owner should not be allowed to prove the contrary to the
prejudice of the person injured, that is, to prove that a third person or another has
become the owner, so that he may thereby be relieved of the responsibility to the
injured person.

The above policy and application of the law may appear quite harsh and would seem
to conflict with truth and justice. We do not think it is so. A registered owner who
has already sold or transferred a vehicle has the recourse to a third-party complaint,
in the same action brought against him to recover for the damage or injury done,
against the vendee or transferee of the vehicle. The inconvenience of the suit is no
justification for relieving him of liability; said inconvenience is the price he pays for
failure to comply with the registration that the law demands and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is

primarily responsible for the damage caused to the vehicle of the plaintiff-appellee,
but he (defendant-appellant) has a right to be indemnified by the real or actual
owner of the amount that he may be required to pay as damage for the injury caused
to the plaintiff-appellant.13

The case is still good law and has been consistently cited in subsequent cases.14 Thus, there
is no good reason to depart from its tenets.

For damage or injuries arising out of negligence in the operation of a motor vehicle, the
registered owner may be held civilly liable with the negligent driver either 1) subsidiarily, if
the aggrieved party seeks relief based on a delict or crime under Articles 100 and 103 of the
Revised Penal Code; or 2) solidarily, if the complainant seeks relief based on a quasi-
delict under Articles 2176 and 2180 of the Civil Code. It is the option of the plaintiff
whether to waive completely the filing of the civil action, or institute it with the criminal
action, or file it separately or independently of a criminal action;15 his only limitation is that
he cannot recover damages twice for the same act or omission of the defendant.16

In case a separate civil action is filed, the long-standing principle is that the registered
owner of a motor vehicle is primarily and directly responsible for the consequences of its
operation, including the negligence of the driver, with respect to the public and all third
persons.17 In contemplation of law, the registered owner of a motor vehicle is the employer
of its driver, with the actual operator and employer, such as a lessee, being considered as
merely the owner's agent.18 This being the case, even if a sale has been executed before a
tortious incident, the sale, if unregistered, has no effect as to the right of the public and
third persons to recover from the registered owner.19 The public has the right to
conclusively presume that the registered owner is the real owner, and may sue
accordingly.20

In the case now before the Court, there is not even a sale of the vehicle involved, but a mere
lease, which remained unregistered up to the time of the occurrence of the quasi-delict that
gave rise to the case. Since a lease, unlike a sale, does not even involve a transfer of title or
ownership, but the mere use or enjoyment of property, there is more reason, therefore, in
this instance to uphold the policy behind the law, which is to protect the unwitting public
and provide it with a definite person to make accountable for losses or injuries suffered in
vehicular accidents.21 This is and has always been the rationale behind compulsory motor
vehicle registration under the Land Transportation and Traffic Code and similar laws,
which, as early as Erezo, has been guiding the courts in their disposition of cases involving
motor vehicular incidents. It is also important to emphasize that such principles apply to all
vehicles in general, not just those offered for public service or utility.22

The Court recognizes that the business of financing companies has a legitimate and
commendable purpose.23 In earlier cases, it considered a financial lease or financing lease a
legal contract,24 though subject to the restrictions of the so-called Recto Law or Articles

30 | P a g e
1484 and 1485 of the Civil Code.25 In previous cases, the Court adopted the statutory
definition of a financial lease or financing lease, as:

[A] mode of extending credit through a non-cancelable lease contract under which
the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business and office machines, and other
movable or immovable property in consideration of the periodic payment by the
lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of
the purchase price or acquisition cost, including any incidental expenses and a
margin of profit over an obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the leased property, x x x but with no
obligation or option on his part to purchase the leased property from the owner-
lessor at the end of the lease contract. 26

Petitioner presented a lengthy discussion of the purported trend in other jurisdictions,

which apparently tends to favor absolving financing companies from liability for the
consequences of quasi-delictual acts or omissions involving financially leased
property.27 The petition adds that these developments have been legislated in our
jurisdiction in Republic Act (R.A.) No. 8556,28 which provides:

Section 12. Liability of lessors. - Financing companies shall not be liable for loss,
damage or injury caused by a motor vehicle, aircraft, vessel, equipment, machinery
or other property leased to a third person or entity except when the motor vehicle,
aircraft, vessel, equipment or other property is operated by the financing company,
its employees or agents at the time of the loss, damage or injury.1avvphi1

Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of the
new Sec. 12 to the old law, is deemed to have absolved petitioner from liability, fails to
convince the Court.

These developments, indeed, point to a seeming emancipation of financing companies from

the obligation to compensate claimants for losses suffered from the operation of vehicles
covered by their lease. Such, however, are not applicable to petitioner and do not exonerate
it from liability in the present case.

The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not
supersede or repeal the law on compulsory motor vehicle registration. No part of the law
expressly repeals Section 5(a) and (e) of R.A. No. 4136, as amended, otherwise known as
the Land Transportation and Traffic Code, to wit:

Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and
trailer of any type used or operated on or upon any highway of the Philippines must
be registered with the Bureau of Land Transportation (now the Land
Transportation Office, per Executive Order No. 125, January 30, 1987, and Executive
Order No. 125-A, April 13, 1987) for the current year in accordance with the
provisions of this Act.

xxxx

(e) Encumbrances of motor vehicles. - Mortgages, attachments, and other

encumbrances of motor vehicles, in order to be valid against third parties must
be recorded in the Bureau (now the Land Transportation Office). Voluntary
transactions or voluntary encumbrances shall likewise be properly recorded on the
face of all outstanding copies of the certificates of registration of the vehicle
concerned.

31 | P a g e
 Cancellation or foreclosure of such mortgages, attachments, and other
encumbrances shall likewise be recorded, and in the absence of such cancellation,
no certificate of registration shall be issued without the corresponding notation of
mortgage, attachment and/or other encumbrances.

x x x x (Emphasis supplied)

Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is
frowned upon, unless there is clear showing that the later statute is so irreconcilably
inconsistent and repugnant to the existing law that they cannot be reconciled and made to
stand together.29 There is nothing in R.A. No. 4136 that is inconsistent and incapable of
reconciliation.

Thus, the rule remains the same: a sale, lease, or financial lease, for that matter, that is not
registered with the Land Transportation Office, still does not bind third persons who are
aggrieved in tortious incidents, for the latter need only to rely on the public registration of
a motor vehicle as conclusive evidence of ownership.30 A lease such as the one involved in
the instant case is an encumbrance in contemplation of law, which needs to be registered in
order for it to bind third parties.31 Under this policy, the evil sought to be avoided is the
exacerbation of the suffering of victims of tragic vehicular accidents in not being able to
identify a guilty party. A contrary ruling will not serve the ends of justice. The failure to
register a lease, sale, transfer or encumbrance, should not benefit the parties responsible,
to the prejudice of innocent victims.

The non-registration of the lease contract between petitioner and its lessee precludes the
former from enjoying the benefits under Section 12 of R.A. No. 8556.

This ruling may appear too severe and unpalatable to leasing and financing companies, but
the Court believes that petitioner and other companies so situated are not entirely left
without recourse. They may resort to third-party complaints against their lessees or
whoever are the actual operators of their vehicles. In the case at bar, there is, in fact, a
provision in the lease contract between petitioner and SUGECO to the effect that the latter
shall indemnify and hold the former free and harmless from any "liabilities, damages, suits,
claims or judgments" arising from the latter's use of the motor vehicle.32 Whether
petitioner would act against SUGECO based on this provision is its own option.

The burden of registration of the lease contract is minuscule compared to the chaos that
may result if registered owners or operators of vehicles are freed from such responsibility.
Petitioner pays the price for its failure to obey the law on compulsory registration of motor
vehicles for registration is a pre-requisite for any person to even enjoy the privilege of
putting a vehicle on public roads.

WHEREFORE, the petition is DENIED. The Decision dated December 12, 2003 and
Resolution dated February 18, 2004 of the Court of Appeals are AFFIRMED.

Costs against petitioner.SO ORDERED.

32 | P a g e
 SECOND DIVISION

FEB LEASING AND FINANCE G.R. No. 181398

CORPORATION (now BPI

LEASING CORPORATION) , Present:

Petitioner,

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,*

BRION,

- versus - PEREZ, and

SERENO, JJ.

SPOUSES SERGIO P. BAYLON

and MARITESS VILLENA-BAYLON,

BG HAULER, INC., and Promulgated:

MANUEL Y. ESTILLOSO,

Respondents. June 29, 2011

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

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 of the 9 October 2007 Decision2 and the 18
January 2008 Resolution3 of the Court of Appeals in CA-G.R. CV No. 81446. The 9 October

33 | P a g e
2007 Decision affirmed the 30 October 2003 Decision4 of the Regional Trial Court (Branch
35) of Gapan City in Civil Case No. 2334 ordering petitioner to pay respondents damages.
The 18 January 2008 Resolution denied petitioners motion for reconsideration.

The Facts

On 2 September 2000, an Isuzu oil tanker running along Del Monte Avenue in Quezon City
and bearing plate number TDY 712 hit Loretta V. Baylon (Loretta), daughter of respondent
spouses Sergio P. Baylon and Maritess Villena-Baylon (spouses Baylon). At the time of the
accident, the oil tanker was registered5 in the name of petitioner FEB Leasing and Finance
Corporation6 (petitioner). The oil tanker was leased7 to BG Hauler, Inc. (BG Hauler) and
was being driven by the latters driver, Manuel Y. Estilloso. The oil tanker was insured8 by
FGU Insurance Corp. (FGU Insurance).

The accident took place at around 2:00 p.m. as the oil tanker was coming
from Balintawak and heading towards Manila. Upon reaching the intersection
of Bonifacio Street and Del Monte Avenue, the oil tanker turned left. While the driver of the
oil tanker was executing a left turn side by side with another vehicle towards Del Monte
Avenue, the oil tanker hit Loretta who was then crossing Del Monte Avenue coming
from Mayon Street. Due to the strong impact, Loretta was violently thrown away about
three to five meters from the point of impact. She fell to the ground unconscious. She was
brought for treatment to the Chinese General Hospital where she remained in a coma until
her death two days after.9

The spouses Baylon filed with the RTC (Branch 35) of Gapan City a Complaint10 for
damages against petitioner, BG Hauler, the driver, and FGU Insurance. Petitioner filed its
answer with compulsory counterclaim while FGU Insurance filed its answer with
counterclaim. On the other hand, BG Hauler filed its answer with compulsory counterclaim
and cross-claim against FGU Insurance.

Petitioner claimed that the spouses Baylon had no cause of action against it because under
its lease contract with BG Hauler, petitioner was not liable for any loss, damage, or injury
that the leased oil tanker might cause. Petitioner claimed that no employer-employee
relationship existed between petitioner and the driver.

BG Hauler alleged that neither do the spouses Baylon have a cause of action against it since
the oil tanker was not registered in its name. BG Hauler contended that the victim was
guilty of contributory negligence in crossing the street. BG Hauler claimed that even if its
driver was at fault, BG Hauler exercised the diligence of a good father of a family in the
selection and supervision of its driver. BG Hauler also contended that FGU Insurance is
obliged to assume all liabilities arising from the use of the insured oil tanker.

For its part, FGU Insurance averred that the victim was guilty of contributory negligence.
FGU Insurance concluded that the spouses Baylon could not expect to be paid the full

34 | P a g e
amount of their claims. FGU Insurance pointed out that the insurance policy covering the
oil tanker limited any claim to a maximum of P400,000.00.

During trial, FGU Insurance moved that (1) it be allowed to deposit in court the amount
of P450,000.00 in the joint names of the spouses Baylon, petitioner, and BG Hauler and (2)
it be released from further participating in the proceedings. After the RTC granted the
motion, FGU Insurance deposited in the Branch Clerk of Court a check in the names of the
spouses Baylon, petitioner, and BG Hauler. The RTC then released FGU Insurance from its
contractual obligations under the insurance policy.

The Ruling of the RTC

After weighing the evidence submitted by the parties, the RTC found that the death of
Loretta was due to the negligent act of the driver. The RTC held that BG Hauler, as the
employer, was solidarily liable with the driver. The RTC further held that petitioner, as the
registered owner of the oil tanker, was also solidarily liable.

The RTC found that since FGU Insurance already paid the amount of P450,000.00 to the
spouses Baylon, BG Hauler, and petitioner, the insurers obligation has been satisfactorily
fulfilled. The RTC thus dismissed the cross-claim of BG Hauler against FGU Insurance.
The decretal part of the RTCs decision reads:

Wherefore, premises considered, judgment is hereby rendered in favor of the

plaintiffs and against defendants FEB Leasing (now BPI Leasing), BG Hauler, and
Manuel Estilloso, to wit:

1. Ordering the defendants, jointly and severally, to pay plaintiffs the following:

a. the amount of P62,000.00 representing actual expenses incurred by the plaintiffs;

b. the amount of P50,000.00 as moral damages;

c. the amount of P2,400,000.00 for loss of earning capacity of the deceased victim,
Loretta V. Baylon;

d. the sum of P50,000.00 for death indemnity;

e. the sum of P50,000.00 for and as attorneys fees; and

f. with costs against the defendants.

2. Ordering the dismissal of defendants counter-claim for lack of merit and the cross
claim of defendant BG Hauler against defendant FGU Insurance.

35 | P a g e
SO ORDERED.11

Petitioner, BG Hauler, and the driver appealed the RTC Decision to the Court of Appeals.
Petitioner claimed that as financial lessor, it is exempt from liability resulting from any loss,
damage, or injury the oil tanker may cause while being operated by BG Hauler as financial
lessee.

On the other hand, BG Hauler and the driver alleged that no sufficient evidence existed
proving the driver to be at fault. They claimed that the RTC erred in finding BG Hauler
negligent despite the fact that it had exercised the diligence of a good father of a family in
the selection and supervision of its driver and in the maintenance of its vehicles. They
contended that petitioner, as the registered owner of the oil tanker, should be solely liable
for Lorettas death.

The Ruling of the Court of Appeals

The Court of Appeals held that petitioner, BG Hauler, and the driver are solidarily liable for
damages arising from Lorettas death. Petitioners liability arose from the fact that it was the
registered owner of the oil tanker while BG Haulers liability emanated from a provision in
the lease contract providing that the lessee shall be liable in case of any loss, damage, or
injury the leased oil tanker may cause.

Thus, the Court of Appeals affirmed the RTC Decision but with the modification that the
award of attorneys fees be deleted for being speculative. The dispositive part of the
appellate courts Decision reads:

WHEREFORE, in the light of the foregoing, the instant appeal is DENIED.

Consequently, the assailed Decision of the lower court is AFFIRMED with the
MODIFICATION that the award of attorneys fees is DELETED.

IT IS SO ORDERED.12

Dissatisfied, petitioner and BG Hauler, joined by the driver, filed two separate motions for
reconsideration. In its 18 January 2008 Resolution, the Court of Appeals denied both
motions for lack of merit.

Unconvinced, petitioner alone filed with this Court the present petition for review on
certiorari impleading the spouses Baylon, BG Hauler, and the driver as respondents.13

The Issue

36 | P a g e
The sole issue submitted for resolution is whether the registered owner of a financially
leased vehicle remains liable for loss, damage, or injury caused by the vehicle
notwithstanding an exemption provision in the financial lease contract.

The Courts Ruling

Petitioner contends that the lease contract between BG Hauler and petitioner specifically
provides that BG Hauler shall be liable for any loss, damage, or injury the leased oil tanker
may cause even if petitioner is the registered owner of the said oil tanker. Petitioner claims
that the Court of Appeals erred in holding petitioner solidarily liable with BG Hauler
despite having found the latter liable under the lease contract.

For their part, the spouses Baylon counter that the lease contract between petitioner and
BG Hauler cannot bind third parties like them. The spouses Baylon maintain that the
existence of the lease contract does not relieve petitioner of direct responsibility as the
registered owner of the oil tanker that caused the death of their daughter.

On the other hand, BG Hauler and the driver argue that at the time petitioner and BG
Hauler entered into the lease contract, Republic Act No. 598014 was still in effect. They
point out that the amendatory law, Republic Act No. 8556,15 which exempts from liability in
case of any loss, damage, or injury to third persons the registered owners of vehicles
financially leased to another, was not yet enacted at that time.

In point is the 2008 case of PCI Leasing and Finance, Inc. v. UCPB General Insurance Co.,
Inc.16 There, we held liable PCI Leasing and Finance, Inc., the registered owner of an 18-
wheeler Fuso Tanker Truck leased to Superior Gas & Equitable Co., Inc. (SUGECO) and
being driven by the latters driver, for damages arising from a collision. This despite an
express provision in the lease contract to the effect that the lessee, SUGECO, shall indemnify
and hold the registered owner free from any liabilities, damages, suits, claims, or judgments
arising from SUGECOs use of the leased motor vehicle.

In the instant case, Section 5.1 of the lease contract between petitioner and BG Hauler
provides:

Sec. 5.1. It is the principle of this Lease that while the title or ownership of the
EQUIPMENT, with all the rights consequent thereof, are retained by the LESSOR, the
risk of loss or damage of the EQUIPMENT from whatever source arising, as well
as any liability resulting from the ownership, operation and/or possession
thereof, over and above those actually compensated by insurance, are hereby
transferred to and assumed by the LESSEE hereunder which shall continue in full
force and effect.17 (Emphasis supplied)

37 | P a g e
If it so wishes, petitioner may proceed against BG Hauler to seek enforcement of the latters
contractual obligation under Section 5.1 of the lease contract. In the present case,
petitioner did not file a cross-claim against BG Hauler. Hence, this Court cannot require BG
Hauler to reimburse petitioner for the latters liability to the spouses Baylon. However, as
the registered owner of the oil tanker, petitioner may not escape its liability to third
persons.

Under Section 5 of Republic Act No. 4136,18 as amended, all motor vehicles used or
operated on or upon any highway of the Philippines must be registered with the Bureau of
Land Transportation (now Land Transportation Office) for the current
year.19 Furthermore, any encumbrances of motor vehicles must be recorded with the Land
Transportation Office in order to be valid against third parties.20

In accordance with the law on compulsory motor vehicle registration, this Court has
consistently ruled that, with respect to the public and third persons, the registered owner
of a motor vehicle is directly and primarily responsible for the consequences of its
operation regardless of who the actual vehicle owner might be.21 Well-settled is the rule
that the registered owner of the vehicle is liable for quasi-delicts resulting from its use.
Thus, even if the vehicle has already been sold, leased, or transferred to another person at
the time the vehicle figured in an accident, the registered vehicle owner would still be liable
for damages caused by the accident. The sale, transfer or lease of the vehicle, which is not
registered with the Land Transportation Office, will not bind third persons aggrieved in an
accident involving the vehicle. The compulsory motor vehicle registration underscores the
importance of registering the vehicle in the name of the actual owner.

The policy behind the rule is to enable the victim to find redress by the expedient recourse
of identifying the registered vehicle owner in the records of the Land Transportation Office.
The registered owner can be reimbursed by the actual owner, lessee or transferee who is
known to him. Unlike the registered owner, the innocent victim is not privy to the lease,
sale, transfer or encumbrance of the vehicle. Hence, the victim should not be prejudiced by
the failure to register such transaction or encumbrance. As the Court held in PCI Leasing:

The burden of registration of the lease contract is minuscule compared to the chaos
that may result if registered owners or operators of vehicles are freed from such
responsibility. Petitioner pays the price for its failure to obey the law on compulsory
registration of motor vehicles for registration is a pre-requisite for any person to
even enjoy the privilege of putting a vehicle on public roads.22

In the landmark case of Erezo v. Jepte,23 the Court succinctly laid down the public policy
behind the rule, thus:

38 | P a g e
 The main aim of motor vehicle registration is to identify the owner so that if any
accident happens, or that any damage or injury is caused by the vehicle on the
public highways, responsibility therefor can be fixed on a definite individual, the
registered owner. Instances are numerous where vehicles running on public
highways caused accidents or injuries to pedestrians or other vehicles without
positive identification of the owner or drivers, or with very scant means of
identification. It is to forestall these circumstances, so inconvenient or prejudicial to
the public, that the motor vehicle registration is primarily ordained, in the interest
of the determination of persons responsible for damages or injuries caused on
public highways.

xxx

Were a registered owner allowed to evade responsibility by proving who the

supposed transferee or owner is, it would be easy for him, by collusion with others
or, or otherwise, to escape said responsibility and transfer the same to an indefinite
person, or to one who possesses no property with which to respond financially for
the damage or injury done. A victim of recklessness on the public highways is
usually without means to discover or identify the person actually causing the injury
or damage. He has no means other than by a recourse to the registration in the
Motor Vehicles Office to determine who is the owner. The protection that the law
aims to extend to him would become illusory were the registered owner given the
opportunity to escape liability by disproving his ownership. If the policy of the law is
to be enforced and carried out, the registered owner should not be allowed to prove
the contrary to the prejudice of the person injured, that is to prove that a third
person or another has become the owner, so that he may be thereby be relieved of
the responsibility to the injured person.24

In this case, petitioner admits that it is the registered owner of the oil tanker that figured in
an accident causing the death of Loretta. As the registered owner, it cannot escape liability
for the loss arising out of negligence in the operation of the oil tanker. Its liability remains
even if at the time of the accident, the oil tanker was leased to BG Hauler and was being
driven by the latters driver, and despite a provision in the lease contract exonerating the
registered owner from liability.

As a final point, we agree with the Court of Appeals that the award of attorneys fees by the
RTC must be deleted for lack of basis. The RTC failed to justify the award
of P50,000 attorneys fees to respondent spouses Baylon. The award of attorneys fees must
have some factual, legal and equitable bases and cannot be left to speculations and
conjectures.25 Consistent with prevailing jurisprudence,26attorneys fees as part of damages
are awarded only in the instances enumerated in Article 2208 of the Civil Code.27 Thus, the
award of attorneys fees is the exception rather than the rule. Attorneys fees are not
awarded every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate.28

39 | P a g e
WHEREFORE, we DENY the petition. We AFFIRM the 9 October 2007 Decision and the 18
January 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 81446 affirming with
modification the 30 October 2003 Decision of the Regional Trial Court (Branch 35)
of Gapan City in Civil Case No. 2334 ordering petitioner FEB Leasing and Finance
Corporation, BG Hauler, Inc., and driver Manuel Y. Estilloso to solidarily pay respondent
spouses Sergio P. Baylon and Maritess Villena-Baylon the following amounts:

a. P62,000.00 representing actual expenses incurred by the plaintiffs;

b. P50,000.00 as moral damages;

c. P2,400,000.00 for loss of earning capacity of the deceased victim, Loretta

V. Baylon; and

d. P50,000.00 for death indemnity.

Costs against petitioner.

SO ORDERED.

40 | P a g e
REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH

EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect
its citizens from a lack of awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which part or all of the price is
payable subsequent to the making of such sale or contract; any rental-purchase contract;
any contract or arrangement for the hire, bailment, or leasing of property; any option,
demand, lien, pledge, or other claim against, or for the delivery of, property or money;
any purchase, or other acquisition of, or any credit upon the security of, any obligation of
claim arising out of any of the foregoing; and any transaction or series of transactions
having a similar purpose or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as the Board may be regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit (including
any person who as a regular business practice make loans or sells or rents property or
services on a time, credit, or installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the payment of a finance charge.

(5) "Person" means any individual, corporation, partnership, association, or other

organized group of persons, or the legal successor or representative of the foregoing, and
includes the Philippine Government or any agency thereof, or any other government, or
of any of its political subdivisions, or any agency of the foregoing.

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the Board, the
following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

41 | P a g e
 (7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

Section 5. The Board shall prescribe such rules and regulations as may be necessary or
proper in carrying out the provisions of this Act. Any rule or regulation prescribed
hereunder may contain such classifications and differentiations as in the judgment of the
Board are necessary or proper to effectuate the purposes of this Act or to prevent
circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or
regulation issued thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose
to any person any information in violation of this Act or any regulation issued thereunder
shall be liable to such person in the amount of P100 or in an amount equal to twice the
finance charged required by such creditor in connection with such transaction, whichever
is the greater, except that such liability shall not exceed P2,000 on any credit transaction.
Action to recover such penalty may be brought by such person within one year from the
date of the occurrence of the violation, in any court of competent jurisdiction. In any action
under this subsection in which any person is entitled to a recovery, the creditor shall be
liable for reasonable attorney's fees and court costs as determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act
or any regulation contained in this Act or any regulation thereunder shall affect the
validity or enforceability of any contract or transactions.

(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to
the effect that a defendant has willfully violated this Act shall be prima facie
evidence against such defendant in an action or proceeding brought by any other
party against such defendant under this Act as to all matters respecting which said
judgment would be an estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners, vs. PHILIPPINE NATIONAL BANK,

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if
not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a
stipulation granting a party the option to prepay the loan if said party is not agreeable to
the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a
contract which grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing all along is
improper or illegal.

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28,

42 | P a g e
2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.

Factual Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two
decades of operating a department store and buying and selling of ready-to-wear apparel.
Respondent Philippine National Bank (PNB) is a banking corporation organized and
existing under Philippine laws.

To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB,

petitioners constituted in August 1987 a Real Estate Mortgage5 over a 370-square meter lot
in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the
credit line was increased to ₱1.8 million and the mortgage was correspondingly increased
to ₱1.8 million.6

And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed
to cover the same credit line, which was increased to ₱2.5 million, and additional security
was given in the form of a 134-square meter lot covered by TCT T-16208. In addition,
petitioners issued eight Promissory Notes8 and signed a Credit Agreement.9 This July 1989
Credit Agreement contained a stipulation on interest which provides as follows:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per
annum. Interest shall be payable in advance every one hundred twenty days at the rate
prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice
versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is
equal to the Bank’s spread over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future.10 (Emphases supplied)

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB
the right to increase or reduce interest rates "within the limits allowed by law or by the
Monetary Board."11

The Real Estate Mortgage agreement provided the same right to increase or reduce
interest rates "at any time depending on whatever policy PNB may adopt in the future."12

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

43 | P a g e
 7. 7th Promissory Note dated March 1, 1991 – 30%; and

8. 8th Promissory Note dated July 11, 1991 – 24%.13

In August 1991, an Amendment to Credit Agreement14 was executed by the parties,

with the following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.15 (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the
following 18 Promissory Notes, which petitioners settled – except the last (the note
covering the principal) – at the following interest rates:

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

7. 15th Promissory Note dated November 17, 1993 – 21%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and

18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the
"rate the Bank may at any time without notice, raise within the limits allowed by law x x
x."17

On the other hand, the 18th up to the 26th promissory notes – including PN
9707237, which is the 26th promissory note – carried the following provision:

44 | P a g e
 x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby
agree that in the event I/we are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option top repay the loan or credit facility without penalty
within ten (10) calendar days from the Interest Setting Date.18 (Emphasis supplied)

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made
good on the promissory notes, religiously paying the interests without objection or fail. But
in 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis.
Petitioners’ sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in
July 1997 and due 120 days later or on October 28, 1997 – became past due, and despite
repeated demands, petitioners failed to make good on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in
case of default, as follows:

Without need for notice or demand, failure to pay this note or any installment thereon,
when due, shall constitute default and in such cases or in case of garnishment, receivership
or bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal
of this note, at the option of the Bank and without prior notice of demand, shall
immediately become due and payable and shall be subject to a penalty charge of twenty
four percent (24%) per annum based on the defaulted principal amount. x x x 19 (Emphasis
supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due
and demandable from petitioners in the total amount of ₱3,620,541.60, broken down as
follows:

Principal P 2,500,000.00

Interest 538,874.94

Penalties 581,666.66

Total P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were
sold to it at auction for the amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was
registered on March 11, 1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975,
seeking annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners
theorized that after the first promissory note where they agreed to pay 19.5% interest, the
succeeding stipulations for the payment of interest in their loan agreements with PNB –
which allegedly left to the latter the sole will to determine the interest rate – became null
and void. Petitioners added that because the interest rates were fixed by respondent
without their prior consent or agreement, these rates are void, and as a result, petitioners
should only be made liable for interest at the legal rate of 12%. They claimed further that
they overpaid interests on the credit, and concluded that due to this overpayment of steep
interest charges, their debt should now be deemed paid, and the foreclosure and sale of

45 | P a g e
TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the imposed penalty
of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage and the Supplement
thereto did not include penalties as part of the secured amount, the same should be
excluded from the foreclosure amount or bid price, even if such penalties are provided for
in the final Promissory Note, or PN 9707237.22

In addition, petitioners sought to be reimbursed an alleged overpayment of

₱848,285.00 made during the period August 21, 1991 to March 5, 1998,resulting from
respondent’s imposition of the alleged illegal and steep interest rates. They also prayed to
be awarded ₱200,000.00 by way of attorney’s fees.23

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that
petitioners agreed that without prior notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of penalties was agreed upon in the
Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive
clause in the Real Estate Mortgage agreement which provides that the mortgage shall stand
as security for any and all other obligations of whatever kind and nature owing to
respondent, which thus includes penalties imposed upon default or non-payment of the
principal and interest on due date.

On pre-trial, the parties mutually agreed to the following material facts, among others:

a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;25 and

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto were
all prepared by respondent PNB and were presented to her and her husband Eduardo only
for signature; that she was told by PNB that the latter alone would determine the interest
rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up
the interest rate portion thereof; that at the time the parties executed the said Credit
Agreement, she was not informed about the applicable spread that PNB would impose on
her account; that the interest rate portion of all Promissory Notes she and Eduardo issued
were always left in blank when they executed them, with respondent’s mere assurance that
it would be the one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. She further testified that the two
Real Estate Mortgage agreements she signed did not stipulate the payment of penalties;
that she and Eduardo consulted with a lawyer, and were told that PNB’s actions were
improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation of
their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No.
5975.27

On cross-examination, Lydia testified that she has been in business for 20 years; that
she also borrowed from other individuals and another bank; that it was only with banks
that she was asked to sign loan documents with no indicated interest rate; that she did not
bother to read the terms of the loan documents which she signed; and that she received
several PNB statements of account detailing their outstanding obligations, but she did not
complain; that she assumed instead that what was written therein is correct.28

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness
for respondent, stated on cross-examination that as a practice, the determination of the
prime rates of interest was the responsibility solely of PNB’s Treasury Department which is
based in Manila; that these prime rates were simply communicated to all PNB branches for

46 | P a g e
implementation; that there are a multitude of considerations which determine the interest
rate, such as the cost of money, foreign currency values, PNB’s spread, bank administrative
costs, profitability, and the practice in the banking industry; that in every repricing of each
loan availment, the borrower has the right to question the rates, but that this was not done
by the petitioners; and that anything that is not found in the Promissory Note may be
supplemented by the Credit Agreement.29

Ruling of the Regional Trial Court

On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30

It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the future,
it likewise allows for the decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is
valid,31 as was held in Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court of
Appeals;32

2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead
be made dependent on prevailing rates upon which to peg such variable interest rates;33

3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails
over the Credit Agreement and the Real Estate Mortgage.

As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory
Note prevail over those mentioned in the Credit Agreement and the Real Estate Mortgage
agreements;34

4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct;35

5. Because the loan was admittedly due and demandable, the foreclosure was regularly
made;36

6. By the admission of petitioners during pre-trial, all payments made to PNB were
properly applied to the principal, interest and penalties.37

The dispositive portion of the trial court’s Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the

respondent and against the petitioners by DISMISSING the latter’s petition.

Costs against the petitioners.

SO ORDERED.38

Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial
court granted only a modification in the award of attorney’s fees, reducing the same from
10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in
the amount of ₱356,589.90, viz:

WHEREFORE, judgment is hereby rendered upholding the validity of the interest

rate charged by the respondent as well as the extra-judicial foreclosure proceedings and
the Certificate of Sale. However, respondent is directed to refund to the petitioner the
amount of ₱356,589.90 representing the excess interest charged against the latter.

47 | P a g e
 No pronouncement as to costs.

SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the
following decretal portion:

WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The
modified Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby
AFFIRMED with MODIFICATIONS, to wit:

1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;

2. [T]hat the attorney’s fees of10% is valid and binding; and

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid
price of ₱377,505.99 which is the difference between the total amount due [PNB]
and the amount of its bid price.

SO ORDERED.41

On the other hand, respondent did not appeal the June 4,2003 Order of the trial
court which reduced its award of attorney’s fees. It simply raised the issue in its appellee’s
brief in the CA, and included a prayer for the reversal of said Order.

In effect, the CA limited petitioners’ appeal to the following issues:

1) Whether x x x the interest rates on petitioners’ outstanding obligation were

unilaterally and arbitrarily imposed by PNB;

2) Whether x x x the penalty charges were secured by the real estate mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid.42

The CA noted that, based on receipts presented by petitioners during trial, the latter
dutifully paid a total of ₱3,027,324.60 in interest for the period August 7, 1991 to August 6,
1997, over and above the ₱2.5 million principal obligation. And this is exclusive of
payments for insurance premiums, documentary stamp taxes, and penalty. All the while,
petitioners did not complain nor object to the imposition of interest; they in fact paid the
same religiously and without fail for seven years. The appellate court ruled that petitioners
are thus estopped from questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB
wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged
petitioners, and the latter paid, an excess of ₱736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate
Mortgage agreements contemplated the inclusion of the PN 9707237-stipulated 24%
penalty in the amount to be secured by the mortgaged property, thus –

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 others that the MORTGAGEE may extend to the MORTGAGOR, including interest
and expenses, and other obligations owing by the MORTGAGOR to the MORTGAGEE,
whether direct or indirect, principal or secondary, as appearing in the accounts, books and

48 | P a g e
records of the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of
mortgage unto the MORTGAGEE x x x43 (Emphasis supplied)

The CA believes that the 24% penalty is covered by the phrase "and other
obligations owing by the mortgagor to the mortgagee" and should thus be added to the
amount secured by the mortgages.44

The CA then proceeded to declare valid the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208, which came as a necessary result of petitioners’
failure to pay the outstanding obligation upon demand.45The CA saw fit to increase the trial
court’s award of 1% to 10%, finding the latter rate to be reasonable and citing the Real
Estate Mortgage agreement which authorized the collection of the higher rate.46

Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the
difference between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed
obligation as of January 14, 1999, or the date of the auction sale, in the amount of
₱3,946,667.87.47

Hence, the present Petition.

Issues

The following issues are raised in this Petition:

A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT

NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED
JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST
21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL DETERMINATION OF THE
RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE,
WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS
ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL
17, 1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN
APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED
COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.

B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT
DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE
LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE
LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-
1998 IN THE ADMITTED TOTAL AMOUNT OF ₱3,484,287.00, TO PAYMENT OF THE
PRINCIPAL OF ₱2,500,000.[00] LEAVING AN OVERPAYMENT OF₱984,287.00
REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.

II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES
ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO
PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS
A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE
BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.

III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT,
WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL INDEBTEDNESS

49 | P a g e
CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING]
10% ATTORNEY’S FEES.48

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated to
PNB the sole power to fix interest rates based on arbitrary criteria or factors such as bank
policy, profitability, cost of money, foreign currency values, and bank administrative costs;
spaces for interest rates in the two Credit Agreements and the promissory notes were left
blank for PNB to unilaterally fill, and their consent or agreement to the interest rates
imposed thereafter was not obtained; the interest rate, which consists of the prime rate
plus the bank spread, is determined not by agreement of the parties but by PNB’s Treasury
Department in Manila. Petitioners conclude that by this method of fixing the interest
rates, the principle of mutuality of contracts is violated, and public policy as well as Circular
90549 of the then Central Bank had been breached.

Petitioners question the CA’s application of the principle of estoppel, saying that no
estoppel can proceed from an illegal act. Though they failed to timely question the
imposition of the alleged illegal interest rates and continued to pay the loan on the basis of
these rates, they cannot be deemed to have acquiesced, and hence could recover what they
erroneously paid.50

Petitioners argue that if the interest rates were nullified, then their obligation to
PNB is deemed extinguished as of July 1997; moreover, it would appear that they even
made an over payment to the bank in the amount of ₱984,287.00.

Next, petitioners suggest that since the Real Estate Mortgage agreements did not
include nor specify, as part of the secured amount, the penalty of 24% authorized in PN
9707237, such amount of ₱581,666.66 could not be made answerable by or collected from
the mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine
Bank of Communications [PBCom] v. Court of Appeals,51 petitioners insist that the phrase
"and other obligations owing by the mortgagor to the mortgagee"52 in the mortgage
agreements cannot embrace the ₱581,666.66 penalty, because, as held in the PBCom case,
"[a] penalty charge does not belong to the species of obligations enumerated in the
mortgage, hence, the said contract cannot be understood to secure the penalty";53while the
mortgages are the accessory contracts, what items are secured may only be determined
from the provisions of the mortgage contracts, and not from the Credit Agreement or the
promissory notes.

Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should
be maintained, given that in foreclosures, a lawyer’s work consists merely in the
preparation and filing of the petition, and involves minimal study.54 To allow the
imposition of a staggering ₱396,211.00 for such work would be contrary to equity.
Petitioners state that the purpose of attorney’s fees in cases of this nature "is not to give
respondent a larger compensation for the loan than the law already allows, but to protect it
against any future loss or damage by being compelled to retain counsel x x x to institute
judicial proceedings for the collection of its credit."55 And because the instant case involves
a simple extrajudicial foreclosure, attorney’s fees may be equitably tempered.

Respondent’s Arguments

50 | P a g e
 For its part, respondent disputes petitioners’ claim that interest rates were
unilaterally fixed by it, taking relief in the CA pronouncement that petitioners are deemed
estopped by their failure to question the imposed rates and their continued payment
thereof without opposition. It adds that because the Credit Agreement and promissory
notes contained both an escalation clause and a de-escalation clause, it may not be said that
the bank violated the principle of mutuality. Besides, the increase or decrease in interest
rates have been mutually agreed upon by the parties, as shown by petitioners’ continuous
payment without protest. Respondent adds that the alleged unilateral imposition of
interest rates is not a proper subject for review by the Court because the issue was never
raised in the lower court.

As for petitioners’ claim that interest rates imposed by it are null and void for the
reasons that 1) the Credit Agreements and the promissory notes were signed in blank; 2)
interest rates were at short periods; 3) no interest rates could be charged where no
agreement on interest rates was made in writing; 4) PNB fixed interest rates on the basis of
arbitrary policies and standards left to its choosing; and 5) interest rates based on prime
rate plus applicable spread are indeterminate and arbitrary – PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank –
Respondent claims that this issue was never raised in the lower court. Besides,
documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in this
regard is self-serving, unsupported and uncorroborated, and for being the lone evidence
on this issue. The fact remains that these documents are in proper form, presumed
regular, and endure, against arbitrary claims by Silos – who is an experienced business
person – that she signed questionable loan documents whose provisions for interest rates
were left blank, and yet she continued to pay the interests without protest for a number
of years.56

b. That interest rates were at short periods – Respondent argues that the law which
governs and prohibits changes in interest rates made more than once every twelve
months has been removed57 with the issuance of Presidential Decree No. 858.58

c. That no interest rates could be charged where no agreement on interest rates was
made in writing in violation of Article 1956 of the Civil Code, which provides that no
interest shall be due unless it has been expressly stipulated in writing – Respondent
insists that the stipulated 25% per annum as embodied in PN 9707237 should be
imposed during the interim, or the period after the loan became due and while it remains
unpaid, and not the legal interest of 12% as claimed by petitioners.59

d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its
choosing – According to respondent, interest rates were fixed taking into consideration
increases or decreases as provided by law or by the Monetary Board, the bank’s overall
costs of funds, and upon agreement of the parties.60

e. That interest rates based on prime rate plus applicable spread are indeterminate and
arbitrary – On this score, respondent submits there are various factors that influence
interest rates, from political events to economic developments, etc.; the cost of money,
profitability and foreign currency transactions may not be discounted.61

On the issue of penalties, respondent reiterates the trial court’s finding that during
pre-trial, petitioners admitted that the Statement of Account as of October 12, 1998 –
which detailed and included penalty charges as part of the total outstanding obligation
owing to the bank – was correct. Respondent justifies the imposition and collection of a
penalty as a normal banking practice, and the standard rate per annum for all commercial
banks, at the time, was 24%.

51 | P a g e
 Respondent adds that the purpose of the penalty or a penal clause for that matter is
to ensure the performance of the obligation and substitute for damages and the payment of
interest in the event of non-compliance.62 And the promissory note – being the principal
agreement as opposed to the mortgage, which is a mere accessory – should prevail. This
being the case, its inclusion as part of the secured amount in the mortgage agreements is
valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-

empting consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners
filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership over these
properties, because they failed to timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the
propriety of the CA’s ruling on the following issues is squarely raised:

1. That the interest rate to be applied after the expiration of the first 30-day interest
period for PN 9707237 should be 12% per annum; and

2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99
which is the difference between the total amount due to PNB and the amount of its
bid price.

Our Ruling

The Court grants the Petition.

Before anything else, it must be said that it is not the function of the Court to re-examine or
re-evaluate evidence adduced by the parties in the proceedings below. The rule admits of
certain well-recognized exceptions, though, as when the lower courts’ findings are not
supported by the evidence on record or are based on a misapprehension of facts, or when
certain relevant and undisputed facts were manifestly overlooked that, if properly
considered, would justify a different conclusion. This case falls within such exceptions.

The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First
Division denying respondent’s petition in G.R. No. 181046, due to late filing, failure to
attach the required affidavit of service of the petition on the trial court and the petitioners,
and submission of a defective verification and certification of non-forum shopping. On June
25, 2008, the Court issued another Resolution denying with finality respondent’s motion
for reconsideration of the March 5, 2008 Resolution. And on August 15, 2008, entry of
judgment was made. This thus settles the issues, as above-stated, covering a) the interest
rate – or 12% per annum– that applies upon expiration of the first 30 days interest period
provided under PN 9707237, and b)the

CA’s decree that PNB should reimburse petitioner the excess in the bid price of
₱377,505.09.

It appears that respondent’s practice, more than once proscribed by the Court, has been
carried over once more to the petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or required of, its borrowers which

52 | P a g e
allow the bank to increase or decrease interest rates "within the limits allowed by law at
any time depending on whatever policy it may adopt in the future." Thus, in Philippine
National Bank v. Court of Appeals,64 such stipulation and similar ones were declared in
violation of Article 130865 of the Civil Code. In a second case, Philippine National Bank v.
Court of Appeals,66 the very same stipulations found in the credit agreement and the
promissory notes prepared and issued by the respondent were again invalidated. The
Court therein said:

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by
law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured
by this mortgage as well as the interest on the amount which may have been advanced by
the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of
this contract to such an increase within the rate allowed by law, as the Board of Directors of
the MORTGAGEE may prescribe for its debtors.

xxxx

In making the unilateral increases in interest rates, petitioner bank relied on the escalation
clause contained in their credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future and provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read
as follows:

53 | P a g e
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased bylaw or by the Monetary Board;
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided
further, That the adjustment in the rate of interest agreed upon shall take effect on or after
the effectivity of the increase or decrease in the maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe
the maximum rates of interest for loans and certain forbearances. Pursuant to such
authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan
or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However, contrary to the stubborn
insistence of petitioner bank, the said law and circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.

54 | P a g e
We cannot countenance petitioner bank’s posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
(1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private
respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker party’s (the debtor) participation being reduced to the alternative "to take it or
leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.67 (Emphases supplied)

Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the
very same provisions in the respondent’s prepared Credit Agreement, declaring thus:

The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. Any contract which appears to be heavily weighed in favor of one
of the parties so as to lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest
rates on the loan without the prior assent of the latter. In fact, the manner of agreement is
itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No
interest shall be due unless it has been expressly stipulated in writing." What has been
"stipulated in writing" from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21% interest,
subject to a possible escalation or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt about
this is in fact readily resolved by a careful reading of the credit agreement because the
same plainly uses the phrase "interest rate agreed upon," in reference to the original 21%
interest rate. x x x

55 | P a g e
 xxxx

Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an increase
in interest rates from 18% to as much as 68% is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to
virtually half of the entire principal (₱7,735,004.66) which was applied to interest alone. By
the time the spouses tendered the amount of ₱40,142,518.00 in settlement of their
obligations; respondent bank was demanding ₱58,377,487.00 over and above those
amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only [are] the increases of the interest rates on the basis of the
escalation clause patently unreasonable and unconscionable, but also there are no valid
and reasonable standards upon which the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the
law requiring the parties to agree to changes in the interest rate in writing, we hold that the
unilateral and progressive increases imposed by respondent PNB were null and void. Their
effect was to increase the total obligation on an eighteen million peso loan to an amount
way over three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)

Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was
reiterated:

The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together with
interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may
at any time without notice, raise within the limits allowed by law, and I/we also agree to
pay jointly and severally ____% per annum penalty charge, by way of liquidated damages
should this note be unpaid or is not renewed on due dated.

Payment of this note shall be as follows:

*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

On the reverse side of the note the following condition was stamped:

All short-term loans to be granted starting January 1, 1978 shall be made subject to the
condition that any and/or all extensions hereof that will leave any portion of the amount
still unpaid after 730 days shall automatically convert the outstanding balance into a
medium or long-term obligation as the case may be and give the Bank the right to charge
the interest rates prescribed under its policies from the date the account was originally
granted.

To secure payment of the loan the parties executed a real estate mortgage contract which
provided:

56 | P a g e
(k) INCREASE OF INTEREST RATE:

The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provision hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.

xxxx

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate
court’s ruling. The Court of Appeals nullified the interest rate increases not because the
promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but
because the absence of such provision made the clause so one-sided as to make it
unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage
Bank v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans
granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate
the one-sidedness of the escalation clause. Indeed because of concern for the unequal
status of borrowers vis-à-vis the banks, our cases after Banco Filipino have fashioned the
rule that any increase in the rate of interest made pursuant to an escalation clause must be
the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB
to increase the stipulated interest per annum" within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest
rate on this note shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board." The real estate
mortgage likewise provided:

The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provisions hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then
to 41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB]
to be in violation of the principle of mutuality as embodied in Art.1308 of the Civil Code,
which provides that "[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them." As the Court explained:

In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the ₱1.8 million loan agreement between the PNB

57 | P a g e
and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party’s (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co.,
95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:

The BANK reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future: Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest is reduced by law or by the Monetary Board. . . .

As in the first case, PNB successively increased the stipulated interest so that what was
originally 12% per annum became, after only two years, 42%. In declaring the increases
invalid, we held:

We cannot countenance petitioner bank’s posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts.

Only recently we invalidated another round of interest increases decreed by PNB pursuant
to a similar agreement it had with other borrowers:

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in
the said circular could possibly be read as granting respondent bank carte blanche
authority to raise interest rates to levels which would either enslave its borrowers or lead
to a hemorrhaging of their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents
to the successive increases in the interest rate. Private respondents’ assent to the increases
can not be implied from their lack of response to the letters sent by PNB, informing them of
the increases. For as stated in one case, no one receiving a proposal to change a contract is
obliged to answer the proposal.71 (Emphasis supplied)

We made the same pronouncement in a fifth case, New Sampaguita Builders Construction,
Inc. v. Philippine

National Bank,72 thus –

58 | P a g e
Courts have the authority to strike down or to modify provisions in promissory notes that
grant the lenders unrestrained power to increase interest rates, penalties and other
charges at the latter’s sole discretion and without giving prior notice to and securing the
consent of the borrowers. This unilateral authority is anathema to the mutuality of
contracts and enable lenders to take undue advantage of borrowers. Although the Usury
Law has been effectively repealed, courts may still reduce iniquitous or unconscionable
rates charged for the use of money. Furthermore, excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even if stipulated in the
promissory notes, cannot be given effect under the Truth in Lending Act.73 (Emphasis
supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above
pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated
contract stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996
case of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause
PNB used in the present case to justify the increased interest rates is no different from the
escalation clause assailed in the 1996 PNB case; in both, the interest rates were increased
from the agreed 12% per annum rate to 42%. x x x

xxxx

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to
contest the increased interest rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted to their implied acceptance of
the increase – should likewise fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest
rates prompted the lower courts to declare excessive and illegal the interest rates imposed.
Togo around this lower court finding, PNB alleges that the ₱206,297.47 deficiency claim
was computed using only the original 12% per annum interest rate. We find this unlikely.
Our examination of PNB’s own ledgers, included in the records of the case, clearly indicates
that PNB imposed interest rates higher than the agreed 12% per annum rate. This
confirmatory finding, albeit based solely on ledgers found in the records, reinforces the
application in this case of the rule that findings of the RTC, when affirmed by the CA, are
binding upon this Court.75 (Emphases supplied)

Verily, all these cases, including the present one, involve identical or similar provisions
found in respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit
Agreement executed by petitioners and respondent contained the following stipulation on
interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum].
Interest shall be payable in advance every one hundred twenty days at the rate prevailing
at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice

59 | P a g e
versa. Where the Bank has imposed on the Loan interest at a rate per annum which is equal
to the Bank’s spread over the current floating interest rate, the Borrower hereby agrees
that the Bank may, without need of notice to the Borrower, increase or decrease its spread
over the floating interest rate at any time depending on whatever policy it may adopt in the
future.76 (Emphases supplied)

while the eight promissory notes issued pursuant thereto granted PNB the right to increase
or reduce interest rates "within the limits allowed by law or the Monetary Board"77 and the
Real Estate Mortgage agreement included the same right to increase or reduce interest
rates "at any time depending on whatever policy PNB may adopt in the future."78

On the basis of the Credit Agreement, petitioners issued promissory notes which they
signed in blank, and respondent later on entered their corresponding interest rates, as
follows:

1st Promissory Note dated July 24, 1989 – 19.5%;

2nd Promissory Note dated November 22, 1989 – 23%;

3rd Promissory Note dated March 21, 1990 – 22%;

4th Promissory Note dated July 19, 1990 – 24%;

5th Promissory Note dated December 17, 1990 – 28%;

6th Promissory Note dated February 14, 1991 – 32%;

7th Promissory Note dated March 1, 1991 – 30%; and

8th Promissory Note dated July 11, 1991 – 24%.79

On the other hand, the August 1991 Amendment to Credit Agreement contains the
following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.80 (Emphases supplied)

and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:

9th Promissory Note dated November 8, 1991 – 26%;

10th Promissory Note dated March 19, 1992 – 25%;

11th Promissory Note dated July 11, 1992 – 23%;

12th Promissory Note dated November 10, 1992 – 21%;

13th Promissory Note dated March 15, 1993 – 21%;

14th Promissory Note dated July 12, 1993 – 17.5%;

15th Promissory Note dated November 17, 1993 – 21%;

16th Promissory Note dated March 28, 1994 – 21%;

60 | P a g e
 17th Promissory Note dated July 13, 1994 – 21%;

18th Promissory Note dated November 16, 1994 – 16%;

19th Promissory Note dated April 10, 1995 – 21%;

20th Promissory Note dated July 19, 1995 – 18.5%;

21st Promissory Note dated December 18, 1995 – 18.75%;

22nd Promissory Note dated April 22, 1996 – 18.5%;

23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

25th Promissory Note dated May 30, 1997 – 17.5%; and

26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate
the Bank may at any time without notice, raise within the limits allowed by law x x x."82 On
the other hand, the 18th up to the 26th promissory notes – which includes PN 9707237 –
carried the following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby
agree that in the event I/we are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option to prepay the loan or credit facility without penalty
within ten (10) calendar days from the Interest Setting Date.83 (Emphasis supplied)

These stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the imposed
interest rates. For this case, this lack of consent by the petitioners has been made obvious
by the fact that they signed the promissory notes in blank for the respondent to fill. We find
credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its
witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by
its Treasury Department in Manila, which were then simply communicated to all PNB
branches for implementation. If this were the case, then this would explain why petitioners
had to sign the promissory notes in blank, since the imposable interest rates have yet to be
determined and fixed by respondent’s Treasury Department in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes
– such as cost of money, foreign currency values, bank administrative costs, profitability,
and considerations which affect the banking industry – it can be seen that considerations
which affect PNB’s borrowers are ignored. A borrower’s current financial state, his
feedback or opinions, the nature and purpose of his borrowings, the effect of foreign
currency values or fluctuations on his business or borrowing, etc. – these are not factors
which influence the fixing of interest rates to be imposed on him. Clearly, respondent’s
method of fixing interest rates based on one-sided, indeterminate, and subjective criteria
such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed
standard or margin above or below these considerations.

The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses Beluso
valid. According to said stipulation:

61 | P a g e
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or the resulting profitability to the LENDER after
due consideration of all dealings with the BORROWER.

It should be pointed out that the authority to review the interest rate was given [to] UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in this
provision as it wishes. As worded in the above provision, UCPB may give as much weight as
it desires to each of the following considerations: (1) the prevailing financial and monetary
condition;(2) the rate of interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or(3) the resulting profitability
to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin
above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)

To repeat what has been said in the above-cited cases, any modification in the contract,
such as the interest rates, must be made with the consent of the contracting
parties.1âwphi1 The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon; otherwise, it
has no binding effect.

What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; -instead, they are
worded in such a way that the borrower shall agree to whatever interest rate respondent
fixes. In credit agreements covered by the above-cited cases, it is provided that:

The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in maximum interest rate.85 (Emphasis supplied)

Whereas, in the present credit agreements under scrutiny, it is stated that:

IN THE JULY 1989 CREDIT AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice
versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is
equal to the Bank’s spread over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future.86 (Emphases supplied)

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment

62 | P a g e
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.87 (Emphasis supplied)

Plainly, with the present credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes respondent’s unlawful act all the more
reprehensible.

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is against public
policy."88

It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the true cost
of credit to the user by using a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy."89 The law "gives a
detailed enumeration of the specific information required to be disclosed, among which are
the interest and other charges incident to the extension of credit."90 Section 4 thereof
provides that a disclosure statement must be furnished prior to the consummation of the
transaction, thus:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

Under Section 4(6), "finance charge" represents the amount to be paid by the debtor
incident to the extension of credit such as interest or discounts, collection fees, credit
investigation fees, attorney’s fees, and other service charges. The total finance charge
represents the difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price and non-finance
charges.91

By requiring the petitioners to sign the credit documents and the promissory notes in
blank, and then unilaterally filling them up later on, respondent violated the Truth in
Lending Act, and was remiss in its disclosure obligations. In one case, which the Court finds
applicable here, it was held:

63 | P a g e
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned
amount, and the like. The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to the contract,
and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s
claim of substantial compliance would defeat these purposes of the Truth in Lending Act.
The belated discovery of the true cost of credit will too often not be able to reverse the ill
effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with particularity the interest
rate to be applied to the loan covered by said promissory notes.92 (Emphases supplied)

However, the one-year period within which an action for violation of the Truth in Lending
Act may be filed evidently prescribed long ago, or sometime in 2001, one year after
petitioners received the March 2000 demand letter which contained the illegal charges.

The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondent’s breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision.93

Neither may the statements be considered proposals sent to secure the petitioners’
conformity; they were sent after the imposition and application of the interest rate, and not
before. And even if it were to be presumed that these are proposals or offers, there was no

64 | P a g e
acceptance by petitioners. "No one receiving a proposal to modify a loan contract,
especially regarding interest, is obliged to answer the proposal."94

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low
initial interest rates, but actually accompanied by provisions written in fine print that allow
lenders to later on increase or decrease interest rates unilaterally, without the consent of
the borrower, and depending on complex and subjective factors. Because they have been
lured into these contracts by initially low interest rates, borrowers get caught and stuck in
the web of subsequent steep rates and penalties, surcharges and the like. Being ordinary
individuals or entities, they naturally dread legal complications and cannot afford court
litigation; they succumb to whatever charges the lenders impose. At the very least,
borrowers should be charged rightly; but then again this is not possible in a one-sided
credit system where the temptation to abuse is strong and the willingness to rectify is
made weak by the eternal desire for profit.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in
every repricing of petitioners’ loan availment, they are given the right to question the
interest rates imposed. The import of respondent’s line of reasoning cannot be other than
that if one out of every hundred borrowers questions respondent’s practice of unilaterally
fixing interest rates, then only the loan arrangement with that lone complaining borrower
will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the profits from
such unscrupulous practice. The Court can no more condone a view so perverse. This is
exactly what the Court meant in the immediately preceding cited case when it said that "the
belated discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision;"95 as to the 99 borrowers who did not or could not
complain, the illegal act shall have become a fait accompli– to their detriment, they have
already suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under
the circumstances, irrelevant; we have a situation where the petitioners do not stand on
equal footing with the respondent. It is doubtful that any borrower who finds himself in
petitioners’ position would dare question respondent’s power to arbitrarily modify interest
rates at any time. In the second place, on what basis could any borrower question such
power, when the criteria or standards – which are really one-sided, arbitrary and
subjective – for the exercise of such power are precisely lost on him?

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to
the 26th promissory notes, petitioners are granted the option to prepay the loan or credit
facility without penalty within 10 calendar days from the Interest Setting Date if they are
not agreeable to the interest rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time petitioners learn of the interest
rate, they are already bound to pay it because they have already pre-signed the note where
the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one
party the right to choose whether to continue with or withdraw from the agreement if it
discovers that what the other party has been doing all along is improper or illegal.

Thus said, respondent’s arguments relative to the credit documents – that documentary
evidence prevails over testimonial evidence; that the credit documents are in proper form,
presumed regular, and endure, against arbitrary claims by petitioners, experienced
business persons that they are, they signed questionable loan documents whose provisions
for interest rates were left blank, and yet they continued to pay the interests without
protest for a number of years – deserve no consideration.

65 | P a g e
With regard to interest, the Court finds that since the escalation clause is annulled, the
principal amount of the loan is subject to the original or stipulated rate of interest, and
upon maturity, the amount due shall be subject to legal interest at the rate of 12% per
annum. This is the uniform ruling adopted in previous cases, including those cited
here.96 The interests paid by petitioners should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be, and later, to the capital or
principal.97 Respondent should then refund the excess amount of interest that it has
illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by
petitioners when they had no obligation to do so."98 Thus, the parties’ original agreement
stipulated the payment of 19.5% interest; however, this rate was intended to apply only to
the first promissory note which expired on November 21, 1989 and was paid by
petitioners; it was not intended to apply to the whole duration of the loan. Subsequent
higher interest rates have been declared illegal; but because only the rates are found to be
improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of
12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting
July1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in
Nacar v. Gallery Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No.
799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum based
on the defaulted principal amount shall be imposed. Petitioners claim that this penalty
should be excluded from the foreclosure amount or bid price because the Real Estate
Mortgage and the Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying that the purpose
of the penalty or a penal clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-
compliance.100 Respondent adds that the imposition and collection of a penalty is a normal
banking practice, and the standard rate per annum for all commercial banks, at the time,
was 24%. Its inclusion as part of the secured amount in the mortgage agreements is thus
valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the
secured amount. Having found the credit agreements and promissory notes to be tainted,
we must accord the same treatment to the mortgages. After all, "[a] mortgage and a note
secured by it are deemed parts of one transaction and are construed together."101 Being so
tainted and having the attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts strictly, and against the party who
drafted it. An examination of the mortgage agreements reveals that nowhere is it stated
that penalties are to be included in the secured amount. Construing this silence strictly
against the respondent, the Court can only conclude that the parties did not intend to
include the penalty allowed under PN 9707237 as part of the secured amount. Given its
resources, respondent could have – if it truly wanted to – conveniently prepared and
executed an amended mortgage agreement with the petitioners, thereby including
penalties in the amount to be secured by the encumbered properties. Yet it did not.

With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue
since it was not raised by the petitioners in their appeal; it was the respondent that
improperly brought it up in its appellee’s brief, when it should have interposed an appeal,
since the trial court’s Decision on this issue is adverse to it. It is an elementary principle in
the subject of appeals that an appellee who does not himself appeal cannot obtain from the
appellate court any affirmative relief other than those granted in the decision of the court
below.

x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to
make counter assignments of error in ordinary actions, when the purpose is merely to

66 | P a g e
defend himself against an appeal in which errors are alleged to have been committed by the
trial court both in the appreciation of facts and in the interpretation of the law, in order to
sustain the judgment in his favor but not when his purpose is to seek modification or
reversal of the judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment.102

Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no
authority to pass upon it at the instance of respondent. The ruling of the trial court in this
respect should remain undisturbed.

For the fixing of the proper amounts due and owing to the parties – to the respondent as
creditor and to the petitioners who are entitled to a refund as a consequence of
overpayment considering that they paid more by way of interest charges than the 12% per
annum103 herein allowed – the case should be remanded to the lower court for proper
accounting and computation, applying the following procedure:

1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;

2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum.104 Thus, interest payment made
in excess of 12% on the 2nd promissory note shall immediately be applied to the
principal, and the principal shall be accordingly reduced. The reduced principal shall
then be subjected to the 12%105 interest on the 3rd promissory note, and the excess
over 12% interest payment on the 3rd promissory note shall again be applied to the
principal, which shall again be reduced accordingly. The reduced principal shall
then be subjected to the 12% interest on the 4th promissory note, and the excess
over12% interest payment on the 4th promissory note shall again be applied to the
principal, which shall again be reduced accordingly. And so on and so forth;

3. After the above procedure is carried out, the trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);

4. Such outstanding balance/obligation, if there be any, shall then be subjected to a

12% per annum interest from October 28, 1997 until January 14, 1999, which is the
date of the auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum

penalty from August 14, 1997 until January 14, 1999. But from this total penalty, the
petitioners’ previous payment of penalties in the amount of ₱202,000.00made on
January 27, 1998106 shall be DEDUCTED;

6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and
executory award of 1% attorney’s fees shall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees
(6.) shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties (5.) are
not included because they are not included in the secured amount;

8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance
(3.), interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE
PETITIONERS;

9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award

67 | P a g e
 of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;

11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and
award of 1% attorney’s fees (6.), the excess shall be RETURNED to the petitioners,
with legal interest, under the principle of solutio indebiti;107

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award
of 1% attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees
(6.) exceed petitioners’ overpayment, then the excess shall be DEDUCTED from the
bid price of ₱4,324,172.96;

14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1%
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;

15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208. The outstanding penalties, if any, shall be collected by other means.

From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary,
respondent must refund the excess to petitioners.1âwphi1 In such case, the
extrajudicial foreclosure and sale of the properties shall be declared null and void
for obvious lack of basis, the case being one of solutio indebiti instead. If, on the
other hand, it turns out that petitioners’ overpayments in interests do not exceed
their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be to
return the difference between its bid price (₱4,324,172.96) and petitioners’ total
obligation outstanding – except penalties – after applying the latter’s overpayments.

WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of
the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is
hereby rendered as follows:

1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory
Notes are DECLARED NULL AND VOID, and such notes shall instead be subject to
interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and
starting July 1, 2013, six percent (6%) per annum until full satisfaction;

2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
from the amounts secured by the real estate mortgages;

3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
Aklan for the computation of overpayments made by petitioners spouses Eduardo
and Lydia Silos to respondent Philippine National Bank, taking into consideration
the foregoing dispositions, and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the validity

of the extrajudicial foreclosure and sale, declaring the same null and void in case of
overpayment and ordering the release and return of Transfer Certificates of Title
Nos. T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the

68 | P a g e
 petitioners of the difference between the bid price and the total remaining
obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from

consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until
all the steps in the procedure above set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of ₱377,505.99, which

respondent Philippine National Bank is ordered to reimburse petitioners, should be
HELD IN ABEYANCE until the true amount owing to or owed by the parties as
against each other is determined;

8. Considering that this case has been pending for such a long time and that further
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to
proceed with dispatch.

SO ORDERED.

UNITED COCONUT PLANTERS BANK, G.R.

No. 159912
Petitioner, - versus -SPOUSES SAMUEL and
ODETTE BELUSO,

Respondents.

CHIC

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which
seeks to annul the Court of Appeals Decision[1] dated 21 January 2003 and its
Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of
Appeals Decision and Resolution affirmed in turn the Decision[3] dated 23 March 2000 and
Order[4] dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in
Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes
executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor
of petitioner United Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under
a Credit Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory notes, a real estate mortgage over parcels
of land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as
additional security for the obligation. The Credit Agreement was subsequently amended to
increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and
to extend the term thereof to 28 February 1998.

69 | P a g e
 The spouses Beluso availed themselves of the credit line under the following
Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August P 700,000

1996

8314-96-00085-0 2 May 1996 30 August P 500,000

1996

8314-96-000292- 20 November 20 March 1997 P 800,000

2 1996

The three promissory notes were renewed several times. On 30 April 1997, the
payment of the principal and interest of the latter two promissory notes were debited from
the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory note with a due date of 28 February
1998.

To completely avail themselves of the P2.35 Million credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February P 200,000

1998

98-00002-4 2 January 1998 28 February P 150,000

1998

However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus, claimed that
the principal indebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging
from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay the
total sum of P763,692.03.

70 | P a g e
 From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24

97-00366-6 P 700,000 30.17% 32.786% P 795,294.72

(102 days)
(7 days)

97-00368-2 P 1,300,000 28% 30.41% P 1,462,124.54

(102 days)
(2 days)

98-00002-4 P 150,000 33% 36% P 170,034.71

(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to
comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by
the spouses Beluso to secure their credit line, which, by that time, already ballooned
to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting
and Damages against UCPB with the RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the
case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the

interest rate used by [UCPB] void and the foreclosure and Sheriffs Certificate
of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the
properties subject of the foreclosure; to pay [the spouses Beluso] the amount
of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The
spouses Beluso] are hereby ordered to pay [UCPB] the sum
of P1,560,308.00.[5]

71 | P a g e
 On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, [6] prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed
the RTC Decision, to wit:

WHEREFORE, premises considered, the decision dated March 23,

2000 of the Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-
314 is hereby AFFIRMED subject to the modification that defendant-
appellant UCPB is not liable for attorneys fees or the costs of suit.[7]

On 9 September 2003, the Court of Appeals denied UCPBs Motion for

Reconsideration for lack of merit. UCPB thus filed the present petition, submitting the
following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST
RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION
BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS AND ORDERED
RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION
FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS
(P1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER
OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT
COMPUTATION OF RESPONDENTS INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF
THE TRUTH IN LENDING ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING[8]

Validity of the Interest Rates

72 | P a g e
 The Court of Appeals held that the imposition of interest in the following provision
found in the promissory notes of the spouses Beluso is void, as the interest rates and the
bases therefor were determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.

SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally promise
to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB
Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS,
(P_____), Philippine Currency, with interest thereon at the rate indicative of
DBD retail rate or as determined by the Branch Head.[9]

UCPB asserts that this is a reversible error, and claims that while the interest rate
was not numerically quantified in the face of the promissory notes, it was nonetheless
categorically fixed, at the time of execution thereof, at the rate indicative of the DBD retail
rate. UCPB contends that said provision must be read with another stipulation in the
promissory notes subjecting to review the interest rate as fixed:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a prevailing
rate or prime rate allowed by this Court in Polotan v. Court of Appeals.[11] Furthermore,
UCPB argues that even if the proviso as determined by the branch head is considered void,
such a declaration would not ipso facto render the connecting clause indicative of DBD
retail rate void in view of the separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions

contained in this AGREEMENT, or documents executed in connection
herewith shall be declared invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired.[12]

According to UCPB, the imposition of the questioned interest rates did not infringe
on the principle of mutuality of contracts, because the spouses Beluso had the liberty to
choose whether or not to renew their credit line at the new interest rates pegged by
petitioner.[13] UCPB also claims that assuming there was any defect in the mutuality of the
contract at the time of its inception, such defect was cured by the subsequent conduct of
the spouses Beluso in availing themselves of the credit line from April 1996 to February
1998 without airing any protest with respect to the interest rates imposed by
UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel.[14]

73 | P a g e
 We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals,[15] where

we held:

In order that obligations arising from contracts may have the force of
law between the parties, there must be mutuality between the parties based
on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none)
to increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.

The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will of
petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the
interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined
by the Branch Head. As UCPB is given this choice, the rate should be categorically
determinable in both choices. If either of these two choices presents an opportunity for
UCPB to fix the rate at will, the bank can easily choose such an option, thus making the
entire interest rate provision violative of the principle of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate as determined by the Branch Head gives the latter unfettered
discretion on what the rate may be. The Branch Head may choose any rate he or she
desires. As regards the rate indicative of the DBD retail rate, the same cannot be considered
as valid for being akin to a prevailing rate or prime rate allowed by this Court
in Polotan. The interest rate in Polotan reads:

74 | P a g e
 The Cardholder agrees to pay interest per annum at 3% plus the prime rate
of Security Bank and Trust Company. x x x.[16]

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the
parties can easily determine the interest rate by applying simple arithmetic. On the other
hand, the provision in the case at bar does not specify any margin above or below the DBD
retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate,
again giving it unfettered discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses Beluso
valid. According to said stipulation:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.[17]

It should be pointed out that the authority to review the interest rate was given UCPB alone
as the lender. Moreover, UCPB may apply the considerations enumerated in this provision
as it wishes. As worded in the above provision, UCPB may give as much weight as it desires
to each of the following considerations: (1) the prevailing financial and monetary
condition; (2) the rate of interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or (3) the resulting profitability
to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin
above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the principle of
mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract,

validity cannot be given to it by estoppel if it is prohibited by law or is against public
policy.[18]

75 | P a g e
 The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later,
because they violate the Truth in Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is, furthermore, a form of deception which we
cannot countenance. It is against the policy of the State as stated in the Truth in Lending
Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of

the State to protect its citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national
economy.[19]

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the credit line. In
fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still
reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head.

Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the interest
rates imposed by UCPB, both failed to include in their computation of the outstanding
obligation of the spouses Beluso the legal rate of interest of 12% per annum. Furthermore,
the penalty charges were also deleted in the decisions of the RTC and the Court of
Appeals. Section 2.04, Article II on Interest and other Bank Charges of the subject Credit
Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for

in Section 2.01 of this ARTICLE, any principal obligation of the CLIENT
hereunder which is not paid when due shall be subject to a penalty charge of
one percent (1%) of the amount of such obligation per month computed from
due date until the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof, the
penalty charge shall be used on the total principal amount outstanding and
unpaid computed from the date of acceleration until the obligation is paid in
full.[20]

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity,

I/We, jointly and severally, agree to pay an additional sum equivalent to

76 | P a g e
 twenty-five percent (25%) of the total due on the Note as attorneys fee, aside
from the expenses and costs of collection whether actually incurred or not,
and a penalty charge of one percent (1%) per month on the total amount due
and unpaid from date of default until fully paid.[21]

Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to

Section 9.06 of the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement
of its rights under this AGREEMENT, the Note(s), the collaterals and other
related documents, the BANK shall be entitled to recover attorneys fees
equivalent to not less than twenty-five percent (25%) of the total amounts
due and outstanding exclusive of costs and other expenses.[22]

Another alleged computational error pointed out by UCPB is the negation of the
Compounding Interest agreed upon by the parties under Section 2.02 of the Credit
Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form
part of the principal and shall be subject to the same interest rate as herein
stipulated.[23]

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the
principal and shall likewise bear interest at the same rate.[24]

UCPB lastly avers that the application of the spouses Belusos payments in the
disputed computation does not reflect the parties agreement. The RTC deducted the
payment made by the spouses Beluso amounting to P763,693.00 from the principal
of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as
with the agreement of the parties as to the facts of the case. In paragraph 7 of the spouses
Belusos Manifestation and Motion on Proposed Stipulation of Facts and Issues vis--
vis UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to
the interest and not to the principal, in accord with Section 3.03, Article II of the Credit
Agreement on Order of the Application of Payments, which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT

shall be applied in accordance with the following order of preference:

77 | P a g e
 1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of

collection;

3. Penalty charges;

4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees
had been erroneously excluded by the RTC and the Court of Appeals from the computation
of the total amount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB
is for a considerably bigger amount and, therefore, the demand should be considered
void. There being no valid demand, according to the spouses Beluso, there would be no
default, and therefore the interests and penalties would not commence to run. As it was
likewise improper to foreclose the mortgaged properties or file a case against the spouses
Beluso, attorneys fees were not warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.[26] The excess amount in such a demand does not nullify the demand itself, which
is valid with respect to the proper amount. A contrary ruling would put commercial
transactions in disarray, as validity of demands would be dependent on the exactness of the
computations thereof, which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses
Beluso are considered in default with respect to the proper amount and, therefore, the
interests and the penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: There being no valid
stipulation as to interest, the legal rate of interest shall be charged.[27] It seems that the RTC
inadvertently overlooked its non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal rate
of interest in both the body and the prayer of its petition with the RTC:

78 | P a g e
 12. Since the provision on the fixing of the rate of interest by the sole
will of the respondent Bank is null and void, only the legal rate of interest
which is 12% per annum can be legally charged and imposed by the bank,
which would amount to only about P599,000.00 since 1996 up to August 31,
1998.

WHEREFORE, in view of the foregoing, petiitoners pray for judgment

or order:

2. By way of example for the public good against the Banks taking
unfair advantage of the weaker party to their contract, declaring the legal
rate of 12% per annum, as the imposable rate of interest up to February 28,
1999 on the loan of 2.350 million.[28]

All these show that the spouses Beluso had acknowledged before the RTC their obligation
to pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal
interest in its computation, however, the spouses Beluso merely defended in the appellate
courts this non-inclusion, as the same was beneficial to them. We see, however, sufficient
basis to impose a 12% legal interest in favor of petitioner in the case at bar, as what we
have voided is merely the stipulated rate of interest and not the stipulation that the loan
shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of

interest. The provisions in the Credit Agreement and in the promissory notes providing for
the compounding of interest were neither nullified by the RTC or the Court of Appeals, nor
assailed by the spouses Beluso in their petition with the RTC. The compounding of interests
has furthermore been declared by this Court to be legal. We have held in Tan v. Court of
Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest due and

unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise

upholding the imposition thereof in the contract, we find the rate iniquitous. Like in the
case of grossly excessive interests, the penalty stipulated in the contract may also be
reduced by the courts if it is iniquitous or unconscionable.[30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be

iniquitous considering the fact that this penalty is already over and above the compounded
interest likewise imposed in the contract. If a 36% interest in itself has been declared
unconscionable by this Court,[31] what more a 30.41% to 36% penalty, over and above the
payment of compounded interest?UCPB itself must have realized this, as it gave us a sample

79 | P a g e
computation of the spouses Belusos obligation if both the interest and the penalty charge
are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor
even if there had been no demand. Filing a case in court is the judicial demand referred to
in Article 1169[32]of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the
spouses Beluso were forced to litigate the issue on the illegality of the interest rate
provision of the promissory notes. The award of attorneys fees, it must be recalled, falls
under the sound discretion of the court.[33] Since both parties were forced to litigate to
protect their respective rights, and both are entitled to the award of attorneys fees from the
other, practical reasons dictate that we set off or compensate both parties liabilities for
attorneys fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall
merely affirm the deletion of the award of attorneys fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded
legal interest of 12% per annum and a penalty charge of 12% per annum. We also hold that,
instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the
deletion of the award of attorneys fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been
consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses
Beluso failed to exercise their right of redemption which expired on 25 March 2000. The
RTC, however, annulled the foreclosure of mortgage based on an alleged incorrect
computation of the spouses Belusos indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are
present in the case at bar. Furthermore, the annulment of the foreclosure proceedings and
the certificates of sale were mooted by the subsequent issuance of new certificates of title in
the name of said bank. UCPB claims that the spouses Belusos action for annulment of
foreclosure constitutes a collateral attack on its certificates of title, an act proscribed by
Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration
Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of

title shall not be subject to collateral attack. It cannot be altered, modified or
cancelled except in a direct proceeding in accordance with law.

80 | P a g e
 The spouses Beluso retort that since they had the right to refuse payment of an
excessive demand on their account, they cannot be said to be in default for refusing to pay
the same.Consequently, according to the spouses Beluso, the enforcement of such illegal
and overcharged demand through foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we
already found that a valid demand was made by UCPB upon the spouses Beluso, despite
being excessive, the spouses Beluso are considered in default with respect to the proper
amount of their obligation to UCPB and, thus, the property they mortgaged to secure such
amounts may be foreclosed.Consequently, proceeds of the foreclosure sale should be
applied to the extent of the amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are
present in this case. The grounds for the proper annulment of the foreclosure sale are the
following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted;
or (3) that the price was inadequate and the inadequacy was so great as to shock the
conscience of the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs
alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in
Lending Act which mandates the filing of an action to recover such penalty must be made
under the following circumstances:

Section 6. (a) Any creditor who in connection with any credit

transaction fails to disclose to any person any information in violation of this
Act or any regulation issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is greater,
except that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation,
in any court of competent jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that [a]dmittedly the original
complaint did not explicitly allege a violation of the Truth in Lending Act and no action to
formally admit the amended petition [which expressly alleges violation of the Truth in
Lending Act] was made either by [respondents] spouses Beluso and the lower court. x x
x.[35]

81 | P a g e
 UCPB further claims that the action to recover the penalty for the violation of the
Truth in Lending Act had been barred by the one-year prescriptive period provided for in
the Act. UCPB asserts that per the records of the case, the latest of the subject promissory
notes had been executed on 2 January 1998, but the original petition of the spouses Beluso
was filed before the RTC on 9 February 1999, which was after the expiration of the period
to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of
Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the
Truth in Lending Act and no action to formally admit the amended petition
was made either by [respondents] spouses Beluso and the lower court. In
such transactions, the debtor and the lending institutions do not deal on an
equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure
thereof by the lender. We find that its infringement may be inferred or
implied from allegations that when [respondents] spouses Beluso executed
the promissory notes, the interest rate chargeable thereon were left
blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to
[respondents] Spouses Beluso the charges applicable on their loans.[36]

We agree with the Court of Appeals. The allegations in the complaint, much more
than the title thereof, are controlling. Other than that stated by the Court of Appeals, we
find that the allegation of violation of the Truth in Lending Act can also be inferred from the
same allegation in the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic)

respondent bank has relied on the provision of their promissory note
granting respondent bank the power to unilaterally fix the interest rates,
which rate was not determined in the promissory note but was left solely to
the will of the Branch Head of the respondent Bank, x x x.[37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix
the interest rates certainly also means that the promissory notes do not contain a clear
statement in writing of (6) the finance charge expressed in terms of pesos and centavos;
and (7) the percentage that the finance charge bears to the amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.[38] Furthermore, the spouses Belusos prayer for such other reliefs just and
equitable in the premises should be deemed to include the civil penalty provided for in
Section 6(a) of the Truth in Lending Act.

82 | P a g e
 UCPBs contention that this action to recover the penalty for the violation of the
Truth in Lending Act has already prescribed is likewise without merit. The penalty for the
violation of the act is P100 or an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is greater, except that such liability
shall not exceed P2,000.00 on any credit transaction.[39] As this penalty depends on
the finance charge required of the borrower, the borrowers cause of action would only
accrue when such finance charge is required. In the case at bar, the date of the demand for
payment of the finance charge is 2 September 1998, while the foreclosure was made on 28
December 1998. The filing of the case on 9 February 1999 is therefore within the one-year
prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense,
cannot be inferred nor implied from the allegations made in the complaint. [40] Pertinent
provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction
fails to disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount
of P100 or in an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit transaction. Action to
recover such penalty may be brought by such person within one year from
the date of the occurrence of the violation, in any court of competent
jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable attorneys
fees and court costs as determined by the court.

(c) Any person who willfully violates any provision of this Act
or any regulation issued thereunder shall be fined by not less than P1,000 or
more than P5,000 or imprisonment for not less than 6 months, nor more than
one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the
said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal
offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment
or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for
failure to disclose any information of the required information to any person in violation of
the Act. The penalty therefor is an amount of P100 or in an amount equal to twice the
finance charge required by the creditor in connection with such transaction, whichever is
greater, except that the liability shall not exceed P2,000.00 on any credit transaction. The
action to recover such penalty may be instituted by the aggrieved private person separately
and independently from the criminal case for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare
the interests in the promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides:

83 | P a g e
 SEC. 5. Joinder of causes of action.A party may in one pleading assert, in
the alternative or otherwise, as many causes of action as he may have against
an opposing party, subject to the following conditions:

(a) The party joining the causes of action shall comply with the rules
on joinder of parties;

(b) The joinder shall not include special civil actions or actions
governed by special rules;

(c) Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be allowed in the
Regional Trial Court provided one of the causes of action falls within the
jurisdiction of said court and the venue lies therein; and

(d) Where the claims in all the causes of action are principally for
recovery of money, the aggregate amount claimed shall be the test of
jurisdiction.

In attacking the RTCs disposition on the violation of the Truth in Lending Act since
the same was not alleged in the complaint, UCPB is actually asserting a violation of due
process. Indeed, due process mandates that a defendant should be sufficiently apprised of
the matters he or she would be defending himself or herself against. However, in the 1 July
1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for civil sanctions
for violation of the Truth in Lending Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in
Lending Act in not informing the borrower in writing before the execution of
the Promissory Notes of the interest rate expressed as a percentage of the
total loan, the respondent bank instead is liable to pay petitioners double the
amount the bank is charging petitioners by way of sanction for its
violation.[41]

In the same pre-trial brief, the spouses Beluso also expressly raised the following
issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with
the Truth in Lending Act provision to express the interest rate as a simple
annual percentage of the loan?[42]

These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting up a
defense thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act,

84 | P a g e
considering that the present action allegedly involved a single credit transaction as there
was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to
declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the above actions belong to the
jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court
on Joinder of Causes of Action provides:

(c) Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be allowed in the
Regional Trial Court provided one of the causes of action falls within the
jurisdiction of said court and the venue lies therein.

Furthermore, opening 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. In the case at bar, the violation of the Truth in Lending Act
allegedly occurred not when the parties executed the Credit Agreement, where no interest
rate was mentioned, but when the parties executed the promissory notes, where the
allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of the terms
thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that
the disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear statement
in writing setting forth, to the extent applicable and in accordance with rules
and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be

acquired;

(2) the amounts, if any, to be credited as down payment and/or

trade-in;

85 | P a g e
 (3) the difference between the amounts set forth under clauses (1)
and (2)

(4) the charges, individually itemized, which are paid or to be paid by

such person in connection with the transaction but which are not
incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness
of the true cost thereof, proceeding from the experience that banks are able to conceal such
true cost by hidden charges, uncertainty of interest rates, deduction of interests from the
loaned amount, and the like. The law thereby seeks to protect debtors by permitting them
to fully appreciate the true cost of their loan, to enable them to give full consent to the
contract, and to properly evaluate their options in arriving at business decisions. Upholding
UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending
Act. The belated discovery of the true cost of credit will too often not be able to reverse the
ill effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in
RTC, Makati City) on the ground that the spouses Beluso instituted another case (Civil Case
No. V-7227) before the RTC of Roxas City, involving the same parties and issues. UCPB
claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed
for the issuance of a temporary restraining order and/or injunction to stop foreclosure of
spouses Belusos properties, it poses issues which are similar to those of the present
case.[43] To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case
No. V-7227, which contains similar allegations as those in the present case. The RTC of

86 | P a g e
Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB
raised the same issue with the Court of Appeals, and is raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of
Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure
before the true account of spouses Beluso is determined. On the other hand, the issue in
Case No. 99-314 before the RTC of Makati City is the validity of the interest rate
provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot because,
before the RTC of Roxas City could act on the restraining order, UCPB proceeded with the
foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-7227 has
already been accomplished, the spouses Beluso had to file a different action, that of
Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.

Even if we assume for the sake of argument, however, that only one cause of action
is involved in the two civil actions, namely, the violation of the right of the spouses Beluso
not to have their property foreclosed for an amount they do not owe, the Rules of Court
nevertheless allows the filing of the second action. Civil Case No. V-7227 was dismissed by
the RTC of Roxas City before the filing of Case No. 99-314 with the RTC of Makati City, since
the venue of litigation as provided for in the Credit Agreement is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order

granting a motion to dismiss based on paragraphs (f), (h) and (i) of section 1
hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c)
of Section 1, not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.Within the time for but before filing the answer
to the complaint or pleading asserting a claim, a motion to dismiss may be
made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending
party;

(b) That the court has no jurisdiction over the subject matter of the
claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for
the same cause;

87 | P a g e
 (f) That the cause of action is barred by a prior judgment or by the
statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading
has been paid, waived, abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable

under the provisions of the statute of frauds; and

(j) That a condition precedent for filing the claim has not been
complied with.[44] (Emphases supplied.)

When an action is dismissed on the motion of the other party, it is only when the
ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the action
cannot be refiled. As regards all the other grounds, the complainant is allowed to file same
action, but should take care that, this time, it is filed with the proper court or after the
accomplishment of the erstwhile absent condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration
filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion
had not yet been ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the
RTC of Makati. Hence, there were allegedly two pending actions between the same parties
on the same issue at the time of the filing of Civil Case No. 99-314 on 9 February 1999 with
the RTC of Makati. This will still not change our findings. It is indeed the general rule that in
cases where there are two pending actions between the same parties on the same issue, it
should be the later case that should be dismissed. However, this rule is not
absolute. According to this Court in Allied Banking Corporation v. Court of Appeals[45]:

In these cases, it is evident that the first action was filed in anticipation
of the filing of the later action and the purpose is to preempt the later suit or
provide a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it
may nevertheless be dismissed if the later action is the more
appropriate vehicle for the ventilation of the issues between the
parties.Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the

later case should yield to the earlier case. What is required
merely is that there be another pending action, not a prior
pending action. Considering the broader scope of inquiry
involved in Civil Case No. 4102 and the location of the property
involved, no error was committed by the lower court in
deferring to the Bataan court's jurisdiction.

88 | P a g e
 Given, therefore, the pendency of two actions, the following are the
relevant considerations in determining which action should be dismissed: (1)
the date of filing, with preference generally given to the first action filed to be
retained; (2) whether the action sought to be dismissed was filed merely to
preempt the later action or to anticipate its filing and lay the basis for its
dismissal; and (3) whether the action is the appropriate vehicle for litigating
the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action
for injunction against a foreclosure sale that has already been held, while Civil Case No. 99-
314 before the RTC of Makati City includes an action for the annulment of said foreclosure,
an action certainly more proper in view of the execution of the foreclosure sale. The former
case was improperly filed in Roxas City, while the latter was filed in Makati City, the proper
venue of the action as mandated by the Credit Agreement. It is evident, therefore, that Civil
Case No. 99-314 is the more appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was
not in error in not dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
following MODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,

respondent spouses Samuel and Odette Beluso are also liable for the following amounts:

a. Penalty of 12% per annum on the amount due[46] from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due[47] from date of
demand;

2. The following amounts shall be deducted from the liability of the spouses Samuel and
Odette Beluso:

a. Payments made by the spouses in the amount of P763,692.00. These payments shall
be applied to the date of actual payment of the following in the order that they are
listed, to wit:

i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall
be deducted from the liability of the spouses Samuel and Odette Beluso on 9 February
1999 to the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of payment;

89 | P a g e
 ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the

amounts which the Regional Trial Court and the Court of Appeals ordered respondents to
pay, as modified in this Decision, shall be deducted from the proceeds of the foreclosure
sale. SO ORDERED.

DEVELOPMENT BANK OF PHILIPPINES,- versus -FELIPE P. ARCILLA, JR.,

FELIPE P. ARCILLA, JR., Petitioner - versus - PUNO, J., Chairman,AUSTRIA-

MARTINEZ, CALLEJO, SR.,TINGA, andDEVELOPMENT BANK OF CHICO-NAZARIO, JJ.

THE PHILIPPINES,

Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP)
in October 1981. About five or six months thereafter, he was assigned to the legal
department, and thereafter, decided to avail of a loan under the Individual Housing Project
(IHP) of the bank.[1] On September 12, 1983, DBP and Arcilla executed a Deed of
Conditional Sale[2] over a parcel of land, as well as the house to be constructed thereon, for
the price of P160,000.00. Arcilla borrowed the said amount from DBP for the purchase of
the lot and the construction of a residential building thereon. He obliged himself to pay the
loan in 25 years, with a monthly amortization of P1,417.91, with 9% interest per annum, to
be deducted from his monthly salary.[3]

DBP obliged itself to transfer the title of the property upon the payment of the loan,
including any increments thereof. It was also agreed therein that if Arcilla availed of
optional retirement, he could elect to continue paying the loan, provided that the
loan/amount would be converted into a regular real estate loan account with the prevailing
interest assigned on real estate loans, payable within the remaining term of the loan
account.[4]

Arcilla was notified of the periodic release of his loan.[5] During the period of July
1984 to December 31, 1986, the monthly amortizations for the said account were deducted
from his monthly salary, for which he was issued receipts.[6]

The monthly amortization was increased to P1,468.92 in November 1984, and to P1,691.51
beginning January 1985. However, Arcilla opted to resign from the bank in December 1986.
Conformably with the Deed of Conditional Sale, the bank informed him, on June 11, 1987,
that the balance of his loan account with the bank had been converted to a regular housing
loan, thus:

Amount converted Interest Rate Remaining Term Monthly

toPH Loan
Amortization

90 | P a g e
 P 155,218.79 - 1 9% 22 yrs. & 6 mos P1,342.72

6,802.45 - 2 9% 21 yrs. &10 mos. 59.41

24,342.91 - 3 9% 22 yrs. 212.07

Plus: MRI at PC. 41/thousand P1,614.20

76.41

P186,364.15 Total P1,690.61[7] ========

On July 24, 1987, Arcilla signed three Promissory Notes[8] for the total amount
of P186,364.15. He was also obliged to pay service charge and interests, as follows:

a.1 On the amount advanced or balance thereof that remains unpaid for 30
days* or less:

i. Interest on advances at 7% p.a. over DBPs borrowing cost:

ii. No 2% service charge

iii. No 8% penalty charge

a.2 On the amount advanced or balance thereof that remains unpaid for more
than 30 days:

i. Interest on the advance at 7% p.a. ] over DBPs borrowing cost; ]

ii. One time 2% service charge ]-- To be computed from

iii. Interest on the service charge ] the start of the 30-day

iv. 8% penalty charge on the balances ] period of the advances and service
charge.[9]

Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date ofadvances

Other Advances - 30-day period to be computed from date ofnotification

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest 7% p.a. over borrowing cost

Penalty charge 8% p.a. if unpaidafter 30 days from date of advance

91 | P a g e
 i. Interest of the advance at ]7% p.a. over DBPs ]borrowing costs; ]-- To
be computed from start

ii One time 2% service charge ] of 30-day period

iii Interest on the service charge]

iv. 8% penalty charge on the ] balances of the advance and ] service

charge. ]

*Insurance Premiums - 30-day period to be computed from date of advances.

Other Advances - 30-day period to be computed from date of notification.

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest 7% p.a. over borrowing cost Penalty charge 8% p.a.
if unpaid

after 30 days from date of advance

However, Arcilla also agreed to the reservation by the DBP of its right to increase
(with notice to him) the rate of interest on the loan, as well as all other fees and charges on
loans and advances pursuant to such policy as it may adopt from time to time during the
period of the loan; Provided, that the rate of interest on the loan shall be reduced by law or
by the Monetary Board; Provided, further, that the adjustment in the rate of interest shall
take effect on or after the effectivity of the increase or decrease in the maximum rate of
interest.[10]

Upon his request, DBP agreed to grant Arcilla an additional cash advance
of P32,000.00. Thereafter, on May 23, 1984, a Supplement to the Conditional Sale
Agreement was executed in which DBP and Arcilla agreed on the following terms of the
loan:

Amount Interest Rate Per Annum Terms Amortization

P32,000.00 Nine (9%) per cent MRI 24 years P271.57 for P32,000.00 at P0.40/

1,000.00 12.80

P32,000.00 same to be consolidated with the (Est. P 284.37

original advance in accordance Amort.) =======

with Condition No. 8 hereof.[11]

92 | P a g e
The additional advance was, thus, consolidated to the outstanding balance of Arcillas
original advance, payable within the remaining term thereof at 9% per annum. However,
he failed to pay his loan account, advances, penalty charges and interests which, as of
October 31, 1990, amounted to P241,940.93.[12] DBP rescinded the Deed of Conditional Sale
by notarial act on November 27, 1990.[13] Nevertheless, it wrote Arcilla, on January 3, 1992,
giving him until October 24, 1992, within which to repurchase the property upon full
payment of the current appraisal or updated total, whichever is lesser; in case of failure to
do so, the property would be advertised for bidding.[14] DBP reiterated the said offer on
October 7, 1992.[15] Arcilla failed to respond. Consequently, the property was advertised for
sale at public bidding on February 14, 1994.[16]

Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo,
Rizal, on February 21, 1994. He alleged that DBP failed to furnish him with the disclosure
statement required by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158
prior to the execution of the deed of conditional sale and the conversion of his loan account
with the bank into a regular housing loan account. Despite this, DBP immediately deducted
the account from his salary as early as 1984. Moreover, the bank applied its own formula
and imposed its usurious interests, penalties and charges on his loan account and advances.
He further alleged, thus:

13. That when plaintiff could no longer cope-up with defendants illegal
and usurious impositions, the DBP unilaterally increased further the rate of
interest, without notice to the latter, and heaped-up usurious interests,
penalties and charges;

14. That to further bend the back of the plaintiff, defendant rescinded the
subject deed of conditional sale on 4 December 1990 without giving due
notice to plaintiff;

15. That much later, on 10 October 1993, plaintiff received a letter

from defendant dated 19 September 1993, informing plaintiff that the subject
deed of conditional sale was already rescinded on 4 December 1990 (xerox
copy of the same is hereto attached and made an integral part hereof as
Annex C;[17]

In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No.
3765 and CB Circular No. 158 because the details required in said statements were
particularly disclosed in the promissory notes, deed of conditional sale and the required
notices sent to Arcilla. In any event, its failure to comply strictly with R.A. No. 3765 did not
affect the validity and enforceability of the subject contracts or transactions. DBP
interposed a counterclaim for the possession of the property.

On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified
the notarial rescission of the deeds executed by the parties. The fallo of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of the plaintiff and against the defendant. Defendant is hereby directed
to furnish the disclosure statement to the plaintiff within five (5) days upon

93 | P a g e
 receipt hereof in the manner and form provided by R.A. No. 3765 and submit
to this Court for approval the total obligation of the plaintiff as of this date,
within ten (10) days from receipt of this order. The Notarial Rescission (Exh.
16) dated November 27, 1990 is hereby declared null and void. Costs against
the defendant. SO ORDERED.[18]

DBP appealed the decision to the Court of Appeals (CA) wherein it made the
following assignment of errors:

4.1. The trial court erred in ruling that the provision of the details of the loan
without the issuance of a Disclosure Statement is not compliance with the
Truth in Lending Act;

4.2. The trial court erred in declaring the Notarial Rescission null and void;
and

4.3. The trial court erred in denying DBPs counterclaims for recovery of
possession, back rentals and litigation expenses.[19]

On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the
RTC. In ordering the dismissal of the complaint, the appellate court ruled that DBP
substantially complied with R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for
reconsideration of the decision. For its part, DBP filed a motion for partial reconsideration
of the decision, praying that Arcilla be ordered to vacate the property. However, the
appellate court denied both motions.

The parties filed separate petitions for review on certiorari with this Court. The first
petition, entitled Development Bank of the Philippines v. Court of Appeals, was docketed as
G.R. No. 161397; the second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was
docketed as G.R. No. 161426. The Court resolved to consolidate the two cases.

The issues raised in the two petitions are the following: a) whether or not petitioner DBP
complied with the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series
of 1978, in the execution of the deed of conditional sale, the supplemental deed of
conditional sale, as well as the promissory notes; and b) whether or not respondent Felipe
Arcilla, Jr. is mandated to vacate the property and pay rentals for his occupation thereof
after the notarial rescission of the deed of conditional sale was rescinded by notarial act, as
well as the supplement executed by DBP.

On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the
DBP, as the creditor bank, was mandated to furnish him with the requisite information in
such form prescribed by the Central Bank before the commutation of the loan transaction.
He avers that the disclosure of the details of the loan contained in the deed of conditional
sale and the supplement thereto, the promissory notes and release sheet, do

94 | P a g e
not constitute substantial compliance with the law and the CB Circular. He avers that the
required disclosure did not include the following:

[T]he percentage of Finance Charges to Total Amount Financed (Computed in

accordance with Sec. 2(i) of CB Circular 158; the Additional Charges in case
certain stipulations in the contract are not met by the debtor; Total Non-
Finance Charges; Total Finance Charges, Effective Interest Rate, etc. [20]

Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No.
3765 and CB Circular No. 158 forecloses its right to rescind the transaction between them,
and to demand compliance of his obligation arising from said transaction. Moreover, the
bank had no right to deduct the monthly amortizations from his salary without first
complying with the mandate of R.A. No. 3765.

DBP, on the other hand, avers that all the information required by R.A. No. 3765 was
already contained in the loan transaction documents. It posits that even if it failed to
comply strictly with the disclosure requirement of R.A. No. 3765, nevertheless, under
Section 6(b) of the law, the validity and enforceability of any action or transaction is not
affected. It asserts that Arcilla was estopped from invoking R.A. No. 3765 because he failed
to demand compliance with R.A. No. 3765 from the bank before the consummation of the
loan transaction, until the time his complaint was filed with the trial court.

In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering
judgment on its counterclaim for the possession of the subject property, and the liability of
Arcilla for rentals while in the possession of the property after the notarial rescission of the
deeds of conditional sale. For his part, Arcilla (in G.R. No. 161426) insists that the
respondent failed to comply with its obligation under R.A. No. 3765; hence, the notarial
rescission of the deed of conditional sale and the supplement thereof was null and void.
Until DBP complies with its obligation, he is not obliged to comply with his.

The petition of Arcilla has no merit.

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction,
the bank, as creditor, is obliged to furnish a client with a clear statement, in writing, setting
forth, to the extent applicable and in accordance with the rules and regulations prescribed
by the Monetary Board of the Central Bank of the Philippines, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;

(5) the total amount to be financed;

95 | P a g e
 (6) the finance charges expressed in terms of pesos and centavos; and

(7) the percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No.
3765 shall be included in the contract covering the credit transaction or any other
document to be acknowledged and signed by the debtor, thus:

The contract covering the credit transaction, or any other document

to be acknowledged and signed by the debtor, shall indicate the above seven
items of information. In addition, the contract or document shall specify
additional charges, if any, which will be collected in case certain stipulations
in the contract are not met by the debtor.

Furthermore, the contract or document shall specify additional charges, if any,

which will be collected in case certain stipulations in the contract are not met by the
debtor.[21]

If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to collect such
charge or increases thereof, even if stipulated in the promissory note.[22] However, such
failure shall not affect the validity or enforceability of any contract or transaction.[23]

In the present case, DBP failed to disclose the requisite information in the disclosure
statement form authorized by the Central Bank, but did so in the loan transaction
documents between it and Arcilla. There is no evidence on record that DBP sought to
collect or collected any interest, penalty or other charges, from Arcilla other than those
disclosed in the said deeds/documents.

The Court is convinced that Arcillas claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was but an
afterthought. Despite the notarial rescission of the conditional sale in 1990, and DBPs
subsequent repeated offers to repurchase the property, the latter maintained his silence.
Arcilla filed his complaint only on February 21, 1994, or four years after the said notarial
rescission. The Court finds and so holds that the following findings and ratiocinations of the
CA are correct:

After a careful perusal of the records, We find that the appellee had been
sufficiently informed of the terms and the requisite charges necessarily
included in the subject loan. It must be stressed that the Truth in Lending Act
(R.A. No. 3765), was enacted primarily to protect its citizens from a lack of
awareness of the true cost of credit to the user
by using a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy (Emata vs.

96 | P a g e
 Intermediate Appellate Court, 174, SCRA 464 [1989]; Sec. 2, R.A. No.
3765). Contrary to appellees claim that he was not sufficiently informed of
the details of the loan, the records disclose that the required informations
were readily available in the three (3) promissory notes he executed.
Precisely, the said promissory notes were executed to apprise appellee of the
remaining balance on his loan when the same was converted into a regular
housing loan. And on its face, the promissory notes signed by no less than the
appellee readily shows all the data required by the Truth in Lending Act (R.A.
No. 3765).

Apropos, We agree with the appellant that appellee, a lawyer, would not be so
gullible or negligent as to sign documents without knowing fully well the
legal implications and consequences of his actions, and that appellee was a
former employee of appellant. As such employee, he is as well presumed
knowledgeable with matters relating to appellants business and fully
cognizant of the terms of the loan he applied for, including the charges that
had to be paid.

It might have been different if the borrower was, say, an ordinary

employee eager to buy his first house and is easily lured into accepting
onerous terms so long as the same is payable on installments. In such cases,
the Court would be disposed to be stricter in the application of the Truth in
Lending Act, insisting that the borrower be fully informed of what he is
entering into. But in the case at bar, considering appellees education and
training, We must hold, in the light of the evidence at hand, that he was duly
informed of the necessary charges and fully understood their implications
and effects. Consequently, the trial courts annulment of the rescission
anchored on this ground was unjustified.[24]

Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals
therefor from 1990, a review of the records has shown that it failed to adduce evidence on
the reasonable amount of rentals for Arcillas occupancy of the property. Hence, the Court
orders a remand of the case to the court of origin, for the parties to adduce their respective
evidence on the banks counterclaim.

IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for
lack of merit. The petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of
Antipolo, Rizal, Branch 73, for it to resolve the counterclaim of the Development Bank of
the Philippines for possession of the property, and for the reasonable rentals for Felipe P.
Arcilla, Jr.s occupancy thereof after the notarial rescission of the Deed of Conditional Sale in
1990.Costs against petitioner Felipe P. Arcilla, Jr. SO ORDERED.NEW SAMPAGUITA
BUILDERS CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R. DEE Present: and
ARCELITA M. DEE, Petitioners, Panganiban, J,Chairman,Sandoval-Gutierrez,

Corona,* and - versus - Carpio Morales, JJ PHILIPPINE NATIONAL BANK, Respondent.

97 | P a g e
Courts have the authority to strike down or to modify provisions in promissory notes that
grant the lenders unrestrained power to increase interest rates, penalties and other
charges at the latters sole discretion and without giving prior notice to and securing
the consent of the borrowers. This unilateral

__________________

* On leave.

authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may
still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify
the June 20, 2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 55231. The
decretal portion of the assailed Decision reads as follows:

WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated
December 28, 1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the
mortgaged properties of defendants-appellees[4] and the February 26, 1992 auction sale
are declared legal and valid and said defendants-appellees are ordered to pay plaintiff-
appellant PNB,[5] jointly and severally[,] the amount of deficiency that will be computed
by the trial court based on the original penalty of 6% per annum as explicitly stated in
the loan documents and to pay attorneys fees in an amount equivalent to x x x 1% of the
total amount due and the costs of suit and expenses of litigation.[6]

The Facts

The facts are narrated by the CA as follows:

On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by
[Petitioner] NSBCI [1)] authorizing the company to x x x apply for or secure a
commercial loan with the PNB in an aggregate amount of P8.0M, under such terms
agreed by the Bank and the NSBCI, using or mortgaging the real estate properties
registered in the name of its President and Chairman of the Board [Petitioner] Eduardo
R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to
sign any [and all] documents which may be required by [Respondent] PNB[,] and that
[petitioner-spouses] shall act as sureties or co-obligors who shall be jointly and
severally liable with [Petitioner] NSBCI for the payment of any [and all] obligations.

On August 15, 1989, Resolution No. 77 was approved by granting the request of
[Respondent] PNB thru its Board NSBCI for an P8 Million loan broken down into a
revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating
and working capital[7] to mobilize its various construction projects, namely:

98 | P a g e
 1) MWSS Watermain; 2) NEA-Liberty farm; 3) Olongapo City Pag-Asa Public Market;

4) Renovation of COA-NCR Buildings 1, 2 and 9; 5) Dupels, Inc., Extensive prawn farm

development project; 6) Banawe Hotel Phase II; 7) Clark Air Base -- Barracks and
Buildings; and 8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and
AngelesCity.

The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a)
three (3) parcels of residential land located at Mangaldan, Pangasinan with total land
area of 1,214 square meters[,] including improvements thereon and registered under
TCT Nos. 128449, 126071, and 126072 of the Registry of Deeds of Pangasinan; b) six
(6) parcels of residential land situated at San Fabian, Pangasinan with total area of
1,767 square meters[,] including improvements thereon and covered by TCT Nos.
144006, 144005, 120458, 120890, 144161[,] and 121127 of the Registry of Deeds of
Pangasinan; and c) a residential lot and improvements thereon located at Mangaldan,
Pangasinan with an area of 4,437 square meters and covered by TCT No. 140378 of the
Registry of Deeds of Pangasinan.

The loan was further secured by the joint and several signatures of [Petitioners]
Eduardo Dee and Arcelita Marquez Dee, who signed as accommodation-mortgagors
since all the collaterals were owned by them and registered in their names.

Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note
dated June 29, 1989 in the amount of P5,000,000.00 with due date on October 27, 1989;
[b)] promissory note dated September 1, 1989 in the amount of P2,700,000.00 with due
date on December 30, 1989; and c) promissory note dated September 6, 1989 in the
amount of P300,000.00 with maturity date on January 4, 1990.

In addition, [petitioner] corporation also signed the Credit Agreement dated August 31,
1989 relating to the revolving credit line of P7.7 Million x x x and the Credit Agreement
dated September 5, 1989 to support the unadvised line of P300,000.00.

On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement (JSA)
in favor of [Respondent] PNB unconditionally and irrevocably binding themselves to be
jointly and severally liable with the borrower for the payment of all sums due and
payable to the Bank under the Credit Document.

Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory
notes.

On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a
letter to the Branch Manager of the PNB Dagupan Branch requesting for a 90-day
extension for the payment of interests and restructuring of its loan for another term.

99 | P a g e
 Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks
aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the
amount of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount
of P650,000.00; and 3) check no. 03499998 dated August 15, 1991 in the amount
of P150,000.00.[8]

In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly
Cruzabra, was informed by [Petitioner] Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering interests, penalties and part of the loan
principals of his due account.

On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo
Dee[,] informing him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided the
total payment should be P4,128,968.29 that [would] cover the amount of P1,019,231.33
as principal, P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,]
with the issuance of post-dated checks to be dated not later than November 29, 1991.

On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager
reiterating his proposals for the settlement of [Petitioner] NSBCIs past due loan account
amounting to P7,019,231.33.

[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks
aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:

Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70

03500088 Oct. 29, 1991 P277,826.70

03500089 Nov. 29, 1991 P277,826.70

03500090 Dec. 20, 1991 P277,826.57

Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated

September 29 and October 29, 1991 were dishonored by the drawee bank and returned
due [to] a stop payment order from [petitioners].

On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing
him that unless the dishonored checks [were] made good, said PNB branch shall recall
its recommendation to the Head Office for the restructuring of the loan account and
refer the matter to its legal counsel for legal action.[] [Petitioners] did not heed
[respondents] warning and as a result[,] the PNB Dagupan Branch sent demand letters

100 | P a g e
 to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr.
Avenue, Quezon City[,] asking it to settle its past due loan account.

[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe]
given them and as a result, [Respondent] PNB filed with the Provincial Sheriff of
Pangasinan at Lingayen a Petition for Sale under Act 3135, as amended[,] and
Presidential Decree No. 385 dated January 30, 1992.

The notice of extra-judicial sale of the mortgaged properties relating to said PNBs
[P]etition for [S]ale was published in the February 8, 15 and 22, 1992 issues of the
Weekly Guardian, allegedly a newspaper of general circulation in the Province of
Pangasinan, including the cities of Dagupan and San Carlos. In addition[,] copies of the
notice were posted in three (3) public places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and
at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo and
Arcelita Dee at 213 Wilson St., San Juan, Metro Manila.

On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen,
Pangasinan foreclosed the real estate mortgage and sold at public auction the
mortgaged properties of [petitioner-spouses,] with [Respondent] PNB being declared
the highest bidder for the amount of P10,334,000.00.

On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered mail
to [petitioner] corporations address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City and [petitioner-spouses] address at 213 Wilson St., San Juan, Metro Manila.

On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their
address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing
them that the properties securing their loan account [had] been sold at public auction,
that the Sheriffs Certificate of Sale had been registered with the Registry of Deeds of
Pangasinan on March 13, 1992[,] and that a period of one (1) year therefrom [was]
granted to them within which to redeem their properties.

[Petitioners] failed to redeem their properties within the one-year redemption period[,]
and so [Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to
the properties in its name. TCT Nos. 189935 to 189944 were later issued to [Petitioner]
PNB by the Registry of Deeds of Pangasinan.

On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of
the sale conducted on February 26, 1992 were not sufficient to cover its total claim
amounting to P12,506,476.43[,] and thus demanded from the latter the deficiency
of P2,172,476.43 plus interest and other charges[,] until the amount [was] fully paid.

101 | P a g e
 [Petitioners] refused to pay the above deficiency claim which compelled [Respondent]
PNB to institute the instant [C]omplaint for the collection of its deficiency claim.

Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI
the benefits under the program, the court a quo ruled in favor of [petitioners] in its
Decision dated December 28, 1995, the fallo of which reads:

In view of the foregoing, the Court believes and so holds that the [respondent] has no
cause of action against the [petitioners].WHEREFORE, the case is hereby DISMISSED,
without costs.[9]

On appeal, respondent assailed the trial courts Decision dismissing its deficiency
claim on the mortgage debt. It also challenged the ruling of the lower court that Petitioner
NSBCIs loan account was bloated, and that the inadequacy of the bid price was sufficient to
set aside the auction sale.

Ruling of the Court of Appeals

Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of
respondents debt relief package (DRP) or take steps to comply with the conditions for
qualifying under the program. The appellate court also ruled that entitlement to the
program was not a matter of right, because such entitlement was still subject to the
approval of higher bank authorities, based on their assessment of the borrowers
repayment capability and satisfaction of other requirements.

As to the misapplication of loan payments, the CA held that the subsidiary ledgers of
NSBCIs loan accounts with respondent reflected all the loan proceeds as well as the partial
payments that had been applied either to the principal or to the interests, penalties and
other charges. Having been made in the ordinary and usual course of the banking business
of respondent, its entries were presumed accurate, regular and fair under Section 5(q) of
Rule 131 of the Rules of Court. Petitioners failed to rebut this presumption.

The increases in the interest rates on NSBCIs loan were also held to be authorized
by law and the Monetary Board and -- like the increases in penalty rates -- voluntarily and
freely agreed upon by the parties in the Credit Agreements they executed. Thus, these
increases were binding upon petitioners.

However, after considering that two to three of Petitioner NSBCIs projects covered
by the loan were affected by the economic slowdown in the areas near the military bases in
the cities of Angeles and Olongapo, the appellate court annulled and deleted the adjustment
in penalty from 6 percent to 36 percent per annum. Not only did respondent fail to
demonstrate the existence of market forces and economic conditions that would justify

102 | P a g e
such increases; it could also have treated petitioners request for restructuring as a request
for availment of the DRP. Consequently, the original penalty rate of 6 percent per annum
was used to compute the deficiency claim.

The auction sale could not be set aside on the basis of the inadequacy of the auction
price, because in sales made at public auction, the owner is given the right to redeem the
mortgaged properties; the lower the bid price, the easier it is to effect redemption or to sell
such right. The bid price of P10,334,000.00 vis--vis respondents claim of P12,506,476.43
was found to be neither shocking nor unconscionable.

The attorneys fees were also reduced by the appellate court from 10 percent to 1
percent of the total indebtedness. First, there was no extreme difficulty in an extrajudicial
foreclosure of a real estate mortgage, as this proceeding was merely administrative in
nature and did not involve a court litigation contesting the proceedings prior to the auction
sale. Second, the attorneys fees were exclusive of all stipulated costs and fees. Third, such
fees were in the nature of liquidated damages that did not inure to respondents salaried
counsel.

Respondent was also declared to have the unquestioned right to foreclose the Real
Estate Mortgage. It was allowed to recover any deficiency in the mortgage account not
realized in the foreclosure sale, since petitioner-spouses had agreed to be solidarily liable
for all sums due and payable to respondent.

Finally, the appellate court concluded that the extrajudicial foreclosure proceedings
and auction sale were valid for the following reasons: (1) personal notice to the
mortgagors, although unnecessary, was actually made; (2) the notice of extrajudicial sale
was duly published and posted; (3) the extrajudicial sale was conducted through the
deputy sheriff, under the direction of the clerk of court who was concurrently the ex-oficio
provincial sheriff and acting as agent of respondent; (4) the sale was conducted within the
province where the mortgaged properties were located; and (5) such sale was not shown
to have been attended by fraud.

Hence this Petition.[10]

Issues

Petitioners submit the following issues for our consideration.

Whether or not the Honorable Court of Appeals correctly ruled that

petitioners did not avail of PNBs debt relief package and were not entitled
thereto as a matter of right.

II

103 | P a g e
 Whether or not petitioners have adduced sufficient and convincing evidence
to overthrow the presumption of regularity and correctness of the PNB
entries in the subsidiary ledgers of the loan accounts of petitioners.

III

Whether or not the Honorable Court of Appeals seriously erred in not

holding that the Respondent PNB bloated the loan account of petitioner
corporation by imposing interests, penalties and attorneys fees without legal,
valid and equitable justification.

IV

Whether or not the auction price at which the mortgaged properties was sold
was disproportionate to their actual fair mortgage value.

Whether or not Respondent PNB is not entitled to recover the deficiency in

the mortgage account not realized in the foreclosure sale, considering that:

A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation

which has a separate personality from the [petitioner-spouses].

B. The joint and solidary agreement executed by [petitioner- spouses] are contracts
of adhesion not binding on them;

C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses]

because they were compelled to execute the said Resolution[;] otherwise[,] Respondent
PNB would not grant petitioner corporation the loan;

D. The Respondent PNB had already in its possession the properties of the
[petitioner-spouses] which served as a collateral to the loan obligation of petitioner
corporation[,] and to still allow Respondent PNB to recover the deficiency claim
amounting to a very substantial amount of P2.1 million would constitute unjust
enrichment on the part of Respondent PNB.

VI

Whether or not the extrajudicial foreclosure proceedings and auction sale,

including all subsequent proceedings[,] are null and void for non-compliance
with jurisdictional and other mandatory requirements; whether or not the
petition for extrajudicial foreclosure of mortgage was filed prematurely; and
whether or not the finding of fraud by the trial court is amply supported by
the evidence on record.[11]

The foregoing may be summed up into two main issues: first, whether the loan accounts are
bloated; and second, whether the extrajudicial foreclosure and subsequent claim for
deficiency are valid and proper.

The Courts Ruling

The Petition is partly meritorious.

104 | P a g e
 First Main Issue:

Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a petition
for review on certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact
cannot be the subject of this mode of appeal,[13] for [t]he Supreme Court is not a trier of
facts.[14] As exceptions to this rule, however, factual findings of the CA may be reviewed on
appeal[15] when, inter alia, the factual inferences are manifestly mistaken;[16] the judgment
is based on a misapprehension of facts;[17] or the CA manifestly overlooked certain relevant
and undisputed facts that, if properly considered, would justify a different legal
conclusion.[18] In the present case, these exceptions exist in various instances, thus
prompting us to take cognizance of factual issues and to decide upon them in the interest of
justice and in the exercise of our sound discretion.[19]

Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with
some iniquitous imposition of interests, penalties, other charges and attorneys fees. To
demonstrate this point, the Court shall take up one by one the promissory notes, the credit
agreements and the disclosure statements.

Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to
be charged: 19.5 percent in the first, and 21.5 percent in the second and again in the
third.However, a uniform clause therein permitted respondent to increase the rate within
the limits allowed by law at any time depending on whatever policy it may adopt in the
future x x x,[20] without even giving prior notice to petitioners. The Court holds that
petitioners accessory duty to pay interest[21] did not give respondent unrestrained freedom
to charge any rate other than that which was agreed upon. No interest shall be due, unless
expressly stipulated in writing.[22] It would be the zenith of farcicality to specify and agree
upon rates that could be subsequently upgraded at whim by only one party to the
agreement.

The unilateral determination and imposition[23] of increased rates is violative of the

principle of mutuality of contracts ordained in Article 1308[24] of the Civil Code.[25] One-
sided impositions do not have the force of law between the parties, because such
impositions are not based on the parties essential equality.

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining
the value of money on long-term contracts,[27] giving respondent an unbridled right to
adjust the interest independently and upwardly would completely take away from
petitioners the right to assent to an important modification in their agreement [28] and
would also negate the element of mutuality in their contracts. The clause cited earlier made
the fulfillment of the contracts dependent exclusively upon the uncontrolled will[29] of
respondent and was therefore void. Besides, the pro forma promissory notes have the
character of a contract dadhsion,[30] where the parties do not bargain on equal footing, the
weaker partys [the debtors] participation being reduced to the alternative to take it or
leave it.[31]

105 | P a g e
While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No.
905,[33] nothing in the said Circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.[34] In fact, we have declared nearly ten years ago that neither this Circular nor PD
1684, which further amended the Usury Law,
authorized either party to unilaterally raise the interest rate without the others consent.[35]

Moreover, a similar case eight years ago pointed out to the same respondent (PNB)
that borrowing signified a capital transfusion from lending institutions to businesses and
industries and was done for the purpose of stimulating their growth; yet respondents
continued unilateral and lopsided policy[36] of increasing interest rates without the prior
assent[37] of the borrower not only defeats this purpose, but also deviates from this
pronouncement. Although such increases are not usurious, since the Usury Law is now
legally inexistent[38] -- the interest ranging from 26 percent to 35 percent in the statements
of account[39] -- must be equitably reduced for being iniquitous, unconscionable and
exorbitant.[40] Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract
thereon.[41] Above all, it is undoubtedly against public policy to charge excessively for the
use of money.[42]

It cannot be argued that assent to the increases can be implied either from the June 18,
1991 request of petitioners for loan restructuring or from their lack of response to the
statements of account sent by respondent. Such request does not indicate any agreement to
an interest increase; there can be no implied waiver of a right when there is no clear,
unequivocal and decisive act showing such purpose.[43] Besides, the statements were not
letters of information sent to secure their conformity; and even if we were to presume
these as an offer, there was no acceptance. No one receiving a proposal to modify a loan
contract, especially interest -- a vital component -- is obliged to answer the proposal.[44]

Furthermore, respondent did not follow the stipulation in the Promissory Notes providing
for the automatic conversion of the portion that remained unpaid after 730 days -- or two
years from date of original release -- into a medium-term loan, subject to the applicable
interest rate to be applied from the dates of original release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid
as of October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates --
should have been automatically converted by respondent into medium-term loans on June
30, 1991, September 2, 1991, and September 7, 1991, respectively. And on this unpaid
amount should have been imposed the same interest rate charged by respondent on other
medium-term loans; and the rate applied from June 29, 1989, September 1, 1989 and
September 6, 1989 -- their respective original release -- until paid. But these steps were not
taken. Aside from sending demand letters, respondent did not at all exercise its option to
enforce collection as of these Notes due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed with the
courts. It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties
was filed -- with the provincial sheriff, instead.[49] Moreover, respondent did not supply the
interest rate to be charged on medium-term loans granted by automatic

106 | P a g e
conversion. Because of this deficiency, we shall use the legal rate of 12 percent per
annum on loans and forbearance of money, as provided for by CB Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main document involved in
the principal obligation is the set of credit agreements executed and their annexes.

The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in
evidence, and even referred to in the first Promissory Note -- cannot be given weight.

First, it was not signed by respondent through its branch manager.[52] Apparently it was
surreptitiously acknowledged before respondents counsel, who unflinchingly declared that
it had been signed by the parties on every page, although respondents signature does not
appear thereon.[53]

Second, it was objected to by petitioners,[54] contrary to the trial courts

findings.[55] However, it was not the Agreement, but the revolving credit
line[56] of P5,000,000, that expired one year from the Agreements date of
implementation.[57]

Third, there was no attached annex that contained the General Conditions.[58] Even the
Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be
added to the Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate on the first
availment pegged at 3 percent over and above respondents prime rate[60] on the date of
such availment[61] has no bearing at all on the loan. After the first Notes due date, the rate
of 19 percent agreed upon should continue to be applied on the availment, until its
automatic conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for interest --
respondents prime rate, plus the applicable spread[63] in effect as of the date of each
availment,[64] on a revolving credit line of P7,700,000[65] -- but did not state any provision
on its increase or decrease.[66] Consequently, petitioners could not be made to bear interest
more than such prime rate plus spread. The Court gives weight to this second Credit
Agreement for the following reasons.

First, this document submitted by respondent was admitted by petitioners.[67] Again,

contrary to their assertion, it was not the Agreement -- but the credit line -- that expired
one year from the Agreements date of implementation.[68] Thus, the terms and conditions
continued to apply, even if drawdowns could no longer be made.

107 | P a g e
Second, there was no 7-page annex[69] offered in evidence that contained the General
Conditions,[70] notwithstanding the Acknowledgment of its existence by respondents
counsel. Thus, no terms or conditions could be appended to the Agreement other than
those specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence had no
probative value. There was no reference to it in the Acknowledgment of the Agreement;
neither was respondents signature on any of the pages thereof. Thus, the General
Conditions stipulations on interest adjustment,[72] whether on a fixed or a floating scheme,
had no effect whatsoever on the Agreement. Contrary to the trial courts findings,[73] the
General Condition were correctly objected to by petitioners.[74] The rate of 21.5 percent
agreed upon in the second Note thus continued to apply to the second availment, until its
automatic conversion into a medium-term loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of
interest as that in the second Agreement. This rate was to be applied to availments of an
unadvised line of P300,000. Since there was no mention in the third Agreement, either, of
any stipulation on increases or decreases[76] in interest, there would be no basis for
imposing amounts higher than the prime rate plus spread. Again, the 21.5 percent rate
agreed upon would continue to apply to the third availment indicated in the third Note,
until such amount was automatically converted into a medium-term loan.

The Court also finds that, first, although this document was admitted by petitioners,[77] it
was the credit line that expired one year from the implementation of the Agreement.[78]The
terms and conditions therein continued to apply, even if availments could no longer be
drawn after expiry.

Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondents counsel
affirming its existence. Thus, the terms and conditions in this Agreement relating to
interest cannot be expanded beyond that which was already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by

respondent set forth the same interest rates as those respectively indicated in the
Promissory Notes. Although no method of computation was provided showing how such
rates were arrived at, we will nevertheless take up the Statements seriatim in order
to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13, 1989, we
hold that the 19.5 percent effective interest rate per annum[83] would indeed apply to the
first availment or drawdown evidenced by the first Promissory Note. Not only was this
Statement issued prior to the consummation of such availment or drawdown, but the rate
shown therein can also be considered equivalent to 3 percent over and above respondents
prime rate in effect. Besides, respondent mentioned no other rate that it considered to be
the prime rate chargeable to petitioners. Even if we disregarded the related Credit

108 | P a g e
Agreement, we assume that this private transaction between the parties was fair and
regular,[84] and that the ordinary course of business was followed.[85]

As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2,

1989, we hold that the 21.5 percent effective interest rate per annum[87] would definitely
apply to the second availment or drawdown evidenced by the second Promissory
Note. Incidentally, this Statement was issued only after the consummation of its related
availment or drawdown, yet such rate can be deemed equivalent to the prime rate plus
spread, as stipulated in the corresponding Credit Agreement. Again, we presume that this
private transaction was fair and regular, and that the ordinary course of business was
followed. That the related Promissory Note was pre-signed would also bolster petitioners
claim although, under cross-examination Efren Pozon -- Assistant Department Manager
I[88] of PNB, Dagupan Branch -- testified that the Disclosure Statements were the basis for
preparing the Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September 6,

1989, we hold that the same 21.5 percent effective interest rate per annum [91] would apply
to the third
availment or drawdown evidenced by the third Promissory Note. This Statement was made
available to petitioner-spouses, only after the related Credit Agreement had been executed,
but simultaneously with the consummation of the Statements related availment or
drawdown. Nonetheless, the rate herein should still be regarded as equivalent to the prime
rate plus spread, under the similar presumption that this private transaction was fair and
regular and that the ordinary course of business was followed.

In sum, the three disclosure statements, as well as the two credit agreements considered by
this Court, did not provide for any increase in the specified interest rates. Thus, none would
now be permitted. When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of
PNB, Dagupan Branch, even testified that the bases for computing such rates were those
sent by the head office from time to time, and not those indicated in the notes or disclosure
statements.[92]

In addition to the preceding discussion, it is then useless to labor the point that the
increase in rates violates the impairment[93] clause of the Constitution,[94] because the sole
purpose of this provision is to safeguard the integrity of valid contractual agreements
against unwarranted interference by the State[95] in the form of laws. Private individuals
intrusions on interest rates is governed by statutory enactments like the Civil Code.

Penalty, or Increases Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in

any of the clauses in the second and the third Credit Agreements[97] earlier discussed.While
a standard penalty charge of 6 percent per annum has been imposed on the amounts stated
in all three Promissory Notes still remaining unpaid or unrenewed when they fell
due,[98] there is no stipulation therein that would justify any increase in that charges. The
effect, therefore, when the borrower is not clearly informed of the Disclosure Statements --

109 | P a g e
prior to the consummation of the availment or drawdown -- is that the lender will have no
right to collect upon such charge[99] or increases thereof, even if stipulated in the Notes. The
time is now ripe to give teeth to the often ignored forty-one-year old Truth in Lending
Act[100] and thus transform it from a snivelling paper tiger to a growling financial watchdog
of hapless borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid
per se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly
construed against respondent who caused it.[101] Worse, in the statements of account, the
penalty rate has again been unilaterally increased by respondent to 36 percent without
petitioners consent. As a result of its move, such
liquidated damages intended as a penalty shall be equitably reduced by the Court to
zilch[102] for being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the
execution of the transaction, it is not a contract that can be modified by the related
Promissory Note, but a mere statement in writing that reflects the true and effective cost of
loans from respondent. Novation can never be presumed,[104] and the animus novandimust
appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.[105] To allow novation will surely flout the policy of the State to
protect
its citizens from a lack of awareness of the true cost of credit.[106]

With greater reason should such penalty charges be indicated in the second and
third Disclosure Statements, yet none can be found therein. While the charges are issued
after the respective availment or drawdown, the disclosure statements are given
simultaneously therewith. Obviously, novation still does not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not warranted. No particular
values or rates of service charge are indicated in the Promissory Notes or Credit
Agreements, and no total value or even the breakdown figures of such non-finance charge
are specified in the Disclosure Statements. Moreover, the provision in the Mortgage that
requires the payment of insurance and other charges is neither made part of nor reflected
in such Notes, Agreements, or Statements.[107]

Attorneys Fees Equitably Reduced

We affirm the equitable reduction in attorneys fees.[108] These are not an integral part of
the cost of borrowing, but arise only when collecting upon the Notes becomes
necessary.The purpose of these fees is not to give respondent a larger compensation for the
loan than the law already allows, but to protect it against any future loss or damage by
being compelled to retain counsel in-house or not -- to institute judicial proceedings for the
collection of its credit.[109] Courts have has the power[110] to determine their
reasonableness[111] based on quantum meruit[112] and to reduce[113] the amount thereof if
excessive.[114]

110 | P a g e
In addition, the disqualification argument in the Affidavit of Publication raised by
petitioners no longer holds water, inasmuch as Act 496[115] has repealed the Spanish
Notarial Law.[116] In the same vein, their engagement of their counsel in another capacity
concurrent with the practice of law is not prohibited, so long as the roles being assumed by
such counsel is made clear to the client.[117] The only reason for this clarification
requirement is that certain ethical considerations operative in one profession may not be
so in the other.[118]

Debt Relief Package Not Availed Of

We also affirm the CAs disquisition on the debt relief package (DRP).

Respondents Circular is not an outright grant of assistance or extension of payment, [119] but
a mere offer subject to specific terms and conditions.

Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly
affected by the economic slowdown in the peripheral areas of the then US military
bases. Its allegations, devoid of any verification, cannot lead to a supportable conclusion. In
fact, for short-term loans, there is still a need to conduct a thorough review of the
borrowers repayment possibilities.[120]

Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan
value of hard collaterals,[122] to be eligible for the package. Additional accommodations on
an unsecured basis may be granted only when regular payment amortizations have been
established, or when the merits of the credit application would so justify.[123]

The branch managers recommendation to restructure or extend a total outstanding

loan not exceeding P8,000,000 is not final, but subject to the approval of respondents
Branches Department Credit Committee, chaired by its executive vice-president.[124] Aside
from being further conditioned on other pertinent policies of respondent, [125] such
approval nevertheless needs to be reported to its Board of Directors for
confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks shall grant
loans and other credit accommodations only in amounts and for periods of time essential
to the effective completion of operations to be financed, consistent with safe and sound
banking practices.[128] The Monetary Board -- then and now -- still prescribes, by
regulation, the conditions and limitations under which banks may grant extensions or
renewals of their loans and other credit accommodations.[129]

Entries in Subsidiary Ledgers

Regular and Correct

Contrary to petitioners assertions, the subsidiary ledgers of respondent properly reflected

all entries pertaining to Petitioner NSBCIs loan accounts. In accordance with the Generally
Accepted Accounting Principles (GAAP) for the Banking Industry,[130] all interests accrued
or earned on such loans, except those that were restructured and non-accruing,[131] have

111 | P a g e
been periodically taken into income.[132] Without a doubt, the subsidiary ledgers in a
manual accounting system are mere private documents[133] that support and are controlled
by the general ledger.[134] Such ledgers are neither foolproof nor standard in format, but are
periodically subject to audit. Besides, we go by the presumption that the recording of
private transactions has been fair and regular, and that the ordinary course of business has
been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But

Deficiency Claims Excessive

Respondent aptly exercised its option to foreclose the mortgage,[135] after petitioners had
failed to pay all the Notes in full when they fell due.[136] The extrajudicial sale and
subsequent proceedings are therefore valid, but the alleged deficiency claim cannot be
recovered.

Auction Price Adequate

In the accessory contract[137] of real mortgage,[138] in which immovable property or real

rights thereto are used as security[139] for the fulfillment of the principal loan
obligation,[140] the bid price may be lower than the propertys fair market value.[141] In fact,
the loan value itself is only 70 percent of the appraised value.[142] As correctly emphasized
by the appellate court, a low bid price will make it
easier[143] for the owner to effect redemption [144] by subsequently reacquiring the property
or by selling the right to redeem and thus recover alleged losses. Besides, the public auction
sale has been regularly and fairly conducted,[145] there has been ample authority to effect
the sale,[146] and the Certificates of Title can be relied upon. No personal notice[147] is even
required,[148] because an extrajudicial foreclosure is an action in rem, requiring only notice
by publication and posting, in order to bind parties interested in the foreclosed
property.[149]

As no redemption[150] was exercised within one year after the date of registration of the
Certificate of Sale with the Registry of Deeds,[151] respondent -- being the highest bidder --
has the right to a writ of possession, the final process that will consummate the
extrajudicial foreclosure. On the other hand, petitioner-spouses, who are mortgagors
herein, shall lose all their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
extinguished. Although the mortgagors, being third persons, are not liable for any
deficiency in the absence of a contrary stipulation,[153] the action for recovery of such
amount -- being clearly sureties to the principal obligation -- may still be directed against
them.[154]However, respondent may impose only the stipulated interest rates of 19.5
percent and 21.5 percent on the respective availments -- subject to the 12 percent legal

112 | P a g e
rate revision upon automatic conversion into medium-term loans -- plus 1 percent
attorneys fees, without additional charges on penalty, insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account sent to

petitioners are reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory
Notes; upon loan conversion, these rates are further reduced to the legal rate of 12
percent. Payments made by petitioners are pro-rated, the charges on penalty and insurance
eliminated, and the resulting total unpaid principal and interest of P6,582,077.70 as of the
date of public auction is then subjected to 1 percent attorneys fees. The total outstanding
obligation is compared to the bid price. On the basis of these rates and the comparison
made, the deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead,
there is an overpayment by more than P3 million, as shown in the following Schedules:

SCHEDULE 1: PN (1) drawdown amount on 6/29/89

Less: Interest deducted in advance (per 6/13/89 Disclosure

Statement)

Net proceeds

Principal

Add:

Interest at 19.5% p.a.

10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365]) 17

1/1/90-1/5/90 (5,000,000 x 19.5% x

[5/365]) 1

Amount due as of 1/5/90

Less: Payment on 1/5/90 (pro-rated upon

interest)

Balance

Add:

Interest at 19.5% p.a.

1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x

[84/365])

Amount due as of 3/30/90

Less: Payment on 3/30/90 (pro-rated upon

interest)

Balance

113 | P a g e
 Add:

Interest at 19.5% p.a.

3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5% x

[62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon

interest)

Balance

Add:

Interest at 19.5% p.a.

6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)] x 19.5% x

[29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon

interest)

Balance

Add:

Interest at 19.5% p.a.

6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x

[185/365]) 3

1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x
19.5% x [180/365]) 3

Interest at 12% p.a. upon automatic

conversion

6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%

x [40/365])

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

8/9/91-8/15/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%

114 | P a g e
 x [7/365])

Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

8/16/91-11/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [106/365])

Amount due as of
11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

11/30/91-12/20/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [21/365])

Amount due as of
12/20/91

Less: Payment on 12/20/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [11/365])

1/1/92-2/26/92 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%

x [57/365])

Amount due on PN (1) as of 2/26/92

SCHEDULE 2: PN (2) drawdown amount on

9/1/89

Less: Interest deducted in advance (per 9/1/89 Disclosure

Statement)

Net proceeds

115 | P a g e
 Principal

Add:

Interest at 21.5% p.a.

12/31/89 (2,700,000 x 21.5% x

[1/365]) 1

1/1/90-1/5/90 (2,700,000 x 21.5% x

[5/365]) 7

Amount due as of 1/5/90

Less: Payment on 1/5/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x

[84/365])

Amount due as of 3/30/90

Less: Payment on 3/30/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x

[62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x 21.5% x

[29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon

interest)

116 | P a g e
 Balance

Add:

Interest at 21.5% p.a.

6/30/90-12/31/90 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x

[185/365]) 238

1/1/91-8/8/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
21.5% x [220/365]) 284

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

8/9/91-8/15/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
21.5% x [7/365])

Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

8/16/91-9/1/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
21.5% x [17/365]) 21

Interest at 12% p.a. upon automatic

conversion

9/2/91-11/29/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
12% x [89/365]) 64

Amount due as of
11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

117 | P a g e
 Interest at 12% p.a.

11/30/91-12/20/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
12% x [21/365])

Amount due as of
12/20/91

Less: Payment on 12/20/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
12% x [11/365]) 7

1/1/92-2/26/92 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12%

x [57/365]) 41

Amount due on PN (2) as of 2/26/92

SCHEDULE 3: PN (3) drawdown amount on

9/6/89

Less: Interest deducted in advance (per 9/6/89 Disclosure

Statement)

Net proceeds

Principal

Add:

Interest at 21.5% p.a.

1/5/90 (300,000 x 21.5% x

[1/365])

Amount due as of 1/5/90

Less: Payment on 1/5/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

1/6/90-3/30/90 ([300,000-337.22] x 21.5% x

[84/365])

Amount due as of 3/30/90

118 | P a g e
 Less: Payment on 3/30/90 (pro-rated upon
interest)

Balance

Add:

Interest at 21.5% p.a.

3/31/90-5/31/90 ([300,000-337.22] x 21.5% x

[62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5%

x [29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x 21.5% x

[185/365]) 2

1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x

[220/365]) 3

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x

[7/365])

119 | P a g e
 Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x

[22/365])

Interest at 12% p.a. upon automatic

conversion

9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[84/365])

Amount due as of
11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[21/365])

Amount due as of
12/20/91

Less: Payment on 12/20/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[11/365])

1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[57/365])

Amount due on PN (3) as of 2/26/92

SCHEDULE 4: Application of Payments Upon

Interest

120 | P a g e
 Date Interest

Payable Pro-rated

1/5/90 PN (1) P 186,986.30 P 543,807.61

PN (2) 9,542.47 27,752.12

PN (3) 176.71 513.93

196,705.48 572,073.65

3/30/90 PN (1) 208,370.59 163,182.85

PN (2) 132,693.52 103,917.28

PN (3) 14,827.15 11,611.70

355,891.26 278,711.83

5/31/90 PN (1) 198,985.09 199,806.42

PN (2) 126,716.69 127,239.72

PN (3) 14,159.30 14,217.74

339,861.08 341,263.89

6/29/90 PN (1) 71,924.74 839,012.66

PN (2) 45,801.92 534,286.14

PN (3) 5,117.90 59,701.04

122,844.56 1,432,999.84

8/8/91 PN (1) 806,639.99 493,906.31

PN (2) 523,113.94 320,303.08

PN (3) 58,452.66 35,790.61

1,388,206.59 850,000.00

8/15/91 PN (1) 321,652.11 86,593.37

121 | P a g e
 PN (2) 211,852.33 57,033.69

PN (3) 23,672.34 6,372.93

557,176.79 150,000.00

11/29/91 PN (1) 370,109.22 161,096.81

PN (2) 240,937.94 104,872.65

PN (3) 27,241.23 11,857.24

638,288.39 277,826.70

12/20/91 PN (1) 235,767.70 162,115.78

PN (2) 151,204.51 103,969.45

PN (3) 17,075.64 11,741.35

P 404,047.85 P 277,826.57

In the preparation of the above-mentioned schedules, these basic legal principles were
followed:

First, the payments were applied to debts that were already due.[155] Thus, when the
first payment was made and applied on January 5, 1990, all Promissory Notes were already
due.

Second, payments of the principal were not made until the interests had been
covered.[156] For instance, the first payment on January 15, 1990 had initially been applied
to all interests due on the notes, before deductions were made from their respective
principal amounts. The resulting decrease in interest balances served as the bases for
subsequent pro-ratings.

Third, payments were proportionately applied to all interests that were due and of
the same nature and burden.[157] This legal principle was the rationale for the pro-rated
computations shown on Schedule 4.

Fourth, since there was no stipulation on capitalization, no interests due and unpaid
were added to the principal; hence, such interests did not earn any additional

122 | P a g e
interest.[158]The simple -- not compounded -- method of interest calculation[159] was used
on all Notes until the date of public auction.

In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency

receivable in favor of PNB, but rather an excess claim or surplus[162] payable by
respondent; this excess should immediately be returned to petitioner-spouses or their
assigns -- not to mention the buildings and improvements[163] on and the fruits of the
property -- to the end that no one may be unjustly enriched or benefited at
the expense of another.[164] Such surplus is in the amount of P3,686,101.52, computed as
follows:

Total unpaid principal and interest on the

promissory notes as of February 26, 1992:

Drawdown on June 29, 1989

(Schedule 1) P 4,037,204.10

Drawdown on September 1, 1989

(Schedule 2) 2,289,040.38

Drawdown on September 6, 1989

(Schedule 3) 255,833.22

6,582,077.70

Add: 1% attorneys fees 65,820.78

Total outstanding obligation 6,647,898.48

Less: Bid price 10,334,000.00

Excess P 3,686,101.52

Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their
Joint and Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They
consented to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not
only for the payment of all sums due and payable in favor of respondent, but also for the
faithful and prompt performance of all the terms and conditions thereof.[167] Additionally,
the corporate secretary of Petitioner NSBCI certified as early as February 23, 1989, that the
spouses should act as such surety.[168] But, their solidary liability should be carefully
studied, not sweepingly assumed to cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by
petitioners,[169] it covered only the Promissory Notes of P2,700,000 and P300,000 made
after that date. The terms of a contract of suretyship undeniably determine the suretys
liability[170] and cannot extend beyond what is stipulated therein.[171] Yet, the total amount
petitioner-spouses agreed to be held liable for was P7,700,000; by the time the JSA was

123 | P a g e
executed, the first Promissory Note was still unpaid and was thus brought within the JSAs
ambit.[172]

Second, while the JSA included all costs, charges and expenses that respondent might incur
or sustain in connection with the credit documents,[173] only the interest was imposed
under the pertinent Credit Agreements. Moreover, the relevant Promissory Notes had to be
resorted to for proper valuation of the interests charged.

Third, although the JSA, as a contract of adhesion, should be taken contra

proferentum against the party who may have caused any ambiguity therein, no such
ambiguity was found.Petitioner-spouses, who agreed to be accommodation
mortgagors,[174] can no longer be held individually liable for the entire onerous
obligation[175] because, as
it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5
percent and 21.5 percent stipulated in the Promissory Notes may be imposed by
respondent on the respective availments. After 730 days, the portions remaining unpaid
are automatically converted into medium-term loans at the legal rate of 12 percent. In all
instances, the simple method of interest computation is followed. Payments made by
petitioners are applied and pro-rated according to basic legal principles. Charges on
penalty and insurance are eliminated, and 1 percent attorneys fees imposed upon the total
unpaid balance of the principal and interest as of the date of public auction. The P2 million
deficiency claim therefore vanishes, and a refund of P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum
of P3,686,101.52 representing the overcollection computed above, plus interest thereon at
the legal rate of six percent (6%) per annum from the filing of the Complaint until the
finality of this Decision. After this Decision becomes final and executory, the applicable rate
shall be twelve percent (12%) per annum until its satisfaction. No costs.

SO ORDERED.

Republic of the Philippines

Congress of the Philippines
Metro Manila

Fourteenth Congress
Second Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eighth day of July, two thousand
eight.

Republic Act No. 9576 April 29, 2009

AN ACT INCREASING THE MAXIMUM DEPOSIT INSURANCE COVERAGE, AND IN

CONNECTION THEREWITH, TO STRENGTHEN THE REGULATORY AND

124 | P a g e
 ADMINISTRATIVE AUTHORITY, AND FINANCIAL CAPABILITY OF THE PHILIPPINE
DEPOSIT INSURANCE CORPORATION (PDIC), AMENDING FOR THIS PURPOSE
REPUBLIC ACT NUMBERED THREE THOUSAND FIVE HUNDRED NINETY-ONE, AS
AMENDED, OTHERWISE KNOWN AS THE PDIC CHARTER, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled::

Section 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy
of the State to strengthen the mandatory deposit insurance coverage system to generate,
preserve, maintain faith and confidence in the country's banking system, and protect it
from illegal schemes and machinations.

Towards this end, the government must extend all means and mechanisms necessary for
the Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting
and safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and
stable banking system at all times.

Section 2. Section 4 (f) of Republic Act No. 3591, as amended, is hereby amended by
adding an additional paragraph, to read as follows:

"(f) The term "deposit" means the unpaid balance of money or its equivalent received by
a bank in the usual course of business and for which it has given or is obliged to give
credit to a commercial, checking, savings, time or thrift account, or issued in accordance
with Bangko Sentral rules and regulations and other applicable laws, together with such
other obligations of a bank, which, consistent with banking usage and practices, the
Board of Directors shall determine and prescribe by regulations to be deposit liabilities of
the bank: Provided, That any obligation of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a deposit for any of the purposes of this Act
or included as part of the total deposits or of insured deposits: Provided, further, That,
subject to the approval of the Board of Directors, any insured bank which is incorporated
under the laws of the Philippines which maintains a branch outside the Philippines may
elect to include for insurance its deposit obligations payable only at such branch.

The corporation shall not pay deposit insurance for the following accounts or
transactions, whether denominated, documented, recorded or booked as deposit by the
bank:

"(1) Investment products such as bonds and securities, trust accounts, and other similar
instruments;

"(2) Deposit accounts or transactions which are unfunded, or that are fictitious or
fraudulent;

"(3) Deposits accounts or transactions constituting, and/or emanating from, unsage and
unsound banking practice/s, as determined by the Corporation, in consultation with the
BSP, after due notice and hearing, and publication of a cease and desist order issued by
the Corporation against such deposit accounts or transactions; and

"(4) Deposits that are determined to be the proceeds of an unlawful activity as defined
under republic act 9160, as amended.

"The actions of the Corporation taken under this section shall be final and executory, and
may not be restrained or set aside by the court, except on appropriate petition
for certiorari on the ground that the action was taken in excess of jurisdiction or with
such grave abuse of discretion as to amount to a lack or excess of jurisdiction. The

125 | P a g e
 petition for certiorari may only be filed within thirty (30) days from notice of denial of
claim for deposit insurance."

Section. 3. Section 4(g) of the same Act is hereby amended to read as follows:

"(g) The term "insured deposit" means the amount due to any bona fide depositor
for legitimate deposits in an insured bank net of any obligation of the depositor to
the insured bank as of date of closure, but not to exceed Five hundred thousand
pesos (P500,000.00). Such net amount shall be determined according to such
regulations as the Board of Directors may prescribe, In determining such amount
due to any depositor, there shall be added together all deposits in the bank
maintained in the same right and capacity for his benefits either in his own name or
in the name of others. A joint account regardless of whether the conjunction 'and,'
'or,' 'and/or' is used, shall be insured separately from any individually-owned
deposit account: Provided, That (1) If the account is held jointly by two or more
natural persons, or by two or more juridical persons or entities, the maximum
insured deposit shall be divided into as many equal shares as there are individuals,
juridical persons or entities, unless a different sharing is stipulated in the document
of deposit, and (2) If the account is held by a juridical person or entity jointly with
one or more natural persons, the maximum insured deposits shall be presumed to
belong entirely to such juridical person or entity: Provided, further, That the
aggregate of the interest of each co-owner over several joint accounts, whether
owned by the same or different combinations of individuals, juridical persons or
entities, shall likewise be subject to the maximum insured deposit of Five hundred
thousand pesos (P500,000.00): Provided, Furthermore, The the provisions of any law
to the contrary notwithstanding, no owner/holder of any negotiable certificate of
deposit shall be recognized as a depositor entitled to the rights provided in this Act
unless his name is registered as owner/holder thereof in the books of the issuing
bank: Provided, Finally, That, in case of a condition that threatens the monetary and
financial stability of the banking system that may have systemic consequences, as
defined in section 17 hereof, as determined by the monetary board, the maximum
deposit insurance cover may be adjusted in such amount, for such a period, and/or
for such deposit products, as may be determined by a unanimous vote of the Board
of Directors in a meeting called for the purpose and chaired by the Secretary of
Finance, subject to the approval of the President of the Philippines."

Section 4. The maximum deposit insurance coverage of Five hundred thousand pesos
(P500,000.00) provided in Section 4(g) of Republic Act 3591, as amended herein, shall be
paid by the Corporation: Provided, That for the first three (3) years from the effectivity of
this Act, the first Two hundred fifty thousand pesos (P250,000.00) of the deposited
insurance coverage shall be for the account of the Corporation, and those in excess of Two
hundred fifty thousand pesos (P250,000.00) but not more than Five hundred thousand
pesos (P500,000.00) shall be for the account of the National Government. The Congress
shall annually appropriate the necessary funding to reimburse the Corporation for any
payment to insured depositors paid in excess of Two hundred fifty thousand pesos
(P250,000.00).

Section 5. Section 8, paragraph Eighth of the same Act is hereby amended to read as
follows:

"Eighth - To conduct examination of banks with prior approval of the Monetary

Board: Provided, That no examination can be conducted within twelve (12) months
from the last examination date: Provided, however, That the Corporation may, in
coordination with the Bangko Sentral, conduct a special examination as the Board of
Directors, by an affirmative vote of a majority of all of its members, if there is a
threatened or impending closure of a bank: Provided, further, That notwithstanding
the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as

126 | P a g e
 amended, Republic Act No. 8791, and other laws, the Corporation and/or Bangko
Sentral may inquire into or examine deposit accounts and all information related
thereto in case there is a finding of unsafe or unsound banking
practice: Provided, finally, That to avoid overlapping of efforts, the examination shall
maximize the efficient use of the relevant reports, information, and findings of the
Bangko Sentral, which it shall make available to the Corporation."

Section 6. A new Section 9 (h) of the same Act is hereby added to read as follows:

"(h) Unless the actions of the Corporation or any of its officers and employees are
found to be in willful violation of this Act, performed in bad faith, with malice
and/or gross negligence, the Corporation, its directors, officers, employees and
agents are held free and harmless to the fullest extent permitted by law from any
liability, and they shall be indemnified for any and all liabilities, losses, claims,
demands, damages, deficiencies, costs and expenses of whatsoever kind and nature
that may arise in connection with the performance of their functions, without
prejudice to any criminal liability under existing laws."

Section 7. Section 9 (h) of the same Act is accordingly renumbered as Section 9 (i).

Section 8. An additional paragraph to Section 17 of the same Act is hereby added after
subparagraph (b) to read as follows:

"(c) It is hereby declared to be the policy of the State that the Deposit Insurance
Fund of the Corporation shall be preserved and maintained at all times. Accordingly,
all tax obligations of the Corporation for a period of five (5) years reckoned from the
date of effectivity of this Act shall be chargeable to the Tax Expenditure Fund (TEF)
in the annual General Appropriation Act pursuant to the provisions of Executive
Order No. 93, series of 1986: Provided, That, on the 6th year and thereafter, the
Corporation shall be exempt from income tax, final withholding tax, value-added tax
on assessments collected from member banks and local taxes."

Section 9. Section 17 (c) of the same Act shall be accordingly renumbered as Section 17
(d).

Section 10. Section 19 is hereby amended to read as follows.

"SEC. 19. With the approval of the President of the Philippines, the Corporation is
authorized to issue bonds, debentures, and other obligations, both local or foreign,
as may be necessary for purposes of providing liquidity for settlement of insured
deposits in closed banks as well as for financial assistance as provided
herein: Provided, That the Board of Directors shall determine the interest rates,
maturity and other requirements of said obligations: Provided, further, That the
Corporation shall provide for appropriate reserves for the redemption or retirement
of said obligation.

All notes, debentures, bonds, or such obligations issued by the Corporation shall be
exempt from taxation both as to principal and interest, and shall be fully guaranteed
by the Government of the Republic of the Philippines. Such guarantee, which in no
case shall exceed two times the Deposit Insurance Fund as of date of the debt
issuance, shall be expressed on the face thereof.

The Board of Directors shall have the power to prescribe rules and regulations for
the issuance, reissuance, servicing, placement and redemption of the bonds herein
authorized to be issued as well as the registration of such bonds at the request of the
holders thereof."

127 | P a g e
Section 11. Section 21, paragraph (f)(5) is hereby amended to read as follows.

"5) splitting of deposits or creation of fictitious loans or deposits accounts.

"Splitting of deposits occurs whenever a deposit account with an outstanding

balance of more that the statutory maximum amount of insured deposit maintained
under the name of natural or juridical persons is broken down and transferred into
two (2) or more accounts in the name/s of natural or juridical persons or entities
who have no beneficial ownership on transferred deposits in their names within one
hundred twenty (120) days immediately preceding or during a bank-declared bank
holiday, or immediately preceding a closure order issued by the Monetary Board of
the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit
insurance coverage."

Section 12. An additional paragraph shall be inserted under Section 2, to read as follows:

"SEC. 2. xxx The Board of Directors shall have the authority:

"xxx

"7. To review the organizational set-up of the Corporation and adopt a new or
revised organizational structure as it may deem necessary for the Corporation to
undertake its mandate and functions."

Section 13. Joint Congressional Oversight Committee. - There is hereby created a joint
congressional oversight committee to oversee the implementation of this Act. The
committee shall be composed of the chairpersons of the Senate Committee on Banks,
Financial Institutions and Currencies and the Committee on Finance and five (5) senators
to be appointed by the President of the Senate, and the chairpersons of the House
Committee on Banks and Financial Intermediaries and the Committee on Appropriations
and five (5) members to be appointed by the Speaker of the House of Representatives.

Section 14. Separability Clause. - If any provision or section of this Act or the application
thereof to any person or circumstances is held invalid, the other provisions or sections of
this Act, in the application of such provision or section to other persons or circumstances,
shall not be affected thereby.

Section 15. Repealing Clause. - All acts or parts of acts and executive orders,
administrative orders, or parts thereof, which are inconsistent with the provisions of this
Act are hereby repealed.

Section 16. Effectivity Clause. - This Act shall take effect fifteen (15) days following the
completion of its publication in the Official Gazette or in two (2) newspapers of general
circulation.

REPUBLIC ACT NO. 3591

AN ACT ESTABLISHING THE PHILIPPINE DEPOSIT INSURANCE CORPORATION,

DEFINING ITS POWERS AND DUTIES AND FOR OTHER PURPOSES

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter

referred to as the “Corporation” which shall insure, as herein provided, the deposits of all
banks which are entitled to the benefits of insurance under this Act, and which shall have
the powers hereinafter granted.

SECTION 2. The powers and functions of the Corporation shall be vested in a board of
directors consisting of three (3) members one of whom shall be the Governor of the Central
Bank of the Philippines and two of whom shall be citizens of the Republic of the Philippines

128 | P a g e
to be appointed by the President of the Philippines with the advice and consent of the
Commission on Appointments. One of the appointive members shall be the Chairman of the
Board of Directors of the Corporation who shall be appointed on a full time basis for a term
of six (6) years at an annual salary of twenty-four thousand pesos (P24,000.00). The other
appointive member, who shall be appointed for a term of four (4) years and the Governor
of the Central Bank shall each receive a per diem of not exceeding fifty pesos (P50.00) for
each day of meeting actually attended by them but in no case shall each of them receive
more than five hundred pesos (P500.00) a month. In the event of a vacancy in the Office of
the Governor of the Central Bank of the Philippines, and pending the appointment of his
successor or during the absence of the Governor, the Acting Governor of the Central Bank
of the Philippines shall act as member of the Board of Directors. In the event of a vacancy in
the Office of the Chairman of the Board of Directors and pending the appointment of his
successor, the Governor of the Central Bank of the Philippines shall act as Chairman. The
members of the Board of Directors shall be ineligible during the time they are in office and
for a period of two years thereafter to hold any office, position or employment in any
insured bank, except that this restriction shall not apply to any member who has served the
full term for which he was appointed. No member of the Board of Directors shall be an
officer or director of any insured bank; and before entering upon his duties as member of
the Board of Directors he shall certify under oath that he has complied with this
requirement and such certification shall be filed with the Secretary of the Board of
Directors. Any vacancy in the Board created by the death, resignation, or removal of an
appointive member shall be filled by the appointment of new member to complete the
unexpired period of the term of the member concerned.{{1}}

The Board of Directors shall have the authority:

1. To prepare and issue rules and regulations as it considers necessary for the effective
discharge of its responsibilities;

2. To direct the management, operations and administration of the Corporation;

3. To appoint, fix the remunerations and remove all officers and employees of the
Corporation, subject to the Civil Service Law; and{{2}}

4. To authorize such expenditures by the Corporation as are in the interest of the effective
administration and operation of the Corporation.{{3}}

[See additions as per RA 9302{{4}} and RA 9576{{5}}]

SECTION 3. As used in this Act —

(a) The term “Board of Directors” means the Board of Directors of the Corporation.

(b) The term “Bank” and “Banking Institution” shall be synonymous and interchangeable
and shall include banks, commercial banks, savings banks, mortgage banks, rural banks,
development banks, cooperative banks, trust companies, branches and agencies in the
Philippines of foreign banks and all other companies, corporations, partnership performing
banking functions in the Philippines.

(c) The term “receiver” includes a receiver, liquidating agent, conservator, commission,
person, or other agency charged by law with the duty of winding up the affairs of a bank.

(d) The term “insured bank” means any bank the deposit of which are insured in
accordance with the provision of this Act;

(e) The term “non-insured bank” means any bank the deposit of which are not insured.

129 | P a g e
(f) The term “deposit” means the unpaid balance of money or its equivalent received by a
bank in the usual course of business and for which it has given or is obliged to give credit to
a commercial, checking, savings, time or thrift account or which is evidenced by its
certificate of deposit, and trust funds held by such bank whether retained or deposited in
any department of such bank or deposited in another bank, together with such other
obligations of a bank as the Board of Directors shall find and shall prescribe by regulations
to be deposit liabilities of the Bank: Provided, That any obligation of a bank which is
payable at the office of the bank located outside of the Philippines shall not be a deposit for
any of the purposes of this Act or included as part of the total deposits or of the insured
deposit: Provided, further, That any insured bank which is incorporated under the laws of
the Philippines which maintains a branch outside the Philippines may elect to include for
insurance its deposit obligation payable only at such branch.

(g) The term “insured deposit” means the net amount due to any depositor for deposits in
an insured bank (after deducting offsets) less any part thereof which is in excess of
P10,000. Such net amount shall be determined according to such regulations as the Board
of Directors may prescribe and in determining the amount due to any depositor there shall
be added together all deposits in the bank maintained in the same capacity and the same
right for his benefit or in his own name or in the names of others.

(h) The term “transfer deposit” means a deposit in an insured bank made available to a
depositor by the Corporation as payment of insured deposit of such depositor in a closed
bank and assumed by another insured bank.

(i) The term “trust funds” means funds held by an insured bank in a fiduciary capacity and
includes without being limited to, funds held as trustee, executor, administrator, guardian,
or agent.{{6}}

SECTION 4. Any bank or banking institution which is engaged in the business of receiving
deposits as herein defined on the effective date of this Act, or which thereafter may engage
in the business of receiving deposits, may insure its deposit liabilities with the Corporation.
Before approving the application of such bank to become an insured bank, the Board of
Directors shall give consideration to the factors enumerated in Section 5 and shall
determine upon the basis of a thorough examination of such bank, that its assets in excess
of its capital requirements are adequate to enable it to meet all its liabilities to depositors
and other creditors as shown by the books of the bank.{{7}}

SECTION 5. The factors to be considered by the Board of Directors under the preceding
section shall be the following: the financial history and condition of the Bank, the adequacy
of its capital structure, its future earning prospects, the general character of its
management, the convenience and needs of the community to be served by the Bank and
whether or not its corporate powers are consistent with the purposes of this Act.{{8}}

SECTION 6. (a) The assessment rate shall be determined by the Board of Directors:
Provided, That the assessment rate shall not exceed one-twelfth of one per centum per
annum. The semiannual assessment for each insured bank shall be in the amount of the
product of one-half (1/2) the assessment rate multiplied by the assessment base. The
assessment base shall be the amount of the liability of the bank for deposits, according to
the definition of the term “deposit” in and pursuant to subsection (f) of Section 3 without
any deduction for indebtedness of depositors: Provided, further, That the bank —

(1) may deduct (i) from the deposit balance due to an insured bank the deposit balance due
from such insured bank (other than trust funds deposited by it in such bank) which is
subject to an immediate withdrawal; and (ii) cash items as determined by either of the
following methods, at the option of the bank: (aa) by multiplying by 2 the total of the cash
items forwarded for collection on the assessment base days (being the days on which the
average deposits are computed) and cash items held for clearings at the close of business

130 | P a g e
on said days, which are in the process of collection and which the bank has paid in the
regular course of business or credited to deposit accounts; or (bb) by deducting the total of
cash items forwarded for collection on the assessment base days and cash items held for
clearings at the close of business on said days, which are in the process of collection and
which the bank has paid in the regular course of business or credited to deposit accounts,
plus such uncollected items paid or credited on preceding days which are in the process of
collection: Provided, That the Board of Directors may define the terms “cash items”,
“process of collection”, and “uncollected items” and shall fix the maximum period for which
any such item may be deducted; and

(2) may exclude from its assessment base (i) drafts drawn by it on deposit accounts in
other banks which are issued in the regular course of business; and the amount of devices
or authorizations issued by it for cash letters received, directing that its deposit account in
the sending bank be charged with the amount thereof; and (ii) cash funds which are
received and held solely for the purpose of securing a liability to the bank but not in an
amount in excess of such liability, and which are not subject to withdrawal by the obligor
and are carried in a special non-interest bearing account designated to properly show their
purpose.

Each insured bank, as a condition to the right to make any such deduction or exclusion in
determining its assessment base, shall maintain such records as will readily permit
verification of the correctness thereof. The semiannual assessment base for one semi-
annual period shall be the average of the assessment base of the bank as of the close of
business on March thirty-one and June thirty, and the semi-annual assessment base for the
other semi-annual period shall be the average of the assessment base of the bank as of the
close of business on September thirty and December thirty-one: Provided, That when any
of said days is a nonbusiness day or a legal holiday, either National or Provincial, the
preceding business day shall be used. The certified statements required to be filed with the
Corporation under subsections (b) and (c) of this section shall be in such form and set forth
such supporting information as the Board of Directors shall prescribe. The assessment
payments required from insured banks under subsections (b) and (c) of this section shall
be made in such manner and at such time or times as the Board of Directors shall prescribe,
provided the time or times so prescribed shall not be later than sixty days after filing the
certified statement setting forth the amount of assessment.{{9}}{{10}}

(b) On or before the 15th of July of each year, each insured bank shall file with the
Corporation a certified statement showing for the six months ending on the preceding June
thirty the amount of the assessment base and the amount of the semi-annual assessment
due to the Corporation for the period ending on the following December thirty-one,
determined in accordance with subsection (a) of this section, which shall contain or be
verified by a written declaration that it is made under the penalties of perjury. Each insured
bank shall pay to the Corporation the amount of the semi-annual assessment it is required
to certify. On or before the 15th day of January of each year, each insured bank shall file
with the Corporation a similar certified statement for the six months ending on the
preceding December thirty-one and shall pay to the Corporation the amount of the semi-
annual assessment for the period ending on the following June thirty which it is required to
certify.{{11}}

(c) Each bank which becomes an insured bank shall not be required to file any certified
statement or pay any assessment for the semi-annual period in which it becomes an
insured bank. On the expiration of such period, each such bank shall comply with the
provisions of subsection (b) of this section except that the semi-annual assessment base for
its first certified statement shall be the assessment base of the bank as of the close of
business on the preceding June thirty or December thirty-one, whichever is applicable,
determined in accordance with subsection (a) of this section. If such bank has assumed the
liabilities for deposits of another bank or banks, it shall include such liabilities in its

131 | P a g e
assessment base. The first certified statement shall show as the amount of the first semi-
annual assessment due to the Corporation, an amount equal to the product of one-half of
the annual assessment rate multiplied by such assessment base.

(d) As of December thirty-one nineteen hundred sixty-four and as of December thirty-one

of each calendar year thereafter, the Corporation shall transfer 40 per centum of its net
assessment income to its capital account and the balance of the net assessment income
shall be credited pro rata to the insured banks based upon the assessment of each bank
becoming due during the said calendar year. Each year such credit shall be applied by the
Corporation toward the payment of the total assessment becoming due for the semi-annual
assessment period beginning the next ensuing July 1 and any excess credit shall be applied
upon the assessment next becoming due. The term “net assessment income” as used
therein means the total assessments which become due during the calendar year less (1)
the operating costs and expenses of the Corporation for the calendar year; (2) additions to
reserve to provide for insurance losses during the calendar year, except that any
adjustment to reserve which result in a reduction of such reserve shall be added; and (3)
the insurance losses sustained in said calendar year plus losses from any preceding years in
excess of such reserves. If the above deductions exceed in amount the total assessments
which become due during the calendar year, the amount of such excess shall be restored by
deduction from total assessments becoming due in subsequent years.{{12}}

(e) The Corporation (1) may refund to an insured bank any payment of assessment in
excess of the amount due to the Corporation or (2) may credit such excess toward the
payment of the assessment next becoming due from such bank and upon succeeding
assessments until the credit is exhausted.

(f) Any insured bank which fails to file any certified statement required to be filed by it in
connection with determining the amount of any assessment payable by the bank to the
Corporation may be compelled to file such statement by mandatory injunction or other
appropriate remedy in a suit brought for such purpose by the Corporation against the bank
and any officer or officers thereof in any court of the Philippines of competent jurisdiction
in which such bank is located.

(g) The Corporation, in a suit brought in any court of competent jurisdiction, shall be
entitled to recover from any insured bank the amount of any unpaid assessment lawfully
payable by such insured bank to the Corporation, whether or not such bank shall have filed
any such certified statement and whether or not suit shall have been brought to compel the
bank to file any such statement. No action or proceeding shall be brought for recovery of
any assessment due to the Corporation or for the recovering of any amount paid to the
Corporation in excess of the amount due to it, unless such action or proceeding shall have
been brought within five years after the right accrued for which the claim is made, except
where the insured bank has made or filed with the Corporation a false or fraudulent
certified statement with the intent to evade, in whole or in part, the payment of assessment,
in which case the claim shall not have been deemed to have accrued until the discovery by
the Corporation that the certified statement is false or fraudulent.

(h) Should any insured bank fail or refuse to pay any assessment required to be paid by
such bank under any provision of this Act, and should the bank not correct such failure or
refusal within thirty days after written notice has been given by the Corporation to an
officer of the bank, citing this subsection, and stating that the bank has failed or refused to
pay as required by law the insured status of such bank shall be terminated by the Board of
Directors. The remedies provided in this subsection and in the two preceding subsections
shall not be construed as limiting any other remedies against an insured bank but shall be
in addition thereto.{{13}}

(i) Trust funds held by an insured bank in a fiduciary capacity whether held in trust or
deposited in any other department or in another bank shall be insured like other forms of

132 | P a g e
deposits, in an amount not to exceed P10,000 for each trust estate, and when deposited by
the fiduciary bank in another insured bank, such trust funds shall be similarly insured to
the fiduciary bank according to the trust estates represented. Notwithstanding any other
provision of this Act, such insurance shall be separate from and additional to that covering
other deposits of the owners of such trust funds or the beneficiaries of such trust estates:
Provided, That where the fiduciary bank deposits any of such trust funds in other insured
banks, the amount so held by other insured banks on deposit shall not for the purpose of
any certified statement required under subsections (b) and (c) of this section be considered
to be a deposit liability of the fiduciary bank, but shall be considered to be a deposit liability
of the bank in which such funds are so deposited by such fiduciary bank. The Board of
Directors shall have the power by regulation to prescribe the manner of reporting and of
depositing such trust funds.

SECTION 7. (a) Any insured bank may, upon not less than ninety days, written notice to the
Corporation, and to the Development Bank of the Philippines if it owns or holds as pledges
any preferred stock, capital notes, or debentures of such bank, terminate its status as an
insured bank. Whenever the Board of Directors shall find that an insured bank or its
directors or trustees have continued unsafe or unsound practices in conducting the
business of the bank or which have knowingly or negligently permitted any of its officers or
agents to violate any provisions of any law or regulation to which the insured bank is
subject, the Board of Directors shall first give to the Central Bank of the Philippines a
statement with respect to such practices or violations for the purpose of securing the
correction thereof and shall give a copy thereof to the bank. Unless such correction shall be
made within one hundred twenty days or such shorter period of time as the Central Bank of
the Philippines shall require, the Board of Directors, if it shall determine to proceed further,
shall give to the bank not less than thirty days’ written notice of intention to determine the
status of the bank as an insured bank, and shall fix a time and place for a hearing before the
Board of Directors or before a person designated by it to conduct such hearing, at which
evidence may be produced, and upon such evidence the Board of Directors shall make
written findings which shall be conclusive. Unless the bank shall appear at the hearing by a
duly authorized representative, it shall be deemed to have consented to the termination of
its status as an insured bank. If the Board of Directors shall find that any unsafe or unsound
practice or violation specified in such notice has been established and has not been
corrected within the time above prescribed in which to make such correction, the Board of
Directors may order that the insured status of the bank be terminated on a date subsequent
to such finding and to the expiration of the time specified in such notice of intention. The
Corporation may publish notice of such termination and the bank shall give notice of such
termination to each of the depositors at his last address of record on the books of the bank,
in such a manner and at such a time as the Board of Directors may find to be necessary and
may order for the protection of the depositors. After the termination of the insured status
of any bank under the provisions of this subsection, the insured deposits of each depositor
in the bank on the date of such termination, less all subsequent withdrawals from any
deposits of such depositor, shall continue for a period of two years to be insured, and the
bank shall continue to pay to the Corporation assessments as in the case of an insured bank
during such period. No additions to any such deposits and no new deposits in such bank
made after the date of such termination shall be insured by the Corporation, and the bank
shall not advertise or hold itself out as having insured deposits unless in the same
connection it shall also state equal prominence that such additions to deposits and new
deposits made after such date are not so insured. Such bank shall, in all other respects, be
subject to the duties and obligations of an insured bank for the period of two years from
the date of such termination, and in the event that such bank shall be closed on account of
insolvency within such period of two years, the Corporation shall have the same powers
and rights with respect to such bank as in case of an insured bank.{{14}}

(b) Notwithstanding any other provision of law, whenever the Board of Directors shall
determine that an insured banking institution is not engaged in the business of receiving

133 | P a g e
deposits, the Corporation shall notify the banking institution that its insured status will
terminate at the expiration of the first full semi-annual assessment period following such
notice. A finding by the Board of Directors that a banking institution is not engaged in the
business of receiving deposits shall be conclusive. The Board of Directors shall prescribe
the notice to be given by the banking institution of such termination and the Corporation
may publish notice thereof. Upon the termination of the insured status of any such banking
institution, its deposits shall thereupon cease to be insured and the banking institution
shall thereafter be relieved of all future obligations to the Corporation, including the
obligation to pay future assessments.{{15}}

(c) Whenever the liabilities of an insured bank for deposits shall have been assumed by
another insured bank or banks, the insured status of the bank whose liabilities are so
assumed shall terminate on the date of receipt by the Corporation of satisfactory evidence
of such assumption with like effect as if its insured status had been terminated on said date
by the Board of Directors after proceedings under subsection (a) of this section: Provided,
That if the bank whose liabilities are so assumed gives to its depositors notice of such
assumption within thirty days after such assumption takes effect, by publication or by any
reasonable means, in accordance with regulations to be prescribed by the Board of
Directors, the insurance of its deposits shall terminate at the end of six months from the
date such assumption takes effect. Such bank shall be subject to the duties and obligations
of an insured bank for the period its deposits are insured: Provided, further, That if the
deposits are assumed by a newly insured bank, the bank whose deposits are assumed shall
not be required to pay any assessment upon the deposits which have been so assumed
after the semi-annual period in which the assumption takes effect.

SECTION 8. The Corporation as a corporate body shall have the power —

First. — To adopt and use a corporate seal.

Second. — To have succession until dissolved by an Act of Congress.

Third. — To make contracts.

Fourth. — To sue and be sued, complain and defend, in any court of law in the Philippines.
All suits of a civil nature to which the corporation shall be a part shall be deemed to arise
under the laws of the Philippines. No attachment or execution shall be issued against the
Corporation or its property before final judgment in any suit, action, or proceeding in any
court. The Board of Directors shall designate an agent upon whom service of process may
be made in any province or city or jurisdiction in which any insured bank is located.

Fifth. — To appoint by its Board of Directors such officers and employees as are not
otherwise provided for in this Act to define their duties, fix their compensation, require
bonds of them and fix penalty thereof and to dismiss such officers and employees for cause.

Sixth. — To prescribe, by its Board of Directors, by-laws not inconsistent with law,
regulating the manner in which its general business may be conducted, and the privileges
granted to it by law may be exercised and enjoyed.

Seventh. — To exercise by its Board of Directors, or duly authorized officers or agents, all
powers specifically granted by the provisions of this Act, and such incidental powers as
shall be necessary to carry on the powers so granted.

Eighth. — To make examinations of and to require information and reports from banks, as
provided in this Act.{{16}}

Ninth. — To act as receiver.

134 | P a g e
Tenth. — To prescribe by its Board of Directors such rules and regulations as it may deem
necessary to carry out the provisions of this Act.{{17}}

[See additions as per PD 1940{{18}} and RA 7400{{19}}]

SECTION 9. (a) The Board of Directors shall administer the affairs of the Corporation fairly
and impartially and without discrimination. The Corporation shall be entitled to the free
use of Philippine mail in the same manner as the other offices of the national government.

(b) The Board of Directors shall appoint examiners who shall have power, on behalf of the
Corporation to examine any insured bank or any bank making application to become an
insured bank, whenever in the judgment of the Board of Directors an examination of the
bank is necessary. Each such examiner shall have power to make a thorough examination
of all the affairs of the bank and in doing so he shall have power to administer oaths and to
examine and take and preserve the testimony of any of the officers and agents thereof, and
shall make a full and detailed report of the condition of the bank to the Corporation. The
Board of Directors in like manner shall appoint claim agents who shall have power to
investigate and examine all claims for insured deposits and transferred deposits. Each
claim agent shall have power to administer oaths and to examine under oath and take and
preserve the testimony of any person relating to such claims.{{20}}{{21}}

(c) Each insured bank shall make to the Corporation reports of condition in such form and
at such times as the Board of Directors may require such reports to be published in such
manner, not inconsistent with any applicable law, as it may direct. Every such bank which
fails to make or publish any such report within such time, not less than five days, as the
Board of Directors may require, shall be subject to a penalty of not more than P100 for each
day of such failure recoverable by the Corporation for its use.

(d) The Corporation shall have access to reports of examination made by, and reports of
condition made to the Superintendent of Banks or the Governor of the Central Bank of the
Philippines, and the Superintendent of Banks or the Governor of the Central Bank of the
Philippines shall also have access to reports of examination made on behalf of, and reports
of condition made to the Corporation.{{22}}{{23}}

(e) The members of the Board of Directors and the officers and employees of the
Corporation are prohibited from revealing any information relating to the condition or
business of any insured bank and any member of the Board of Directors, officer or
employee of the Corporation violating this provision shall be held liable for any loss or
injury suffered by the Corporation.{{24}}

[See additions as per RA 9302, RA 9576, and RA 7400{{25}}]

SECTION 10. (a) A permanent insurance fund in the amount of P5,000,000 to be

appropriated from the General Fund is hereby created to be used by the Corporation to
carry out the purposes of this Act; Provided, That the maximum amount of the insured
deposit of any depositor shall be P10,000.{{26}}

(b) For the purposes of this Act an insured bank shall be deemed to have been closed on
account of insolvency in any case in which it has been closed for the purpose of liquidation
without adequate provision being made for payment of its depositors.{{27}}

(c) Whenever an insured bank shall have been closed on account of insolvency, payment of
the insured deposits in such bank shall be made by the Corporation as soon as possible
either (1) by cash or (2) by making available to each depositor a transferred deposit in
another insured bank in an amount equal to the insured deposit of such depositor:
Provided, That the Corporation, in its discretion, may require proof of claims to be filed
before paying the insured deposits, and that in any case where the Corporation is not

135 | P a g e
satisfied as to the validity of a claim for an insured deposit, it may require the final
determination of a court of competent jurisdiction before paying such claim.{{28}}

(d) The Corporation, upon the payment of any depositor as provided for in subsection (c)
of this section shall be subrogated to all rights of the depositor against the closed bank to
the extent of such payment. Such subrogation shall include the right on the part of the
Corporation to receive the same dividends from the proceeds of the assets of such closed
bank and recoveries on account of stockholders’ liability as would have been payable to the
depositor on a claim for the insured deposits, but such depositor shall retain his claim for
any uninsured portion of his deposit.

SECTION 11. (a) Payment of an insured deposit to any person by the Corporation shall
discharge the Corporation, and payment of a transferred deposit to any person by the new
bank or by an insured bank in which a transferred deposit has been made available shall
discharge the Corporation and such new bank or other insured bank, to the same extent
that payment to such person by the closed bank would have discharged it from liability for
the insured deposit.

(b) Except as otherwise prescribed by the Board of Directors, neither the Corporation nor
such other insured bank shall be required to recognize as the owner of any portion of a
deposit appearing on the records of the closed bank under a name other than that of the
claimant, any person whose name or interest as such owner is not disclosed on the records
of such closed bank as part owner of said deposit, if such recognition would increase the
aggregate amount of the insured deposits in such closed bank.

(c) The Corporation may withhold payment of such portion of the insured deposit of any
depositor in a closed bank as may be required to provide for the payment of any liability of
such depositor as a stockholder of the closed bank, or of any liability of such depositor to
the closed bank or its receiver, which is not offset against a claim due from such bank,
pending the determination and payment of such liability by such depositor or any other
person liable therefor.

(d) If, after the Corporation shall have given at least three months notice to the depositor
by mailing a copy thereof to his last-known address appearing on the records of the closed
bank, any depositor in the closed bank shall fail to claim his insured deposit from the
Corporation within eighteen months after the Monetary Board of the Central Bank of the
Philippines or the proper court shall have ordered the conversion of the assets of such
closed bank into money, all rights of the depositor against the Corporation with respect to
the insured deposit shall be barred, and all rights of the depositor against the closed bank
and its shareholders or the receivership estate to which the Corporation may have become
subrogated, shall thereupon revert to the depositor.{{29}}

SECTION 12. (a) Money of the Corporation not otherwise employed shall be invested in
obligations of the Republic of the Philippines or in obligations guaranteed as to principal
and interest by the Republic of the Philippines: Provided, That the Corporation shall not
sell or purchase any such obligations for its own account and in its own right and interest,
at any one time aggregating in excess of P100,000, without the approval of the Insurance
Commissioner: And Provided, further, That the Insurance Commissioner may waive the
requirement of his approval with respect to any transaction or classes of transactions
subject to the provisions of this subsection for such period of time and under such
conditions as he may determine.

(b) The banking or checking accounts of the Corporation shall be kept with the Central
Bank of the Philippines, with the Philippine National Bank, or with any other bank
designated as depository or fiscal agent of the Philippine Government.

136 | P a g e
(c) When the Corporation has determined that an insured bank is in danger of closing, in
order to prevent such closing, the Corporation, in the discretion of its Board of Directors, is
authorized to make loans to, or purchase the assets of, or make deposits in, such insured
bank, upon such terms and conditions as the Board of Directors may prescribe, when in the
opinion of the Board of Directors, the continued operation of such bank is essential to
provide adequate banking service in the community. Such loans and deposits may be in
subordination to the rights of depositors and other creditors.{{30}}{{31}}

SECTION 13. The corporation is authorized to borrow from the Central Bank of the
Philippines and the Central Bank is authorized and directed to loan the Corporation on
such terms as may be fixed by the Corporation and the Central Bank, such funds as in the
judgment of the Board of Directors of the Corporation are from time to time required for
insurance purposes not exceeding in the aggregate of one hundred million pesos
outstanding at any one time: Provided, That the rate of interest to be charged in connection
with any loan made pursuant to this section shall not be less than the current average rate
on outstanding marketable and nonmarketable obligations of the Republic of the
Philippines as of the last day of the month preceding the making of such loan. Any such loan
shall be used by the Corporation solely in carrying out its functions with respect to such
insurance.{{32}}

SECTION 14. All notes, debentures, bonds or such obligations issued by the Corporation
shall be exempt from taxation.{{33}}

SECTION 15. (a) The Corporation shall annually make a report of its operations to the
Congress as soon as practicable after the 1st day of January in each year.

(b) The financial transactions of the Corporation shall be audited by the General Auditing
Office in accordance with the principles and procedures applicable to commercial
corporate transactions and under such rules and regulations as may be prescribed by the
Auditor General. The audit shall be conducted at the place or places where accounts of the
Corporation are normally kept. The representatives of the General Auditing Office shall
have access to all books, accounts, records, reports, files, and all other papers, things, or
property belonging to or in use by the Corporation pertaining to its financial transactions
and necessary to facilitate the audit, and they shall be afforded full facilities for verifying
transactions with the balances or securities held by depositaries, fiscal agents, and
custodians. All such books, accounts, records, reports, files, papers, and property of the
Corporation shall remain in possession and custody of the Corporation.

(c) A report of the Audit for each fiscal year ending on June 30 shall be made by the Auditor
General to the Congress not later than January 15 following the close of such fiscal year. On
or before December 15 following such fiscal year the Auditor General shall furnish the
Corporation a short form report showing the financial position of the Corporation at the
close of fiscal year. The report to the Congress shall set forth the scope of the audit and
shall include a statement of assets and liabilities and surplus or deficit; a statement of
surplus or deficit analysis; a statement of income and expenses; a statement of sources and
application of funds and such comments and information as may be deemed necessary to
inform Congress of the financial operations and condition of the Corporation, together with
such recommendations with respect thereto as the Auditor General may deem advisable.
The report shall also show specifically any program, expenditure, or other financial
transactions or undertaking observed in the course of the audit, which in the opinion of the
Auditor General, has been carried on or made without authority of law. A copy of each
report shall be furnished to the President of the Philippines, to the Governor of the Central
Bank of the Philippines, and to the Corporation at the time submitted to the
Congress.{{34}}

SECTION 16. (a) Every insured bank shall display at each place of business maintained by it
a sign or signs, and shall include a statement to the effect that its deposits are insured by

137 | P a g e
the Corporation in all of its advertisements: Provided, That the Board of Directors may
exempt from this requirement advertisements which do not relate to deposits or when it is
impractical to include such statement therein. The Board of Directors shall prescribe by
regulation the forms of such signs and the manner of display and the substance of such
statements and the manner of use. For each day an insured bank continues to violate any
provisions of this subsection or any lawful provisions of said regulations, it shall be subject
to a penalty of not more than P100, which the Corporation may recover for its use.{{35}}

(b) No insured bank shall pay any dividend on its capital stock or interest on its capital
notes or debentures (if such interest is required to be paid only out of net profits) or
distribute any of its capital assets while it remains in default in the payment of any
assessment due to the Corporation; and any director or officer of any insured bank who
participates in the declaration or payment of any such dividend or interest or in any such
distribution shall, upon conviction, be fined not more than P1,000 or imprisoned not more
than one year, or both: Provided, That if such default is due to a dispute between the
insured bank and the Corporation over the amount of such assessment, this subsection
shall not apply, if such bank shall deposit security satisfactory to the Corporation of
payment upon final determination of the issue.{{36}}

(c) Without prior written consent by the Corporation, no insured bank shall (1) merge or
consolidate with any noninsured bank or institution or convert into a noninsured bank or
institution or (2) assume liability to pay any deposits made in, or similar liabilities of, any
noninsured bank or institution or (3) transfer assets to any noninsured bank or institution
in consideration of the assumption of liabilities for any portion of the deposits made in
such insured bank.{{37}}

(d) The Corporation may require any insured bank to provide protection and indemnity
against burglary, defalcation, and other similar insurable losses. Whenever any insured
bank refuses to comply with any such requirement the Corporation may contract for such
protection and indemnity and add the cost thereof to the assessment otherwise payable by
such bank.{{38}}

(e) Any insured bank which willfully fails or refuses to file any certified statement or pay
any assessment required under this Act shall be subject to a penalty of not more than P100
for each day that such violations continue, which penalty the Corporation may recover for
its use: Provided, That this subsection shall not be applicable under the circumstances
stated in the provisions of subsection (b) of this section.{{39}}

SECTION 17. Except with the written consent of the Corporation, no person shall serve as a
director, officer, or employee of an insured bank who has been convicted, or who is
hereafter convicted, of any criminal offense involving dishonesty or a breach of trust. For
each willful violation of this prohibition, the bank involved shall be subject to a penalty of
not more than P100 for each day this prohibition is violated, which the Corporation may
recover for its use.{{40}}{{41}}{{42}}{{43}}{{44}}

SECTION 18. If any provision or section of this Act or the application thereof to any person
or circumstances is held invalid, the other provisions or sections of this Act, in the
application of such provision or section to other persons or circumstances, shall not be
affected thereby.{{45}}{{46}}

SECTION 19. All Acts or parts of Acts and executive orders, administrative orders, or parts
thereof which are inconsistent with the provisions of this Act are hereby repealed.{{47}}

SECTION 20. This Act shall take effect upon approval. The Philippine Deposit Insurance
Corporation shall commence business upon organization of the Board of Directors and
certification by the Treasurer of the Philippines that the Permanent Insurance Fund has
been appropriated.{{48}}

138 | P a g e
[

Approved: June 22, 1963

Published in the Official Gazette, Vol. 59, No. 36, p. 6003 on September 9, 1963.

Source: CD Asia

[[1]] As amended by Republic Act No. 9302, August 12, 2004:

SECTION 2. The powers and functions of the Corporation shall be vested in and exercised
by a Board of Directors which shall be composed of five (5) members as follows:

a. The Secretary of Finance who shall be the ex-officio Chairman of the Board without
compensation.

b. The Governor of the Bangko Sentral ng Pilipinas, who shall be ex-officio member of the
Board without compensation.

c. The President of the Corporation, who shall be appointed by the President of the
Philippines from either the Government or private sector to serve on a full-time basis for a
term of six (6) years. The President of the Corporation shall also serve as Vice Chairman of
the Board.

d. Two (2) members from the private sector, to be appointed for a term of six (6) years
without reappointment by the President of the Philippines: Provided, That of those first
appointed, the first appointee shall serve for a period of two (2) years.

No person shall be appointed as member of the Board unless he be of good moral character
and of unquestionable integrity and responsibility, and who is of recognized competence in
economics, banking and finance, law, management administration or insurance, and shall
be at least thirty-five (35) years of age. For the duration of their tenure or term in office and
for a period of one year thereafter, the appointive members of the Board shall be
disqualified from holding any office, position or employment in any insured bank.

The Secretary of Finance and the Governor of the Bangko Sentral may each designate a
representative, whose position shall not be lower than an undersecretary or deputy
governor respectively, to attend such meetings and to vote on behalf of their respective
principals. Whenever the Chairman of the Board is unable to attend a meeting of the Board,
or in the event of a vacancy in the office of the Secretary of Finance, the President of the
Corporation shall act as Chairman.

The presence of three (3) members shall constitute a quorum. All decisions of the Board of
Directors shall require the concurrence of at least three (3) members.

The Secretary of Finance shall fix the rate of per diem for every Board meeting attended by
the members of the Board of Directors from the private sector. The President of the
Philippines may fix such emoluments that may be received by the Board of Directors
comparable to the emoluments of members of the Board of Directors of other government
financial institutions.[[1]]

[[2]] As amended by RA 9302:

3. To establish a human resource management system which shall govern the selection,
hiring, appointment, transfer, promotion, or dismissal of all personnel. Such system shall
aim to establish professionalism and excellence at all levels of the Corporation in
accordance with sound principles of management.

139 | P a g e
A compensation structure, based on job evaluation studies and wage surveys and subject to
the Board’s approval, shall be instituted as an integral component of the Corporation’s
human resource development program: Provided, That all positions in the Corporation
shall be governed by a compensation, position classification system and qualification
standards approved by the Board based on a comprehensive job analysis and audit of
actual duties and responsibilities. The compensation plan shall be comparable with the
prevailing compensation plans of other government financial institutions and shall be
subject to review by the Board no more than once every two (2) years without prejudice to
yearly merit reviews or increases based on productivity and profitability. The Corporation
shall therefore be exempt from existing laws, rules and regulations on compensation,
position classification and qualification standards. It shall however endeavor to make its
system conform as closely as possible with the principles under Republic Act No. 6758, as
amended.[[2]]

[[3]]As amended by RA 9302:

4. To appoint, establish the rank, fix the remuneration, approve local and foreign training
of, and remove any officer or employee of the Corporation, for cause, subject to pertinent
civil service laws: Provided, That the Board of Directors may delegate this authority to the
President subject to specific guidelines;[[3]]

[[4]] As added by RA 9302:

5. To adopt an annual budget for, and authorize such expenditures by the Corporation as
are in the interest of the effective administration and operation of the Corporation; and

6. To approve the methodology for determining the level and amount of provisioning for
insurance and financial assistance losses, which shall establish reasonable levels of deposit
insurance reserves.[[4]]

[[5]] As added by RA 9576:

7. To review the organizational set-up of the Corporation and adopt a new or revised
rganizational structure as it may deem necessary for the Corporation to undertake its
mandate and functions.[[5]]

[[6]] Renumbered from Sec. 2 by RA 9302:

SECTION 3. The President of the Corporation shall be the Chief Executive thereof and his
salary shall be fixed by the President of the Philippines at a sum commensurate to the
importance and responsibility attached to the position. The sum total of the salary of the
President and the allowances and other emoluments which the Board of Directors may
grant him shall be the ceiling for fixing the salary, allowances and other emoluments of all
other personnel in the Corporation.

The powers and duties of the President of the Corporation are:

a. To prepare the agenda for the meeting of the Board and to submit for the consideration
of the Board the policies and measures which he believes to be necessary to carry out the
purposes and provisions of this Act;

b. To execute and administer the policies and measures approved by the Board;

c. To direct and supervise the operations and internal administration of the Corporation in
accordance with the policies established by the Board. The President may delegate certain
of his administrative responsibilities to other officers of the Corporation, subject to the
rules and regulations of the Board;

140 | P a g e
d. To represent the Corporation, upon prior authority of the Board, in all dealings with
other offices, agencies and instrumentalities of the government and with all other persons
or entities, public or private, whether domestic, foreign or international;

e. To authorize, with his signature, upon prior authority of the Board, contracts entered
into by the Corporation, notes and securities issued by the Corporation, and the annual
reports, balance sheets, profits and loss statements, correspondence and other documents
of the Corporation. The signature of the President may be in facsimile wherever
appropriate;

f. To represent the Corporation, either personally or through counsel, in all legal

proceedings or actions;

g. To delegate, with the prior approval of the Board of Directors, his power to represent the
Corporation, as provided in subsections (d) and (f) of this Section, to other officers of the
Corporation; and

h. To exercise such other powers as may be vested in him by the Board.

The President shall be assisted by a Vice President and other officials whose appointment
and removal for cause shall be approved and whose salary shall be fixed by the Board of
Directors upon recommendation of the President of the Corporation. During the absence or
temporary incapacity of the President, or in case of vacancy or permanent incapacity and
pending the appointment of a new President of the Corporation by the President of the
Philippines, the Vice President shall act as President and discharge the duties and
responsibilities thereof (as amended by Executive Order No. 890, April 8, 1983; RA 7400,
April 13, 1992).[[6]]

[[7]] Renumbered from Sec. 3 by RA 9302:

SECTION 4. As used in this Act –

a. The term “Board of Directors” means the Board of Directors of the Corporation.

b. The term “Bank” and “Banking Institution” shall be synonymous and interchangeable and
shall include banks, commercial banks, savings bank, mortgage banks, rural banks,
development banks, cooperative banks, stock savings and loan associations and branches
and agencies in the Philippines of foreign banks and all other corporations authorized to
perform banking functions in the Philippines (as amended by RA 7400).

c. The term “receiver” includes a receiver, commission, person or other agency charged by
law with the duty to take charge of the assets and liabilities of a bank which has been
forbidden from doing business in the Philippines, as well as the duty to gather, preserve
and administer such assets and liabilities for the benefit of the depositors and creditors of
said bank, and to continue into liquidation whenever authorized under this Act or other
laws, and to dispose of the assets and to wind up the affairs of such bank (as amended by RA
7400).

d. The term “insured bank” means any bank the deposits of which are insured in
accordance with the provisions of this Act.

e. The term “non-insured bank” means any bank the deposits of which are not insured.

f. The term “deposit” means the unpaid balance of money or its equivalent received by a
bank in the usual course of business and for which it has given or is obliged to give credit to
a commercial, checking, savings, time or thrift account, or issued in accordance
with Bangko Sentral rules and regulations and other applicable laws, together with such
other obligations of a bank, which, consistent with banking usage and practices, the Board

141 | P a g e
of Directors shall determine and prescribe by regulations to be deposit liabilities of the
bank: Provided, That any obligation of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a deposit for any of the purposes of this Act
or included as part of the total deposits or of insured deposit: Provided, further, That,
subject to the approval of the Board of Directors, any insured bank which is incorporated
under the laws of the Philippines which maintains a branch outside the Philippines may
elect to include for insurance its deposit obligations payable only at such branch.

The Corporation shall not pay deposit insurance for the following accounts or transactions,
whether denominated, documented, recorded or booked as deposit by the bank:

1. Investment products such as bonds and securities, trust accounts, and other similar
instruments;

2. Deposit accounts or transactions which are unfunded, or that are fictitious or

fraudulent;

3. Deposit accounts or transactions constituting, and/or emanating from, unsafe and

unsound banking practice/s, as determined by the Corporation, in consultation with
the BSP, after due notice and hearing, and publication of a cease and desist order
issued by the Corporation against such deposit accounts or transactions; and

4. Deposits that are determined to be the proceeds of an unlawful activity as defined

under Republic Act 9160, as amended.

The actions of the Corporation taken under this section shall be final and executory, and
may not be restrained or set aside by the court, except on appropriate petition for
certiorari on the ground that the action was taken in excess of jurisdiction or with such
grave abuse of discretion as to amount to a lack or excess of jurisdiction. The petition for
certiorari may only be filed within thirty (30) days from notice of denial of claim for
deposit insurance (as amended by Presidential Decree 1940, June 27, 1984; RA 7400; RA
9302; RA 9576).

g. The term “insured deposit” means the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the insured
bank as of the date of closure, but not to exceed Five Hundred Thousand Pesos
(P500,000.00). Such net amount shall be determined according to such regulations as the
Board of Directors may prescribe. In determining such amount due to any depositor, there
shall be added together all deposits in the bank maintained in the same right and capacity
for his benefit either in his own name or in the name of others. A joint account regardless of
whether the conjunction “and,” “or,” “and/or” is used, shall be insured separately from any
individually-owned deposit account: Provided, That (1) If the account is held jointly by two
or more natural persons, or by two or more juridical persons or entities, the maximum
insured deposit shall be divided into as many equal shares as there are individuals,
juridical persons or entities, unless a different sharing is stipulated in the document of
deposit, and (2) if the account is held by a juridical person or entity jointly with one or
more natural persons, the maximum insured deposit shall be presumed to belong entirely
to such juridical person or entity: Provided, further, That the aggregate of the interest of
each co-owner over several joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities, shall likewise be subject to the
maximum insured deposit of Five Hundred Thousand Pesos (P500,000.00): Provided,
furthermore, That the provisions of any law to the contrary notwithstanding, no
owner/holder of any negotiable certificate of deposit shall be recognized as a depositor
entitled to the rights provided in this Act unless his name is registered as owner/holder
thereof in the books of the issuing bank: Provided, finally, That, in case of a condition that
threatens the monetary and financial stability of the banking system that may have
systemic consequences, as defined in section 17 hereof, as determined by the Monetary

142 | P a g e
Board, the maximum deposit insurance cover may be adjusted in such amount, for such a
period, and/or for such deposit products, as may be determined by a unanimous vote of the
Board of Directors in a meeting called for the purpose and chaired by the Secretary of
Finance, subject to the approval of the President of the Philippines (as amended by RA 9302;
RA 9576).

h. The term “transfer deposit” means a deposit in an insured bank made available to a
depositor by the Corporation as payment of insured deposit of such depositor in a closed
bank and assumed by another insured bank.

i. The term “trust funds” means funds held by an insured bank in a fiduciary capacity and
includes without being limited to, funds held as trustee, executor, administrator, guardian
or agent.[[7]]

[[8]] As amended by RA 6037, August 4, 1969; renumbered from Sec. 4 by RA 9302:

SECTION 5. The deposit liabilities of any bank or banking institution, which is engaged in
the business of receiving deposits as herein defined on the effective date of this Act, or
which thereafter may engage in the business of receiving deposits, shall be insured with the
Corporation.[[8]]

[[9]] As amended by RA 9302:

SECTION 6.

a. The assessment rate shall be determined by the Board of Directors: Provided, That the
assessment rate shall not exceed one-fifth (1/5) of one per centum (1%) per annum. The
semiannual assessment for each insured bank shall be in the amount of the product of one-
half (1/2) the assessment rate multiplied by the assessment base but in no case shall it be
less than Five thousand pesos (P5,000.00). The assessment base shall be the amount of the
liability of the bank for deposits as defined under subsection (f) of Section 4 without any
deduction for indebtedness of depositors.[[9]]

[[10]] As amended by RA 7400:

The semi-annual assessment base for one semi-annual period shall be the average of the
assessment base of the bank as of the close of business on March thirty-one and June thirty
and the semi-annual assessment base for the other semi-annual period shall be the average
of the assessment base of the bank as of the close of business on September thirty and
December thirty-one: Provided, That when any of said days is a non-business day or legal
holiday, either national or provincial, the preceding business day shall be used. The
certified statements required to be filed with the Corporation under subsections (b) and (c)
of this Section shall be in such form and set forth such supporting information as the Board
of Directors shall prescribe. The assessment payments required from the insured banks
under subsections (b) and (c) of this Section shall be made in such manner and at such time
or times as the Board of Directors shall prescribe, provided the time or times so prescribed
shall not be later than sixty (60) days after filing the certified statement setting forth the
amount of assessment.[[10]]

[[11]]As amended by PD 1940:

b. On or before the 31st of July of each year, each insured bank shall file with the
Corporation a certified statement showing for the six months ending on the preceding June
thirty the amount of the assessment base and the amount of the semi-annual assessment
due to the Corporation for the period ending on the following December thirty-one,
determined in accordance with subsection (a) of this Section, which shall contain or be
verified by a written declaration that it is made under the penalties of perjury. Each insured

143 | P a g e
bank shall pay to the Corporation the amount of the semi-annual assessment it is required
to certify. On or before the 31st day of January of each year, each insured bank shall file with
the Corporation a similar certified statement for the six months ending on the preceding
December thirtyone and shall pay to the Corporation the amount of the semi-annual
assessment for the period ending on the following June thirty which it is required to
certify.[[11]]

[[12]] As amended by RA 9302:

d. All assessment collections and income from operations after expenses and charges shall
be added to the Deposit Insurance Fund under Section 13 hereof. Such expenses and
charges are: (1) the operating costs and expenses of the Corporation for the calendar year;
(2) additions to reserve to provide for insurance and financial assistance losses, net of
recoverable amounts from applicable assets and collaterals, during the calendar year; and
(3) the net insurance and financial assistance losses sustained in said calendar year.[[12]]

[[13]] As amended by RA 9302:

h. The Corporation shall not terminate the insured status of any bank which continues to
operate or receive deposits. Should any insured bank fail or refuse to pay any assessment
required to be paid by such bank under any provision of this Act, and should the bank not
correct such failure or refusal within thirty (30) days after written notice has been given by
the Corporation to an officer of the bank citing this subsection, and stating that the bank
has failed or refused to pay as required by the law, the Corporation may, at its discretion,
file a case for collection before the appropriate court without prejudice to the imposition of
administrative sanctions allowed under the provisions of this Law on the bank officials
responsible for the non-payment of assessment fees.[[13]]

[[14]] As amended by RA 7400; RA 9302:

a. Whenever upon examination by the Corporation into the condition of any insured bank,
it shall be disclosed that an insured bank or its directors or agents have committed, are
committing or about to commit unsafe or unsound practices in conducting the business of
the bank, or have violated, are violating or about to violate any provisions of any law or
regulation to which the insured bank is subject, the Board of Directors shall submit the
report of the examination to the Monetary Board to secure corrective action thereon. If no
such corrective action is taken by the Monetary Board within forty-five (45) days from the
submission of the report, the Board of Directors shall, motu proprio, institute corrective
action which it deems necessary. The Board of Directors may thereafter issue a cease and
desist order, and require the bank or its directors or agents concerned to correct the
practices or violations within forty-five (45) days. However, if the practice or violation is
likely to cause insolvency or substantial dissipation of assets or earnings of the bank, or is
likely to seriously weaken the condition of the bank or otherwise seriously prejudice the
interests of its depositors and the Corporation, the period to take corrective action shall not
be more than fifteen (15) days. The order may also include the imposition of fines provided
in Section 21 (f) hereof. The Board of Directors shall duly inform the Monetary Board of
the Bangko Sentral ng Pilipinas of action it has taken under this subsection with respect to
such practices or violations.[[14]]

[[15]] As amended by EO 890; RA 7400:

b. The actions and proceedings provided in the preceding subsection may be undertaken by
the Corporation if, in its opinion, an insured bank or its directors or agents have violated,
are violating or about to violate any provision of this Act or any order, rule or instruction
issued by the Corporation or any written condition imposed by the Corporation in
connection with any transaction with or grant by the Corporation. [[15]]

144 | P a g e
[[16]] As amended by RA 9302; RA 9576:

Eighth – To conduct examination of banks with prior approval of the Monetary

Board: Provided, That no examination can be conducted within twelve (12) months from
the last examination date: Provided, however, That the Corporation may, in coordination
with the Bangko Sentral, conduct a special examination as the Board of Directors, by an
affirmative vote of a majority of all of its members, if there is a threatened or impending
closure of a bank; Provided, further, That, notwithstanding the provisions of Republic Act
No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and
other laws, the Corporation and/or the Bangko Sentral, may inquire into or examine
deposit accounts and all information related thereto in case there is a finding of unsafe or
unsound banking practice; Provided, finally, That to avoid overlapping of efforts, the
examination shall maximize the efficient use of the relevant reports, information, and
findings of the Bangko Sentral, which it shall make available to the Corporation;[[16]]

[[17]] As amended by RA 6037:

Tenth – To prescribe by its Board of Directors such rules and regulations as it may deem
necessary to carry out the provisions of this Act;[[17]]

[[18]] As amended by PD 1940:

Eleventh – The Corporation may establish its own provident fund which shall consist of
contributions made both by the Corporation and by its officers and employees to a common
fund for the payment of benefits to such officers or employees or their heirs. The Board of
Directors shall prepare and issue rules and regulations as it may deem necessary to make
effective the establishment and operation of the fund;[[18]]

[[19]] As added by RA 7400:

Twelfth – To compromise, condone or release, in whole or in part, any of claim or settled

liability to the Corporation, regardless of the amount involved, under such terms and
conditions as may be imposed by the Board of Directors to protect the interest of the
Corporation.[[19]]

[[20]] As amended by EO 890; RA 7400:

b. The Board of Directors shall appoint examiners who shall have power, on behalf of the
Corporation to examine any insured bank. Each such examiner shall have the power to
make a thorough examination of all the affairs of the bank and in doing so, he shall have the
power to administer oaths, to examine and take and preserve the testimony of any of the
officers and agents thereof, and, to compel the presentation of books, documents, papers,
or records necessary in his judgment to ascertain the facts relative to the condition of the
bank; and shall make a full and detailed report of the condition of the bank to the
Corporation. The Board of Directors in like manner shall appoint claim agents who shall
have the power to investigate and examine all claims for insured deposits and transferred
deposits. Each claim agent shall have the power to administer oaths and to examine under
oath and take and preserve testimony of any person relating to such claim.[[20]]

[[21]] As added by RA 9302:

(b-1) The investigators appointed by the Board of Directors shall have the power on behalf
of the Corporation to conduct investigations on frauds, irregularities and anomalies
committed in banks, based on reports of examination conducted by the Corporation
and Bangko Sentral ng Pilipinas or complaints from depositors or from other government
agency. Each such investigator shall have the power to administer oaths, and to examine

145 | P a g e
and take and preserve the testimony of any person relating to the subject of
investigation.[[21]]

[[22]] As amended by EO 890; RA 7400; RA 9302:

d. The Corporation shall have access to reports of examination made by, and reports of
condition made to the Bangko Sentral ng Pilipinas or its appropriate supervising
departments, and the Bangko Sentral ng Pilipinas shall also have access to reports of
examination made by, and reports of condition made to the Corporation:Provided, That the
provisions of any law to the contrary notwithstanding, the Corporation shall likewise have
access to reports, findings and any other information derived from any special or general
examination or inquiry conducted by the Bangko Sentral in respect to bank fraud or serious
irregularity in an insured bank: Provided, That the Corporation shall use reports and
findings under similar terms and conditions prescribed by applicable laws on the Bangko
Sentral.[[22]]

[[23]] As added by RA 9302:

(d-1) Each insured bank shall keep and maintain a true and accurate record or statement of
its daily deposit transactions consistent with the standards set by the Bangko Sentral ng
Pilipinas and the Corporation. Compliance with such standards shall be duly certified by
the president of the bank or the compliance officer:Provided, That refusal or willful failure
to issue the required certification shall constitute a violation of this Section and shall
subject such officers of the bank to the sanctions provided for under Section 21 (f) of this
Act.[[23]]

[[24]] As added by RA 7400:

e. Personnel of the Corporation are hereby prohibited from:

1. being an officer, director, consultant, employee or stockholder, directly or indirectly,

of any bank or banking institution except as otherwise provided in this Act;

2. receiving any gift or thing of value from any officer, director or employee thereof;

3. revealing in any manner, except as provided in this Act or under order of the court,
information relating to the condition or business of any such institution. This
prohibition shall not apply to the giving of information to the Board of Directors, the
President of the Corporation, Congress, any agency of government authorized by
law, or to any person authorized by either of them in writing to receive such
information (as amended by RA 9302).[[24]]

[[25]] f. The Corporation shall underwrite or advance litigation costs and expenses,
including legal fees and other expenses of external counsel, or provide legal assistance to,
directors, officers, employees or agents of the Corporation in connection with any civil,
criminal, administrative or any other action or proceeding, to which such director, officer,
employee or agent is made a party by reason of, or in connection with, the exercise of
authority or performance of functions and duties under this Act: Provided, That such legal
protection shall not apply to any civil, criminal, administrative or any action or proceeding
that may be initiated by the Corporation, in whatever capacity, against such director,
officer, employee or agent: Provided, further, That directors, officers, employees or agents
who shall resign, retire, transfer to another agency or be separated from the service, shall
continue to be provided with such legal protection in connection with any act done or
omitted to be done by them in good faith during their tenure or employment with the
Corporation: Provided, finally, That in the event of a settlement or compromise,
indemnification shall be provided only in connection with such matters covered by the

146 | P a g e
settlement as to which the Corporation is advised by counsel that the persons to be
indemnified did not commit any negligence or misconduct (as added by RA 9302).

g. The costs and expenses incurred in defending the aforementioned action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay the amount advanced should it ultimately be
determined by the Board of Directors that he is not entitled to be indemnified as provided
in this subsection (as added by RA 9302).

h. Unless the actions of the Corporation or any of its officers and employees are found to be
in willful violation of this Act, performed in bad faith, with malice and/or gross negligence,
the Corporation, its directors, officers, employees and agents are held free and harmless to
the fullest extent permitted by law from any liability, and they shall be indemnified for any
and all liabilities, losses, claims, demands, damages, deficiencies, costs and expenses of
whatsoever kind and nature that may arise in connection with the performance of their
functions, without prejudice to any criminal liability under existing laws (as added by RA
9576).

i. Legal assistance shall include the grant or advance of reasonable legal fees as determined
by the Board of Directors to enable the concerned director, officer, employee or agent to
engage counsel of his choice, subject to approval by the Board of Directors.

Notwithstanding the provisions of this Section and Section 2, members of the Board of
Directors and personnel of the Corporation may become directors and officers of any bank
and banking institution and of any entity related to such institution in connection with
financial assistance extended by the Corporation to such institution and when, in the
opinion of the Board, it is appropriate to make such designation to protect the interest of
the Corporation (as amended by RA 9302).

Borrowing from any bank or banking institution by examiners and other personnel of the
examination departments of the Corporation shall be prohibited only with respect to the
particular institution in which they are assigned, or are conducting an examination.
Personnel of other departments, offices or units of the Corporation shall likewise be
prohibited from borrowing from any bank or banking institution during the period of time
that a transaction of such institution with the Corporation is being evaluated, processed or
acted upon by such personnel: Provided, however, That the Board may, at its discretion,
indicate the position levels or functional groups to which the prohibition is applicable (as
amended by RA 7400).

Borrowing by all full-time personnel of the Corporation from any bank or banking
institution shall be secured and disclosed to the Board, and shall be subject to such further
rules and regulations as the Board may prescribe (as amended by RA 7400).[[25]]

[[26]] As amended/renumbered from Sec. 9-A by RA 9302:

SECTION 10. a. The provisions of other laws, general or special, to the contrary
otwithstanding, whenever it shall be appropriate for the Monetary Board of the Bangko
Sentral ng Pilipinas to appoint a receiver of any banking institution pursuant to existing
laws, the Monetary Board shall give prior notice and appoint the Corporation as
receiver.[[26]]

[[27]] As added by RA 9302:

b. The Corporation as receiver shall control, manage and administer the affairs of the
closed bank. Effective immediately upon takeover as receiver of such bank, the powers,
functions and duties, as well as all allowances, remunerations and perquisites of the

147 | P a g e
directors, officers, and stockholders of such bank are suspended, and the relevant
provisions of the Articles of Incorporation and By-laws of the closed bank are likewise
deemed suspended.

The assets of the closed bank under receivership shall be deemed in custodia legis in the
hands of the receiver. From the time the closed bank is placed under such receivership, its
assets shall not be subject to attachment, garnishment, execution, levy or any other court
processes. Therefore, a judge, officer of the court or any person who shall issue, order,
process or cause the issuance or implementation of the writ of garnishment, levy,
attachment or execution shall be liable under Section 21 hereof.[[27]]

[[28]] As amended and added by RA 9302:

c. In addition to the powers of a receiver pursuant to existing laws, the Corporation is

empowered to:

1. bring suits to enforce liabilities to or recoveries of the closed bank;

2. appoint and hire persons or entities of recognized competence in banking or finance

as its deputies and assistants, to perform such powers and functions of the
Corporation as receiver or liquidator of the closed bank;

3. suspend or terminate the employment of officers and employees of the closed

bank: Provided, That payment of separation pay or benefits shall be made only after
the closed bank has been placed under liquidation pursuant to the order of the
Monetary Board under Section 30 of R.A. 7653, and that such payment shall be made
from available funds of the bank after deducting reasonable expenses for
receivership and liquidation;

4. pay accrued utilities, rentals and salaries of personnel of the closed bank, for a
period not exceeding three (3) months, from available funds of the closed bank;

5. collect loans and other claims of the closed bank, and for the purpose, modify,
compromise or restructure the terms and conditions of such loans or claims as may
be deemed advantageous to the interest of the creditors and claimants of the closed
bank;

6. hire or retain private counsels as may be necessary;

7. borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed
bank, when necessary to preserve or prevent dissipation of the assets, or to redeem
foreclosed assets of the closed bank, or to minimize losses to the depositors and
creditors;

8. if the stipulated interest on deposits is unusually high compared with the prevailing
applicable interest rate, the Corporation as receiver may exercise such powers
which may include a reduction of the interest rate to a reasonable rate: Provided,
That any modification or reduction shall apply only to unpaid interest; and and

9. exercise such other powers as are inherent and necessary for the effective discharge
of the duties of the Corporation as a receiver.

The Board of Directors shall adopt such policies and guidelines as may be necessary for the
performance of the above powers by personnel, deputies and agents of the
Corporation.[[28]]

[[29]] As added by RA 9302:

148 | P a g e
SECTION 11. In all cases or actions filed by the Corporation as receiver for the recovery of,
or involving any asset of the closed bank, payment of all docket and other court fees shall
be deferred until the action is terminated with finality. Any such fees shall constitute as a
first lien on any judgment in favor of the closed bank or in case of unfavorable judgment,
such fees shall be paid as administrative expenses during the distribution of the assets of
the closed bank.[[29]]

[[30]] As added by RA 7400; renumbered from Sec. 9-B by RA 9302:

Before any distribution of the assets of the closed bank in accordance with the preference
established by law, the Corporation shall periodically charge against said assets reasonable
receivership expenses and subject to approval by the proper court, reasonable liquidation
expenses, it has incurred as part of the cost of receivership/liquidation proceedings and
collect payment therefore from available assets.[[30]]

[[31]] As added by RA 9302:

After the payment of all liabilities and claims against the closed bank, the Corporation shall
pay any surplus dividends at the legal rate of interest from date of takeover to date of
distribution, to creditors and claimants of the closed bank in accordance with legal priority
before distribution to the shareholders of the closed bank.[[31]]

[[32]] As amended and added by RA 9302:

SECTION 13. To carry out the purposes of this Act, the permanent insurance fund shall be
Three billion pesos (P3,000,000,000.00).

The Deposit Insurance Fund shall be the capital account of the Corporation and shall
principally consist of the following: (i) the Permanent Insurance Fund; (ii) assessment
collections, subject to the charges enumerated in Section 6 (d); (iii) reserves for insurance
and financial assistance losses; and (iv) retained earnings: Provided, That the reserves for
insurance and financial assistance losses and retained earnings shall be maintained at a
reasonable level to ensure capital adequacy: Provided, further, That the Corporation may,
within two (2) years from the passage of this Act, and every five (5) years thereafter,
conduct a study on the need to adjust the amount of the Permanent Insurance Fund,
insurance cover, assessment rate and assessment base, and thereafter make the necessary
recommendation to Congress. For this purpose, the Corporation may hire the services of
actuarial consultants to determine, among others, the affordability of assessment rates,
analysis and evaluation of insurance risk, and advisability of imposing varying assessment
rates or insurance cover of different bank categories.[[32]]

[[33]] As amended by RA 9302:

SECTION 14. Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank
shall be made by the Corporation as soon as possible either (1) by cash or (2) by making
available to each depositor a transferred deposit in another insured bank in an amount
equal to insured deposit of such depositor: Provided, however, That the Corporation, in its
discretion, may require proof of claims to be filed before paying the insured deposits, and
that in any case where the Corporation is not satisfied as to the viability of a claim for an
insured deposit, it may require final determination of a court of competent jurisdiction
before paying such claim: Provided, further, That failure to settle the claim, within six (6)
months from the date of filing of claim for insured deposit, where such failure was due to
grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction,
subject the directors, officers or employees of the Corporation responsible for the delay, to
imprisonment from six (6) months to one (1) year: Provided, furthermore, That the period
shall not apply if the validity of the claim requires the resolution of issues of facts and or

149 | P a g e
law by another office, body or agency including the case mentioned in the first proviso or
by the Corporation together with such other office, body or agency.[[33]]

[[34]] As amended by PD 1940; RA 7400; renumbered from Sec. 10(d) by RA 9302:

SECTION 15. The Corporation, upon payment of any depositor as provided for in
subsection (c) of this Section, shall be subrogated to all rights of the depositor against the
closed bank to the extent of such payment. Such subrogation shall include the right on the
part of the Corporation to receive the same dividends and payments from the proceeds of
the assets of such closed bank and recoveries on account of stockholders’ liability as would
have been payable to the depositor on a claim for the insured deposits but, such depositor
shall retain his claim for any uninsured portion of his deposit. All payments by the
Corporation of insured deposits in closed banks partake of the nature of public funds, and
as such, must be considered a preferred credit similar to taxes due to the National
Government in the order of preference under Article 2244 of the New Civil Code: Provided,
further, That this preference shall be likewise effective upon liquidation proceedings
already commenced and pending as of the approval of this Act, where no distribution of
assets has been made.[[34]]

[[35]] As added by RA 9302:

a. The Corporation shall commence the determination of insured deposits due the
depositors of a closed bank upon its actual takeover of the closed bank. The Corporation
shall give notice to the depositors of the closed bank of the insured deposits due them by
whatever means deemed appropriate by the Board of Directors: Provided, That the
Corporation shall publish the notice once a week for at least three (3) consecutive weeks in
a newspaper of general circulation or, when appropriate, in a newspaper circulated in the
community or communities where the closed bank or its branches are located.[[35]]

[[36]] Renumbered from Sec. 11 (a) by RA 9302:

b. Payment of an insured deposit to any person by the Corporation shall discharge the
Corporation, and payment of transferred deposit to any person by the new bank or by an
insured bank in which a transferred deposit has been made available shall discharge the
Corporation and such new bank or other insured bank, to the same extent that payment to
such person by the closed bank would have discharged it from liability for the insured
deposit.[[36]]

[[37]] Renumbered from Sec. 11 (b) by RA 9302:

c. Except as otherwise prescribed by the Board of Directors, neither the Corporation nor
such other insured bank shall be required to recognize as the owner of any portion of a
deposit appearing on the records of the closed bank under a name other than that of the
claimant, any person whose name or interest as such owner is not disclosed on the records
of such closed bank as part owner of said deposit, if such recognition would increase the
aggregate amount of the insured deposits in such closed bank.[[37]]

[[38]] Renumbered from Sec. 11 (c) by RA 9302:

d. The Corporation may withhold payment of such portion of the insured deposit of any
depositor in a closed bank as may be required to provide for the payment of any liability of
such depositor as a stockholder of the closed bank, or of any liability of such depositor to
the closed bank or its receiver, which is not offset against a claim due from such bank,
pending the determination and payment of such liability by such depositor or any other
liable therefor.[[38]]

[[39]] As amended by RA 9302:

150 | P a g e
e. Unless otherwise waived by the Corporation, if the depositor in the closed bank shall fail
to claim his insured deposits with the Corporation within two (2) years from actual
takeover of the closed bank by the receiver, or does not enforce his claim filed with the
corporation within two (2) years after the two-year period to file a claim as mentioned
hereinabove, all rights of the depositor against the Corporation with respect to the insured
deposit shall be barred; however, all rights of the depositor against the closed bank and its
shareholders or the receivership estate to which the Corporation may have become
subrogated, shall thereupon revert to the depositor. Thereafter, the Corporation shall be
discharged from any liability on the insured deposit.[[39]]

[[40]] As amended by RA 6037; renumbered from Sec. 12 by RA 9302:

SECTION 17. a. Money of the Corporation not otherwise employed shall be invested in
obligations of the Republic of the Philippines or in obligations guaranteed as to principal
and interest by the Republic of the Philippines.[[40]]

[[41]] As amended by RA 9302:

b. The banking or checking accounts of the Corporation shall be kept with the Bangko
Sentral ng Pilipinas, with the Philippine National Bank, or with any other bank designated
as depository or fiscal agent of the Philippine government.[[41]]

[[42]] As amended by RA 9576:

c. It is hereby declared to be the policy of the State that the Deposit Insurance Fund of the
Corporation shall be preserved and maintained at all times. Accordingly, all tax obligations
of the Corporation for a period of five (5) years reckoned from the date of effectivity of this
Act shall be chargeable to the Tax Expenditure Fund (TEF) in the annual General
Appropriations Act pursuant to the provisions of Executive Order No. 93, series of 1986;
Provided, That, on the 6th year and thereafter, the Corporation shall be exempt from
income tax, final withholding tax, value-added tax on assessments collected from member
banks, and local taxes (as added by RA 9576).

d. When the Corporation has determined that an insured bank is in danger of closing, in
order to prevent such closing, the Corporation, in the discretion of its Board of Directors, is
authorized to make loans to, or purchase the assets of, or assume liabilities of, or make
deposits in, such insured bank, upon such terms and condition as the Board of Directors
may prescribe, when in the opinion of the Board of Directors, the continued operation of
such bank is essential to provide adequate banking service in the community or maintain
financial stability in the economy (renumbered from Sec. 17 (c) by RA 9576).[[42]]

[[43]] As amended by RA 7400:

The authority of the Corporation under the foregoing paragraph to extend financial
assistance to, assume liabilities of, purchase the assets of an insured bank may also be
exercised in the case of a closed insured bank if the Corporation finds that the resumption
of operations of such bank is vital to the interests of the community, or a severe financial
climate exists which threatens the stability of a number of banks possessing significant
resources: Provided, That the reopening and resumption of operations of the closed bank
shall be subject to the prior approval of the Monetary Board.

The Corporation may provide any corporation acquiring control of, merging or
consolidating with or acquiring the assets of an insured bank in danger of closing in order
to prevent such closing or of a closed insured bank in order to restore to normal
operations, with such financial assistance as it could provide an insured bank under this
subsection: Provided, That, within sixty (60) days from date of assistance the Corporation
shall submit a report thereof to the Monetary Board.[[43]]

151 | P a g e
[[44]] As amended by RA 9302:

The Corporation, prior to the exercise of the powers under this Section, shall determine
that actual payoff and liquidation thereof will be more expensive than the exercise of this
power: Provided, That when the Monetary Board has determined that there are systemic
consequences of a probable failure or closure of an insured bank, the Corporation may
grant financial assistance to such insured bank in such amount as may be necessary to
prevent its failure or closure and/or restore the insured bank to viable operations, under
such terms and conditions as may be deemed necessary by the Board of Directors, subject
to concurrence by the Monetary Board and without additional cost to the Deposit
Insurance Fund.

A systemic risk refers to the possibility that failure of one bank to settle net transactions
with other banks will trigger a chain reaction, depriving other banks of funds leading to a
general shutdown of normal clearing and settlement activity. Systemic risk also means the
likelihood of a sudden, unexpected collapse of confidence in a significant portion of the
banking or financial system with potentially large real economic effects. Finally, the
Corporation may not use its authority under this subsection to purchase the voting or
common stock of an insured bank but it can enter into and enforce agreements that it
determines to be necessary to protect its financial interests: Provided, That the financial
assistance may take the form of equity or quasiequity of the insured bank as may be
deemed necessary by the Board of Directors with concurrence by the Monetary
Board: Provided, further, That the Corporation shall dispose of such equity as soon as
practicable.[[44]]

[[45]] As amended/renumbered from Sec. 13 by RA 9302:

SECTION 18. The Corporation is authorized to borrow from the Bangko Sentral ng
Pilipinas and theBangko Sentral is authorized to lend the Corporation on such terms as may
be agreed upon by the Corporation and the Bangko Sentral, such funds as in the judgment
of the Board of Directors of the Corporation are from time to time required for insurance
purposes and financial assistance provided for in Section 17(d) of this Act: Provided, That
any such loan as may be granted by the Bangko Sentral shall be consistent with monetary
policy; Provided, further, That the rate of interest thereon shall be fixed by the Monetary
Board but shall not exceed the treasury bill rate.[[45]]

[[46]] As amended by RA 6037; PD 653, February 1, 1975; PD 1940; RA 7400:

When in the judgment of the Board of Directors the funds of the Corporation are not
sufficient to provide for an emergency or urgent need to attain the purposes of this Act, the
Corporation is likewise authorized to borrow money, obtain loans or arrange credit lines or
other credit accommodations from any bank designated as depository or fiscal agent of the
Philippine Government: Provided, That such loan shall be of short-term duration.[[46]]

[[47]] As amended by RA 9576:

SECTION 19. With the approval of the President of the Philippines, the Corporation is
authorized to issue bonds, debentures, and other obligations, both local or foreign, as may
be necessary for purposes of providing liquidity for settlement of insured deposits in
closed banks as well as for financial assistance as provided herein: Provided, That the
Board of Directors shall determine the interest rates, maturity and other requirements of
said obligations: Provided, further, That the Corporation shall provide for appropriate
reserves for the redemption or retirement of said obligation.

All notes, debentures, bonds, or such obligations issued by the Corporation shall be exempt
from taxation both as to principal and interest, and shall be fully guaranteed by the
Government of the Republic of the Philippines. Such guarantee, which in no case shall

152 | P a g e
exceed two times the Deposit Insurance Fund as of date of the debt issuance, shall be
expressed on the face thereof.

The Board of Directors shall have the power to prescribe rules and regulations for the
issuance, reissuance, servicing, placement and redemption of the bonds herein authorized
to be issued as well as the registration of such bonds at the request of the holders
thereof.[[47]]

[[48]] As amended by RA 9302:

SECTION 20. a. The Corporation shall annually make a report of its operations to the
Congress as soon as practicable after the 1st day of January in each year (renumbered from
Sec. 15 (a) by RA 9302).

b. The financial transactions of the Corporation shall be audited by the Commission on

Audit in accordance with the principles and procedures applicable to commercial corporate
transactions and under such rules and regulations as may be prescribed by the Commission
on Audit. The audit shall be conducted at the place or places where accounts of the
Corporation are normally kept. Except as to matters relating to the function of the
Corporation as receiver which shall be subject to visitorial audit only, the representatives
of the Commission on Audit shall have access to all books, accounts, records, reports, files
and all other papers, things, or property belonging to or in use by the Corporation
pertaining to its financial transactions and necessary to facilitate the audit, and they shall
be afforded full facilities for verifying transactions with the balances or securities held by
depositories, fiscal agents, and custodians. All such books, accounts, records, reports, files,
papers, and property of the Corporation shall remain in possession and custody of the
Corporation (as amended/renumbered from Sec. 15 (b) by RA 9302).

c. A report of the Audit for each fiscal year ending on June 30 shall be made by the Auditor
General to the Congress not later than January 15 following the close of such fiscal year. On
or before December 15 following such fiscal year, the Auditor General shall furnish the
Corporation a short form report showing the financial position of the Corporation at the
close of fiscal year. The report to the Congress shall set forth the scope of the audit and
shall include a statement of assets and liabilities and surplus or deficit; a statement of
surplus or deficit analysis; a statement of income and expenses; a statement of sources and
application of funds and such comments and information as may be deemed necessary to
inform Congress of the financial operations and condition of the Corporation, together with
such recommendations with respect thereto as the Auditor General may deem advisable.
The report shall also show specifically any program, expenditure, or other financial
transactions or undertaking observed in the course of the audit, which in the opinion of the
Auditor General, has been carried on or made without authority of law. A copy of each
report shall be furnished to the President of the Philippines, to the Governor of the Bangko
Sentral ng Pilipinas, and to the Corporation at the time submitted to the Congress (as
amended/renumbered from Sec. 15 (c) by RA 9302).[[48]]

[[49]]SECTION 21.

a. Every insured bank shall display at each place of business maintained by it a sign or
signs, and shall include a statement in all its advertisements to the effect that its deposits
are insured by the Corporation: Provided, That the Board of Directors may exempt from
this requirement advertisements which do not relate to deposits or when it is impractical
to include such statement therein. The Board of Directors shall prescribe by regulations the
forms of such signs and the manner of use (as amended/renumbered from Sec. 16 (a) by
RA 9302).

b. No insured bank shall pay any dividend on its capital stock or interest on its capital notes
or debentures (if such interest is required to be paid only out of net profits) or distribute

153 | P a g e
any of its capital assets while it remains in default in the payment of any assessment due to
the Corporation: Provided, That if such default is due to a dispute between the insured
bank and the Corporation over the amount of such assessment, this subsection shall not
apply if such bank shall deposit security satisfactory to the Corporation for payment upon
final determination of the issue (as amended/renumbered from Sec. 16 (b) by RA 9302).

c. Without prior written consent by the Corporation, no insured bank shall (1) merge or
consolidate with any bank or institution or (2) assume liability to pay any deposits made in,
or similar liabilities of, any bank or institution or (3) transfer assets to any bank or
institution in consideration of the assumption of liabilities for any portion of the deposits
made in such insured bank (as amended by EO 890; renumbered from Sec. 16 (c) by RA
9302).

d. The Corporation may require an insured bank to provide protection and indemnity
against burglary, defalcation, losses arising from discharge of duties by, or particular acts of
defaults of its directors, officers, or employees, and other similar insurable losses. The
Board of Directors in consultation with the Bangko Sentral, shall determine the bonding
requirement as it refers to directors, officers and employers of the insured bank as well as
the form and amount of the bond. Whenever any insured bank refuses to comply with any
such requirement the Corporation may contract for such protection and add the cost
thereof to the assessment otherwise payable by such bank (as amended by RA 7400; RA
9302).

e. Any assessment payable by an insured bank under this Act shall be subject to payment of
interest computed from the date such assessment became due and payable and at the legal
rate for loans as prescribed by law or appropriate authority and in case of willful failure or
refusal to pay such assessment and interest thereon, there shall be added a penalty
equivalent to twice the amount of interest payable as computed herein for each day such
violations continue, which the interest and penalty the Corporation may recover for its
use: Provided, That the penalty shall not be applicable under the circumstances stated in
the provisions of subsection (b) of this Section (as amended by EO 890; RA 7400).

f. The penalty of prision mayor or a fine of not less than Fifty thousand pesos (P50,000.00)
but not more than Two million pesos (P2,000,000.00), or both, at the discretion of the
court, shall be imposed upon any director, officer, employee or agent of a bank (as
amended by RA 9302):

1. for any willful refusal to submit reports as required by law, rules and regulations
(as amended by RA 9302);

2. any unjustified refusal to permit examination and audit of the deposit records or the
affairs of the institution (as amended by RA 9302);

3. any willful making of a false statement or entry in any bank report or document
required by the Corporation (as amended by RA 9302);

4. submission of false material information in connection with or in relation to any

financial assistance of the Corporation extended to the bank (as added by RA 9302);

5. splitting of deposits or creation of fictitious loans or deposit accounts (as added by

RA 9302).

Splitting of deposits occurs whenever a deposit account with an outstanding balance

of more than the statutory maximum amount of insured deposit maintained under
the name of natural or juridical persons is broken down and transferred into two
(2) or more accounts in the name/s of natural or juridical persons or entities who
have no beneficial ownership on transferred deposits in their names within one

154 | P a g e
 hundred twenty (120) days immediately preceding or during a bankdeclared bank
holiday, or immediately preceding a closure order issued by the Monetary Board of
the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit
insurance coverage (as added by RA 9302; as amended by RA 9576);

6. refusal to allow the Corporation to take over a closed bank placed under its
receivership or obstructing such action of the Corporation (as added by RA 9302);

7. refusal to turn over or destroying or tampering bank records (as added by RA

9302);

8. fraudulent disposal, transfer or concealment of any asset, property or liability of the

closed bank under the receivership of the Corporation (as added by RA 9302);

9. violation of, or causing any person to violate, the exemption from garnishment, levy,
attachment or execution provided under this Act and the New Central Bank Act (as
added by RA 9302);

10. any willful failure or refusal to comply with, or violation of any provision of this Act,
or commission of any other irregularities, and/or conducting business in an unsafe
or unsound manner as may be determined by the Board of Directors (as amended
by RA 9302).

g. The Board of Directors is hereby authorized to impose administrative fines for any act or
omission enumerated in the preceding subsection, and for violation of any order,
instruction, rule or regulation issued by the Corporation, against a bank and/or any of its
directors, officers or agents responsible for such act, omission, or violation, in amounts as it
may be determined to be appropriate, but in no case to exceed three times the amount of
the damages or costs caused by the transaction for each day that the violation subsists,
taking into consideration the attendant circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank (as amended by RA 9302).[[49]]

[[50]] SECTION 22. No court, except the Court of Appeals, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory injunction against the
Corporation for any action under this Act (as added by RA 9302).

This prohibition shall apply in all cases, disputes or controversies instituted by a private
party, the insured bank, or any shareholder of the insured bank (as added by RA 9302).

The Supreme Court may issue a restraining order or injunction when the matter is of
extreme urgency involving a constitutional issue, such that unless a temporary restraining
order is issued, grave injustice and irreparable injury will arise. The party applying for the
issuance of a restraining order or injunction shall file a bond in an amount to be fixed by
the Supreme Court, which bond shall accrue in favor of the Corporation if the court should
finally decide that the applicant was not entitled to the relief sought (as added by RA 9302).

Any restraining order or injunction issued in violation of this Section is void and of no force
and effect and any judge who has issued the same shall suffer the penalty of suspension of
at least sixty (60) days without pay (as added by RA 9302).[[50]]

[[51]] SECTION 23. The Corporation may be reorganized by the Board of Directors by
adopting if it so desires, an entirely new staffing pattern or organizational structure to suit
the operations of the Corporation under this Act. No preferential or priority right shall be
given to or enjoyed by any personnel for appointment to any position in the new staffing
pattern nor shall any personnel be considered as having prior or vested rights with respect
to retention in the Corporation or in any position which may be created in the new staffing
pattern, even if he should be the incumbent of a similar position prior to reorganization.

155 | P a g e
The reorganization shall be completed within six (6) months after the effectivity of this Act.
Personnel who are not retained are deemed separated from the service (as added by RA
9302).[[51]]

[[52]] SECTION 24. The Board of Directors is hereby authorized to provide separation
incentives, and all those who shall retire or be separated from the service on account of
reorganization under the preceding section shall be entitled to such incentives which shall
be in addition to all gratuities and benefits to which they may be entitled under existing
laws (as added by RA 9302).[[52]]

[[53]] SECTION 25. The words “Central Bank” and the “Central Bank of the Philippines”
wherever they appear in Republic Act No. 3591, as amended, is hereby replaced with
Bangko Sentral and/or Bangko Sentral ng Pilipinas, respectively (as added by RA
9302).[[53]]

[[54]] SECTION 26. Separability Clause. – If any provision or section of this Act or the
application thereof to any person or circumstances is held invalid, the other provisions or
sections of this Act, in the application of such provision or section to other persons or
circumstances, shall not be affected thereby (as added by RA 9302).[[54]]

[[55]] SECTION 27. Repealing Clause. – All acts or parts of acts and executive orders,
administrative orders, or parts thereof which are inconsistent with the provisions of this
Act are hereby repealed (as added by RA 9302).[[55]]

[[56]] SECTION 28. Effectivity Clause. – This Act shall take effect fifteen (15) days
following the completion of its publication in the Official Gazette or in two (2) newspapers
of general circulation (as added by RA 9302).[[56]]

PHILIPPINE DEPOSIT INSURANCE CORPORATION,Petitioner - vs CITIBANK, N.A. and

BANK OF AMERICA, S.T. & N.A.,

This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil
Procedure, assailing the October 27, 2005 Decision[1] of the Court of Appeals (CA) in CA-G.R.
CV No. 61316, entitled Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit
Insurance Corporation.

The Facts

Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government

instrumentality created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No.
9302.[2]

Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent

Bank of America, S.T. & N.A. (BA) is a national banking association, both of which are duly
organized and existing under the laws of the United States of America and duly licensed to
do business in the Philippines, with offices in Makati City.[3]

In 1977, PDIC conducted an examination of the books of account of Citibank. It

discovered that Citibank, in the course of its banking business, from September 30, 1974 to
June 30, 1977, received from its head office and other foreign branches a total

156 | P a g e
of P11,923,163,908.00 in dollars, covered by Certificates of Dollar Time Deposit that were
interest-bearing with corresponding maturity dates.[4] These funds, which were lodged in
the books of Citibank under the account Their Account-Head Office/Branches-Foreign
Currency, were not reported to PDIC as deposit liabilities that were subject to assessment
for insurance.[5] As such, in a letter dated March 16, 1978, PDIC assessed Citibank for
deficiency in the sum of P1,595,081.96.[6]

Similarly, sometime in 1979, PDIC examined the books of accounts of BA which

revealed that from September 30, 1976 to June 30, 1978, BA received from its head office
and its other foreign branches a total of P629,311,869.10 in dollars, covered by Certificates
of Dollar Time Deposit that were interest-bearing with corresponding maturity dates and
lodged in their books under the account Due to Head Office/Branches.[7] Because BA also
excluded these from its deposit liabilities, PDIC wrote to BA on October 9, 1979, seeking the
remittance of P109,264.83 representing deficiency premium assessments for dollar
deposits.[8]

Believing that litigation would inevitably arise from this dispute, Citibank and BA
each filed a petition for declaratory relief before the Court of First Instance (now the
Regional Trial Court) of Rizal on July 19, 1979 and December 11, 1979, respectively.[9] In
their petitions, Citibank and BA sought a declaratory judgment stating that the money
placements they received from their head office and other foreign branches were not
deposits and did not give rise to insurable deposit liabilities under Sections 3 and 4 of R.A.
No. 3591 (the PDIC Charter) and, as a consequence, the deficiency assessments made by
PDIC were improper and erroneous.[10] The cases were then consolidated.[11]

On June 29, 1998, the Regional Trial Court, Branch 163, Pasig
City (RTC) promulgated its Decision[12] in favor of Citibank and BA, ruling that the subject
money placements were not deposits and did not give rise to insurable deposit liabilities,
and that the deficiency assessments issued by PDIC were improper and
erroneous. Therefore, Citibank and BA were not liable to pay the same. The RTC reasoned
out that the money placements subject of the petitions were not assessable for insurance
purposes under the PDIC Charter because said placements were deposits made outside of
the Philippines and, under Section 3.05(b) of the PDIC Rules and Regulations,[13] such
deposits are excluded from the computation of deposit liabilities. Section 3(f) of the PDIC
Charter likewise excludes from the definition of the term deposit any obligation of a bank
payable at the office of the bank located outside the Philippines. The RTC further stated
that there was no depositor-depository relationship between the respondents and their
head office or other branches. As a result, such deposits were not included as third-party
deposits that must be insured. Rather, they were considered inter-branch deposits which
were excluded from the assessment base, in accordance with the practice of the United
States Federal Deposit Insurance Corporation (FDIC) after which PDIC was patterned.

Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in
its October 27, 2005 Decision. In so ruling, the CA found that the money placements were
received as part of the banks internal dealings by Citibank and BA as agents of their
respective head offices. This showed that the head office and the Philippine branch were
considered as the same entity. Thus, no bank deposit could have arisen from the
transactions between the Philippine branch and the head office because there did not exist
two separate contracting parties to act as depositor and depositary.[14]Secondly, the CA
called attention to the purpose for the creation of PDIC which was to protect the deposits of
depositors in the Philippines and not the deposits of the same bank through its head office

157 | P a g e
or foreign branches.[15] Thirdly, because there was no law or jurisprudence on the
treatment of inter-branch deposits between the Philippine branch of a foreign bank and its
head office and other branches for purposes of insurance, the CA was guided by the
procedure observed by the FDIC which considered inter-branch deposits as non-
assessable.[16] Finally, the CA cited Section 3(f) of R.A. No. 3591, which specifically excludes
obligations payable at the office of the bank located outside the Philippines from the
definition of a deposit or an insured deposit. Since the subject money placements were
made in the respective head offices of Citibank and BA located outside the Philippines, then
such placements could not be subject to assessment under the PDIC Charter.[17]

Hence, this petition.

The Issues

PDIC raises the issue of whether or not the subject dollar deposits are assessable for
insurance purposes under the PDIC Charter with the following assigned errors:

A.

The appellate court erred in ruling that the subject dollar deposits are
money placements, thus, they are not subject to the provisions of
Republic Act No. 6426 otherwise known as the Foreign Currency
Deposit Act of the Philippines.

B.

The appellate court erred in ruling that the subject dollar deposits are
not covered by the PDIC insurance.[18]

Respondents similarly identify only one issue in this case:

Whether or not the money placements subject matter of these petitions

are assessable for insurance purposes under the PDIC Act.[19]

The sole question to be resolved in this case is whether the funds placed in the Philippine
branch by the head office and foreign branches of Citibank and BA are insurable deposits
under the PDIC Charter and, as such, are subject to assessment for insurance premiums.

The Courts Ruling

The Court rules in the negative.

A branch has no separate legal personality;Purpose of the PDIC

PDIC argues that the head offices of Citibank and BA and their individual foreign branches
are separate and independent entities. It insists that under American jurisprudence, a
banks head office and its branches have a principal-agent relationship only if they operate
in the same jurisdiction. In the case of foreign branches, however, no such relationship
exists because the head office and said foreign branches are deemed to be two distinct
entities.[20] Under Philippine law, specifically, Section 3(b) of R.A. No. 3591, which defines
the terms bank and banking institutions, PDIC contends that the law treats a branch of a
foreign bank as a separate and independent banking unit.[21]

158 | P a g e
The respondents, on the other hand, initially point out that the factual findings of the RTC
and the CA, with regard to the nature of the money placements, the capacity in which the
same were received by the respondents and the exclusion of inter-branch deposits from
assessment, can no longer be disturbed and should be accorded great weight by this
Court.[22] They also argue that the money placements are not deposits. They postulate that
for a deposit to exist, there must be at least two parties a depositor and a depository each
with a legal personality distinct from the other.Because the respondents respective head
offices and their branches form only a single legal entity, there is no creditor-debtor
relationship and the funds placed in the Philippine branch belong to one and the same
bank. A bank cannot have a deposit with itself.[23]

This Court is of the opinion that the key to the resolution of this controversy is the
relationship of the Philippine branches of Citibank and BA to their respective head offices
and their other foreign branches.

The Court begins by examining the manner by which a foreign corporation can establish its
presence in the Philippines. It may choose to incorporate its own subsidiary as a domestic
corporation, in which case such subsidiary would have its own separate and independent
legal personality to conduct business in the country. In the alternative, it may create a
branch in the Philippines, which would not be a legally independent unit, and simply obtain
a license to do business in the Philippines.[24]

In the case of Citibank and BA, it is apparent that they both did not incorporate a separate
domestic corporation to represent its business interests in the Philippines. Their Philippine
branches are, as the name implies, merely branches, without a separate legal personality
from their parent company, Citibank and BA. Thus, being one and the same entity, the funds
placed by the respondents in their respective branches in the Philippines should not be
treated as deposits made by third parties subject to deposit insurance under the PDIC
Charter.

For lack of judicial precedents on this issue, the Court seeks guidance from American
jurisprudence. In the leading case of Sokoloff v. The National City Bank of New
York,[25] where the Supreme Court of New York held:

Where a bank maintains branches, each branch becomes a separate business entity
with separate books of account. A depositor in one branch cannot issue checks or
drafts upon another branch or demand payment from such other branch, and in many
other respects the branches are considered separate corporate entities and as distinct
from one another as any other bank. Nevertheless, when considered with relation to
the parent bank they are not independent agencies; they are, what their name
imports, merely branches, and are subject to the supervision and control of the
parent bank, and are instrumentalities whereby the parent bank carries on its business,
and are established for its own particular purposes, and their business conduct and
policies are controlled by the parent bank and their property and assets belong to the
parent bank, although nominally held in the names of the particular branches. Ultimate
liability for a debt of a branch would rest upon the parent bank. [Emphases
supplied]

This ruling was later reiterated in the more recent case of United States v. BCCI Holdings
Luxembourg[26] where the United States Court of Appeals, District of Columbia Circuit,
emphasized that while individual bank branches may be treated as independent of one

159 | P a g e
 another, each branch, unless separately incorporated, must be viewed as a part of the
parent bank rather than as an independent entity.

In addition, Philippine banking laws also support the conclusion that the head office of a
foreign bank and its branches are considered as one legal entity. Section 75 of R.A. No.
8791 (The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act
Liberalizing the Entry of Foreign Banks) both require the head office of a foreign bank to
guarantee the prompt payment of all the liabilities of its Philippine branch, to wit:

Republic Act No. 8791:

Sec. 75. Head Office Guarantee. In order to provide effective protection of the interests of
the depositors and other creditors of Philippine branches of a foreign bank, the head
office of such branches shall fully guarantee the prompt payment of all liabilities of its
Philippine branch.

Residents and citizens of the Philippines who are creditors of a branch in

the Philippines of foreign bank shall have preferential rights to the assets of such branch
in accordance with the existing laws.

Republic Act No. 7721:

Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.

Moreover, PDIC must be reminded of the purpose for its creation, as espoused in
Section 1 of R.A. No. 3591 (The PDIC Charter) which provides:

Section 1. There is hereby created a Philippine Deposit Insurance

Corporation hereinafter referred to as the Corporation which shall insure, as
herein provided, the deposits of all banks which are entitled to the benefits
of insurance under this Act, and which shall have the powers hereinafter
granted.

The Corporation shall, as a basic policy, promote and safeguard the interests
of the depositing public by way of providing permanent and continuing
insurance coverage on all insured deposits.

R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the
establishment of the PDIC:

Section 1. Statement of State Policy and Objectives. - It is hereby declared to

be the policy of the State to strengthen the mandatory deposit insurance
coverage system to generate, preserve, maintain faith and confidence in the
country's banking system, and protect it from illegal schemes and
machinations.

Towards this end, the government must extend all means and mechanisms
necessary for the Philippine Deposit Insurance Corporation to effectively
fulfill its vital task of promoting and safeguarding the interests of the
depositing public by way of providing permanent and continuing insurance
coverage on all insured deposits, and in helping develop a sound and stable
banking system at all times.

The purpose of the PDIC is to protect the depositing public in the event of a bank
closure. It has already been sufficiently established by US jurisprudence and Philippine
statutes that the head office shall answer for the liabilities of its branch. Now, suppose the
Philippine branch of Citibank suddenly closes for some reason. Citibank N.A. would then be

160 | P a g e
required to answer for the deposit liabilities of Citibank Philippines. If the Court were to
adopt the posture of PDIC that the head office and the branch are two separate entities and
that the funds placed by the head office and its foreign branches with the Philippine branch
are considered deposits within the meaning of the PDIC Charter, it would result to the
incongruous situation where Citibank, as the head office, would be placed in the ridiculous
position of having to reimburse itself, as depositor, for the losses it may incur occasioned
by the closure of Citibank Philippines. Surely our law makers could not have envisioned
such a preposterous circumstance when they created PDIC.

Finally, the Court agrees with the CA ruling that there is nothing in the definition of a bank
and a banking institution in Section 3(b) of the PDIC Charter[27] which explicitly states that
the head office of a foreign bank and its other branches are separate and distinct from their
Philippine branches.

There is no need to complicate the matter when it can be solved by simple logic bolstered
by law and jurisprudence. Based on the foregoing, it is clear that the head office of a bank
and its branches are considered as one under the eyes of the law. While branches are
treated as separate business units for commercial and financial reporting purposes, in the
end, the head office remains responsible and answerable for the liabilities of its branches
which are under its supervision and control. As such, it is unreasonable for PDIC to require
the respondents, Citibank and BA, to insure the money placements made by their home
office and other branches. Deposit insurance is superfluous and entirely unnecessary when,
as in this case, the institution holding the funds and the one which made the placements are
one and the same legal entity.

Funds not a deposit under the definition

of the PDIC Charter;

Excluded from assessment

PDIC avers that the funds are dollar deposits and not money placements. Citing R.A.
No. 6848, it defines money placement as a deposit which is received with authority to
invest. Because there is no evidence to indicate that the respondents were authorized to
invest the subject dollar deposits, it argues that the same cannot be considered money
placements.[28] PDIC then goes on to assert that the funds received by Citibank and BA are
deposits, as contemplated by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the
dollar deposits were received by Citibank and BA in the course of their banking operations
from their respective head office and foreign branches and were recorded in their books as
Account-Head Office/Branches-Time Deposits pursuant to Central Bank Circular No. 343
which implements R.A. No. 6426; (2) the dollar deposits were credited as dollar time
accounts and were covered by Certificates of Dollar Time Deposit which were interest-
bearing and payable upon maturity, and (3) the respondents maintain 100% foreign
currency cover for their deposit liability arising from the dollar time deposits as required
by Section 4 of R.A. No. 6426.[29]

To refute PDICs allegations, the respondents explain the inter-branch transactions

which necessitate the creation of the accounts or placements subject of this case. When the
Philippine branch needs to procure foreign currencies, it will coordinate with a branch in
another country which handles foreign currency purchases. Both branches have existing
accounts with their head office and when a money placement is made in relation to the
acquisition of foreign currency from the international market, the amount is credited to the
account of the Philippine branch with its head office while the same is debited from the

161 | P a g e
account of the branch which facilitated the purchase. This is further documented by the
issuance of a certificate of time deposit with a stated interest rate and maturity date. The
interest rate represents the cost of obtaining the funds while the maturity date represents
the date on which the placement must be returned. On the maturity date, the amount
previously credited to the account of the Philippine branch is debited, together with the
cost for obtaining the funds, and credited to the account of the other branch. The
respondents insist that the interest rate and maturity date are simply the basis for the debit
and credit entries made by the head office in the accounts of its branches to reflect the
inter-branch accommodation.[30] As regards the maintenance of currency cover over the
subject money placements, the respondents point out that they maintain foreign currency
cover in excess of what is required by law as a matter of prudent banking practice.[31]

PDIC attempts to define money placement in order to impugn the respondents claim
that the funds received from their head office and other branches are money placements
and not deposits, as defined under the PDIC Charter. In the process, it loses sight of the
important issue in this case, which is the determination of whether the funds in question
are subject to assessment for deposit insurance as required by the PDIC Charter. In its
struggle to find an adequate definition of money placement, PDIC desperately cites R.A. No.
6848, The Charter of the Al-Amanah Islamic Investment Bank of the Philippines. Reliance
on the said law is unfounded because nowhere in the law is the term money placement
defined. Additionally, R.A. No. 6848 refers to the establishment of an Islamic bank subject
to the rulings of Islamic Sharia to assist in the development of the Autonomous Region of
Muslim Mindanao (ARMM),[32] making it utterly irrelevant to the case at bench. Since
Citibank and BA are neither Islamic banks nor are they located anywhere near the ARMM,
then it should be painfully obvious that R.A. No. 6848 cannot aid us in deciding this case.

Furthermore, PDIC heavily relies on the fact that the respondents documented the
money placements with certificates of time deposit to simply conclude that the funds
involved are deposits, as contemplated by the PDIC Charter, and are consequently subject
to assessment for deposit insurance. It is this kind of reasoning that creates non-existent
obscurities in the law and obstructs the prompt resolution of what is essentially a
straightforward issue, thereby causing this case to drag on for more than three decades.

Noticeably, PDIC does not dispute the veracity of the internal transactions of the
respondents which gave rise to the issuance of the certificates of time deposit for the funds
the subject of the present dispute. Neither does it question the findings of the RTC and the
CA that the money placements were made, and were payable, outside of the Philippines,
thus, making them fall under the exclusions to deposit liabilities. PDIC also fails to impugn
the truth of the testimony of John David Shaffer, then a Fiscal Agent and Head of the
Assessment Section of the FDIC, that inter-branch deposits were excluded from the
assessment base. Therefore, the determination of facts of the lower courts shall be accepted
at face value by this Court, following the well-established principle that factual findings of
the trial court, when adopted and confirmed by the CA, are binding and conclusive on this
Court, and will generally not be reviewed on appeal.[33]

As explained by the respondents, the transfer of funds, which resulted from the
inter-branch transactions, took place in the books of account of the respective branches in
their head office located in the United States. Hence, because it is payable outside of
the Philippines, it is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:

Sec. 3(f) The term deposit means the unpaid balance of money or its
equivalent received by a bank in the usual course of business and for which
it has given or is obliged to give credit to a commercial, checking, savings,
time or thrift account or which is evidenced by its certificate of deposit, and
trust funds held by such bank whether retained or deposited in any
department of said bank or deposit in another bank, together with such
other obligations of a bank as the Board of Directors shall find and shall

162 | P a g e
 prescribe by regulations to be deposit liabilities of the Bank; Provided, that
any obligation of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a deposit for any of the
purposes of this Act or included as part of the total deposits or of the
insured deposits; Provided further, that any insured bank which is
incorporated under the laws of the Philippines may elect to include for
insurance its deposit obligation payable only at such branch. [Emphasis
supplied]

The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC,
after which PDIC was modelled, is also persuasive. Inter-branch deposits refer to funds of
one branch deposited in another branch and both branches are part of the same parent
company and it is the practice of the FDIC to exclude such inter-branch deposits from a
banks total deposit liabilities subject to assessment.[34]

All things considered, the Court finds that the funds in question are not deposits within the
definition of the PDIC Charter and are, thus, excluded from assessment.

WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of
Appeals in CA-G.R. CV No. 61316 is AFFIRMED.

PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), - versus - PHILIPPINE

COUNTRYSIDE RURAL BANK, INC., RURAL BANK OF CARMEN (CEBU), INC., BANK
OF EAST ASIA(MINGLANILLA, CEBU), INC., and PILIPINO RURAL BANK (CEBU), INC.,

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by the
Philippine Deposit Insurance Corporation (PDIC) assailing the September 18, 2006
Decision of the Court of Appeals-Cebu (CA-Cebu), which granted the petition for injunction
filed by respondents Philippine Countryside Rural Bank, Inc. (PCRBI), Rural Bank of
Carmen (Cebu), Inc. (RBCI), Bank of East Asia (Minglanilla, Cebu), Inc. (BEAI), and Pilipino
Rural Bank (Cebu), Inc. (PRBI), all collectively referred to as Banks. The dispositive portion
of the CA-Cebu decision reads:

WHEREFORE, in view of all the foregoing premises, the petition for injunction is
hereby GRANTED. The respondent PDIC is restrained from further conducting
investigations or examination on petitioners-banks without the requisite approval from the
Monetary Board. SO ORDERED.[1]

In a resolution dated January 25, 2007, the CA-Cebu denied petitioners motion for
reconsideration for lack of merit.[2]

THE FACTS

On March 9, 2005, the Board of Directors of the PDIC (PDIC Board) adopted Resolution No.
2005-03-032[3] approving the conduct of an investigation, in accordance with Section 9(b-
1) of Republic Act (R.A.) No. 3591, as amended, on the basis of the Reports of Examination
of the Bangko Sentral ng Pilipinas (BSP) on ten (10) banks, four (4) of which are
respondents in this petition for review. The said resolution also created a Special
Investigation Team to conduct the said investigation, with the authority to administer
oaths, to examine, take and preserve testimony of any person relating to the subject of the
investigation, and to examine pertinent bank records.

163 | P a g e
 On May 25, 2005, the PDIC Board adopted another resolution, Resolution No. 2005-
05-056,[4] approving the conduct of an investigation on PCRBI based on a Complaint-
Affidavit filed by a corporate depositor, the Philippine School of Entrepreneurship and
Management (PSEMI) through its president, Jacinto L. Jamero.

On June 3, 2005, in accordance with the two PDIC Board resolutions, then PDIC President
and Chief Executive Officer Ricardo M. Tan issued the Notice of Investigation[5] to the
President or The Highest Ranking Officer of PCRBI.

On June 7, 2005, the PDIC Investigation Team personally served the Notice of Investigation
on PCRBI at its Head Office in Pajo, Lapu-Lapu City.[6]

According to PDIC, in the course of its investigation, PCRBI was found to have granted loans
to certain individuals, which were settled by way of dacion of properties. These properties,
however, had already been previously foreclosed and consolidated under the names of
PRBI, BEAI and RBCI.[7]

On June 15, 2005, PDIC issued similar notices of investigation to PRBI[8] and BEAI.[9]

The notices stated that the investigation was to be conducted pursuant to Section 9 (b-1) of
the PDIC Charter and upon authority of PDIC Board Resolution No. 2005-03-032
authorizing the twelve (12) named representatives of PDIC to conduct the investigation.[10]

The investigation was sought because the Banks were found to be among the ten (10)
banks collectively known as Legacy Banks. The Reports of General and Special
Examinations of the BSP as of June 30, 2004, disclosed, among others, that the Legacy
Banks were commonly owned and/or controlled by Legacy Plans Inc. (now Legacy
Consolidated Plans, Inc.), and Celso Gancayco delos Angles, Jr. and his family.[11]

The notice of investigation was served on PRBI the next day, June 16, 2005.[12]

On June 25, 2005, a separate notice of investigation[13] was served on RBCI. The latter
provided the PDIC Investigation Team with certified copies of the loan documents they had
requested, until its president received an order directing him not to allow the
investigation.[14]

Subsequently, PRBI and BEAI refused entry to their bank premises and access to their
records and documents by the PDIC Investigation Team, upon advice of their respective
counsels.[15]

On June 16 and 17, 2005, Atty. Victoria G. Noel (Atty. Noel) of the Tiongson & Antenor Cruz
Law Office sent letters to the PDIC[16] informing it of her legal advice to PCRBI and BEAI not
to submit to PDIC investigation on the ground that its investigatory power pursuant to
Section 9(b-1) of R.A. No. 3591, as amended (An Act Establishing The Philippine Deposit
Insurance Corporation, Defining Its Powers And Duties And For Other Purposes), cannot be
differentiated from the examination powers accorded to PDIC under Section 8, paragraph 8
of the same law, under which, prior approval from the Monetary Board is required.

164 | P a g e
On June 17, 2005, PDIC General Counsel Romeo M. Mendoza sent a reply to Atty. Noel
stating that PDICs investigation power, as distinguished from the examination power of the
PDIC under Section 8 of the same law, does not need prior approval of the Monetary
Board.[17] PDIC then urged PRBI and BEAI not to impede the conduct of PDICs investigation
as the same constitutes a violation of the PDIC Charter for which PRBI and BEAI may be
held criminally and/or administratively liable.[18]

On June 27 and 28, 2005, the Banks, through counsel, sought further clarification from
PDIC on its source of authority to conduct the impending investigations and requested that
PDIC refrain from proceeding with the investigations.[19]

Simultaneously, the Banks wrote to the Monetary Board requesting a clarification on the
parameters of PDICs power of investigation/examination over the Banks and for an
issuance of a directive to PDIC not to pursue the investigations pending the requested
clarification.[20]

On June 28, 2005, PRBI and BEAI again received letters from PDIC, dated June 24, 2005,
which appeared to be final demands on them to allow its investigation. [21] PRBI and BEAI
replied that letters of clarification had been sent to PDIC and the Monetary
Board.[22] Pending action on such requests, PDIC was requested to refrain from proceeding
with the investigation.[23]

Notwithstanding, on July 11, 2005, the Banks received a letter, dated July 8, 2005, from the
PDIC General Counsel reiterating its position that prior Monetary Board approval was not a
pre-requisite to PDICs exercise of its investigative power.[24]

Not in conformity, on July 28, 2005, the Banks filed a Petition for Declaratory Relief with a
Prayer for the Issuance of a TRO and/or Writ of Preliminary Injunction (RTC Petition) before
the Regional Trial Court of Makati (RTC-Makati) which was docketed as Civil Case No. 05-
697.[25]

In the RTC Petition, the Banks prayed for a judgment interpreting Section 9(b-1) of the
PDIC Charter, as amended, to require prior Monetary Board approval before PDIC could
exercise its investigation/examination power over the Banks.[26]

PDIC filed a motion to dismiss alleging that the RTC had no jurisdiction over the said
petition since a breach had already been committed by the Banks when they received the
notices of investigation, and because PDIC need not secure prior Monetary Board approval
since examination and investigation are two different terms.[27]

Later, the Banks withdrew their application for a temporary restraining

order (TRO) reasoning that lower courts cannot issue injunctions against PDIC. Thus, the
Banks instituted a petition for injunction with application for TRO and/or Preliminary

165 | P a g e
Injunction (CA-Manila petition) before the Court of Appeals-Manila (CA-Manila). The case
was docketed as CA-G.R. SP No. 91038.[28]

Even before the CA-Manila could rule on the application for a TRO and/or writ of
preliminary injunction, the RTC-Makati dismissed the petition on the ground that there
already existed a breach of law that isolated the case from the jurisdiction of the trial
court.[29]

The Banks filed a motion for reconsideration but it was denied by the RTC for lack of
merit.[30] On February 10, 2006, the Banks filed a notice of appeal[31] which they later
withdrew on February 28, 2006.[32]

In view of the dismissal of the RTC-Makati petition, the CA-Manila dismissed the petition
for injunction for being moot and academic. In its Decision, dated February 1, 2006,[33] the
CA-Manila wrote:

What remained for the petitioners to do was to litigate over the breach or
violation by ordinary action, as the circumstances ensuing from the breach or
violation warrant. The ordinary action may either be in the same case, if the
RTC permitted the conversion, in which event the RTC may allow the parties
to file such pleadings as may be necessary or proper, pursuant to Sec. 5, Rule
63; or the petitioners may file another action in the proper court (e.g.
including the Court of Appeals, should injunction be among the reliefs to be
sought) upon some cause of action that has arisen from the breach or
violation.[34]

Thereafter, on March 14, 2006, the Banks filed their Petition for Injunction with
Prayer for Preliminary Injunction[35] (CA-Cebu Petition) with the CA-Cebu (CA-Cebu).

On March 15, 2006, the CA-Cebu issued a resolution granting the Banks application
for a TRO. This enjoined the PDIC, its representatives or agents or any other persons or
agency assisting them or acting for and in their behalf from conducting
examinations/investigations on the Banks head and branch offices without securing the
requisite approval from the Monetary Board of BSP.[36]

During the pendency of the CA-Cebu petition, PDIC filed with this Court a Petition for
Certiorari, Prohibition and Mandamus with Prayer for Issuance of Temporary Restraining
Order and/or Writ of Preliminary Injunction under Rule 65 docketed as G.R. No.
173370.[37] It alleged that the CA-Cebu committed grave abuse of discretion amounting to
lack or excess of jurisdiction in taking cognizance of the Banks petition, and in issuing a
TRO and a writ of preliminary injunction.[38]

On July 31, 2006, this Court issued a resolution dismissing the petition
for certiorari in G.R. No. 173370. The Resolution reads:

Considering the allegations, issues and arguments adduced in the petition for
certiorari, prohibition and mandamus with prayer for preliminary injunction
and/or restraining order dated 19 July 2006, the Court resolves to DISMISS
the petition for failure to sufficiently show that the questioned resolution of
the Court of Appeals is tainted with grave abuse of discretion. Moreover, the

166 | P a g e
 petition failed to conform with Rule 65 and other related provisions of the
1997 Rules of Civil Procedure, as amended, governing petitions for certiorari,
prohibition and mandamus filed with the Supreme Court, since petitioner
failed to submit a verified statement of material date of receipt of the assailed
resolution dated 16 May 2006 in accordance with Section 4, Rule 65 in
relation to the second paragraph of Section 3, Rule 46. In any event, the
petition is premature since no motion for reconsideration of the questioned
resolution of the Court of Appeals was filed prior to the availment of this
special civil action and there are no sufficient allegations to bring the case
within the recognized exceptions to this rule.[39]

On September 18, 2006, after both parties had submitted their respective
memoranda, the CA-Cebu rendered a decision granting the writ of preliminary
injuction,[40] pertinent portions of which read:

[A]fter undergoing a series of amendments, the controlling law with respect

to PDICs power to conduct examination of banks is-prior approval of the
Monetary Board is a condition sine qua non for PDIC to exercise its power of
examination. To rule otherwise would disregard the amendatory law of the
PDICs charter.

The Court is not also swayed by the contention of respondent that what it
seeks to conduct is an investigation and not an examination of petitioners
transactions, hence prior approval of the Monetary Board is a mere
surplusage.

The ordinary definition of the words examination and investigation would

lead one to conclude that both pertain to the same thing and there seems to
be no fine line differentiating one from the other. Blacks Law Dictionary
defines the word investigate as to examine and inquire into with care
and accuracy; to find out by careful inquisition; examination and the word
examination as an investigation. In Collins Dictionary of Banking and
Finance, the word investigation is defined as an examination to find out what
is wrong.

In the case of Anti-Graft League of the Philippines, Inc. vs. Hon. Ortega, et
al.,[41] the Supreme Court using Ballentines Law Dictionary defines an
investigation as an inquiry, judicial or otherwise, for the discovery or
collection of facts concerning the matter or matters involved. Such common
definitions would show that there is really nothing to distinguish between
these two (2) terms as to support the PDIC view differentiating Section 9 (b-
1) from paragraph 8, Section 8 of the PDIC Charter.

In the realm of the PDIC rules, specifically under Section 3 of PDIC Regulatory
Issuance No. 2205-02[42] investigation is defined as: Investigation shall refer
to fact-finding examination, study, inquiry, for determining whether the
allegations in a complaint or findings in a final report of examination may
properly be the subject of an administrative, criminal or civil action.

From the foregoing definition alone, it can be easily deduced that

investigation and examination are synonymous terms. Simply stated,
investigation encompasses a fact-finding examination.Thus, it is inconsistent

167 | P a g e
 with the rules if respondent PDIC be (sic) allowed to conduct an investigation
without the approval of the Monetary Board.

Moreover, the Court sees that the rationale of the law in requiring a
(sic) prior approval from the Monetary Board whenever an examination or in
this case an investigation needs to be conducted by the PDIC is obviously to
ensure that there is no overlapping of efforts, duplication of functions and
more importantly to provide a check and balance to the otherwise
unrestricted power of respondent PDIC to conduct investigations on banks
insured by it.

With the foregoing premises, this Court rules that a prior approval
from the Monetary Board is necessary before respondent PDIC can proceed
with its investigations on petitioners-banks.[43]

PDIC moved for reconsideration but it was denied in a resolution dated January 25,
2007.[44]

Hence, this petition.

THE ISSUES

I.

WHETHER RESPONDENT BANKS VIOLATED THE RULE AGAINST FORUM

SHOPPING WHEN THEY FILED THE PETITION FOR INJUNCTION BEFORE
THE COURT OF APPEALS-CEBU.

II.

WHETHER THE PRONOUNCEMENT OF THE REGIONAL TRIAL COURT OF

MAKATI IN THE PETITION FOR DECLARATORY RELIEF
CONSTITUTES RES JUDICATA TO THE PETITION FOR INJUNCTION IN THE
COURT OF APPEALS-CEBU.

III.

WHETHER PETITIONER WAS DEPRIVED OF ITS OPPORTUNITY TO BE

HEARD WHEN THE COURT OF APPEALS-CEBU ISSUED THE WRIT OF
INJUNCTION.

IV.

WHETHER THE ISSUES RAISED BY PETITIONERS ARE THE SAME ISSUES

RAISED IN G.R. NO. 173370 WHICH WAS EARLIER DISMISSED BY THIS
COURT.

V.

WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT PRIOR

APPROVAL OF THE MONETARY BOARD OF THE BANGKO SENTRAL NG
PILIPINAS IS NECESSARY BEFORE THE PDIC MAY CONDUCT AN
INVESTIGATION OF RESPONDENT BANKS.

THE COURTS RULING

168 | P a g e
I - Whether respondent banks violated the rule against forum shopping when they
filed the petition for injunction before the Court of Appeals-Cebu.

II - Whether the pronouncement of the Regional Trial Court of Makati in the petition
for declaratory relief constitutes res judicata to the petition for injunction in the
Court of Appeals-Cebu.

In the recent case of Sameer Oversees Placement Agency, Inc. v. Mildred R. Santos,[45] the
Court discussed the matter of forum shopping:

Forum shopping is defined as an act of a party, against whom an adverse judgment or

order has been rendered in one forum, of seeking and possibly getting a favorable
opinion in another forum, other than by appeal or special civil action for certiorari. It may
also be the institution of two or more actions or proceedings grounded on the same cause
on the supposition that one or the other court would make a favorable disposition. There
is forum shopping where the elements of litis pendentia are present, namely: (a) there is
identity of parties, or at least such parties as represent the same interest in both actions;
(b) there is identity of rights asserted and relief prayed for, the relief being founded on
the same set of facts; and (c) the identity of the two preceding particulars is such that any
judgment rendered in the pending case, regardless of which party is successful, would
amount to res judicata in the other. It is expressly prohibited by this Court because it
trifles with and abuses court processes, degrades the
administration of justice, and congests court dockets. A willful and deliberate violation of
the rule against forum shopping is a ground for summary dismissal of the case, and may
also constitute direct contempt.[46]

Juxtaposing the RTC-Makati, CA-Manila and CA-Cebu petitions, what must be

determined here, is whether the elements of litis pendentia are present between and among
these petitions, i.e. whether (a) there is identity of parties, or at least such parties as
represent the same interest in both actions; (b) there is identity of rights asserted and
relief prayed for, the relief being founded on the same set of facts; and (c) the identity of the
two preceding particulars is such that any judgment rendered in the pending case,
regardless of which party is successful, would amount to res judicata in the other.

The first element is clearly present as between the RTC-Makati petition and the CA-
Cebu petition. Both involved the Banks on one hand, and the PDIC on the other.

The second and third elements of litis pendentia, however, are patently wanting. The
rights asserted and reliefs prayed for were different, though founded on the same set of
facts. The RTC-Makati Petition was one for declaratory relief while the CA-Manila Petition
was one for injunction with a prayer for preliminary injunction.

A petition for declaratory relief is filed by any person interested under a deed, will,
contract or other written instrument, or whose rights are affected by a statute, executive
order or regulation, ordinance, or any other governmental regulation, before breach or
violation, thereof, to determine any question of construction or validity arising, and for a
declaration of his rights or duties thereunder.[47]

169 | P a g e
 Injunction, on the other hand, is a judicial writ, process or proceeding whereby a
party is directed either to do a particular act, in which case it is called a mandatory
injunction, or to refrain from doing a particular act, in which case it is called a prohibitory
injunction. As a main action, injunction seeks to permanently enjoin the defendant through
a final injunction issued by the court and contained in the judgment.[48]

Clearly, there is a marked difference between the reliefs sought under an action for
declaratory relief and an action for injunction. While an action for declaratory relief seeks a
declaration of rights or duties, or the determination of any question or validity arising
under a statute, executive order or regulation, ordinance, or any other governmental
regulation, or under a deed, will, contract or other written instrument, under which his
rights are affected, and before breach or violation, an action for injunction ultimately seeks
to enjoin or to compel a party to perform certain acts.

Moreover, as stated in the RTC-Makati Decision, because the Banks had already
breached the provisions of law on which declaratory judgment was being sought, it was
without jurisdiction to take cognizance of the same. Any judgment rendered in the RTC-
Makati petition would not amount to res judicata in the CA-Manila Petition. Thus, the RTC
was correct in dismissing the case, having been bereft of jurisdiction to take cognizance of
the action for declaratory judgment.

As between the CA-Manila and the CA-Cebu petitions, the second and third elements
of litis pendentia are absent. The rights asserted and reliefs prayed for were different,
although founded on the same set of facts.

The CA-Manila Petition is a petition for injunction wherein the Banks prayed that:

1) Immediately upon filing of this Petition, a Writ of Preliminary

Injunction and/or Temporary Restraining Order be issued commanding the
respondent and all its officers, employees and agents to cease and desist
from proceeding with the investigations sought to be conducted on the
petitioners head and branch offices while the Petition for Declaratory Relief
before Branch 58 of the Makati Regional Trial Court is pending.

2) After due proceedings, judgment be rendered declaring as

permanent the Writ of Preliminary Injunction and/or Temporary Restraining
Order prayed for above.

Other equitable reliefs are likewise prayed for.[49]

The CA-Cebu Petition, on the other hand, is denominated as a Petition for Injunction
With Prayer for Writ of Preliminary Injunction and/or Restraining Order. The Banks
prayed therein that:

1) Upon filing of this Petition, a Writ of Preliminary Injunction and/or

Temporary Restraining Order be issued forthwith, enjoining Respondent
PDIC and all its officers, employees and agents to cease and desist from
conducting examinations/investigations on Petitioner Banks head and
branch offices without securing the requisite approval from the Monetary
Board of the Bangko Sentral ng Pilipinas, as required by Sec. 8, Paragraph 8
of the PDIC Charter, as amended;

2) After due proceedings, judgment be rendered declaring as permanent the

Writ of Preliminary Injunction and/or Temporary Restraining Order prayed
for above.

170 | P a g e
 Other equitable reliefs are likewise prayed for.[50]

As can be gleaned from the above-cited portions of the CA-Manila and CA-Cebu
petitions, the petitions seek different reliefs.

Therefore, as between and among the RTC Makati, and the CA-Manila and CA-Cebu
petitions, there is no forum shopping.

III - Whether petitioner was deprived of its opportunity to be heard when the Court of
Appeals-Cebu issued the writ of injunction.

PDIC alleges that the CA-Cebu, in issuing the TRO in its March 15, 2006 Resolution, and
subsequently, the preliminary injunction in its May 16, 2006 Resolution, violated the
fundamental rule that courts should avoid issuing injunctive relief which would in effect
dispose of the main case without trial.[51] PDIC argues that a TRO is intended only as a
restraint until the propriety of granting a temporary injunction can be determined, and it
goes no further than to preserve the status until that determination.[52] Moreover, its
purpose is merely to suspend proceedings until such time when there may be an
opportunity to inquire whether any injunction should be granted, and it is not intended to
operate as an injunction pendente lite, and should not, in effect, determine the issues
involved before the parties can have their day in court, or give an advantage to either party
by proceeding in the acquisition or alteration of the property the right to which is disputed
while the hands of the other party are tied.[53]

On the other hand, the Banks claim that PDIC was given every opportunity to
present its arguments against the issuance of the injunction.[54] Its active participation in
the proceedings negates its assertion that it was denied procedural due process in the
issuance of the writ of injunction.[55] Citing Salonga v. Court of Appeals,[56] the Banks state
that the essence of due process is the reasonable opportunity to be heard and to submit
evidence one may have in support of ones defense,[57] and PDIC was able to do so.

On March 15, 2006, the CA-Cebu issued a resolution granting their prayer for a 60-
day TRO, and requiring PDIC to file its comment.[58] The
latter thereafter filed its Comment ad Cautelamdated March 30, 2006. [Underscoring
[59]

ours]

On May 16, 2006, the CA-Cebu issued another resolution, this time granting the
prayer for a preliminary injunction and requiring the parties to file their respective
memoranda. PDIC thereafter filed its memorandum dated July 31, 2006.[60]

On September 18, 2006, the CA-Cebu promulgated its Decision granting the Petition
for Injunction.[61] PDIC filed a motion for reconsideration dated October 10, 2006,[62] which
was subsequently denied.

The essence of procedural due process is found in the reasonable opportunity to be

heard and submit ones evidence in support of his defense.[63] The Court finds that

171 | P a g e
procedural due process was observed by the CA-Cebu. The parties were afforded equal
opportunity to present their arguments. In the absence of any indication to the contrary,
the CA-Cebu must be accorded the presumption of regularity in the performance of their
functions. However, as discussed herein, the matter of whether it erred in its conclusion
and issuance of the TRO, preliminary injunction and final injunction is another matter
altogether.

IV Whether the issues raised by petitioner are the same issues raised in G.R. No.
173370 which was earlier dismissed by this Court.

In G.R. 173370, a petition for certiorari under Rule 65 of the Rules of Court, PDIC
alleged that the CA-Cebu committed grave abuse of discretion amounting to lack or excess
of jurisdiction in taking cognizance of the Banks petition, and in issuing a TRO and a writ of
preliminary injunction.[64]

In the case at bench, a petition for review under Rule 45, PDICs core contention is
that the CA-Cebu erred in finding that prior approval of the
Monetary Board of the BSP is necessary before it may conduct an investigation of the
Banks.

Clearly then, the two petitions were of different nature raising different issues.

G.R. 173370 challenged the CA-Cebus having taken cognizance of the Banks petition
and interlocutory orders on the issuance of a TRO and a writ of preliminary injunction. This
case, however, strikes at the core of the final decision on the merits of the CA-Cebu, and not
merely the interlocutory orders. While both G.R. 173370 and the present case may have
been anchored on the same set of facts, that is, the refusal of the Banks to allow PDIC to
conduct an investigation without the prior consent of the Monetary Board, the issues raised
in the two petitions are not identical.Moreover, the disposal of the first case does not
amount to res judicata in this case.

V Whether the Court of Appeals-Cebu erred in finding that prior approval of the
Monetary Board of the Bangko Sentral ng Pilipinas is necessary before the PDIC may
conduct an investigation of respondent banks.

PDIC is of the position that in order for it to exercise its power of investigation, the law
requires that:

(a) The investigation is based on a complaint of a depositor or any other

government agency, or on the report of examination of [the] Bangko Sentral
ng Pilipinas (BSP) and/or PDIC; and,

172 | P a g e
 (b) The complaint alleges, or the BSP and/or PDIC Report of Examination
contains adverse findings of, fraud, irregularities or anomalies committed by
the Bank and/or its directors, officers, employees or agents; and,

(c) The investigation is upon the authority of the PDIC Board of Directors.[65]

It argues that when it commenced its investigation on the Banks, all of the aforementioned
requirements were met. PDIC stresses that its power of examination is different from its
power of investigation, in such that the former requires prior approval of the Monetary
Board while the latter requires merely the approval of the PDIC Board.[66] It further claims
that the power of examination cannot be exercised within twelve (12) months from the last
examination conducted, whereas the power of investigation is without limitation as to the
frequency of its conduct. It states that the purpose of the PDICs power of examination is
merely to look into the condition of the bank, whereas the power of investigation aims to
address fraud, irregularities and anomalies based on complaints from depositors and other
government agencies or upon reports of examinations conducted by the PDIC itself or by
the BSP.[67]

The Banks, on the other hand, are of the opinion that a holistic reading of the PDIC charter
shows that petitioners power of examination is synonymous with its power of
investigation.[68] They cite, as bases, the law
dictionary definitions, Section 8, Eighth paragraph and Section 9(b-1) of the PDIC
[69] [70]

Charter, and Rule 1, Section 3(1) of PDIC Regulatory Issuance No. 2005-02, which defines
investigation as follows:

(l) Investigation shall refer to fact-finding examination, study or

inquiry for determining whether the allegations in a complaint or findings in
a final report of examination may properly be the subject of an
administrative, criminal or civil action.

The Banks further cite Section X658 of the Manual of Regulations for Banks, which states:

Sec. X658 - Examination by the BSP. The term examination shall, henceforth,
refer to an investigation of an institution under the supervisory authority of
the BSP to determine compliance with laws and regulations. It shall include
determination that the institution is conducting its business on a safe and
sound basis. Examination requires full and comprehensive looking into the
operations and books of institutions, and shall include, but need not be
limited to the following:

173 | P a g e
 a. Determination of the banks solvency and liquidity
position;

b. Evaluation of asset quality as well as determination of

sufficiency of valuation reserves on loans and other risk assets;

c. Review of all aspects of bank operations;

d. Assessment of risk management system, including the

evaluation of the effectiveness of the bank managements
oversight functions, policies, procedures, internal control and
audit;

e. Appraisal of overall management of the bank;

f. Review of compliance and applicable laws, rules and

regulations; and any other activities relevant to the above.

After an evaluation of the respective positions of the parties, the Court is of the view that
the Monetary Board approval is not required for PDIC to conduct an investigation on the
Banks.

The disagreement stems from the interpretation of these two key provisions of the PDIC
Charter. The confusion can be attributed to the fact that although investigation and
examination are two separate and distinct procedures under the charter of the PDIC and
the BSP, the words seem to be used loosely and interchangeably.

It does not help that indeed these terms are very closely related in a generic
sense. However, while examination connotes a mere generic perusal or inspection,
investigation refers to a more intensive scrutiny for a more specific fact-finding
purpose. The latter term is also usually associated with proceedings conducted prior to
criminal prosecution.

The PDIC was created by R.A. No. 3591 on June 22, 1963 as an insurer of deposits in all
banks entitled to the benefits of insurance under the PDIC Charter to promote and
safeguard the interests of the depositing public by way of providing permanent and
continuing insurance coverage of all insured deposits. It is a government instrumentality
that operates under the Department of Finance. Its primary purpose is to act as deposit
insurer, as a co-regulator of banks, and as receiver and liquidator of closed banks.[71]

Section 1 of the PDIC Charter states:

SECTION 1. There is hereby created a Philippine Deposit Insurance

Corporation hereinafter referred to as the Corporation which shall insure, as
herein provided, the deposits of all banks which are entitled to the benefits of
insurance under this Act, and which shall have the powers hereinafter
granted.

174 | P a g e
 The Corporation shall, as a basic policy, promote and safeguard the interests
of the depositing public by way of providing permanent and continuing
insurance coverage on all insured deposits.

Section 1 of R.A. No. 9576 further provides: An Act Increasing the Maximum Deposit
Insurance Coverage, and in connection therewith, to Strengthen the Regulatory and
Administrative Authority, and Financial Capability of the Philippine Deposit Insurance
Corporation (PDIC), amending for this purpose R.A. No. 3591, as Amended, otherwise
known as the PDIC Charter.

SECTION 1. Statement of State Policy and Objectives. - It is hereby declared

to be the policy of the State to strengthen the mandatory deposit insurance
coverage system to generate, preserve, maintain faith and confidence in the
countrys banking system, and protect it from illegal schemes and
machinations.

Towards this end, the government must extend all means and mechanisms
necessary for the Philippine Deposit Insurance Corporation to effectively
fulfill its vital task of promoting and safeguarding the interests of the
depositing public by way of providing permanent and continuing insurance
coverage on all insured deposits, and in helping develop a sound and stable
banking system at all times.

Under its charter, the PDIC is empowered to conduct examination of banks with
prior approval of the Monetary Board:

Eighth To conduct examination of banks with prior approval of the Monetary

Board: Provided, That no examination can be conducted within twelve (12)
months from the last examination date:Provided, however, That the
Corporation may, in coordination with the Bangko Sentral, conduct a special
examination as the Board of Directors, by an affirmative vote of a majority of
all its members, if there is a threatened or impending closure of a
bank; Provided, further, That, notwithstanding the provisions of Republic Act
No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No.
8791, and other laws, the Corporation and/or the Bangko Sentral, may
inquire into or examine deposit accounts and all information related
thereto in case there is a finding of unsafe or unsound banking
practice; Provided, That to avoid overlapping of efforts, the examination shall
maximize the efficient use of the relevant reports, information, and findings
of the Bangko Sentral, which it shall make available to the Corporation; (As
amended by R.A. 9302, 12 August 2004, R.A. 9576, 1 June 2009)

Section 9(b-1) of the PDIC Charter further provides that the PDIC Board shall have
the power to:

175 | P a g e
 POWERS AND RESPONSIBILITIES AND PROHIBITIONS

SECTION 9. x

(b) The Board of Directors shall appoint examiners who shall have power, on
behalf of the Corporation to examine any insured bank. Each such examiner
shall have the power to make a thorough examination of all the affairs of the
bank and in doing so, he shall have the power to administer oaths, to examine
and take and preserve the testimony of any of the officers and agents
thereof, and, to compel the presentation of books, documents, papers, or
records necessary in his judgment to ascertain the facts relative to the
condition of the bank; and shall make a full and detailed report of the
condition of the bank to the Corporation. The Board of Directors in like
manner shall appoint claim agents who shall have the power to investigate
and examine all claims for insured deposits and transferred deposits. Each
claim agent shall have the power to administer oaths and to examine under
oath and take and preserve testimony of any person relating to such
claim. (As amended by E.O. 890, 08 April 1983; R.A. 7400, 13 April 1992)

(b-1) The investigators appointed by the Board of Directors shall have the
power on behalf of the Corporation to conduct investigations on frauds,
irregularities and anomalies committed in banks, based on reports of
examination conducted by the Corporation and Bangko Sentral ng
Pilipinas or complaints from depositors or from other government agency.
Each such investigator shall have the power to administer oaths, and to
examine and take and preserve the testimony of any person relating to the
subject of investigation. (As added by R.A. 9302, 12 August 2004)

xxx. [Underscoring supplied]

As stated above, the charter empowers the PDIC to conduct an investigation of a

bank and to appoint examiners who shall have the power to examine any insured
bank. Such investigators are authorized to conduct investigations on frauds, irregularities
and anomalies committed in banks, based on an examination conducted by the PDIC and
the BSP or on complaints from depositors or from other government agencies.

The distinction between the power to investigate and the power to examine is
emphasized by the existence of two separate sets of rules governing the procedure in the
conduct of investigation and examination. Regulatory Issuance (RI) No. 2005-02 or the
PDIC Rules on Fact-Finding Investigation of Fraud, Irregularities and Anomalies Committed
in Banks covers the procedural requirements of the exercise of the PDICs power of
investigation. On the other hand, RI No. 2009-05 sets forth the guidelines for the conduct of
the power of examination.

The definitions provided under the two aforementioned regulatory issuances

elucidate on the distinction between the power of examination and the power of
investigation.

176 | P a g e
 Section 2 of RI No. 2005-02 states that its coverage shall be applicable to all fact-
finding investigations on fraud, irregularities and/or anomalies committed in banks that
are conducted by PDIC based on: [a] complaints from depositors or other government
agencies; and/or [b] final reports of examinations of banks conducted by the Bangko
Sentral ng Pilipinas and/or PDIC.

The same issuance states that the Final Report of Examination[72] is one of the three
pre-requisites to the conduct of an investigation, in addition to the authorization of the
PDIC Board[73]and a complaint.[74] Juxtaposing this provision with Section 9(b-1) of the
PDIC Charter, since an examination is explicitly made the basis of a fact-finding
examination, then clearly examination and investigation are two different proceedings. It
would obviously defy logic to make the result of an investigation the basis of the same
proceeding. Thus, RI No. 2005-02 defines an investigation as a fact-finding examination,
study or inquiry for determining whether the allegations in a complaint or findings in a
final report of examination may properly be the subject of an administrative, criminal or
civil action.[75]

The Banks cite the dictionary definitions of examination and investigation to justify
their conclusion that these terms refer to one and the same proceeding. It is tempting to
use these two terms interchangeably, which practice may be perfectly justified in a purely
literary sense. Indeed, a reading of the PDIC Charter shows that the two terms have been
used interchangeably at some point.However, based on the provisions aforecited, the
intention of the laws is clearly to differentiate between the process of investigation and
that of examination.

In 2009, to clarify procedural matters, PDIC released RI No. 2009-05 or the Rules
and Regulations on Examination of Banks. Section 2 thereof differentiated between the two
types of examination as follows:

Section 2. Types of Examination

a. Regular Examination - An examination conducted independently or jointly

with the BSP. It requires the prior approval of the PDIC Board of Directors
and the Monetary Board (MB). It may be conducted only after an interval of
at least twelve (12) months from the closing date of the last Regular
Examination.

b. Special Examination An examination conducted at any time in coordination

with the BSP, by an affirmative vote of a majority of all the members of the
PDIC Board of Directors, without need of prior MB approval, if there is a
threatened or impending bank closure as determined by the PDIC Board of
Directors. [Underscoring supplied]

177 | P a g e
 Section 3 of RI No. 2009-05 provides for the general scope of the PDIC
examination:

Section 3. Scope of Examination

The examination shall include, but need not be limited to, the following:

a. Determination of the banks solvency and liquidity position;

b. Evaluation of asset quality as well as determination of

sufficiency of valuation reserves on loans and other risk assets;

c. Review of all aspects of bank operations;

d. Assessment of risk management system, including the

evaluation of the effectiveness of the bank managements
oversight functions, policies, procedures, internal control and
audit

e. Appraisal of overall management of the bank;

f. Review of compliance with applicable banking laws,

and rules and regulations, including PDIC issuances;

g. Follow-through of specific exceptions/ violations

noted during a previous examination; and

h. Any other activity relevant to the above.

Rule 2, Section 1 of PDIC RI No. 2005-02 or the PDIC Rules on Fact-Finding

Investigation of Fraud, Irregularities and Anomalies Committed in Banks provides for the
scope of fact-finding investigations as follows:

SECTION 1. Scope of the Investigation.

Fact-finding Investigations shall be limited to the particular acts or

omissions subject of a complaint or a Final Report of Examination.

From the above-cited provisions, it is clear that the process of examination covers a
wider scope than that of investigation.

Examination involves an evaluation of the current status of a bank and determines

its compliance with the set standards regarding solvency, liquidity, asset valuation,
operations, systems, management, and compliance with banking laws, rules and
regulations.

178 | P a g e
 Investigation, on the other hand, is conducted based on specific findings of certain
acts or omissions which are subject of a complaint or a Final Report of Examination.

Clearly, investigation does not involve a general evaluation of the status of a

bank. An investigation zeroes in on specific acts and omissions uncovered via an
examination, or which are cited in a complaint.

An examination entails a review of essentially all the functions and facets of a bank
and its operation. It necessitates poring through voluminous documents, and requires a
detailed evaluation thereof. Such a process then involves an intrusion into a banks records.

In contrast, although it also involves a detailed evaluation, an investigation centers

on specific acts of omissions and, thus, requires a less invasive assessment.

The practical justification for not requiring the Monetary Board approval to conduct
an investigation of banks is the administrative hurdles and paperwork it entails, and the
correspondent time to complete those additional steps or requirements. As in other types
of investigation, time is always of essence, and it is prudent to expedite the proceedings if
an accurate conclusion is to be arrived at, as an investigation is only as precise as the
evidence on which it is based. The promptness with which such evidence is gathered is
always of utmost importance because evidence, documentary evidence in particular, is
remarkably fungible. A PDIC investigation is conducted to determine[e] whether the
allegations in a complaint or findings in a final report of examination may properly be the
subject of an administrative, criminal or civil action.[76] In other words, an investigation is
based on reports of examination and an examination is conducted with prior Monetary
Board approval.Therefore, it would be unnecessary to secure a separate approval for the
conduct of an investigation. Such would merely prolong the process and provide
unscrupulous individuals the opportunity to cover their tracks.

Indeed, while in a literary sense, the two terms may be used interchangeably, under
the PDIC Charter, examination and investigation refer to two different processes. To
reiterate, an examination of banks requires the prior consent of the Monetary Board,
whereas an investigation based on an examination report, does not.

WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court of
Appeals in CA G.R. CEB SP. No. 01550, dated September 18, 2006 and January 25,
2007 are REVERSED and SET ASIDE.

SO ORDERED.

179 | P a g e
PRESIDENTIAL DECREE No. 679 April 2, 1975

AMENDING ACT NUMBERED THIRTY NINE HUNDRED AND THIRTY SIX, AN ACT
REQUIRING BANKS, TRUST CORPORATIONS, AND BUILDING AND LOAN
ASSOCIATIONS, TO TRANSFER UNCLAIMED BALANCES HELD BY THEM TO THE
TREASURER OF THE PHILIPPINES AND FOR OTHER PURPOSES.

WHEREAS, Act No. 3936 requires the publication of a sworn statement of unclaimed
balances in banks once a week of three consecutive weeks in at least two newspapers of
general circulation in the locality where the banks are situated, if there be any, and if there
is none, in the City of Manila, one in English and one in Spanish, the cost of which shall be
paid by the Bureau of Treasury, which shall be reimbursed out of the escheated funds;

WHEREAS, the law also provides for the publication of summons and a notice upon the
commencement of the prescribed judicial proceedings for the escheat of unclaimed
balances;

WHEREAS, past experience has shown that the cost of publication required by law, the
increase of which has been substantial the past few years, is more than the aggregate
amount of the unclaimed balances to be escheated, the average amount of which is small;

WHEREAS, there is a felt need to simplify the procedure for the escheat of unclaimed
balances for the purpose of reducing the expenses therefor;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers in me vested by the Constitution, do hereby decree and order:

Section 1. Sections 1, 2, 3, 4, and 5 of Act No. 3936 are hereby amended to read as follows:

"Sec. 1. "Unclaimed balances", within the meaning of this Act, shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and
interest thereon with banks, buildings and loan associations, and trust corporations, as
hereinafter defined, in favor of any person known to be dead or who has not made further
deposits or withdrawals during the preceding ten years or more. Such unclaimed balances,
together with the increase and proceeds thereof, shall be deposited with the Treasurer of
the Philippines to the credit of the Government of the Republic of the Philippines to be used
as the National Assembly may direct.

"Banks", "building and loan associations" and "trust corporations", within the meaning of
this Act, shall refer to institutions defined under Section two, thirty-nine and fifty-six,
respectively, of Republic Act Numbered Three Hundred Thirty Seven, otherwise known as
the General Banking Act, as amended, whether organized under special charters or not.

"Sec. 2. Immediately after the taking effect of this Act and within the month of January of
every odd year, all banks, building and loan associations, and trust corporations shall
forward to the Treasurer of the Philippines a statement, under oath, of their respective
managing officers, of all credits and deposits held by them in favor of persons known to be
dead, or who have not made further deposits or withdrawals during the preceding ten
years or more, arranged in alphabetical order according to the names of creditors and
depositors, and showing:

"(a) The names and last known place of residence or post office addresses of the
persons in whose favor such unclaimed balances stand;

"(b) The amount and the date of the outstanding unclaimed balance and whether
the same is in money or in security, and if the latter, the nature of the same;

180 | P a g e
 "(c) The date when the person in whose favor the unclaimed balance stands died, if
known, or the date when he made his last deposit or withdrawal; and

"(d) The interest due on such unclaimed balance, if any, and the amount thereof.

"A copy of the above sworn statement shall be posted in a conspicuous place in the
premises of the bank, building and loan association, or trust corporation concerned for at
least sixty days from the date of filing thereof: Provided, That immediately before filing the
above sworn statement, the bank, building and loan association, and trust corporation shall
communicate with the person in whose favor the unclaimed balance stands at his last
known place of residence or post office address.

"It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from
time to time the existence of unclaimed balances held by banks, building and loan
associations, and trust corporations.

"Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he
shall commence an action or actions in the name of the People of the Republic of the
Philippines in the Court of First Instance of the province or city where the bank, building
and loan association or trust corporation is located, in which shall be joined as parties the
bank, building and loan association or trust corporation and all such creditors or
depositors. All or any of such creditors or depositors or banks, building and loan
association or trust corporations may be included in one action. Service of process in such
action or actions shall be made by delivery of a copy of the complaint and summons to the
president, cashier, or managing officer of each defendant bank, building and loan
association or trust corporation and by publication of a copy of such summons in a
newspaper of general circulation, either in English, in Filipino, or in a local dialect,
published in the locality where the bank, building and loan association or trust corporation
is situated, if there be any, and in case there is none, in the City of Manila, at such time as
the court may order. Upon the trial, the court must hear all parties who have appeared
therein, and if it be determined that such unclaimed balances in any defendant bank,
building and loan association or trust corporation are unclaimed as hereinbefore stated,
then the court shall render judgment in favor of the Government of the Republic of the
Philippines, declaring that said unclaimed balances have escheated to the Government of
the Republic of the Philippines and commanding said bank, building and loan association or
trust corporation to forthwith deposit the same with the Treasurer of the Philippines to
credit of the Government of the Republic of the Philippines to be used as the National
Assembly may direct.

"At the time of issuing summons in the action above provided for, the clerk of court shall
also issue a notice signed by him, giving the title and number of said action, and referring to
the complaint therein, and directed to all persons, other than those named as defendants
therein, claiming any interest in any unclaimed balance mentioned in said complaint, and
requiring them to appear within sixty days after the publication or first publication, if there
are several, of such summons, and show cause, if they have any, why the unclaimed
balances involved in said action should not be deposited with the Treasurer of the
Philippines as in this Act provided and notifying them that if they do not appear and show
cause, the Government of the Republic of the Philippines will apply to the court for the
relief demanded in the complaint. A copy of said notice shall be attached to, and published
with the copy of, said summons required to be published as above, and at the end of the
copy of such notice so published, there shall be a statement of the date of publication, or
first publication, if there are several, of said summons and notice. Any person interested
may appear in said action and become a party thereto. Upon the publication or the
completion of the publication, if there are several, of the summons and notice, and the
service of the summons on the defendant banks, building and loan associations or trust
corporations, the court shall have full and complete jurisdiction in the Republic of the
Philippines over the said unclaimed balances and over the persons having or claiming any

181 | P a g e
interest in the said unclaimed balances, or any of them, and shall have full and complete
jurisdiction to hear and determine the issues herein, and render the appropriate judgment
thereon.

"Sec. 4. If the president, cashier or managing officer of the bank, building and loan
association, or trust corporation neglects or refuses to make and file the sworn statement
required by this action, such bank, building and loan association, or trust corporation shall
pay to the Government the sum of five hundred pesos a month for each month or fraction
thereof during which such default shall continue.

"Sec. 5. Any bank, building and loan association or trust corporation which shall make any
deposit with the Treasurer of the Philippines in conformity with the provisions of this Act
shall not thereafter be liable to any person for the same and any action which may be
brought by any person against in any bank, building and loan association, or trust
corporation for unclaimed balances so deposited with the Treasurer of the Philippines shall
be defended by the Solicitor General without cost to such bank, building and loan
association or trust corporation."

Section 2. This Decree shall take effect immediately.

182 | P a g e
 Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION

RIZAL COMMERCIAL BANKING G.R. No. 192413

CORPORATION,

Petitioner,
Present:

CARPIO, J., Chairperson,

versus
BRION,

PEREZ,

SERENO, and
HI-TRI DEVELOPMENT
CORPORATION and LUZ R. BAKUNAWA, REYES, JJ.

Respondents.

Promulgated:

June 13, 2012

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

DECISION

SERENO, J.:

Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner
Rizal Commercial Banking Corporation (RCBC) against respondents Hi-Tri Development
Corporation (Hi-Tri) and Luz R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the
26 November 2009 Decision and 27 May 2010 Resolution of the Court of Appeals
(CA),[1] which reversed and set aside the 19 May 2008 Decision and 3 November 2008
Order of the Makati City Regional Trial Court (RTC) in Civil Case No. 06-244.[2] The case
before the RTC involved the Complaint for Escheat filed by the Republic of the Philippines
(Republic) pursuant to Act No. 3936, as amended by Presidential Decree No. 679 (P.D.
679), against certain deposits, credits, and unclaimed balances held by the branches of
various banks in the Philippines. The trial court declared the amounts, subject of the special
proceedings, escheated to the Republic and ordered them deposited with the Treasurer of
the Philippines (Treasurer) and credited in favor of the Republic.[3] The assailed RTC
judgments included an unclaimed balance in the amount of ₱1,019,514.29, maintained by
RCBC in its Ermita Business Center branch.

183 | P a g e
 We quote the narration of facts of the CA[4] as follows:

x x x Luz [R.] Bakunawa and her husband Manuel, now deceased

(Spouses Bakunawa) are registered owners of six (6) parcels of land covered
by TCT Nos. 324985 and 324986 of the Quezon City Register of Deeds, and
TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of
Deeds. These lots were sequestered by the Presidential Commission on Good
Government [(PCGG)].

Sometime in 1990, a certain Teresita Millan (Millan), through her

representative, Jerry Montemayor, offered to buy said lots for ₱6,724,085.71,
with the promise that she will take care of clearing whatever preliminary
obstacles there may[]be to effect a completion of the sale. The Spouses
Bakunawa gave to Millan the Owners Copies of said TCTs and in turn, Millan
made a down[]payment of ₱1,019,514.29 for the intended purchase.
However, for one reason or another, Millan was not able to clear said
obstacles. As a result, the Spouses Bakunawa rescinded the sale and offered
to return to Millan her down[]payment of ₱1,019,514.29. However, Millan
refused to accept back the ₱1,019,514.29 down[]payment. Consequently, the
Spouses Bakunawa, through their company, the Hi-Tri Development
Corporation (Hi-Tri) took out on October 28, 1991, a Managers Check from
RCBC-Ermita in the amount of ₱1,019,514.29, payable to Millans company
Rosmil Realty and Development Corporation (Rosmil) c/o Teresita Millan
and used this as one of their basis for a complaint against Millan and
Montemayor which they filed with the Regional Trial Court of Quezon City,
Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991], praying that:

1. That the defendants Teresita Mil[l]an and Jerry

Montemayor may be ordered to return to plaintiffs spouses
the Owners Copies of Transfer Certificates of Title Nos.
324985, 324986, 103724, 98827, 98828 and 98829;

2. That the defendant Teresita Mil[l]an be correspondingly

ordered to receive the amount of One Million Nineteen
Thousand Five Hundred Fourteen Pesos and Twenty Nine
Centavos (₱1,019,514.29);

3. That the defendants be ordered to pay to plaintiffs

spouses moral damages in the amount of ₱2,000,000.00;
and

4. That the defendants be ordered to pay plaintiffs attorneys

fees in the amount of ₱50,000.00.

Being part and parcel of said complaint, and consistent with their
prayer in Civil Case No. Q-91-10719 that Teresita Mil[l]an be
correspondingly ordered to receive the amount of One Million Nineteen
Thousand Five Hundred Fourteen Pesos and Twenty Nine [Centavos]
(₱1,019,514.29)[], the Spouses Bakunawa, upon advice of their counsel,
retained custody of RCBC Managers Check No. ER 034469 and refrained from
canceling or negotiating it.

All throughout the proceedings in Civil Case No. Q-91-10719,

especially during negotiations for a possible settlement of the case, Millan
was informed that the Managers Check was available for her withdrawal, she
being the payee.

184 | P a g e
 On January 31, 2003, during the pendency of the abovementioned
case and without the knowledge of [Hi-Tri and Spouses Bakunawa], x x x
RCBC reported the ₱1,019,514.29-credit existing in favor of Rosmil to the
Bureau of Treasury as among its unclaimed balances as of January 31, 2003.
Allegedly, a copy of the Sworn Statement executed by Florentino N. Mendoza,
Manager and Head of RCBCs Asset Management, Disbursement & Sundry
Department (AMDSD) was posted within the premises of RCBC-Ermita.

On December 14, 2006, x x x Republic, through the [Office of the

Solicitor General (OSG)], filed with the RTC the action below for Escheat
[(Civil Case No. 06-244)].

On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute

with Rosmil and Millan. Instead of only the amount of ₱1,019,514.29,
[Spouses Bakunawa] agreed to pay Rosmil and Millan the amount of
₱3,000,000.00, [which is] inclusive [of] the amount of []₱1,019,514.29. But
during negotiations and evidently prior to said settlement, [Manuel
Bakunawa, through Hi-Tri] inquired from RCBC-Ermita the availability of the
₱1,019,514.29 under RCBC Managers Check No. ER 034469. [Hi-Tri and
Spouses Bakunawa] were however dismayed when they were informed that
the amount was already subject of the escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x

RCBC, viz:

We understand that the deposit corresponding to the amount

of Php 1,019,514.29 stated in the Managers Check is currently
the subject of escheat proceedings pending before Branch 150
of the Makati Regional Trial Court.

Please note that it was our impression that the deposit would
be taken from [Hi-Tris] RCBC bank account once an order to
debit is issued upon the payees presentation of the Managers
Check. Since the payee rejected the negotiated Managers
Check, presentation of the Managers Check was never made.

Consequently, the deposit that was supposed to be allocated

for the payment of the Managers Check was supposed to
remain part of the Corporation[s] RCBC bank account, which,
thereafter, continued to be actively maintained and operated.
For this reason, We hereby demand your confirmation that the
amount of Php 1,019,514.29 continues to form part of the
funds in the Corporations RCBC bank account, since pay-out of
said amount was never ordered. We wish to point out that if
there was any attempt on the part of RCBC to consider the
amount indicated in the Managers Check separate from the
Corporations bank account, RCBC would have issued a
statement to that effect, and repeatedly reminded the
Corporation that the deposit would be considered dormant
absent any fund movement. Since the Corporation never
received any statements of account from RCBC to that effect,
and more importantly, never received any single letter from
RCBC noting the absence of fund movement and advising the
Corporation that the deposit would be treated as dormant.

On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x

RCBC reiterating their position as above-quoted.

185 | P a g e
 In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-
Tri and Spouses Bakunawa] that:

The Banks Ermita BC informed Hi-Tri and/or its principals

regarding the inclusion of Managers Check No. ER034469 in
the escheat proceedings docketed as Civil Case No. 06-244, as
well as the status thereof, between 28 January 2008 and 1
February 2008.

xxx xxx xxx

Contrary to what Hi-Tri hopes for, the funds covered by the

Managers Check No. ER034469 does not form part of the
Banks own account. By simple operation of law, the funds
covered by the managers check in issue became a
deposit/credit susceptible for inclusion in the escheat case
initiated by the OSG and/or Bureau of Treasury.

xxx xxx xxx

Granting arguendo that the Bank was duty-bound to make

good the check, the Banks obligation to do so prescribed as
early as October 2001.

(Emphases, citations, and annotations were omitted.)

The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial
court rendered its assailed Decision declaring the deposits, credits, and unclaimed balances
subject of Civil Case No. 06-244 escheated to the Republic. Among those included in the
order of forfeiture was the amount of ₱1,019,514.29 held by RCBC as allocated funds
intended for the payment of the Managers Check issued in favor of Rosmil. The trial court
ordered the deposit of the escheated balances with the Treasurer and credited in favor of
the Republic. Respondents claim that they were not able to participate in the trial, as they
were not informed of the ongoing escheat proceedings.

Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking

the partial reconsideration of the RTC Decision insofar as it escheated the fund allocated
for the payment of the Managers Check. They asked that they be included as party-
defendants or, in the alternative, allowed to intervene in the case and their motion
considered as an answer-in-intervention. Respondents argued that they had meritorious
grounds to ask reconsideration of the Decision or, alternatively, to seek intervention in the
case. They alleged that the deposit was subject of an ongoing dispute (Civil Case No. Q-91-
10719) between them and Rosmil since 1991, and that they were interested parties to that
case.[5]

On 3 November 2008, the RTC issued an Order denying the motion of respondents.
The trial court explained that the Republic had proven compliance with the requirements
of publication and notice, which served as notice to all those who may be affected and
prejudiced by the Complaint for Escheat. The RTC also found that the motion failed to point
out the findings and conclusions that were not supported by the law or the evidence
presented, as required by Rule 37 of the Rules of Court. Finally, it ruled that the alternative
prayer to intervene was filed out of time.

The CA Ruling

186 | P a g e
 On 26 November 2009, the CA issued its assailed Decision reversing the 19 May
2008 Decision and 3 November 2008 Order of the RTC. According to the appellate
court,[6] RCBC failed to prove that the latter had communicated with the purchaser of the
Managers Check (Hi-Tri and/or Spouses Bakunawa) or the designated payee (Rosmil)
immediately before the bank filed its Sworn Statement on the dormant accounts held
therein. The CA ruled that the banks failure to notify respondents deprived them of an
opportunity to intervene in the escheat proceedings and to present evidence to
substantiate their claim, in violation of their right to due process. Furthermore, the CA
pronounced that the Makati City RTC Clerk of Court failed to issue individual notices
directed to all persons claiming interest in the unclaimed balances, as well as to require
them to appear after publication and show cause why the unclaimed balances should not
be deposited with the Treasurer of the Philippines. It explained that the jurisdictional
requirement of individual notice by personal service was distinct from the requirement of
notice by publication. Consequently, the CA held that the Decision and Order of the RTC
were void for want of jurisdiction.

Issue

After a perusal of the arguments presented by the parties, we cull the main issues as
follows:

I. Whether the Decision and Order of the RTC were void for failure to send
separate notices to respondents by personal service

II. Whether petitioner had the obligation to notify respondents immediately

before it filed its Sworn Statement with the Treasurer

III. Whether or not the allocated funds may be escheated in favor of the
Republic

Discussion

Petitioner bank assails[7] the CA judgments insofar as they ruled that notice by
personal service upon respondents is a jurisdictional requirement in escheat proceedings.
Petitioner contends that respondents were not the owners of the unclaimed balances and
were thus not entitled to notice from the RTC Clerk of Court. It hinges its claim on the
theory that the funds represented by the Managers Check were deemed transferred to the
credit of the payee or holder upon its issuance.

We quote the pertinent provision of Act No. 3936, as amended, on the rule on
service of processes, to wit:

Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed

balances, he shall commence an action or actions in the name of the
People of the Republic of the Philippines in the Court of First Instance of
the province or city where the bank, building and loan association or trust
corporation is located, in which shall be joined as parties the bank,
building and loan association or trust corporation and all such creditors or
depositors. All or any of such creditors or depositors or banks, building and
loan association or trust corporations may be included in one action. Service
of process in such action or actions shall be made by delivery of a copy of
the complaint and summons to the president, cashier, or managing
officer of each defendant bank, building and loan association or trust
corporation and by publication of a copy of such summons in a newspaper
of general circulation, either in English, in Filipino, or in a local dialect,
published in the locality where the bank, building and loan association or
trust corporation is situated, if there be any, and in case there is none, in the

187 | P a g e
 City of Manila, at such time as the court may order. Upon the trial, the court
must hear all parties who have appeared therein, and if it be
determined that such unclaimed balances in any defendant bank,
building and loan association or trust corporation are unclaimed as
hereinbefore stated, then the court shall render judgment in favor of
the Government of the Republic of the Philippines, declaring that said
unclaimed balances have escheated to the Government of the Republic of the
Philippines and commanding said bank, building and loan association or
trust corporation to forthwith deposit the same with the Treasurer of the
Philippines to credit of the Government of the Republic of the Philippines to
be used as the National Assembly may direct.

At the time of issuing summons in the action above provided for, the clerk
of court shall also issue a notice signed by him, giving the title and number
of said action, and referring to the complaint therein, and directed to all
persons, other than those named as defendants therein, claiming any
interest in any unclaimed balance mentioned in said complaint,
and requiring them to appear within sixty days after the publication or
first publication, if there are several, of such summons, and show cause, if
they have any, why the unclaimed balances involved in said action
should not be deposited with the Treasurer of the Philippines as in this
Act provided and notifying them that if they do not appear and show
cause, the Government of the Republic of the Philippines will apply to
the court for the relief demanded in the complaint. A copy of said notice
shall be attached to, and published with the copy of, said summons required
to be published as above, and at the end of the copy of such notice so
published, there shall be a statement of the date of publication, or first
publication, if there are several, of said summons and notice. Any person
interested may appear in said action and become a party thereto. Upon
the publication or the completion of the publication, if there are
several, of the summons and notice, and the service of the summons on the
defendant banks, building and loan associations or trust corporations, the
court shall have full and complete jurisdiction in the Republic of the
Philippines over the said unclaimed balances and over the persons
having or claiming any interest in the said unclaimed balances, or any
of them, and shall have full and complete jurisdiction to hear and
determine the issues herein, and render the appropriate judgment
thereon. (Emphasis supplied.)

Hence, insofar as banks are concerned, service of processes is made by delivery of a

copy of the complaint and summons upon the president, cashier, or managing officer of the
defendant bank.[8] On the other hand, as to depositors or other claimants of the
unclaimed balances, service is made by publication of a copy of the summons in a
newspaper of general circulation in the locality where the institution is situated. [9] A notice
about the forthcoming escheat proceedings must also be issued and published, directing
and requiring all persons who may claim any interest in the unclaimed balances to appear
before the court and show cause why the dormant accounts should not be deposited with
the Treasurer.

Accordingly, the CA committed reversible error when it ruled that the issuance of
individual notices upon respondents was a jurisdictional requirement, and that failure to
effect personal service on them rendered the Decision and the Order of the RTC void for
want of jurisdiction. Escheat proceedings are actions in rem,[10] whereby an action is
brought against the thing itself instead of the person.[11] Thus, an action may be instituted
and carried to judgment without personal service upon the depositors or other
claimants.[12] Jurisdiction is secured by the power of the court over

188 | P a g e
the res.[13] Consequently, a judgment of escheat is conclusive upon persons notified by
advertisement, as publication is considered a general and constructive notice to all persons
interested.[14]

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the

funds allocated for the payment of the Managers Check in the escheat proceedings.

Escheat proceedings refer to the judicial process in which the state, by virtue of its
sovereignty, steps in and claims abandoned, left vacant, or unclaimed property, without
there being an interested person having a legal claim thereto.[15] In the case of dormant
accounts, the state inquires into the status, custody, and ownership of the unclaimed
balance to determine whether the inactivity was brought about by the fact of death or
absence of or abandonment by the depositor.[16] If after the proceedings the property
remains without a lawful owner interested to claim it, the property shall be reverted to the
state to forestall an open invitation to self-service by the first comers.[17] However, if
interested parties have come forward and lain claim to the property, the courts shall
determine whether the credit or deposit should pass to the claimants or be forfeited in
favor of the state.[18] We emphasize that escheat is not a proceeding to penalize depositors
for failing to deposit to or withdraw from their accounts. It is a proceeding whereby the
state compels the surrender to it of unclaimed deposit balances when there is substantial
ground for a belief that they have been abandoned, forgotten, or without an owner.[19]

Act No. 3936, as amended, outlines the proper procedure to be followed by banks
and other similar institutions in filing a sworn statement with the Treasurer concerning
dormant accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month of
January of every odd year, all banks, building and loan associations, and
trust corporations shall forward to the Treasurer of the Philippines a
statement, under oath, of their respective managing officers, of all credits
and deposits held by them in favor of persons known to be dead, or who
have not made further deposits or withdrawals during the preceding
ten years or more, arranged in alphabetical order according to the names of
creditors and depositors, and showing:

(a) The names and last known place of residence or post office addresses of
the persons in whose favor such unclaimed balances stand;

(b) The amount and the date of the outstanding unclaimed balance and
whether the same is in money or in security, and if the latter, the nature
of the same;

(c) The date when the person in whose favor the unclaimed balance stands
died, if known, or the date when he made his last deposit or withdrawal;
and

(d) The interest due on such unclaimed balance, if any, and the amount
thereof.

A copy of the above sworn statement shall be posted in a conspicuous

place in the premises of the bank, building and loan association, or trust
corporation concerned for at least sixty days from the date of filing

189 | P a g e
 thereof: Provided, That immediately before filing the above sworn
statement, the bank, building and loan association, and trust
corporation shall communicate with the person in whose favor the
unclaimed balance stands at his last known place of residence or post
office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor
General from time to time the existence of unclaimed balances held by banks,
building and loan associations, and trust corporations. (Emphasis supplied.)

As seen in the afore-quoted provision, the law sets a detailed system for notifying
depositors of unclaimed balances. This notification is meant to inform them that their
deposit could be escheated if left unclaimed. Accordingly, before filing a sworn statement,
banks and other similar institutions are under obligation to communicate with owners of
dormant accounts. The purpose of this initial notice is for a bank to determine whether an
inactive account has indeed been unclaimed, abandoned, forgotten, or left without an
owner. If the depositor simply does not wish to touch the funds in the meantime, but still
asserts ownership and dominion over the dormant account, then the bank is no longer
obligated to include the account in its sworn statement.[20] It is not the intent of the law to
force depositors into unnecessary litigation and defense of their rights, as the state is only
interested in escheating balances that have been abandoned and left without an owner.

In case the bank complies with the provisions of the law and the unclaimed balances
are eventually escheated to the Republic, the bank shall not thereafter be liable to any
person for the same and any action which may be brought by any person against in any
bank xxx for unclaimed balances so deposited xxx shall be defended by the Solicitor
General without cost to such bank.[21]Otherwise, should it fail to comply with the legally
outlined procedure to the prejudice of the depositor, the bank may not raise the defense
provided under Section 5 of Act No. 3936, as amended.

Petitioner asserts[22] that the CA committed a reversible error when it required

RCBC to send prior notices to respondents about the forthcoming escheat proceedings
involving the funds allocated for the payment of the Managers Check. It explains that,
pursuant to the law, only those whose favor such unclaimed balances stand are entitled to
receive notices. Petitioner argues that, since the funds represented by the Managers Check
were deemed transferred to the credit of the payee upon issuance of the check, the proper
party entitled to the notices was the payee Rosmil and not respondents. Petitioner then
contends that, in any event, it is not liable for failing to send a separate notice to the payee,
because it did not have the address of Rosmil. Petitioner avers that it was not under any
obligation to record the address of the payee of a Managers Check.

In contrast, respondents Hi-Tri and Bakunawa allege[23] that they have a legal
interest in the fund allocated for the payment of the Managers Check. They reason that,
since the funds were part of the Compromise Agreement between respondents and Rosmil
in a separate civil case, the approval and eventual execution of the agreement effectively
reverted the fund to the credit of respondents. Respondents further posit that their
ownership of the funds was evidenced by their continued custody of the Managers Check.

An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a

bank (drawee),[24] requesting the latter to pay a person named therein (payee) or to the
order of the payee or to the bearer, a named sum of money.[25] The issuance of the check
does not of itself operate as an assignment of any part of the funds in the bank to the credit
of the drawer.[26] Here, the bank becomes liable only after it accepts or certifies the
check.[27] After the check is accepted for payment, the bank would then debit the amount to
be paid to the holder of the check from the account of the depositor-drawer.

190 | P a g e
 There are checks of a special type called managers or cashiers checks. These are bills
of exchange drawn by the banks manager or cashier, in the name of the bank, against the
bank itself.[28]Typically, a managers or a cashiers check is procured from the bank by
allocating a particular amount of funds to be debited from the depositors account or by
directly paying or depositing to the bank the value of the check to be drawn. Since the bank
issues the check in its name, with itself as the drawee, the check is deemed accepted in
advance.[29] Ordinarily, the check becomes the primary obligation of the issuing bank and
constitutes its written promise to pay upon demand.[30]

Nevertheless, the mere issuance of a managers check does not ipso facto work as an
automatic transfer of funds to the account of the payee. In case the procurer of the
managers or cashiers check retains custody of the instrument, does not tender it to the
intended payee, or fails to make an effective delivery, we find the following provision on
undelivered instruments under the Negotiable Instruments Law applicable:[31]

Sec. 16. Delivery; when effectual; when presumed. Every contract on a

negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder in due
course, the delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the delivery may be shown
to have been conditional, or for a special purpose only, and not for the
purpose of transferring the property in the instrument. But where the
instrument is in the hands of a holder in due course, a valid delivery thereof
by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved. (Emphasis supplied.)

Petitioner acknowledges that the Managers Check was procured by respondents, and that
the amount to be paid for the check would be sourced from the deposit account of Hi-
Tri.[32] When Rosmil did not accept the Managers Check offered by respondents, the latter
retained custody of the instrument instead of cancelling it. As the Managers Check neither
went to the hands of Rosmil nor was it further negotiated to other persons, the instrument
remained undelivered. Petitioner does not dispute the fact that respondents retained
custody of the instrument.[33]

Since there was no delivery, presentment of the check to the bank for payment did
not occur. An order to debit the account of respondents was never made. In fact, petitioner
confirms that the Managers Check was never negotiated or presented for payment to its
Ermita Branch, and that the allocated fund is still held by the bank. [34] As a result, the
assigned fund is deemed to remain part of the account of Hi-Tri, which procured the
Managers Check. The doctrine that the deposit represented by a managers check
automatically passes to the payee is inapplicable, because the instrument although
accepted in advance remains undelivered. Hence, respondents should have been informed
that the deposit had been left inactive for more than 10 years, and that it may be subjected
to escheat proceedings if left unclaimed.

After a careful review of the RTC records, we find that it is no longer necessary to
remand the case for hearing to determine whether the claim of respondents was valid.
There was no contention that they were the procurers of the Managers Check. It is
undisputed that there was no effective delivery of the check, rendering the instrument
incomplete. In addition, we have already settled that respondents retained ownership of
the funds. As it is obvious from their foregoing actions that they have not abandoned their
claim over the fund, we rule that the allocated deposit, subject of the Managers Check,
should be excluded from the escheat proceedings. We reiterate our pronouncement that

191 | P a g e
the objective of escheat proceedings is state forfeiture of unclaimed balances. We further
note that there is nothing in the records that would show that the OSG appealed the
assailed CA judgments. We take this failure to appeal as an indication of disinterest in
pursuing the escheat proceedings in favor of the Republic.

WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May
2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.

SO ORDERED.

192 | P a g e
 Republic of the Philippines
Congress of the Philippines
Metro Manila

Fourteenth Congress
Second Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand
eight.

Republic Act No. 9510 October 31, 2008

AN ACT ESTABLISHING THE CREDIT INFORMATION SYSTEM AND FOR OTHER

PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled::

Section 1. Title. - This Act shall be known as the "Credit Information System Act".

Section 2. Declaration of Policy. - The State recognizes the need to establish a

comprehensive and centralized credit information system for the collection and
dissemination of fair and accurate information relevant to, or arising from, credit and
credit-related activities of all entities participating in the financial system. A credit
information system will directly address the need for reliable credit information
concerning the credit standing and track record of borrowers.

The operations and services of a credit information system can be expected to: greatly
improve the overall availability of credit especially to micro, small and medium-scale
enterprises; provide mechanisms to make credit more cost-effective; and reduce the
excessive dependence on collateral to secure credit facilities.

The State shall endeavor to have credit information provided at the least cost to all
participants and shall ensure the protection of consumer rights and the existence of fair
competition in the industry at all times.

An efficient credit information system will also enable financial institutions to reduce their
over-all credit risk, contributing to a healthier and more stable financial system.

Section 3. Definition of Terms. - For purposes of this Act:

(a) "Accessing Entity" refers to any submitting entity or any other entity authorized
by the Corporation to access basic credit data from the Corporation.

(b) "Basic Credit Data" refers to positive and negative information provided by a
borrower to a submitting entity in connection with the application for and
availment of a credit facility and any information on the borrower’s
creditworthiness in the possession of the submitting entity and other factual and
objective information related or relevant thereto in the submitting entity’s data files
or that of other sources of information: Provided, that in the absence of a written
waiver duly accomplished by the borrower, basic credit data shall exclude
confidential information on bank deposits and/or clients funds under Republic Act
No. 1405 (Law on Secrecy of Bank Deposits), Republic Act No. 6426 (The Foreign

193 | P a g e
 Currency Deposit Act), Republic Act No. 8791 (The General Banking Law of 2000),
Republic Act No. 9160 (Anti-Money Laundering Law) and their amendatory laws.

(c) "Borrower" refers to a natural or juridical person, including any local

government unit (LGU), its subsidiaries and affiliates, that applies for and/or avails
of a credit facility.

(d) "BSP" refers to the Bangko Sentral ng Pilipinas, created under Republic Act
No.7653.

(e) "Corporation" refers to the Credit Information Corporation established under

Section 5 of this Act.

(f) "Credit facility" refers to any loan, credit line, guarantee or any other form of
financial accommodation from a submitting entity: Provided, That for purposes of
this Act, deposits in banks shall not be considered a credit facility extended by the
depositor in favor of the bank.

(g) "Credit Rating" refers to an opinion regarding the creditworthiness of a

borrower or of an issuer of debt security, using an established and defined ranking
system.

(h) "Credit Report" refers to a summary of consolidated and evaluated information

on creditworthiness, credit standing, credit capacity, character and general
reputation of a borrower.

(i) "Government Lending Institutions" refers to existing and future government

(GFIs), government-owned and controlled corporations (GOCCs) primarilly engaged
in lending activities.

(j) "Negative Credit Information" refers to information/data concerning the poor

credit performance of borrowers such as, but not limited to, defaults on loans,
adverse court judgments relating to debts and reports on bankruptcy, insolvency,
petitions or orders on suspension of payments and corporate rehabilitation.

(k) "Non-Accessing Entity" refers to an entity other than a Submitting Entity, Special
Accessing Entity or Borrower that is authorized by the Corporation to access credit
information from a Special Accessing Entity.

(l) "Outsource entity" refers to any accredited third party provider to whom the
Corporation may outsource the processing and consolidation of basic credit data
pertaining to a borrower or issuer of debt or convertible securities under such
qualifications, criteria and strict confidentiality guidelines that the Corporation shall
prescribe and duly publish.

(m) "Positive credit information" refers to information/data concerning the credit

performance of a borrower such as, but not limited to, information on timely
repayments or non-delinquency.

(n) "Relevant Government Agencies" refers to the Department of Finance,

Department of Trade and Industry, Bangko Sentral ng Pilipinas, Insurance
Commission and the Cooperative Development Authority.

(o) "SEC" refers to the Securities and Exchange Commission.

(p) "Special Accessing Entity" refers to a duly accredited private corporation engaged
primarily in the business of providing credit reports, ratings and other similar credit
information products and services.

194 | P a g e
 (q) "Submitting Entity" refers to any entity that provides credit facilities such as, but
not limited to, banks, quasi-banks, trust entities, investment houses, financing
companies, cooperatives, nongovernmental, micro-financing organizations, credit
card companies, insurance companies and government lending institutions.

Section 4. Establishment of the Credit Information System. - In furtherance of the policy

set forth in Section 2 of this Act, a credit information system is hereby established.

(a) Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies,
credit card companies and other entities that provide credit facilities are required to
submit basic credit data and updates thereon on a regular basis to the Corporation.

(b) The Corporation may include other credit providers to be subject to compulsory
participation: Provided, That all other entities qualified to be submitting entities may
participate subject to their acceptance by the Corporation: Provided, further, That, in
all cases, participation under the system shall be in accordance with such standards
and rules that the SEC in coordination with the relevant government agencies my
prescribe.

(c) Participating submitting entities are required to submit to the Corporation any
negative and positive credit information that tends to update and/or correct the
credit status of borrowers. The Corporation shall fix the time interval for such
submission: Provided, That such interval shall not be less than fifteen (15) working
days but not more than thirty (30) working days.

(d) The Corporation should regularly collect basic credit data of borrowers at least
on a quarterly basis to correct/update the basic credit data of said borrowers.

(e) The Corporation may also access credit and other relevant information from
government offices, judicial and administrative tribunals, prosecutorial agencies
and other related offices, as well as pension plans administered by the government.

(f) Each submitting entity shall notify its borrowers of the former’s obligation to
submit basic credit data to the Corporation and the disclosure thereof to the
Corporation, subject to the provisions of this Act and the implementing rules and
regulations.

(g) The Corporation is in turn authorized to release consolidated basic credit data
on the borrower, subject to the provisions of Section 6 of this Act.

(h) The negative information on the borrower as contained in the credit history files
of borrowers should stay in the database of the Corporation unless sooner
corrected, for not more than three (3) years from and after the date when the
negative credit information was rectified through payment or liquidation of the
debt, or through settlement of debts through compromise agreements or court
decisions that exculpate the borrower from liability. Negative information shall be
corrected and updated within fifteen (15) days from the time of payment,
liquidation or settlement of debts.

(i) Special Accessing Entities shall be accredited by the Corporation in accordance

with such standards and rules as the SEC in coordination with the relevant
government agencies, may prescribe.

(j) Special accessing entities shall be entitled access to the Corporation’s pool of
consolidated basic credit data, subject to the provisions of Section s 6 and 7 of this
Act and related implementing rules and regulations.

195 | P a g e
 (k) Special accessing entities are prohibited from releasing basic credit data
received from the Corporation or credit reports and credit ratings derived from the
basic credit data received from the Corporation, to non-accessing entities unless the
written consent or authorization has been obtained from the
Borrower: Provided, however, That in case the borrower is a local government unit
(LGU) or its subsidiary or affiliate, the special accessing entity may release credit
information on the LGU, its subsidiary or affiliate upon written request and payment
of reasonable fees by a constituent of the concerned LGU.

(l) Outsource Entities, which may process and consolidate basic credit data, are
absolutely prohibited from releasing such data received from the Corporation other
than to the Corporation itself.

(m) Accessing Entities shall hold strictly confidential any credit information they
receive from the Corporation.

(n) The borrower has the right to know the causes of refusal of the application for
credit facilities or services from a financial institution that uses basic credit data as
basis or ground for such a refusal.

(o) The borrower, for a reasonable fee, shall have, as a matter of right, ready and
immediate access to the credit information pertinent to the borrower. In case of
erroneous, incomplete or misleading credit information, the subject borrower shall
have the right to dispute the erroneous, incomplete, outdated or misleading credit
information before the Corporation. The Corporation shall investigate and verify the
disputed information within five (5) working days from receipt of the complaint. If
its accuracy cannot be verified and cannot be proven, the disputed information shall
be deleted. The borrower and the accessing entities and special accessing entities
who have received such information shall be informed of the corresponding
correction or removal within five (5) working days. The Corporation should use a
simplified dispute resolution process to fast track the settlement/resolution of
disputed credit information. Denial of these borrowers’ rights, without justifiable
reason, shall entitle the borrower to indemnity.

Section 5. Establishment of the Central Credit Information Corporation. - There is

hereby created a Corporation which shall be known as the Credit Information Corporation,
whose primary purpose shall be to receive and consolidate basic credit data, to act as a
central registry or central repository of credit information, and to provide access to
reliable, standardized information on credit history and financial condition of borrowers.

(a) The Corporation is hereby authorized to adopt, alter, and use a corporate seal
which shall be judicially noticed; to enter into contracts; to incur liabilities; to lease
or own real or personal property, and to sell or otherwise dispose of the same; to
sue and be sued; to compromise, condone or release any liability and otherwise to
do and perform any and all things that may be necessary or proper to carry out the
purposes of this Act.

(b) The authorized capital stock of the Corporation shall be Five hundred million
pesos (P500,000,000.00) which shall be divided into common and preferred shares
which shall be non-voting. The National Government shall own and hold sixty
percent (60%) of the common shares while the balance of forty percent (40%) shall
be owned by and held by qualified investors which shall be limited to industry
associations of banks, quasi-banks and other credit related associations including
associations of consumers. The amount of Seventy-five million pesos
(PhP75,000,000.00) shall be appropriated in the General Appropriations Act for the
subscription of common shares by the National Government to represent its sixty
percent (60%) equity share and the amount of Fifty million pesos

196 | P a g e
 (PhP50,000,000.00) shall be subscribed and paid up by such qualified investors in
accordance with Section 5(d) hereof.

(c) The National Government may subscribe or purchase securities or financial

instrument that may be issued by the Corporation as a supplement to capital.

(d) Equal equity participation in the Corporation shall be offered and held by
qualified private sector investors but in no case shall each of the qualified investor
represented by an association of banks, quasi-banks and other credit-related
associations including the associations of consumers have more than ten percent
(10%) each of the total common shares issued by the Corporation.

(e) The SEC in coordination with relevant government agencies, shall prescribe
additional requirements for the establishment of the Corporation, such as industry
representation, capital structure, number of independent directors, and the process
for nominating directors, and such other requirements to ensure consumer
protection and free, fair and healthy competition in the industry.

(f) The Chairman of the SEC shall be the Chairman of the Board of Directors of the
Corporation. Whenever the Chairman of the SEC is unable to attend a meeting of the
Board, he/she shall designate an Associate Commissioner of the SEC to act as
his/her alternate.

The powers and functions of the Corporation shall be exercised by a board of

directors composed of fifteen (15) members. The directors representing the
government shares shall be appointed by the President of the Philippines.

(g) The directors and principal officers of the Corporation, shall be qualified by the
"fit and proper" rule for bank directors and officers. To maintain the quality of
management of the Corporation and afford better protection to the system and the
public in general, the SEC in coordination with the relevant government agencies,
shall prescribe, pass upon and review the qualifications and disqualifications of
individuals elected or appointed directors of the Corporation and disqualify those
found unfit. After due notice to the board of directors of the Corporation, the SEC
may disqualify, suspend or remove any director who commits or omits an act which
render him unfit for the position. In determining whether an individual is fit and
proper to hold the position of a director of the Corporation, due regard shall be
given to his integrity, experience, education, training and competence.

The members of the Board of Directors must be Filipino citizens and at least thirty
(30) years of age. In addition, they shall be persons of good moral character, of
unquestionable integrity, of known probity, and have attained competence in the
fields of law, finance, economics, computer science or information technology. In
addition to the disqualifications imposed by the Corporation Code, as amended, no
person shall be nominated by the national government if he has been connected
directly with a banking or financial institution as a director or officer, or has
substantial interest therein within three (3) years prior to his appointment.

(h) The Board of Directors may appoint such officers and employees as are not
otherwise provided for in this Act, define their duties, fix their compensations and
impose disciplinary sanctions upon such officers and employees, for cause. The
salaries and other compensation of the officers and employees of the Corporation
shall be exempt from the Salary Standardization Law. Appointments in the
Corporation, except to those which are policy-determining, primarily confidential or
highly technical in nature, shall be made only according to the Civil Service Law.

197 | P a g e
 (i) The Corporation shall acquire and use state-of-the-art technology and facilities in
its operations to ensure its continuing competence and capability to provide
updated negative and positive credit information; to enable the Corporation to relay
credit information electronically as well as in writing to those authorized to have
access to the credit information system; and to insure accuracy of collected, stored
and disseminated credit information. The Corporation shall implement a borrower’s
identification system for the purpose of consolidating credit information.

(j) The provisions of any general or special law to the contrary notwithstanding, the
importation by the Corporation of all equipment, hardware or software, as well as
all other equipment needed for its operations shall be fully exempt from all customs
duties and from all other taxes, assessments and charges related to such
importation.

(k) The Corporation shall have its principal place of business in Metro Manila, but
may maintain branches in such other places as the proper conduct of its business
may require.

(l) Any and all acquisition of goods and services by the Corporation shall be subject
to Procurement Laws.

(m) The national government shall continue to hold sixty percent (60%) of the
common shares for a period not to exceed five (5) years from the date of
commencement of operations of the Corporation. After the said period, the national
government shall dispose of at least twenty percent (20%) of its stockholdings in
the Corporation to qualified investors which shall be limited to industry
associations of banks, quasi-banks and other credit-related associations, including
associations of consumers. The national government shall offer equal equity
participation in the Corporation to all qualified investors. When the ownership of
the majority of the common voting shares of the Corporation passes to private
investors, the stockholders shall cause the adoption and registration with the SEC of
the amended articles of incorporation within three (3) months from such transfer of
ownership.

Section 6. Confidentiality of Credit Information. - The Corporation, the submitting

entities, the accessing entities, the outsource entities, the special accessing entities and the
duly authorized non-accessing entities shall hold the credit information under strict
confidentiality and shall use the same only for the declared purpose of establishing the
creditworthiness of the borrower. Outsource entities which may process and consolidate
basic credit data are absolutely prohibited from releasing such data received from the
Corporation other than to the Corporation.

The accreditation of an accessing entity, a special entity and/or an outsource entity which
violates the confidentiality of, or which misuses, the credit information accessed from the
Corporation, may be suspended or revoked. Any entity which violates this section may be
barred access to the credit information system and penalized pursuant to Section 11 of this
Act.

The Corporation shall be authorized to release and disclose consolidated basic credit data
only to the Accessing Entities, the Special Accessing Entities, the Outsource Entities and
Borrowers. Basic Consolidated basic credit data released to Accessing Entities shall be
limited to those pertaining to existing Borrowers or Borrowers with pending credit
applications. Credit information shall not be released to entities other than those
enumerated under this Section except upon order of the court.

Section 7. Educational Campaign. - A continuing nationwide educational campaign shall

be developed and undertaken by the Corporation to promote the benefits of a credit

198 | P a g e
information system to the economy; to create awareness on the rights of
consumers/borrowers to access their credit reports collected, stored and disseminated by
the Corporation; to disseminate the rights of the borrowers to dispute any
incorrect/inaccurate credit information in the database file of the Corporation; to
familiarize consumers of the procedure in collecting, storing and disseminating credit
information of borrowers by the Corporation; and to brief consumers of other related
information.

Section 8. Rules and Regulations. - For purposes of creating a healthy balance between
the need for reliable credit information and safeguarding consumer protection, ensuring
free and healthy competition in the industry, the SEC, in coordination with relevant
government agencies and existing industry stakeholders, shall issue the implementing
rules and regulations (IRRs), which shall be reviewed, revised and approved by the
Oversight Committee to ensure consistency and compliance with the provisions of this Act,
embodying among others:

(a) The basic credit data shall be limited or confined in form and content to an
objective and factual information and shall exclude any subjective information or
opinion;

(b) Restrictions on the use and transfer of credit information;

(c) Rights of the borrowers to access their respective credit information and to
dispute the factual accuracy of such credit information;

(d) Requirements and standards for the establishment of the Corporation including,
but not limited to, ownership, industry representation, independent directors and
process of nomination of directors;

(e) Accreditation standards for submitting entities and special accessing entities and
non-accessing entities;

(f) Sanctions to be imposed by the Corporation on:

(i) The submitting entities for non-submission of reports and for delayed
and/or erroneous reporting;

(ii) Accessing entities, special accessing entities, outsource entities and duly
authorized non-accessing entities, for breaches of the confidentiality of
misuse of, the credit information obtained from the credit information
system; and

(iii) Violations of other applicable rules and regulations: Provided, That these
administrative sanctions shall be in the form of fines in amounts as may be
determined by the Corporation but in no case to exceed Thirty thousand
pesos (PhP30,000.00) a day for each violation, taking into consideration the
attendant circumstances, such as the nature and gravity of the violation or
irregularity. Imposition of administrative sanctions shall be without
prejudice to any criminal and other sanctions as may be applicable under this
Act and relevant laws;

(g) Suspension or cancellation of the rights of any Accessing Entity or Special

Accessing Entity to access Credit Information from the Corporation; Provided, That
the SEC in coordination with relevant government agencies and existing industry
stakeholders, may issue subsequent regulations consistent with the IRR as approved
by the Congressional Oversight Committee.

199 | P a g e
 In addition, the SEC may regulate access to the credit information system as well as
the fees that shall be collected by the Corporation from the Accessing and Special
Accessing Entities, taking into consideration the policy of lowering the cost of credit,
promoting fair competition, and the need of the Corporation to employ state-of-the-
art technology; and

(h) The basic credit data about a borrower shall be limited to credit information
existing on the date of the enactment of this Act and thereafter.

Section 9. 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 with at least three (3) Senators representing the
minority. The Members of the House of Representatives shall be appointed by the Speaker
with at least three (3) members representing the minority.

After the Oversight Committee approved the implementing rules and regulations, it shall
thereafter become functus officio, and therefore cease to exist: Provided, That the Congress
may revive the Congressional Oversight Committee in case of a need for any major
revision/s in the implementing rules and regulations.

Section 10. Indemnity in Favor of the Corporation, its Officers and Employees. - Unless
the Corporation or any of its officers and employees is found liable for any willful violation
of this Act, bad faith, malice and/or gross negligence, the Submitting Entities, Accessing
Entities, Special Accessing Entities, Outsource Entities and duly authorized non-accessing
entities shall hold the Corporation, its directors, officers and employees free and harmless
to the fullest extent permitted by law and shall indemnify them from any and all liabilities,
losses, claims, demands, damages, deficiencies, costs and expenses of whatsoever kind and
nature that may arise in connection with the performance of their functions without
prejudice to any criminal liability under existing laws.

Section 11. Penalties. - Any person who willfully violates any of the provisions of this Act
or the rules and regulations promulgated by the SEC in coordination with the relevant
government agencies shall, upon conviction, suffer a fine of not less than Fifty thousand
pesos (PhP50,000.00). nor more than One million pesos (PhP1,000,000.00) or
imprisonment of not less than one (1) year nor more than five (5) years, or both, at the
discretion of the court.

Section 12. Inviolable Nature of the Secrecy of Bank Deposits and/or Client Funds. -
Pursuant to Republic Act No. 1405 (Law on Secrecy of Bank Deposits), Republic Act No.
6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The General Banking
Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law) and their amendatory
laws, nothing in this Act shall impair the secrecy of bank deposits and and/or client funds
and investments in government securities or funds.

Section 13. Annual Report. - The SEC shall submit an annual report to Congress on the
status of the implementation of this Act.

Sec. 14. Principal Government Agency. - The SEC shall be the lead government agency to
implement and enforce this Act. As lead agency, the SEC shall consult and coordinate with
other relevant government agencies in the adoption of all rules and regulations for the full
and effective implementation and enforecement of this Act, taking into account the policy
objectives contained in Section 2 hereof.

Section 15. Separability Clause. - Should any provision of this Act or the application
thereof to any person or circumstance be held invalid, the other provisions or sections of
this Act shall not be affected thereby.

200 | P a g e
Section 16. Repealing Clause. - This Act repeals Presidential Decree No. 1941 in its
entirety. All laws, decrees, executive orders, rules and regulations or parts thereof which
are inconsistent with this Act are hereby repealed, amended or modified accordingly.

Section 17. Effectivity Clause. - This Act shall take effect fifteen (15) days following its
publication in the Official Gazette or in at least two (2) newspapers of general circulation.

201 | P a g e
 MALACAÑANG
Manila

PRESIDENTIAL DECREE No. 129 February 15, 1973

GOVERNING THE ESTABLISHMENT, OPERATION AND REGULATION OF INVESTMENT

HOUSES

WHEREAS, there were pending before Congress, prior to the promulgation of Proclamation
No. 1081, dated September 21, 1972, urgent measures proposing the regulation of the so-
called investment banks;

WHEREAS, an extensive survey and study of the Philippine financial system had been
undertaken in order to determine its adequacy in Philippine economic development, and
an integrated set of recommendations were submitted;

WHEREAS, the recommendations, as endorsed with modifications by the monetary

authorities and made the basis of this Decree, advocated the enactment of the statutory
framework within which the underwriting of securities may be governed and, to the extent
that these entities perform quasi-banking functions, to harmonize their operations with
national monetary goals.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of
the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and
General Order No. 1, dated September 22, 1972, as amended, and in order to effect the
desired changes and reforms in the social, economic, and political structure of our society,
do hereby order and decree and make part of the law of the land the following:

Section 1. Title. This Decree shall be known as "The Investment Houses Law".

Section 2. Scope. Any enterprise which engages in the underwriting of securities of other
corporations shall be considered an "Investment House" and shall be subject to the
provisions of this Decree and of other pertinent laws.

Nothing in this Decree shall be understood to preclude other enterprises from engaging in
the mere buying and selling of short-term securities of other persons or enterprises.

Section 3. Definitions. For the purpose of this Decree, unless the context otherwise
indicates, the following definition of terms are hereby adopted:

(a) "Underwriting" is the act or process of guaranteeing the distribution and sale of
securities of any kind issued by another corporation.

(b) "Securities" are written evidences of ownership, interest, or participation, in an

enterprise, or written evidences of indebtedness of a person or enterprise. It
includes, but is not limited to the instruments enumerated in Section 2 of the
Securities Act (Commonwealth Act No. 83, as amended).

Section 4. Organization and registration. Investment Houses shall be organized in the form
of stock corporations.

The Securities and Exchange Commission shall not register the articles of incorporation of
any Investment House, or any amendment thereto, unless it is satisfied from the evidence
submitted to it:

(a) That all the requirements of this Decree and of existing laws or regulations to
engage in the business have been complied with;

202 | P a g e
 (b) That the proposed enterprise will not be in conflict with public interest and
economic growth;

(c) That the amount of capital, the proposed organization, direction and
administration, as well as the integrity, experience and expertise of the organizers
and the proposed managerial staff, provide reasonable assurance that the enterprise
will be conducted with financial prudence.

In determining compliance with the provisions of subsections (b) and (c) above, the
Securities and Exchange Commission shall consult the Monetary Board of the Central Bank
of the Philippines.

All applications for registration of the articles of incorporation of Investment Houses shall
be accompanied by:

1. At least three copies of the proposed articles of incorporation; lawphi1.net

2. A statement under oath of the educational background and experience of the

organizers, directors, and the proposed managerial staff, as well as in information
on any position concurrently held by them in other financial or banking institutions,
if any;

3. A projected statement of assets and liabilities of the proposed Investment House;

4. A tentative program of operation for one year, including its investment direction
and volume; and

5. Such other information as the Securities and Exchange Commission may require
in support of the application and to enable the Commission to determine the
justifiability of establishing the proposed enterprise.

Any enterprise already in operation and exercising the powers of an Investment House
prior to the effectivity of this Decree shall, within six months therefrom, file an information
sheet with the Securities and Exchange Commission in such form and containing such data
as the Securities and Exchange Commission may, at its discretion, require, to enable the
Commission to determine, in consultation with the Monetary Board, whether the
enterprise meets the requirements of this Decree.

Section 5. Citizenship requirements. The majority of the voting stock of any Investment
House shall be owned by citizens of the Philippines. In determining the percentage of
foreign-owned voting stocks in Investment Houses, the basis for the computation shall be
the citizenship of each stockholder, and, with respect to corporate owners of voting stock,
the citizenship of the individual owners of voting stock in the corporation holding shares in
that Investment House.

The majority of the members of the Board shall be citizens of the Philippines.

Section 6. Prohibitions. Except as may be authorized by the Monetary Board, no director or

officer of an Investment House shall concurrently be a director or officer of a bank, as
defined in Section 2 of the Republic Act No. 337, as amended: Provided, however, That in
no event can a person be authorized to be concurrently an officer of an Investment House
and of a bank.

No Investment House shall engage in banking operations as defined in Section 2 of

Republic Act No. 337, as amended.

Section 7. Powers. In addition to the powers granted to corporations in general, an

Investment House is authorized to do the following:

203 | P a g e
 1. Arrange to distribute on a guaranteed basis securities of other corporations and
of the Government or its instrumentalities;

2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange

to distribute on a guaranteed basis securities of other corporations and of the
Government or its instrumentalities;

3. Arrange to distribute or participate in a syndicate undertaking to purchase and

sell on a best-efforts basis securities of other corporations and of the Government or
its instrumentalities;

4. Participate as soliciting dealer or selling group member in tender offers, block

sales, or exchange offering or securities; deal in options, rights or warrants relating
to securities and such other powers which a dealer may exercise under the
Securities Act (Act No. 83, as amended);

5. Promote, sponsor, or otherwise assist and implement ventures, projects and

programs that contribute to the economy's development;

6. Act as financial consultant, investment adviser, or broker;

7. Act as porfolio manager, and/or financial agent, but not as trustee of a trust fund
or trust property as provided for in Chapter VII of Republic Act No. 337, as
amended;

8. Encourage companies to go public, and initiate and/or promote, whenever

warranted, the formation, merger, consolidation, reorganization, or recapitalization
of productive enterprises, by providing assistance or participation in the form of
debt or equity financing or through the extension of financial or technical advice or
service;

9. Undertake or contract for researches, studies and surveys on such matters as

business and economic conditions of various countries, the structure of financial
markets, the institutional arrangements for mobilizing investments;

10. Acquire, own, hold, lease or obtain an interest in real and/or personal property
as may be necessary or appropriate to carry on its objectives and purposes;

11. Design pension, profit-sharing and other employee benefits plans; and

12. Such other activities or business ventures as are directly or indirectly related to
the dealing in securities and other commercial papers, unless otherwise governed or
prohibited by special laws, in which case the special law shall apply.

Nothing in this section shall preclude other enterprises not covered by this Decree from
engaging in the activities listed under subsections (3) to (11) of this section, except as may
otherwise be governed by special laws.

Section 8. Capital. The minimum initial paid-in-capital of any Investment House shall be
twenty million (P20,000,000) pesos.

Section 9. Credit policies. Investment Houses shall coordinate their credit policies with the
general credit policies of the Monetary Board of the Central Bank.

Section 10. Reports. Investment Houses shall submit to the Securities and Exchange
Commission and to the Central Bank a semi-annual report of operations and financial
condition, signed under oath by its chief accountant and verified by its president.

204 | P a g e
The Securities and Exchange Commission may, at its discretion, require Investment Houses
to include their underwriting commitments as contingent accounts in their financial
statements.

Section 11. Regulations. Within six months after the approval of this Decree, the Securities
and Exchange Commission, in coordination with the Central Bank, shall promulgate the
necessary rules and regulations implementing the provisions of this Decree.

Section 12. Central Bank regulatory powers. Investment Houses shall be subject to such
regulations of the Central Bank or non-bank financial intermediaries as may be
promulgated pursuant to Section 2-B of Republic Act No. 337, as amended. The regulations
which may include, but need not be limited to (a) minimum size of fund acceptance or
receipt, (b) methods of marketing and distribution, (c) terms of placement and maturities,
and (d) uses of funds may be modified by the Monetary Board insofar as they apply to
Investment Houses.

The Monetary Board may, at its discretion, determine whether Investment Houses may be
permitted to perform quasi- banking functions as defined in Section 2-D, subsection (b) of
Republic Act No. 337, as amended. The Monetary Board is hereby authorized, at its
discretion, to require any enterprise which is engaged or proposes to engage in quasi-
banking functions to incorporate as an Investment House. If the Monetary Board decides to
permit Investment Houses to engage in quasi-banking functions, the Board may require as
a condition precedent the obtaining of a certificate of authority for the purpose from the
Monetary Board.

Whenever the Monetary Board authorizes an Investment House to engage in quasi-banking

functions, in accordance with the provisions of this section, the Board may subject
Investment Houses to further regulations, pursuant to Republic Act 337, as amended,
which may include but need not necessarily be limited to (a) liquidity reserve
requirements; (b) capital-to-risk assets ratios; (c) interest rate ceilings; and (d) such other
constraints as the Board may deem necessary.

In the exercise of its authority in this section, the Monetary Board may, whenever, it
determines that the circumstances so warrant subject an Investment House to special
examination.

Whenever on the basis of the reports submitted by, or upon examination of the books and
records of, an Investment House, the Central Bank finds that the Investment House is not
complying with the provisions of this section, with the pertinent provisions of this Decree,
of other laws, or of orders, instructions, rules or regulations issued by the Monetary Board
pertaining non-bank financial intermediaries and quasi-banking activities, said Board shall
forthwith issue a cease-and-desist order upon the Investment House concerned. Failure on
the part of an Investment House to comply with the cease-and-desist order shall subject
said Investment House to a fine not exceeding two hundred (P200) pesos for every day the
order is violated, to be imposed by the Monetary Board, without prejudice to the penalties
provided in Section 16 of this Decree.

Section 13. Applicability of Securities Act. An Investment House may engage in the business
of a dealer or a broker under the Securities Act without obtaining a separate license for the
purpose as required in Section 14 of the Securities Act (C.A. No. 83, as amended).

Section 14. Applicability of Corporation Law. The provisions of the Corporation Law (Act
No. 1459, as amended) insofar as they are not in conflict or inconsistent with the
provisions of this Decree shall apply to Investment Houses.

Section 15. Transitory provisions. Existing enterprises which are operating as Investment
Houses shall, within one year following the approval of this Decree, comply with the

205 | P a g e
requirements hereof, except with respect to the filing of an information sheet which shall
be complied with within six months as provided in the last paragraph of Section 4 of this
Decree.

Section 16. Penalties for violation. Upon proof that an Investment House is violating or not
complying with the provisions of this Decree, of other pertinent laws, of the terms or
conditions of its certificate of registration or charter, or of orders, decisions, rulings or
regulations issued by the Securities and Exchange Commission or by the Central Bank of
the Philippines, the Securities and Exchange Commission shall impose upon the Investment
House and collect a fine not exceeding two hundred (P200) pesos per day for every day
during which such violation or non-compliance continues, and/or suspend its certificate of
registration. The officer or director of the Investment House who ordered or authorized the
violation or non-compliance shall be solidarily liable. The fine so imposed shall be paid to
the Government of the Philippines through the Securities and Exchange Commission.

Without prejudice to the provisions of the preceding paragraph any person, or any director
or officer of an Investment House who violates or does not comply with the provisions of
this Decree, of other pertinent laws, of the terms or conditions of its certificate of
registration or charter, or of orders, decisions, rulings or regulations issued by the
Securities and Exchange Commission or by the Central Bank of the Philippines, shall be
punished by a fine of not more than twenty thousand (P20,000) pesos, or an imprisonment
of not more than five years or both, at the discretion of the Court.

Section 17. Separability clause. The provisions of this Decree are hereby declared
separable, and if any clause, sentence, provision or section hereof, or its application to any
person or circumstance should be declared invalid, such invalidity shall not affect the other
provisions of this Decree which can be given force and effect without the provisions which
have been declared invalid.

Section 18. Repeal. All Acts and existing laws inconsistent with this Decree are hereby
repealed.

Section 19. Effectivity. This Decree shall take effect immediately.

206 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 111797 July 17, 1995

CARLOS ANG GOBONSENG, JR. and THERESITA MIMIE ONG-GOBONSENG, petitioners,

vs.
HON. COURT OF APPEALS, STATE INVESTMENT HOUSE, INC., and BENJAMIN V.
DISPUTADO, in his capacity as the Clerk of Court of the Regional Trial Court and
Sheriff of the Province of Negros Oriental, respondents.

DAVIDE, JR., J.:

Well-settled is the rule that the jurisdiction of this Court in cases brought before it from the
Court of Appeals is limited to the review or revision of errors of law and not to analyze or
weigh the evidence all over again.1 The findings of fact of the Court of Appeals are thus final
and conclusive, except in some cases as where such findings are contrary to those of the
trial court, 2 as in this case where the Court of Appeals and the trial court are hopelessly
opposed to each other on their respective findings concerning the issues presented. This
Court is thus called upon to peruse the voluminous records of the case with the trial court
and the Court of Appeals and re-evaluate the evidence adduced by the parties.

The petitioners seek the review and reversal of the decision3 of 16 December 1992 of the
Court of Appeals in CA-G.R. CV No. 30380, as well as its Resolution 4 of 17 February 1993
denying their motion for its reconsideration. This decision reversed the decision5 of the
Regional Trial Court (RTC), Branch 30, Negros Oriental, of 15 October 1990 in Civil Case
No. 8428, entitled "Carlos Ang Gobonseng, Jr., et al. vs. State Investment House, Inc., et al."

Civil Case No. 8428 was commenced on 21 June 1984 with the filing of a complaint6 for the
annulment of/or reformation of documents, signed in blank, such as promissory notes,
credit agreement, real estate mortgage contracts, amended real estate mortgage contracts,
credit agreement, deed of absolute sale, agreement to sell, dacion en pago, and others, and
for damages with preliminary injunction and restraining order by the petitioners
(hereinafter Gobonsengs) against private respondent State Investment House, Inc.
(hereafter SIHI) and public respondent sheriff.

The factual antecedents which led to the filing of the complaint are briefly summarized in
the assailed decision of the Court of Appeals as follows:

Sometime in December, 1982, spouses Carlos A. Gobonseng, Jr. and Theresita

Mimie P. Gobonseng filed with the State Investment House, Inc. at its Branch
Office in Cebu City an application for a P2-million loan. Whereupon, the
parties executed a Credit Agreement [Exhibit "A"] whereby SIHI granted the
Gobonsengs a credit line or accommodation in the sum of P2-million.
Accordingly, the Gobonsengs constituted a Real Estate Mortgage over their
three (3) parcels of land in Dumaguete City covered by Transfer Certificates
of Title Nos. 12979, 13535 and 13607 as collaterals. The mortgage contract
was annotated at the back of said titles [Exhibits "VV-2", "WW-2", and "KK-
2"].

207 | P a g e
 On January 19, 1983, the parties agreed to reduce the amount of the loan
from P2-million to P900,000.00 [Exhibits "5", "5-A"]. An Amended Real
Estate Mortgage [Exhibit "6"] was executed by the parties to reflect the said
amount.

Later, the Gobonsengs again applied for an additional loan of P800,000.00.

SIHI approved the application under the same terms and conditions as the
first loan but with an additional collateral [Exhibit "9"].

Pursuant to their Credit Agreement [Exhibit "7"], SIHI granted the

Gobonsengs credit lines for such amounts which they desire to avail of. The
availments of such amounts, renewable from time to time, have an average
term of sixty (60) days each.

On January 21, 1983, the Gobonsengs availed of the full amount of

P900,000.00 which they renewed from time to time. With respect to the loan
of P800,000.00, the Gobonsengs obtained various amounts in installments.
The term of each loan granted has an average of 60 days. For each renewal, a
corresponding promissory note was executed by the Gobonsengs. Their last
availment of P900,000.00 was on March 15, 1984 payable on May 2, 1984. As
to the loan of P800,000.00 their last availment thereof was on March 2, 1984
payable also on May 2, 1984. These availments are correspondingly covered
by two promissory notes signed by the Gobonsengs [Exhibits "12" and "13"].

On January 21, 1983, SIHI and the Gobonsengs executed a Consultancy

Contract [Exhibit "8"] whereby the Gobonsengs agreed to pay SIHI for its
consultancy services and professional advice.

Claiming that the Gobonsengs failed to pay the two loans on their due date on
May 2, 1984 and that despite demands, failed to remit the payment due, SIHI
instituted an extrajudicial foreclosure proceedings with defendant Provincial
Sheriff Benjamin V. Diputado, who scheduled the auction sale of the spouses'
properties on July 18, 1984 at 9:00 A.M.

On June 21, 1984, before the scheduled date of the foreclosure sale, the
Gobonsengs filed with the court a quo a complaint for
annulment/reformation of documents and damages with prayer for a
temporary restraining order and preliminary injunction against SIHI and
Benjamin V. Diputado, in his capacity as Clerk of Court of the Regional Trial
Court and Sheriff of Negros Oriental. As stated above, the complaint was
docketed as Civil Case No. 8428.7

On 27 June 1984, the trial court issued a temporary restraining order directing the
provincial sheriff of Negros Oriental to cease and desist, until further orders from the court,
from conducting extrajudicial foreclosure proceedings of the real estate mortgages
executed by the Gobonsengs.8 It also set for hearing on 11 July 1984 the application for a
writ of preliminary injunction9 which SIHI vigorously opposed. 10

In its Answer filed on 30 July 1984, 11 SIHI denied the material allegations in the complaint
and alleged the following: (1) the credit agreement for P2 million which the Gobonsengs
signed on 27 December 1982 was amended and correspondingly adjusted to P900,000.00
on 19 January 1983; (2) on 21 January 1983, the Gobonsengs executed a Consultancy
Contract; (3) they later availed of their P900,000.00 credit line and were granted by SIHI a
loan in the said amount which was renewed from time to time for a term averaging sixty
days; (4) on 23 August 1983, the Gobonsengs, upon an additional collateral, applied for and
were granted an additional loan of P800,000.00 which was renewed from time to time on
an average term of sixty days, the last of which prior to the filing of the complaint, was on 2

208 | P a g e
March 1984 to mature sixty-one days thereafter, or on 2 May 1984; (5) the loan of
P900,000.00 was last renewed on 15 March 1984 prior to the filing of the case and which
was to mature forty-eight days thereafter, or on 2 May 1984; (6) when both the
P800,000.00 and P900,000.00 loans matured on 2 May 1984, the Gobonsengs failed to
remit correct payments thus placing their loans on past-due status; and (7) since demands
for payment were to no avail, SIHI initiated the extrajudicial foreclosure of the real estate
mortgage contracts.

After due hearing, the trial court denied on 10 July 1985 the application for a writ of
preliminary injunction for lack of "clear, convincing and unquestioned evidence." 12 After
their motion for its reconsideration 13 was denied in an order dated 13 September
1985, 14 the Gobonsengs sought relief therefrom in the then Intermediate Appellate Court
through a special civil action for certiorari which was docketed as AC-G.R. SP No. 07153. In
its decision of 20 September 1985, 15 the said court dismissed the case for lack of merit. The
Gobonsengs then filed with this Court a petition under Rule 45 of the Rules of Court to seek
the review of the dismissal of AC-G.R. SP No. 07153. That petition was docketed as G.R. No.
72131. Upon its filing, this Court issued a temporary restraining order enjoining the
provincial sheriff of Negros Oriental from proceeding with the publication of the notice of
the auction sale of the mortgaged lots set on 28 September 1985, 5 October 1985, 12
October 1985, and 16 October 1985. 16 Eventually, in a resolution dated 22 October 1986,
this Court denied the petition for lack of merit considering that "the basic controversy
between the parties involves factual issues, particularly, the maturity dates of the
promissory notes evidencing the indebtedness, petitioners claiming six (6) years, while the
SIHI 60 to 48 days" 17 The Gobonsengs seasonably filed a motion for reconsideration which
was denied with finality in the resolution of 18 February 1987.18With leave of court, 19 they
filed a second motion for reconsideration 20 based on alleged newly discovered evidence
consisting of photocopies of advice slips sent by SIHI to the Gobonsengs and an inter-office
memorandum dated 13 December 1992 of one Shirley T. Uy addressed to Marline Chiu
Ostia, who were the officer-in-charge and assistant officer-in-charge of SIHI's Cebu City
Branch Office, respectively, showing that the Gobonsengs' loans were for a period of six
years. This Court granted the motion in the resolution of 20 May 1987, 21 and set aside the
decision of the Court of Appeals, remanded the case to the trial court for trial on the merits
of the main case, and issued a temporary restraining order enjoining SIHI from foreclosing
the real estate mortgage executed by the Gobonsengs until after the merits of the main case
shall have been resolved. In the said resolution, this Court stated, inter alia:

Considering the conflicting factual allegations of the parties; the admitted

fact that petitioners were made to sign blank promissory notes, real estate
mortgages, etc., by SIHI (Rejoinder to Reply, p. 298,Rollo; Opposition to
Petitioners' Motion for Reconsideration, p. 406, ibid.); the "newly discovered
evidence" of petitioners, the genuineness and authenticity of which will have
to be inquired into and which, if proven, would materially affect the results of
the case, the Court Resolved to SET ASIDE the Decision of respondent
Appellate Court and to REMAND this case to the Regional Trial Court of
Negros Oriental, Branch XXX, Dumaguete City, for trial on the merits of the
main case, which said Court is hereby directed to conduct with deliberate
dispatch. 22

As a consequence of the foregoing resolution, the trial court issued two separate orders:
the first, denying SIHI's urgent motion to require the sheriff to proceed with the foreclosure
sale, 23 and the second, setting the case for pre-trial. 24

At the pre-trial on 26 August 1987, the parties stipulated on the issues to be resolved, to
wit:

1 Whether or not the term of the loans for P900,000.00 and P800,000.00 are
for six (6) years, respectively; and

209 | P a g e
 2 Whether the documents known as Credit Agreements, Promissory Notes,
Real Estate Mortgage Contracts, Consultancy Contracts and Agreements
ancillary thereto are the result of a meeting of the minds of the parties and
actually reflected their true intentions.

and agreed that the evidence they had adduced on the application for preliminary
injunction would be deemed reproduced as part of their evidence on the merits of the main
case. 25 Thereafter, they presented their additional evidence.

On 15 October 1990, the trial court rendered its decision, 26 the dispositive portion of
which reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Declaring the term of Plaintiffs' indebtedness to Defendant SIHI to be SIX

(6) Years from and after January, 1983 in the case of P900,000.00 Loan and
from and after August, 1983 in the case of the P800,000.00 Loan;

(2) Declaring the promissory notes covering the Loan indebtedness of

Plaintiffs to Defendant SIHI to be unenforceable insofar as they contain terms
of 61 days or Less for maturity;

(3) Ordering the parties Plaintiffs and Defendant SIHI to reform the
promissory notes so as to change the term of the indebtedness of
P1,700,000.00 to SIX (6) Years from January, 1983 on the P900,000.00 Loan
and from August, 1983 on the P800,000.00 Loan;

(4) Applying the total amount of P327,300.00 paid by Plaintiff as consultancy

fees to advance interest, effective after May, 1984;

(5) Ordering Defendant SIHI to reimburse Plaintiffs the amounts of

P2,000.00 and P2,800.00 they paid to the Dumaguete Informer and the
Vanguard, respectively, for publication of the notice of extrajudicial sale with
interest at the legal rate from December 10, 1986 and September 11, 1987,
respectively;

(6) Ordering Defendant SIHI to release, from the Real Estate Mortgage, the
properties of Plaintiffs situated along Alfonso XIII Street in Dumaguete City,
covered by Transfer Certificate of Title No. 12992 and at the corner of Real
and Urdaneta Sts. in Dumaguete City covered by Transfer Certificate of Title
No. 13607;

(7) Ordering Defendant SIHI to pay Plaintiffs the amount of P10,000.00 in

moral damages and P10,000.00 as and for attorney's fees;

(8) Ordering the Defendant Provincial Sheriff or anyone presently occupying

and discharging the duties of said office to desist and refrain from proceeding
with the extrajudicial foreclosure and sale of the mortgaged properties of the
Plaintiff which are involved in this case; and

(9) Ordering Defendant SIHI to pay the costs.

(10) Dismissing Defendant SIHI's counterclaim for lack of merit.

SO ORDERED. 27

It found "overwhelming evidence that the term of Plaintiffs' loan with Defendant SIHI was
SIX (6) years — evidence which Defendant SIHI failed to overthrow," and "[s]ince the

210 | P a g e
loan[s] of P900,000.00 and P800,000.00 were obtained by Plaintiffs sometime in the year
1983, they did not yet mature sometime in June, 1984 when Defendant SIHI wrote to the
Provincial Sheriff of Negros Oriental seeking foreclosure of the mortgages." 28

In upholding the theory of the Gobonsengs that the term of the loans of P900,000.00 and
P800,000.00 was six years, the trial court gave credit to the testimonies of petitioner Carlos
Gobonseng, Jr. and Joaquin Castro. It also favorably considered Exhibits "GGG" and "EEEE"
which are photocopies of the alleged inter-office memorandum of 13 December 1982 on a
letterhead of SIHI from Shirley T. Uy to Marline Chiu Ostia (Officer-in-charge and Assistant
officer-in-charge, respectively, of SIHI's Cebu office) with Exhibit "EEEE" purporting to be a
true photocopy certified by one Azonne Tan (Loan-in-charge), as well as the photocopies of
alleged credit advice slips marked as Exhibits "III," "JJJ," "JJJ-1," "JJJ-2," and "JJJ-3," which
indicate the following notations:

PERIOD-PRINCIPAL/6 years
PERIOD-INTEREST/30-60 days
TERM: Six (6) years.

Exhibit "EEEE," which is quoted in the challenged decision of the Court of Appeals, reads as
follows:

INTER OFFICE MEMO: STATE INVESTMENT HOUSE, INC.

Your Ref :
Our Ref :
Dated : Dec. 13, 1982

TO: MS. MARLINE CHIU OSTIA

Asst. Officer-In-Charge

FROM: MS. SHIRLEY T. Uy

Officer-In-Charge

SUBJECT: CARLOS A. GOBONSENG, JR. LOANS

Received Telex Advice from VP Tito

Lopez-Dee approved Gobonseng
Loans of P4.3 M.

P2.0 M — Secured with TCT Nos.

12979, 13607 and 13535

P2.3 M — Secured with TCT No.

12992

TERM: 6 years

INTEREST: 15.5% P.A..

(Sgd) SHIRLEY T. UY
Shirley T. Uy

CERTIFIED TRUE XEROX COPY

Loan-In-Charge
11/19/87
48-6461
Azonne Tan 29

211 | P a g e
The trial court believed the allegations of the Gobonsengs that they obtained Exhibit "GGG"
from SIHI's Manila Office on 23 March 1987 and Exhibit "EEEE" on 19 November 1987 and
that they came into possession of Exhibits "III," "JJJ," "JJJ-1," "JJJ-2," and "JJJ-3," contained in
SIHI's window envelopes (Exhibits "CCCC-1" to "CCCC-4"), only sometime in March 1987
when Carlos Gobonseng, Jr. was told by his septuagenarian mother while they were in their
beach house in Bacong, Negros Oriental, that she received them at his old address. Carlos
Gobonseng, Jr. further testified that when he went to SIHI's office in Manila in March 1987
he was shown his loan record and on that occasion saw the credit availment and the inter-
office memorandum (Exhibit "GGG").

Joaquin Castro, former Credit Supervisor and later Assistant Manager of SIHI's Cebu Branch
who was the first appraiser assigned by SIHI to appraise the properties offered as security
by the Gobonsengs, confirmed the existence of the inter-office memorandum (Exhibits
"GGG" and "EEEE") and described the loan of the Gobonsengs as "long term," for a term of
six years.

The trial court disregarded the testimony of Augusto Lopez-Dee, SIHI's Vice-President, that
he did not send any telex to the Cebu Branch because Shirley Uy failed to categorically deny
the inter-office memorandum which Joaquin Castro said he saw at the time it was
prepared. It also disregarded the documentary evidence for SIHI showing that the original
copies (Exhibits "26," "27," "28," "29," and "30") of the credit advice slips offered in
evidence by the Gobonsengs have unfilled blanks for the lines PERIOD-PRINCIPAL and
PERIOD-INTEREST while the box for Description in each has the entry Purchase of
Commercial Papers for (days indicated) because the photocopies presented by the
Gobonsengs appear to be that of the CLIENT'S COPY of a set of credit advices and, although
Dee testified that SIHI does not "normally" send photocopies thereof, there was no
evidence that the normal practice was followed with respect to the Gobonsengs' credit
advices.30

In concluding that the promissory notes did not reflect the true intention of the parties, the
trial court relied heavily on the signing by the Gobonsengs of several documents, including
blank promissory notes and authority to apply loan proceeds (Exhibits "II," "II-A" to "II-J")
whose blanks were thereafter filled up by SIHI without the participation of the Gobonsengs.
The signing by the Gobonsengs of these documents in blank is admitted by SIHI in its
Answer and by its witnesses Mariano Borromeo, who executed on 28 April 1983 a receipt
(Exhibit "K") acknowledging delivery to him by the Gobonsengs of six sets of signed blank
promissory notes, and Shirley Uy, who explicitly admitted that the Gobonsengs were made
to sign blank SIHI forms such as promissory notes. The trial court also considered the
receipt by SIHI of twenty sets of blank promissory notes (Exhibit "L") from the Gobonsengs
on 13 November 1983. In the authority to apply loan proceeds, the Gobonsengs
"purportedly authorized Defendant SIHI to apply the plaintiffs' 'loan proceeds' under
certain Code numbers as 'full/partial payment' of another loan with another Code based on
certain maturity dates." 31

The trial court also observed that the Consultancy Contract dated 21 January 1983 (Exhibit
"UU," also Exhibit "8") provides, inter alia, "that (such consultancy) services and
professional advises can be communicated with directly or indirectly, verbally or in
writing," and such fees are to be fixed "on the basis of manhours spent in rendering the
service or on the basis of the volume of consultancy work"; such fees are "payable to the
CONSULTANT (SIHI) by the CLIENT upon presentation of the bill to the CLIENT." 32 It
found, however, that SIHI had not presented satisfactory evidence of consultancy service,
for it had not communicated to the Gobonsengs "either directly or indirectly, verbally or in
writing" the nature and extent of such consultancy services and had not presented to them
a "bill" therefor based on manhours spent in rendering the same. Moreover, it noted that
the official receipts issued by SIHI to the Gobonsengs for the so-called consultancy services
show that the amounts periodically paid are almost uniform, despite the fact that such fees

212 | P a g e
are supposed to be based on "manhours spent" or on "volume of consultancy work"; and
considering that "it may be assumed that the manhours spent or the volume of consultancy
work are bigger at the beginning of any business venture, they [should] considerably
decrease to a minimum as time goes on and the businessman, in the process, acquires
certain skills and familiarity with appropriate business techniques [such] that he naturally
would need only a little more help or even none of it at all, from his consultant." 33It then
concluded that this uniformity is indicative of payment of interests and not of consultancy
fees.

In allowing the release of excess collaterals, the trial court gave credit to the evidence of the
Gobonsengs that the assessed or market value of the four mortgaged lots is "much bigger
than their loan indebtedness of P1,700,000.00, which is now even reduced by P7,415.86 as
of May 2, 1984 (Exh. "16-A")," 34 and since the offer of the said properties "was predicated
on the availability of a credit line of P4,300,000.00 which was approved by Defendant SIHI
but was not fully satisfied," it then "stands to reason that some of those properties must be .
. . released." 35

On appeal to the Court of Appeals (CA-G.R. CV No. 30380), this decision was "reversed and
set aside" in the appellate court's decision of 16 December 1992. 36

The findings and conclusion of the Court of Appeals revolve on the "basic issue [of] whether
or not the 'newly discovered evidence' of the Gobonsengs . . . have proved that the term of
the two loans is 6 years instead of the terms reflected in the loan documents." Resolving the
said issue, it stated:

We have closely examined appellees' xerox copies of SIHI's advice slips and
found the entries "6 years" after the printed words "Period-Principal." We
likewise scrutinized the original copies of SIHI's advice slips and observed
that the spaces after the printed words "Period-Principal" and "Period-
interest" are blank.

Section 2, Rule 130 of the Revised Rules of Court is pertinent, thus:

Sec. 2 Original writing must be produced, exceptions. — There can be no

evidence of a writing the contents of which is the subject of inquiry, other
than the original writing itself, except in the following cases:

(a) When the original has been Lost, destroyed, or cannot be

produced in court;

(b) When the original is in the possession of the party against

whom the evidence is offered, and the latter fails to produce it
after reasonable notice;

xxx xxx xxx

In the case at bar, SIHI produced the original copies of the advice slips before
the trial court. Consequently, pursuant to the above Rule, the trial court
should not have admitted in evidence the xerox copies offered by the
appellees. Indeed, We are inclined to believe that the window-envelopes
received by the appellees from SIHI contained the pink copies or duplicate
originals. For why should SIHI send them mere xerox copies which were not
even duly certified? We agree with SIHI that the appellees would not produce
these pink copies for the same would be adverse to them. At this juncture,
suffice it to state that obviously these pink copies can easily be xerox copied,
with prior alteration/s of the entries therein.

213 | P a g e
 Similarly, the inter-office-memo, also in xerox copy, should not have been
admitted in evidence and given weight by the trial court. An inter-office
memo is supposed to be kept only in the office concerned. Moreover, Corazon
"Azonne" Tan vehemently denied that she has been authorized by SIHI to
certify the authenticity of xerox copies of documents and more importantly,
that she made the certification in question.

Verily, the appellees' reliance on their "newly discovered evidence" to prove

that the terms of the two loans is 6 years is misplaced.

A close scrutiny of the Credit Agreement and SIHI's original advice slips
shows that every availment of the loans, either wholly or partially, is
renewable from time to time and has an average term of 60 days. Appellees'
last availment of the P900,000.00 loan was on March 15, 1984 payable on
May 2, 1984. Their last availment of the loan of P800,000.00 was on March 2,
1984, also due on May 2, 1984. These terms are clearly reflected in the two
promissory notes signed by the appellees. The words of these promissory
notes are clear and leave no doubt upon the true intention of the contracting
parties.

On the matter of excessive consultancy fees, the appellees' posture is that

they did not willingly agree to the Consultancy Contract which "they signed
in blank."

By signing the various loan documents, such as Credit Agreement, Real Estate
Mortgages, Promissory Notes and Consultancy Contract, the appellees' are
presumed to be aware of the consequences of their action. Considering that
Carlos A. Gobonseng, Jr. is a certified public accountant, a law graduate and a
businessman, he is supposed to have acted with due care by meticulously
reading the terms and conditions of those contracts before affixing his
signature thereon and to have signed those loan agreements with full
knowledge of their contents as well as the corresponding obligations and
responsibilities.

It bears stressing that contracts are respected as the law between the
contracting parties and that they may not be reformed "simply because a
party later finds itself at the shorter end of an unwise bargain."

In Mata vs. Court of Appeals, et al. [G.R. No. 87880, April 7, 1992, citing Tan
Sua Sia vs. Yu Baio Sontua, 56 Phil. 711], the Supreme Court pertinently held:

. . . The rule that one who signs a contract is presumed to know

its contents has been applied even to contracts of illiterate
persons on the ground that if such persons are unable to read,
they are negligent if they fail to have the contract read to them.
If a person cannot read the instrument, it is as much his duty to
procure some reliable persons to read and explain it to him,
before he signs it, as it would be to read it before he signed it if
he were able to do so and his failure to obtain a reading and
explanation of it is such gross negligence as will estop him
from avoiding it on the ground that he was ignorant of its
contents. (Emphasis supplied).

The requisites of reformation of a contract as enumerated in Article 1359 of

the Civil Code are:

1 There must have been a meeting of the minds to a contract;

214 | P a g e
 2 The instrument or document evidencing the contract does not express the
true intention of the parties; and

3 The failure of the instrument to express the true intention of the parties
must be due to mistake, fraud, inequitable conduct or accident.

The reason why reformation is not available here is that contrary to the
second requisite, the promissory notes in question do express the true
intention of the parties as to the terms of the two loans.

As to the holding of the trial court that certain collaterals should be released,
well entrenched in law is the rule that a mortgage directly and immediately
subjects the property upon which it is imposed [Article 2126, Civil Code], the
same being indivisible even though the debt may be divided [Article
2089, Ibid.] and such indivisibility likewise being unaffected by the fact that
the debtors are not solidarily liable. [Article 2090, Ibid.] . . . .

All told, the intention of the parties is quite clear to the effect that the term of
the two loans is not 6 years, but up to May 2, 1984 only; so also their
intentions in their Consultancy Contract and Real Estate Mortgages. 37

Since their motion for a reconsideration of the decision was denied, the petitioners filed on
24 September 1993 the instant petition for review. They impute to the Court of Appeals the
commission of the following errors:

THE RESPONDENT COURT OF APPEALS COMMITTED A GRAVE

MISAPPREHENSION OF THE FACTS AND A GROSS MISAPPRECIATION OF
THE EVIDENCE WHEN IT HELD THAT THE TERM OF THE LOANS OF
PETITIONERS WITH PRIVATE RESPONDENT SIHI IS SIXTY (60) DAYS ONLY,
AND NOT SIX (6) YEARS AS CLEARLY BORNE OUT BY THE EVIDENCE AND
THE RECORD OF THIS CASE AS WELL AS RESPONDENT SIHI'S DOCUMENTS.

II

THE RESPONDENT COURT OF APPEALS COMMITTED A PATENT AND

GRAVE REVERSIBLE ERROR WHEN IT DID NOT DECLARE NULL AND VOID
THE COLLECTION OF CONSULTANCY FEES BY THE PRIVATE RESPONDENT
SIHI. THE COLLECTION THEREOF BEING UNJUSTIFIED AND INVALID.

III

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT

UPHOLDING THE DECISION OF THE LOWER COURT ORDERING THE
RELEASE OF EXCESS COLLATERALS IN FAVOR OF THE PETITIONERS.

IV

THE RESPONDENT COURT OF APPEALS, IN SUMMARILY DENYING

PETITIONERS' MOTION FOR RECONSIDERATION, VIOLATED THE
PROVISIONS OF THE CONSTITUTION.

THE RESPONDENT COURT OF APPEALS SERIOUSLY ERRED IN NOT

AWARDING DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE
PETITIONERS. 38

215 | P a g e
The parties themselves are to be blamed for the difficulty in determining the term of the
loans in question and the disagreement thereon between the trial court and the Court of
Appeals. For reasons only known to themselves, they did not disclose to the trial court all
the pieces of evidence which could establish their true agreement as to such term. The
Gobonsengs did not ask for the production of the entire records of their transactions with
SIHI which necessarily started with their application for a credit line. Neither did SIHI offer
them in evidence. The application and the approval thereof would shed much light on the
issue, yet SIHI opted to suppress from the court the said records. SIHI's Vice-President,
Augusto Lopez-Dee, proved to be of little help since he could not categorically testify that
the actual term of the credit facility was six years. The best that he could do was to state
that it was short term, "around 60 days normally," 39 and to deny having sent a telex advice
on 13 December 1982 to the Cebu Branch Office to the effect that the approved Gobonseng
loan was for P4.3 million for the term of six years with interest of 15.5% per annum as
purportedly indicated in Exhibit "GGG." 40 Further compounding the matter is Shirley Uy's
claim that "there was no such arrangement on such terms" 41 and the established fact that
the Gobonsengs affixed their signatures even before the approval of the application for a
credit line on blank SIHI standard forms of credit agreement, real estate mortgage
contracts, promissory notes, consultancy agreement, authority to apply loans, and other
documents.

All that we have then on the alleged 6-year term of the credit line are the declarations of
Carlos Gobonseng, Jr. and Joaquin Castro that such was the term with interest at 15.5% per
annum, and Exhibits "GGG," "EEEE," "III," "JJJ," "JJJ-1," "JJJ-2" and "JJJ-3."

Carlos Ang Gobonseng, Jr. declared as follows:

Atty. Lumjod:

Q What else did you talk with Vice-President Roxas with

respect to your loan if any?

A After I talked with Allen Roxas, he told me that he will send a

telex to Shirley Uy about my loan for P2,000,000.00 and after
which, I also met Daniel Chong, the President of State
Investment House, Inc. and I requested him that I needed a
longer term because my loan here at IBAA was also for a longer
term and to which, Daniel Chong granted my request. So, when
I came to Cebu, Shirley Uy showed me the telex that the loan is
P2,000,000.00 for 6 year term and at the rate of 15.5% per
annum.

xxx xxx xxx

Q So, a term of 6 years and with an interest at 15.5% per

annum was granted to you in Manila by Pres. Daniel Chong and
Vice President Alien Roxas?

A Yes.

Q And so, with that, you went to Cebu City and you met Shirley
Uy, the Branch Manager of State Investment House, Inc. and
she also showed you the telex and the loan was for 6 years and
the interest was at 15.5% per annum?

A Yes.

216 | P a g e
 Q How about the payment of the interest, what was the manner
of payment of interest?

A As per our arrangement with Vice-President Allen Roxas and

President Daniel Chong, the interest is payable every 60
days. 42

xxx xxx xxx

Q . . . now, you said, Mr. Gobonseng, that after you have agreed
with President Daniel Chong and Vice-President Allen Roxas of
your P2,000,000.00 loan with an interest of 15.5% for a term of
six (6) years, you went to Shirley Uy in Cebu City to their Cebu
Branch, and you saw a telex to the effect that the term of your
loan is 6 years, among others, how did you happen to see the
telex?

A Because I just wanted to follow-up whether Daniel Chong

had telex to Cebu and as per advice of Daniel Chong and Allen
Roxas, they really sent a telex to Cebu that the term of my loan
is for 6 years at 15.5% interest per annum.

Q Whom did you ask in Cebu if there was any telex?

A Shirley Uy.

Q And, when you asked Shirley Uy whether there was a telex,

what was the reply?

A Well, Shirley Uy said that the instruction from the top is here
so, that is the term payable for 6 years and at 15.5%
interest per annum.

Q When Shirley Uy told you it's here, what did Shirley Uy show
to you?

A A PT & T Telex paper, a piece of bond paper.

Q Did you read the message?

A Yes, she showed me.

Q And, to the best of your recollection, what was the substance

of the telex?

A Carlos Ang Gobonseng and Theresita Mimie Ong-Gobonseng,

the term of the loan is 6 years at the rate of interest 15.5%
payable for 6 years.

Q To that effect?

A Yes. 43

He further testified that on 23 March 1987 when he went to the head office of SIHI in
Binondo, Manila, the officer-in-charge of the Branch Department showed him a folder
pertaining to his credit line availment which disclosed that his approved loan applications
was for six years with interest of 15.5% per annum. 44

217 | P a g e
Joaquin Castro also testified that the Gobonsengs' loan was for a period of six years at
15.5% interest per annum. Thus:

Atty. Lumjod:

Q And, what transpired between Shirley Uy and Gobonseng in

your presence?

A They were discussing about the term of the loan.

Q And, what was the term of the loan granted by SIHI to Mr.
Gobonseng?

xxx xxx xxx

A The amount of the loan is P2 million at 15.5% interest per

annum for a term of 6 years.

Atty. Lumjod:

Q That was the agreement or conversation between Shirley Uy

and Mr. Gobonseng?

A Yes.

xxx xxx xxx

Q Now, in that conversation between Shirley Uy and Mr.

Gobonseng, did you notice if Mr. Gobonseng was shown by
Shirley Uy a communication from the Head Office, Manila?

A Yes.

Q What was that communication?

A We have a Telex facility in our office and communications

coming from Manila are relayed thru our Telex facility in the
office of course, thru our OIC.

Q Did you see that Telex communication from Manila?

A Yes.

xxx xxx xxx

Q What was in this telex communication?

A Advice of approval for P2 million.

Q With respect to the terms and interests?

A As I said, the interest is 15.5% for a term of 6 years. 45

Castro further stated that the Gobonsengs' loan was a long term loan because it was in
excess of P500,000.00 and, therefore, carried a longer maturity period of over two
years, 46 and that although he knew that SIHI charged consultancy fees, he did not know the
reason therefor 47 because he did not see SIHI render any such service. 48

218 | P a g e
Confronted with these direct and positive testimonies, SIHI should have produced its file of
the Gobonseng account to demonstrate beyond doubt that the documents claimed to have
been seen by Carlos Gobonseng, Jr. and Castro are but figments of their imagination.
Nevertheless, unlike the trial court, we cannot give credit to the claims of Carlos
Gobonseng, Jr. and Joaquin Castro that they saw the telex indicating that the approved loan
was for P4.2 million for a term of six years with interest of 15.5% per annum.

On cross-examination, Carlos Gobonseng, Jr. admitted that he saw the telex before he
signed the documents in blank. Thus:

Atty. Hermosisima, Jr.:

Q When did you see the telex for the first time before or after
you signed all those documents that you said you were made to
sign in blank?

A I think, that was before the signing of the documents.

Q So, you saw the telex before you signed all those documents?

A Before. 49

However, his previous testimony on direct examination, during the hearing for the Petition
for Injunction, is to the effect that he signed the documents in blank before the approval of
the application of the credit line. 50 This was confirmed by Shirley Uy herself who testified
on cross-examination as follows:

Q The application of Mr. Gobonseng for P2 million when you

forwarded the same to Manila, it was not yet approved?

A No.

Q And, you told Mr. Gobonseng, you said you told Mr.
Gobonseng that it will take sometime before he will know
whether the loan will be approved or disapproved?

A Yes, of course.

Q And, you said Mr. Gobonseng signed certain documents while

his application is still in Manila?

A Pending approval.

xxx xxx xxx

Q At that time when you said that you told Mr. Gobonseng that
it will still take time for his application to be approved or
disapproved, you said that Mr. Gobonseng signed certain
papers, certain documents, you said that Mr. Gobonseng signed
certain papers and documents, did you not say that?

A Yes, I did. 51

Clearly then, since the signing of the blank documents took place before the approval of the
application for a credit line, Carlos Gobonseng, Jr. could not have seen the telex he imagined
he saw. Also, the Gobonsengs, thru Exhibits "GGG" and "EEEE," tried to represent that, as
conveyed by Vice-President Augusto Lopez-Dee through the telex of 13 December 1982,
the approved loans were for a total of P4.3 million with a term of six years and with

219 | P a g e
interest of 15.5% per annum. They forgot that by their oral evidence they had proved
another version, i.e., the approved loan was for P2 million. Carlos Gobonseng, Jr. was very
emphatic in his testimony that in December of 1982 his transaction with SIHI involved only
a loan of P2 million, thus:

Q Now, sometime in December, 1982, do you recall if you had

any transaction with defendant State Investment House, Inc.?

A Yes, sir.

Q What was your transaction?

A It is a credit accommodation of P2,000,000.00 loan. 52

and that the telex purportedly shown to him by Shirley Uy mentioned a grant of his request
for a P2 million loan. Thus:

Q What else did you talk with Vice President Roxas with
respect to your loan if any?

A After I talked with Allen Roxas, he told me that he will send a

telex to Shirley Uy about my loan for P2,000,000.00 and after
which, I also met Daniel Chong, the President of State
Investment House, Inc. and I requested him that I needed a
longer term and to which, Daniel Chong granted my request.
So, when I came to Cebu, Shirley Uy showed me the telex that the
loan is P2,000,000.00 for 6 year term and at the rate of 15.5%
per annum. 53 [emphasis supplied]

As also earlier shown in the quoted portion of his testimony, Joaquin Castro referred to an
approved loan of P2 million and a telex relative to the approval thereof. Furthermore, the
Gobonsengs exerted no effort in securing the production through compulsory process of
the original copies of this telex and the inter-office memorandum supposedly referring to it.
Their existence then becomes doubtful.

We agree with the Court of Appeals that Exhibits "GGG" and "EEEE" are inadmissible in
evidence, not because the inter-office memorandum concerned ought to be kept only in the
office of SIHI or that Corazon (Azonne) Tan was not authorized by SIHI to certify the
authenticity of the photocopy or that the so-called certification by Corazon Tan on Exhibit
"EEEE" was fraudulently obtained as disclosed in her testimony, but because of the fact that
they are mere photocopies, hence their admission is barred by the best evidence rule under
Section 2, Rule 130 of the Rules of Court. The fraud in obtaining the certification of Corazon
Tan is, of course, obvious upon the face of the exhibit itself. It is placed at the bottom left
hand corner of the paper several inches below the body of the alleged inter-office
memorandum that occupies only the upper half of the paper. This strange and unusual
location of the certification is consistent with and strengthens the testimony of Corazon
Tan that what she was asked to do was merely to write her name and telephone number
which she did on a folded white bond paper as requested by a "boy" who came to the office
as a representative of Carlos Gobonseng, Jr.54 It may be noted that Exhibit "EEEE" is a
photocopy with the words CERTIFIED TRUE XEROX COPY typed thereon as shown by the
impression at the back thereof. Moreover, it appears in Exhibit "EEEE" that Corazon Tan
was the Loan-in-charge, when in fact she was the Security Custodian of the loans section of
SIHI.55

The Court of Appeals also correctly ruled that Exhibits "III," "JJJ," JJJ-1," "JJJ-2," and "JJJ-3"
are inadmissible in evidence. They are plain photocopies, hence, their admission in
evidence are also barred by the best evidence rule. The explanation of Carlos Gobonseng, Jr.

220 | P a g e
that these were received by his 75-year old mother in his old address who told him about
the said window envelopes 56 only on 8 March 1987 does not inspire belief because he
candidly admitted on cross-examination that aside from these exhibits he never received
from SIHI photocopies of any other documents. 57 In other words, what he used to receive
were not photocopies. What can be concluded then is that the Gobonsengs actually
received the original documents which they should have produced and that the said
exhibits were photocopies of the client's copies for the words Client Copy are clearly
reproduced therein. 58

Nonetheless, even if Exhibits "GGG," "EEEE," "III," "JJJ", "JJJ-1,""JJJ-2" and "JJJ-3" are to be
disregarded, the attendant circumstances in this case overwhelmingly support a conclusion
that the credit line applied for was for a longer term or duration which is to be availed of by
promissory notes based on the interest period of, normally, sixty days. Firstly, Shirley Uy
convincingly testified that the Gobonsengs applied for a credit line which, when approved,
would be evidenced by a credit agreement. 59 According to Shirley Uy, a credit agreement is
"merely a general agreement wherein SIHI gives clients the privilege of [its] credit line until
such time that the line is revoked, cancelled or the line has defaulted." 60 Thus, it is
indefinite.

Secondly, the Gobonsengs, on two separate occasions, had stated that the credit facility was
needed to finance the working capital for their palay and corn grits business, as testified to
by Shirley Uy, 61 and/or for their drugstore, as testified to by Augusto Lopez Dee. 62 Indeed,
the Attachment to the Credit Agreement (Exhibit "7"), 63 expressly provides:

AS PARAGRAPH 2 OF THE AGREEMENT. The proceeds of the loan shall be

used and applied exclusively by the BORROWER for working capital
purposes as presented in detail by the BORROWER in its/his loan application
and the papers, documents, or reports submitted in connection therewith to
the LENDER.

And because the unequivocal purpose of obtaining the credit facility or the loan is to
finance the working capital for any of their businesses, the parties, SIHI and the
Gobonsengs, could not have contemplated a short term credit line.

Thirdly, a credit line may be availed of by the issuance of promissory notes for as long as
the credit line lasts. It was precisely for this reason that the Gobonsengs signed even before
the approval of their application for a credit line SIHI's standard promissory notes the
blanks of which would be filled up by SIHI at appropriate times, such as upon the release of
the original loans or upon the subsequent renewals or roll-overs, if the principal is unpaid,
on the basis of the interest period. Under the credit line in question, no fresh money was
given to the Gobonsengs after the first and succeeding renewals of their P900,000.00 and
P800,000.00 loans because they were not able to pay the principals. The succeeding
availments by way of promissory notes were issued in "payment" of the immediately
preceeding availments or promissory notes with, however, the obligation to pay the
interests. This arrangement was made possible because the Gobonsengs had signed in
advance several copies of so-called written authority authorizing SIHI to apply the
proceeds of succeeding availments to the immediately preceeding availments. 64 Also, the
Attachment to the Credit Agreement 65 authorizes the use of the proceeds of the roll-overs
or renewals of the promissory notes, to wit:

AUTHORITY TO APPLY PROCEEDS. "The BORROWER agrees and consents

that the proceeds of any roll over, renewal or restructuring of any loan
availed of or to be availed in the future may, at the LENDER'S option, be used
or applied by the latter to the payment of any matured/renewed obligation
without the need to execute a new agreement. The liability remaining and the
time for payment of the balance resulting after such application, if any, shall

221 | P a g e
 not be affected by such roll-over, renewal or restructuring, unless it is
expressly modified in writing by the parties."

The Gobonsengs are estopped from denying these roll-overs or renewals because they
voluntarily paid the interests thereon 66 and received the receipts therefor. 67 They even
wrote a letter to Shirley Uy on 25 May 1984 advising the latter that the amount of
P21,411.11 which they remitted on 2 May 1984 "represents prepaid interest for the
P800,000.00 and not for the P900,000.00" and "covers the interest good for 61 days from
May 02nd 1984 or until July 02nd 1984"; and that on the P900,000.00 loan, they "already
paid the interest for 60 days from March 15th to May 14th 1984," hence, "[t]he interest for
the next term of 60 days will cover from May 14th 1984 to July 13th 1984" for which they
"will be remitting the corresponding interest on or before July 13th 1984." 68

Clearly then, the credit line granted to the Gobonsengs was for a period longer than sixty
days but is not six years as asserted by the Gobonsengs. The credit line was availed of by
promissory notes with interest duration of, normally, sixty days, 69 and that for as long as
the interests were paid, roll-overs of the promissory notes within the term of the credit line
were automatic since it was SIHI itself which filled up for the purpose the unfilled
promissory notes signed by the Gobonsengs.

It was duly established by the Gobonsengs that interests on the last renewal of the
P800,000.00 and the P900,000.00 loan evidenced by the promissory notes dated 2 March
1984 to be due on 2 May 1984 70 and 15 March 1984 to be due also on 2 May
1984, 71 respectively, were duly paid by them as indicated in their letter of 25 May
1984 72 and as evidenced by Exhibits "DDD" and "DDD-2". As a matter of fact, an amount of
P7,417.86 was credited to the principal in the promissory note with the code IF-84-CB022-
GG 73 per Official Receipt No. 14173 dated 2 May 1984. 74 This partial payment for the
principal clearly proves that the interest due had been paid. Article 1253 of the Civil Code
provides that if the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered. Consequently, automatic renewal of
the loans by way of promissory notes for the succeeding interest period was unavoidable.

Indisputably, the application for foreclosure of the mortgage on 9 June 1984 75 was
premature because by then, the Gobonsengs had not yet defaulted on the payments of
either the principal or the interest of their loans. As the Gobonsengs stated in their 25 May
1994 letter to Shirley Uy, the interest on the P800,000.00 loan for the period ending 2 July
1994 had already been pre-paid on 2 May 1994, and the payment for the interest on the
P900,000.00 loan was due at the end of the next term which was 13 July 1994 yet. SIHI
never controverted these claims by the Gobonsengs and so we are constrained to accept
them as true. Nevertheless, because the Gobonsengs did not pay the remaining unpaid
portion of the principal and the interests due thereon every sixty days thereafter at any
time after the foreclosure proceedings were initiated, the real estate mortgages could have
been validly foreclosed after the Gobonsengs failed to make payments and even if the
Gobonsengs are correct and the term of the credit line was six years, which then expired on
19 January 1989.

Likewise, there is no evidence that the Gobonsengs had made any payment on the interest
and on the unpaid balance of the principal even after the filing of Civil Case No. 8428. The
payment therefor has long become overdue. Justice end equity demand that they be
required to pay them within thirty days from their receipt of this decision, otherwise the
real estate mortgages may be foreclosed.

On the amount purportedly due SIHI as consultancy fees, we agree with the trial court that
it has no basis in fact. As correctly found by it, SIHI had not communicated to the
Gobonsengs, as required in the consultancy contract, the nature and extent of its
consultancy services and had not presented to them a bill therefor based on manhours
spent in the rendition thereof. There is no proof that SIHI performed its obligation under

222 | P a g e
the consultancy contract (Exhibits "UU" and "8"), which is "to render financial consultancy
services to the Gobonsengs for the formulation of financial plans, financial advisory matters
and financial packaging for medium and long term capital requirements." The consultancy
fees thus paid were not legally due for absence of proof of its rendition and must be
returned to the Gobonsengs. However, by way of set-off, the fees already paid by the
Gobonsengs may be applied as partial payment of the interests due on the principal of the
loans in question. They are not to be treated as interests, contrary to the view of the trial
court, because SIHI is an "investment" house, and as such it can render the above
mentioned consultancy services for which fees can be charged.

Finally, the release of alleged excess collaterals is unwarranted. The Gobonsengs

voluntarily offered the collaterals and they did not protest when the credit line was
reduced from P2 million to P900,000.00 after a re-appraisal of the loan value of the
collaterals. They did not even intimate in their complaint a desire for the return of excess
collaterals.

WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No. 30380 is SET ASIDE, and another is hereby rendered:

1 DISMISSING the complaint in Civil Case No. 8428 insofar as reformation of

the documents subject thereof is concerned;

2 ORDERING the petitioners to pay to the private respondent the unpaid

balance of P1,692,582.14 [P1,700,000.00 (P900,000.00 + P800,000.00) -
P7,4l7.86] less the amount of P327,300.00 erroneously paid as consultancy
fees, plus interests on the difference at the rate of fifteen and one-half per
centum(15.5%) per annum commencing on 2 July 1984, within thirty (30)
days from their receipt of a copy of this decision; and AUTHORIZING the
foreclosure of the real estate mortgages in question upon the failure of the
petitioners to pay the obligations within the said period; and

3 DISMISSING the counterclaim of the private respondent for lack of merit.

No pronouncement as to costs.

SO ORDERED.

223 | P a g e
 REPUBLIC ACT NO. 2629

REPUBLIC ACT NO. 2629 - INVESTMENT COMPANY ACT

Section 1. Short title. — This Act may be cited as the "Investment Company Act."

Sec. 2. Declaration of policy. — It is hereby declared that the policy and purposes of this
Act in accordance with which the provisions of this Act shall be interpreted, are to mitigate
and, so far as is feasible, to eliminate the following conditions which adversely affect the
national public interest and the interest of investors:

(a) When investors purchase, pay for, exchange, receive dividends upon, vote, refrain
from voting, sell, or surrender securities issued by investment companies without
adequate, accurate, and explicit information fairly presented, concerning the character of
such securities and the circumstances, policies, and financial responsibility of such
companies and their management;

(b) When investment companies are organized, operated, managed, or their portfolio
securities are selected, in the interest of directors, officers, investment advisers, depositors,
or other affiliated persons thereof, in the interest of underwriters, brokers, or dealers, in
the interest of special classes of their security holders, or in the interest of other
investment companies or persons engaged in other lines of business, rather than in the
interest of all classes of such companies' security holders;

(c) When investment companies issue securities containing inequitable or discriminatory

provisions, or fail to protect the preferences and privileges of the holders of their
outstanding securities;

(d) When the control of investment companies is unduly concentrated through

pyramiding or inequitable methods of control, or is inequitably distributed, or when
investment companies are managed by irresponsible persons;

(e) When investment companies, in keeping their accounts, in maintaining reserves, and
in computing their earnings and the asset value of their outstanding securities, employ
unsound or misleading methods, or are not subjected to adequate independent scrutiny;

(f) When investment companies are reorganized, become inactive, or change the
character of their business, or when the control or management thereof is transferred,
without the consent of their security holders;

(g) When investment companies by excessive borrowing and the issuance of excessive
amounts of senior securities increase unduly the speculative character of their junior
securities; or

(h) When investment companies operate without adequate assets or reserves.

Sec. 3. Definitions. — When used in this Act, unless the context otherwise requires — (a)
"Advisory board" means a board, whether elected or appointed, which is distinct from the
board of directors or board of trustees, or an investment company, and which is composed
solely of persons who do not serve such company in any other capacity, whether or not the
functions of such board are such as to render its members "directors" within the definition
of that term, which board has advisory functions as to investments but has no power to
determine that any security or other investment shall be purchased or sold by such

224 | P a g e
company.

(b) "Affiliated company" means a company which is an affiliated person.

(c) "Affiliated person" of another person means (1) any person directly or indirectly
owning, controlling or holding with power to vote, ten per centum or more of the
outstanding voting securities of such other person; (2) any person ten per centum or more
of whose outstanding voting securities are directly or indirectly owned, controlled, or held
with power to vote, by such other person; (3) any person directly or indirectly controlling,
controlled by, or under common control with, such other person; (4) any officer, director,
partner, copartner, or employee of such other person; and (5) if such other person is an
investment company, any investment adviser thereof or any member of an advisory board
thereof.

(d) "Bank" means (1) a banking institution organized under the laws of the Philippines,
(2) any other banking institution or trust company, doing business under the laws of the
Philippines, a substantial portion of the business of which consists of receiving deposits or
exercising fiduciary powers similar to those permitted to national banks.

(e) "Broker" means any person engaged in the business of effecting transactions in
securities for the account of others, but does not include a bank or any person solely by
reason of the fact that such person is an underwriter for one or more investment
companies.

(f) "Commission" means the Securities and Exchange Commission.

(g) "Company" means a corporation, a registered partnership, or an association lawfully

transacting business in the Philippines.

(h) "Control" means the power to exercise a controlling influence over the management
or policies of a company, unless such power is solely the result of an official position with
such company.

Any person who owns beneficially, either directly or through one or more controlled
companies, more than thirty per centum of the voting securities of a company shall be
presumed to control such company. Any person who does not so more than thirty per
centum of the voting securities of any company shall be presumed not to control such
company. A natural person shall be presumed not to be a controlled person within the
meaning of this Act. Any such presumption may be rebutted by evidence, but except as
hereinafter provided, shall continue until a determination to the contrary is made by the
Commission by order either on its own motion or on application by an interested person. If
an application filed hereunder is not granted or denied by the Commission within sixty
days after filing thereof, the determination sought by the application shall be deemed to
have been temporarily granted pending final determination of the Commission thereon.
The Commission, upon its own motion or upon application, may by order revoke or modify
any order issued under this paragraph whenever it shall find that the determination
embraced in such original order is no longer consistent with the facts.

(i) "Convicted" includes a verdict judgment, or plea of guilty, if such verdict, judgment or
plea has not been reversed, set aside, or withdrawn, whether or not sentence has been
imposed.

(j) "Dealers" means any person regularly engaged in the business of buying and selling
securities for his own account, through a broker or otherwise, but does not include a bank,
insurance company, or investment company, or any person insofar as he is engaged in

225 | P a g e
investing, reinvesting, or trading in securities, or in owning or holding securities, for his
own account, either individually or in some fiduciary capacity, but not as a part of a regular
business.

(k) "Director" means any director of a corporation or any person performing similar
functions with respect to any organization.

(l) "Exchange" means any organization, association, or group of persons which

constitutes, maintains, or provides a market place or facilities for bringing together
purchasers and sellers of securities or for otherwise performing with respect to securities
the functions commonly performed by a stock exchange as that term is generally
understood, and includes the market place and the market facilities maintained by such
exchange.

(m) "Government security" means any security issued or guaranteed as to principal or

interest by the Republic of the Philippines, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the Republic of the Philippines pursuant
to authority granted by the Congress of the Philippines; or any certificate of deposit for any
of the foregoing.

(n) "Insurance company" means a company which is organized as an insurance company,

whose primary and predominant business activity is the writing of insurance or the
reinsuring of risks underwritten by insurance companies, and which is subject to
supervision by the Insurance Commissioner; or any receiver or similar official or any
liquidating agent for such a company, in his capacity as such.

(o) "Investment adviser" of an investment company means (1) any person (other than a
bona fide officer, director, trustee, member of an advisory board, or employee of such
company as such) who pursuant to contract with such company regularly furnishes advice
to such company with respect to the desirability of investing in, purchasing or selling
securities or other property, or is empowered to determine what securities or other
property shall be purchased or sold by such company, and (2) any other person who
pursuant to contract with a person described in clause (1) of this paragraph regularly
performs substantially all of the duties undertaken by such person described in said clause
(1); but does not include (A) a person whose advice is furnished solely through uniform
publications distributed to subscribers thereto, (B) a person who furnishes only statistical
and other factual information, advice regarding economic factors and trends, or advice as
to occasional transactions in specific securities, but without generally furnishing advice or
making recommendations regarding the purchase or sale of securities, (C) a company
furnishing such services at cost to one or more investment companies, insurance
companies, or other financial institutions, (D) any person the character and amount of
whose compensation for such services must be approved by a court or (E) such other
persons as the Commission may by rules and regulations or order determine not to be
within the intent of this definition.

( p) "Investment banker" means any person engaged in the business of underwriting

securities issued by other persons, but does not include an investment company, any
person who acts as an underwriter in isolated transactions, but not as a part of a regular
business, or any person solely by reason of the fact that such person is an underwriter for
one or more investment companies.

(q) "Issuer" means every person who issues or proposes to issue any security, or has
outstanding any security which it has issued.

(r) "Lend" includes a purchase coupled with an agreement by the vendor to repurchase;

226 | P a g e
"borrow" includes a sale coupled with a similar agreement.

(s) "Majority-owned subsidiary" of a person means a company fifty per centum or more of
the outstanding voting securities of which are owned by such person, or by a company
which, within the meaning of this paragraph, is a majority-owned subsidiary of such
person.

(t) "Periodic payment plan certificate" means (1) any certificate, investment contract, or
other security providing for a series of periodic payments by the holders, and representing
an undivided interest in certain specified securities or in a unit or fund of securities
purchased wholly or partly with the proceeds of such payments, and (2) any security the
issuer of which is also issuing securities of the character described in clause (1) and the
holder of which has substantially the same rights and privileges as those which holders of
securities of the character described in said clause (1) have upon completing the periodic
payments for which such securities provide.

(u) "Person" means a natural person or a company.

(v) "Principal underwriter" of or for any investment company other than a closed-end
company, or of any security issued by such a company, means any underwriter who as
principal purchases from such company, or pursuant to contract has the right (whether
absolute or conditional) from time to time purchase from such company, any such security
for distribution, or who as agent for such company sells or has the right to sell any such
security to a dealer or to the public or both, but does not include a dealer who purchases
from such company through a principal underwriter acting as agent for such company.
"Principal underwriter " of or for a closed-end company or any issuer which is not an
investment company, or of any security issued by such a company or issuer, means any
underwriter who, in connection with a primary distribution of securities, (1) is in privity of
contract with the issuer or an affiliated person of the issuer; (2) acting alone or in concert
with one or more other persons, initiates or directs the formation of an underwriting
syndicate; or (3) is allowed a rate of gross commission, spread, or other profit greater than
the rate allowed another underwriter participating in the distribution.

(w) "Promoter" of a company or a proposed company means a person who, acting alone
or in concert with other persons, is initiating or directing, or has within one year initiated
or directed, the organization of such company.

(x) "Redeemable security" means any security, other than short-term paper, under the
terms of which the holder, upon its presentation to the issuer or to a person designated by
the issuer, is entitled to receive approximately his proportionate share of the issuer's
current net assets, or the cash equivalent thereof.

( y) "Reorganization" means (1) a reorganization under the supervision of a court of

competent jurisdiction; (2) a merger or consolidation; (3) a sale of seventy-five per centum
or more in value of the assets of a company; (4) a restatement of the capital of a company,
or an exchange of securities issued by a company for any of its own outstanding securities;
(5) a voluntary dissolution or liquidation of a company; (6) a recapitalization or other
procedure or transaction which has for its purpose the alteration, modification, or
elimination of any of the rights, preferences, or privileges of any class of securities issued
by a company, as provided in its charter or other instrument creating or defining such
rights, preferences, and privileges; (7) an exchange of securities issued by another
company or companies, preliminary to and for the purpose of effecting or consummating
any of the foregoing; or (8) any exchange of securities by a company which is not an
investment company for securities issued by a registered investment company.

227 | P a g e
(z) "Sale", "sell", "offer to sell", or "offer for sale" includes every contract of sale or
disposition of, attempt or offer to dispose of, or solicitation of an offer to buy, a security or
interest in security, for value. Any security given or delivered with, or as a bonus on
account of, any purchase of securities or any other thing, shall be conclusively presumed to
constitute a part of the subject of such purchase and to have been sold for value.

(aa) "Sales load" means the difference between the price of a security to the public and
that portion of the proceeds from its sale which is received and invested or held for
investment by the issuer, less any portion of such difference deducted for trustee's or
custodian's fees, insurance premiums, issue taxes, or administrative expenses or fees which
are not properly chargeable to sales or promotional activities. In the case of a periodic
payment plan certificate, "sales load" includes the sales load on any investment company
securities in which the payments made on such certificate are invested, as well as the sales
load on the certificate itself.

(bb) "Security" means any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, or, in general, any interest or
instrument commonly known as a "security" or any certificate of interest or participation
in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.

(cc) "Short-term paper" means any note, draft, bill of exchange, or banker's acceptance
payable on demand or having a maturity at the time of issuance of not exceeding nine
months, exclusive of days of grace, or any renewal thereof payable on demand or having a
maturity likewise limited; and such other classes of securities, of a commercial rather than
an investment character, as the Commission may designate by rules and regulations.

(dd) "Underwriter" means any person who has purchased from an issuer with a view to,
or sells for an issuer in connection with, the distribution of any security or participates or
has a direct or indirect participation in any such undertaking, or participates or has a
participation in the direct or indirect underwriting of any such undertaking; but such term
shall not include a person whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributor's or seller's commission, As
used in this paragraph the term "issuer" shall include, in addition to an issuer, any person
directly or indirectly controlling or controlled by the issuer, or any person under direct or
indirect common control with the issuer. When the distribution of the securities in respect
of which any person is an underwriter is completed such person shall cease to be an
underwriter in respect of such securities or the issuer thereof.

(ee) "Value", with respect to assets of registered investment companies, means —

(1) As used in section four, (A) with respect to securities owned at the end of the last
preceding fiscal quarter for which market quotations are readily available, the market
value at the end of such quarter; (B) with respect to other securities and assets owned at
the end of the last preceding fiscal quarter, fair value at the end of such quarter, as
determined in good faith by the board of directors; and (C) with respect to securities and
other assets acquired after the end of the last preceding fiscal quarter, the cost thereof; and

(2) As used elsewhere in this Act, (A) with respect to securities for which market
quotations are readily available, the market value of such securities; and (B) with respect
to other securities and assets, fair value as determined in good faith by the board of
directors; in each case as of such time or times as determined pursuant to this Act, and the

228 | P a g e
rules and regulations issued by the Commission thereunder. Notwithstanding the fact that
market quotations for securities issued by controlled companies are available, the board of
directors may in good faith determine the value of such securities: Provided, That the value
so determine is not in excess of the higher of market value or asset value of such securities
in the case of majority-owned subsidiaries, and is not in excess of market value in the case
of other controlled companies.

The foregoing definition shall not derogate from the authority of the Commission with
respect to the reports, information, and documents to be filed with the Commission by any
registered company, or with respect to the accounting policies and principles to be
followed by any such company, as provided in sections seven, twenty-seven and twenty-
eight.

(ff) "Voting security" means any security presently entitling the owner or holder thereof
to vote for the election of directors of a company.

(gg) "Wholly-owned subsidiary" of a person means a company ninety-five per centum or

more of the outstanding voting securities of which are owned by such person, or by a
company which, within the meaning of this paragraph is a wholly-owned subsidiary of such
person.

(hh) "Securities Act" means Commonwealth Act Numbered Eighty-three as heretofore or

hereafter amended.

No provision in this Act shall apply to, or be deemed to include, the Philippines or any
political subdivision thereof, or any agency, authority, or instrumentality of any one or
more of the foregoing, or any corporation which is wholly owned directly or indirectly by
any one or more of the foregoing, or any officer, agent, or employee of any of the foregoing
acting as such in the course of his official duty, unless such provision makes specific
reference thereto.

Sec. 4. Definition of investment company. — (a) when used in this Act "investment
company" means any issuer which is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, or trading in
securities;

(b) Notwithstanding subsection (a), none of the following persons is an investment

company within the meaning of this Act;

(1) Any issuer primarily engaged, directly or through a wholly-owned subsidiary or

subsidiaries, in a business or businesses other than that of investing, reinvesting, or trading
in securities.

(2) Any issuer which the Commission, upon application by such issuer, finds and by order
declares to be primarily engaged in a business or businesses other than that of investing,
reinvesting, or trading in securities either directly or (A) through majority-owned
subsidiaries or (B) through controlled companies conducting similar types of business. The
filing of an application under this paragraph by an issuer other than a registered
investment company shall exempt the applicant for a period of sixty days from all
provisions of this Act applicable to investment companies as such. For cause shown, the
Commission by order may extend such period of exemption for an additional period or
periods. Whenever the Commission, upon its own motion or upon application, finds that
the circumstances which gave rise to the issuance of an order granting an application under
this paragraph no longer exist, the Commission shall by order revoke such order.

229 | P a g e
(3) Any issuer all the outstanding securities of which (other than short-term paper and
directors' qualifying shares) are directly or indirectly owned by a company excepted from
the definition of investment company.

(c) Notwithstanding subsection (a), and (b), none of the following persons is an
investment company within the meaning of this Act:

(1) Any issuer whose outstanding securities (other than short-term paper) are
beneficially owned by not more than twenty-five persons and which is not making and
does not presently propose to make a public offering of its securities. For the purpose of
this paragraph, beneficial ownership by a company shall be deemed to be beneficial
ownership by one person; except that, if such company owns ten per centum or more of the
outstanding voting securities of the issuer, the beneficial ownership shall be deemed to be
that of the holders of such company's outstanding securities (other than short-term
paper).

(2) Any person primarily engaged in the business of underwriting and distributing
securities issued by other persons, selling securities to customers, and acting as broker, or
any one or more of such activities, whose gross income normally is derived principally
from such business and related activities.

(3) Any bank or insurance company; any savings and loan association, building and loan
association, cooperative bank, homestead association, or similar institution, or any
receiver, conservator, liquidator, liquidating agent, or similar official or person thereof or
therefor; any common trust fund or similar fund maintained by a bank exclusively for the
collective investment and reinvestment of moneys contributed thereto by the bank in its
capacity as a trustee, executor, administrator, or guardian.

(4) Any person substantially all of whose business is confined to industrial banking or
similar business.

(5) Any person who is primarily engaged in one or more of the following business: (A)
Purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable,
and other obligations representing part or all of the sales price of merchandise, insurance,
and services; (B) making loans to manufacturers, wholesalers, and retailers of, and to
prospective purchasers of, specified merchandise, insurance, and service; and (C)
purchasing or otherwise acquiring mortgages and other liens on and interests in real
estate.

(6) Any company primarily engaged, directly or through majority-owned subsidiaries, in

one or more of the businesses described in paragraphs (3), (4) and (5), or in one or more of
such businesses (from which not less than forty per centum of such company's gross
income during its last fiscal year was derived) together with an additional business or
businesses other than investing, reinvesting, owning, holding or trading in securities.

(7) Any company ninety per centum or more of the value of whose investment securities
are represented by securities of a single issuer included within a class of persons
enumerated in paragraphs (4), (5), or (6).

(8) Any person substantially all of whose business consist of owning or holding oil, gas, or
other mineral royalties or leases, or fractional interests therein, or certificates of interest or
participation in or investment contracts relative to such royalties, leases, or fractional
interests.

(9) Any company organized and operated exclusively for religious, educational,

230 | P a g e
benevolent, fraternal, charitable, or reformatory purposes, no part of the net earnings of
which inures to the benefit of any private shareholders or individual.

(10) Any employees' stock bonus, pension, or profit- sharing trust.

(11) Any voting trust the assets of which consist exclusively of securities of a single issuer
which is not an investment company.

(12) Any security holders' protective committee or similar issuer having outstanding and
issuing no securities other than certificates of deposit and short-term paper.

Sec. 5. Classification of investment companies. — (a) For the purposes of this Act,
investment companies are divided into open-end and closed-end companies, defined as
follows:

(1) "Open-end company" means an investment company which is offering for sale or has
outstanding any redeemable security of which it is the issuer.

(2) "Closed-end company" means any investment company other than an open-end
company.

Sec. 6. Transactions by investment companies. — (a) No investment company organized

or otherwise created under the laws of the Philippines and having a board of directors,
unless registered under section seven, shall directly or indirectly —

(1) offer for sale, sell, or deliver after sale, within the Philippines, any security or any
interest in a security, whether the issuer of such security is such investment company or
another person;

(2) purchase, redeem, retire, or otherwise acquire or attempt to acquire, within the
Philippines, any security, or any interest in a security, whether the issuer of such security is
such investment company or another person;

(3) control any investment company which does any of the acts enumerated in
paragraphs (1) and (2).

The provisions of this subsection shall not apply to transactions of an investment company
which are merely incidental to its dissolution.

(b) No depositor or trustee of or underwriter for any investment company, organized or

otherwise created under the laws of the Philippines and not having a board of directors,
unless such company is registered under section eight or exempt under section six, shall
directly or indirectly —

(1) offer for sale, sell, or deliver after sale, within the Philippines, any security or any
interest in a security of which such company is the issuer;

(2) purchase, redeem, or otherwise acquire or attempt to acquire, within the Philippines,
any security, or interest in a security of which such company is the issuer; or

(3) sell or purchase for the account of such company, within the Philippines, any security
or interest in a security, by whomsoever issued.

The provisions of this subsection shall not apply to transactions which are merely
incidental to the dissolution of an investment company.

231 | P a g e
Sec. 7. Registration of investment companies. — (a) Any investment company organized
or otherwise created under the laws of the Philippines may register for the purposes of this
Act by filing with the Commission a registration statement, in such form as the Commission
shall by rules and regulations prescribe as necessary or appropriate in the public interest
or for the protection of investors. An investment company shall be deemed to be registered
upon approval by the Commission of such registration statement and the publication
thereof in the Official Gazette for two consecutive weeks and in two dailies of general
circulation for two consecutive days.

(b) Every investment company shall file with the Commission an original and such copies
of a registration statement, in such form and containing such of the following information
and documents as the Commission shall, by rules and regulations, prescribe as necessary or
appropriate in the public interest or for the protection of investors:

(1) a recital of the policy of the registrant in respect of each of the following types of
activities, such recital consisting in each case of a statement whether the registrant
reserves freedom of action to engage in activities of such type, and if such freedom of action
is reserved, a statement briefly indicating, insofar as is practicable, the extent to which the
registrant intends to engage therein: (A) the classification, as defined in section five, within
which the registrant proposes to operate; (B) borrowing money; (C) the issuance of senior
securities; (D) engaging in the business of underwriting securities issued by other persons;
(E) concentrating investments in a particular industry or group of industries; (F) the
purchase and sale of real estate and commodities, or either of them; (G) making loans to
other persons; and (H) portfolio turn-over (including a statement showing the aggregate
peso amount of purchases and sales of portfolio securities, other than Government
securities, in each of the full fiscal years preceding the filing of such registration
statement);

(2) a recital of the policy of the registrant in respect of matters, not enumerated in
paragraph (1), which the registrant deems matters of fundamental policy and elects to
treat as such;

(3) the name and address of each affiliated person of the registrant; the name and
principal address of every company, other than the registrant, of which each such person is
an officer, director or partner; a brief statement of the business experience for the
preceding five years of each officer and director of the registrant; and

(4) the information and documents which would be required to be filed in order to
register under the Securities Act all securities (other than short-term paper) which the
registrant has outstanding or proposes to issue.

(c) The Commission shall make provision, by permissive rules and regulations or order,
for the filing of the following, or so much of the following as the Commission may designate,
in lieu of the information and documents required pursuant to subsection (b):

(1) copies of the most recent registration statement filed by the registrant under the
Securities Act and currently effective under such Act;

(2) a report containing reasonably current information regarding the matters included in
copies filed pursuant to paragraph (1), and such further information regarding matters not
included in such copies as the Commission is authorized to require under subsection (b).

(d) Every investment company as defined in this Act, existing on the date of effectivity
hereof shall register pursuant to the provisions of this section within six months from the

232 | P a g e
approval of this Act.

(e) The Commission, in the exercise of its sound judgment and discretion, shall have
power to limit the registration of investment companies to such number as the investment
opportunities then obtaining would permit, and to allow the registration of new investment
companies only when the conditions warrant it. This provision, however, shall not apply to
investment companies already existing on the date of effectivity of this Act.

(f) If it appears to the Commission that a registered investment company has failed to file
the registration statement required by this section or a report required pursuant to section
twenty-seven (a), or (b), or has filed such registration statement or report but omitted
therefrom material facts required to be stated therein, or has filed such a registration
statement or report in violation of section thirty-one (b), the Commission shall notify such
company by registered mail of the failure to file such registration statement or report, or of
the respects in which such registration statement or report appears to be materially
incomplete or misleading, as the case may be, and shall fix a date (in no event earlier than
thirty days after the mailing of such notice) prior to which such company may file such
registration statement or report or correct the same. If such registration statement or
report is not filed or corrected within the time so fixed by the Commission or any extension
thereof, the Commission, after appropriate notice and opportunity for hearing, and upon
such conditions and with such exemptions as it deems appropriate for the protection of
investors, may by order suspend the registration of such company until such statement or
report is filed or corrected, or may by order revoke such registration, if the evidence
establishes —

(1) that such company has failed to file a registration statement required by this section
or a report required pursuant to section twenty-seven (a) or (b), or has filed such a
registration statement or report but omitted therefrom material facts required to be stated
therein, or has filed such a registration statement or report in violation of section thirty-
one (b); and

(2) that such suspension or revocation is in the public interest.

(g) Whenever the Commission, on its own motion or upon application, finds that a
registered investment company has ceased to be an investment company, it shall so declare
by order and upon the taking effect of such order the registration of such company shall
cease to be in effect. If necessary for the protection of investors, an order under this
subsection may be made upon appropriate conditions. The Commission's denial of any
application under this subsection shall be by order.

Sec. 8. Ineligibility of certain affiliated persons and underwriters. — (a) It shall be

unlawful for any of the following persons to serve or act in the capacity of officer, or
director, member of an advisory board, investment adviser, or depositor of any registered
investment company, or principal underwriter for any registered open-end company;

(1) any person who within ten years has been convicted of any felony or misdemeanor
involving the purchase or sale of any security or arising out of such person's conduct as an
underwriter, broker, dealer, or investment adviser, or as an affiliated person, salesman, or
employee or any investment company, bank, or insurance company;

(2) any person who, by reason of any misconduct, is permanently or temporarily enjoined
by order, judgment, or decree of any court of competent jurisdiction from acting as an
underwriter, broker, dealer, or investment adviser, or as an affiliated person, salesman, or
employee of any investment company, bank, or insurance company, or from engaging in or
continuing any conduct or practice in connection with any such activity or in connection

233 | P a g e
with the purchase or sale of any security; or

(3) a company any affiliated person of which is ineligible, by reason of paragraph (1) or
(2), to serve or act in the foregoing capacities.

(b) Any person who is ineligible, by reason of subsection (a), to serve or act in the
capacities enumerated in such subsection, may file with the Commission an application for
an exemption from the provisions of such subsection. The Commission shall by order grant
such application, either unconditionally or on an appropriate temporary or other
conditional basis, if it is established that the prohibitions of such subsection, as applied to
such person, are unduly or disproportionately severe or that the conduct of such person
has been such as not to make it against the public interest or protection of investors to
grant such application.

Sec. 9. Affiliations of directors, officers and employees. — (a) After one year from the
effective date of this Act, no registered investment company shall have a board of directors
more than fifty per centum of the members of which are persons who are investment
advisers of, or officers or employees of, such registered company.

(b) After one year from the effective date of this Act, no registered investment company
shall —

(1) employ as regular broker any director, officer, or employee of such registered
company, or any person of which any such director, officer, or employee is an affiliated
person;

(2) use a principal underwriter of securities issued by it any director, officer, or employee
of such registered company or may person of which any such director, officer, employee is
an affiliated person; or

(3) have as director, officer, or employee any investment banker, or any affiliated person
of an investment banker. For the purposes of this paragraph, a person shall not be deemed
an affiliated person of an investment banker solely by reason of the fact that he is an
affiliated person of a company (A) all the outstanding securities of which (other than short-
term paper, securities representing bank loans and directors' qualifying shares) are, or
after such acquisition will be, owned by one or more registered investment companies; and
(B) which is primarily engaged in the business of underwriting and distributing securities
issued by other persons, selling securities to customers, or any one or more of such or
related activities, and the gross income of such person normally is derived principally from
such business or related activities.

(c) After the effective date of this Act no registered investment company shall have a
majority of its board of directors consisting of persons who are officers or directors of any
one bank: Provided, That, if prior to the effective date of this Act, any registered investment
company shall have had a majority of its directors consisting or persons who are directors,
officers, or employees of any one bank, such registered company may continue to have the
same percentage of its board of directors consisting of persons who are directors, officers,
or employees of such bank.

(d) If by reason of the death, disqualification, or bona fide resignation of any director or
directors, the requirements of the foregoing provisions of this section in respect of
directors shall not be met by a registered investment company, the operation of such
provision shall be suspended as to such registered company for a period of thirty days if
the vacancy or vacancies may be filled by action of the board of directors, and for a period
of sixty days if a vote of stockholders is required to fill the vacancy or vacancies, or for such

234 | P a g e
longer period as the Commission may prescribe, by rules and regulations upon its own
motion or by order upon application, as not inconsistent with the protection of investors.

(e) No registered investment company shall knowingly purchase or otherwise acquire,

during the existence of any underwriting or selling syndicate, any security (except a
security of which such company is the issuer) a principal underwriter of which is an officer,
director, member of an advisory board, investment adviser, or employee of such registered
company, or is a person (other than a company of the character described in paragraphs
(A) and (B) of subsection (b) (3) of which any such officer, director, member of an advisory
board, investment adviser, or employee is an affiliated person, unless in acquiring such
security such registered company is itself acting as a principal underwriter for the issuer.
The Commission, by rules and regulations upon its own motion or by order upon
application, may conditionally or unconditionally exempt any transaction or classes of
transactions from any of the provisions of this subsection, if and to the extent that such
exemption is consistent with the protection of investors.

(f) In the case of a registered investment company which has an advisory board, such
board, as a distinct entity, shall be subject to the same restrictions as to its membership as
are imposed upon a board of directors by this section.

(g) In the case of a registered investment company which does not have a board of
directors, the provisions of this section shall apply as follows:

(1) the provisions of subsection (a), as modified by subsection (d), shall apply to the
board of directors of the depositor of such company;

(2) the provisions of subsection (b) and (c), as modified by subsection (d), shall apply to
the board of directors of the depositor and of every investment adviser of such company;
and

(3) the provisions of subsection (e) shall apply to purchases and other acquisitions for the
account of such company of securities a principal underwriter of which is the depositor or
an investment adviser of such company, or an affiliated person of such depositor or
investment adviser.

Section 10. Offers to exchange securities. — (a) It shall be unlawful for any registered
open-end company or any principal underwriter for such a company to make or cause to be
made an offer to the holder of a security of such company or of any other open-end
investment company to exchange his security for a security in the same or another such
company on any basis other than the relative net asset values of the respective securities to
be exchanged, unless the terms of the offer have first been submitted to and approved by
the commission or are in accordance with such rules and regulations as the Commission
may have prescribed in respect of such offers which are in effect at the time such offer is
made. For the purposes of this section, (1) an offer by a principal underwriter means an
offer communicated to holders of securities of a class or series but does not include an offer
made by such principal underwriter to an individual investor in the course of a retail
business conducted by such principal underwriter, and (2) the net asset value means the
net asset value which is in effect for the purpose of determining the price at which the
securities, or class or series of securities involved are offered for sale to the public either
(A) at the time of the receipt by the offeror of the acceptance of the offer or (B) at such later
time as is specified in the offer.

(b) The provisions of this section shall not apply to any offer made pursuant to (1) any
plan of reorganization, which is submitted to and requires the approval of the holders of at
least a majority of the outstanding shares of the class or series to which the security owned

235 | P a g e
by the offeree belongs; or (2) the right of conversion, at the option of the holder, from one
class or series into another class or series of securities issued by the same company upon
such terms as are specified in the charter, certificate of incorporation, articles of
association, by-laws, or trust indenture subject to which the securities to be converted
were issued or are to be issued.

Section 11. Functions and activities of investment companies. — (a) It shall be unlawful
for any registered investment company, in contravention of such rules and regulations or
orders as the Commission may prescribe as necessary or appropriate in the public interest
or for the protection of investors —

(1) to purchase any security on margin, except such short-term credits as are necessary
for the clearance of transactions;

(2) to participate on a joint or a joint and several basis in any trading account in
securities, except in connection with an underwriting in which such registered company is
a participant; or

(3) to effect a short sale of any security, except in connection with an underwriting in
which such registered company is a participant.

(b) It shall be unlawful for any registered open-end company (other than a company
complying with the provisions of section ten) to act as a distributor of securities of which it
is the issuer, except through an underwriter, in contravention of such rules and regulations
as the Commission may prescribe as necessary or appropriate in the public interest or for
the protection of investors.

(c) It shall be unlawful for any investment company to —

(1) Generate funds for promoting the private business or industry of any employee,
official, director, organizer, incorporator or stockholder thereof;

(2) Allow any of its employee, official, director, organizer, incorporator or stockholder to
buy real estate, personal property or any other kind of property and sell the same to the
company at a price higher than the procurement cost or sell any property of the company,
or a portion thereof, at a price below the market value thereof to any of the aforementioned
persons.

Section 12. Changes in investment policy. — (a) No registered investment company shall,
unless authorized by the vote of a majority of its outstanding voting securities —

(1) borrow money, issue senior securities, underwrite securities issued by other persons,
purchase or sell real estate or commodities or make loans to other persons, except in each
case in accordance with the recitals of policy contained in its registration statement in
respect thereto;

(2) deviate from its policy in respect of concentration of investments in any particular
industry or group of industries as recited in its registration statement, or deviate from any
fundamental policy recited in its registration statement pursuant to section seven (b) (2);
or

(3) change the nature of its business so as to cease to be an investment company.

(b) Where the change will involve an amendment of the organization papers of the
investment company, the pertinent provisions of law on the vote necessary and other

236 | P a g e
requisites to effectuate the same, shall likewise be complied with.

Section 13. Size of investment companies. — No registered investment company

organized after the effective date of this Act, and principal underwriter for such a company,
shall make a public offering of securities of which such company is the issuer, unless —

(1) such company has a paid-up capital of at least five hundred thousand pesos, as
certified to by an independent certified public accountant; or

(2) such company has previously made a public offering of its securities, and at the time
of such offering had a paid-up capital of at least five hundred thousand pesos, as certified to
by an independent certified public accountant: Provided, however, That no investment
company shall redeem, directly or indirectly, any security of which such company is the
issuer unless the remaining unimpaired capital shall be at least two hundred fifty thousand
pesos or fifty per cent of its outstanding liabilities to the creditors of said company,
whichever is higher.

Section 14. Contracts of advisers and underwriters. — (a) After the effective date of this
Act it shall be unlawful for any person to serve or act as investment adviser of a registered
investment company, except pursuant to a written contract, which contract, whether with
such registered company or with an investment adviser of such registered company, unless
in effect prior to the effective date of this Act, has been approved by the vote of a majority
of the outstanding voting securities of such registered company and —

(1) precisely describes all compensation to be paid thereunder;

(2) shall continue in effect for a period more than two years from the date of its execution,
only so long as such continuance is specifically approved at least annually by the board of
directors or by vote of a majority of the outstanding voting securities of such company;

(3) provides, in substance, that it may be terminated at any time, without the payment of
any penalty, by the board of directors of such registered company or by vote of two-thirds
of the outstanding voting securities of such company on not more than sixty days' written
notice to the investment adviser; and

(4) provides, in substance, for its automatic termination in the event of its assignment by
the investment adviser.

(b) After one year from the effective date of this Act, it shall be unlawful for any principal
underwriter for a registered open-end company to offer for sale, sell, or deliver after sale
any security of which such company is the issuer, except pursuant to a written contract
with such company, which contract, unless in effect prior to the effective date of this Act —

(1) shall continue in effect for a period more than two years from the date of its execution,
only so long as such continuance is specifically approved at least annually by the board of
directors or by vote of two-thirds of the outstanding voting securities of such company;
and

(2) provides, in substance, for its automatic termination in the event of its assignment by
such underwriter.

(c) In addition to the requirements of subsections (a) and (b) it shall be unlawful for any
registered investment company having a board of directors to enter into, renew, or
perform any contract or agreement, written or oral, except a written agreement which was
in effect prior to the effective date of this Act, whereby a person undertakes regularly to

237 | P a g e
serve or act as investment adviser of or principal underwriter for such company, unless the
terms of such contract or agreement and any renewal thereof have been approved (1) by a
majority of the directors who are not parties to such contract or agreement or affiliated
persons of any such party, or (2) by the vote of a majority of the outstanding voting
securities of such company.

(d) It shall be unlawful for any person, after the effective date of this Act —

(1) to serve or act as investment adviser of a registered investment company, pursuant to

a written contract which was in effect prior to the effective date of this Act; or

(2) as principal underwriter for a registered opened investment company to offer for sale,
sell, or deliver after sale any security of which such company is the issuer, pursuant to a
written contract which was in effect prior to the effective date of this Act, unless such
contract is renewed in such form that it complies with the requirements of subsection (a)
or (b), as the case may be, and approved in the manner required by this section.

(e) Nothing contained in this section shall be deemed to require or contemplate any
action by an advisory board of any registered company or by any of the members of such a
board.

Section 15. Board of directors; election; term vacancies; and salaries. — No person shall
serve as a director of a registered investment company unless he is a Filipino citizen and
elected to that office by the holders of the outstanding voting securities of such company, at
an annual or a special meeting duly called for the purpose; except that vacancies occurring
between such meeting may be filed in any otherwise legal manner if immediately after
filing any such vacancy at least two-thirds of the directors then holding office shall have
been elected to such office by the holders' of the outstanding voting securities of the
company at such an annual or special meeting. In the event that at any time less than a
majority of the directors of such company holding office at that time were so elected by the
holders of the outstanding voting securities, the board of directors or proper officer of such
company shall forthwith cause to be held as promptly as possible and in any event within
sixty days a meeting of such holders for the purpose of electing directors to fill any existing
vacancies in the board of directors unless the Commission shall by order extend such
period. The foregoing provisions shall not apply to members of an advisory board.

No member of the Board of Directors or any executive official shall receive any salary or
emolument from the investment company at a rate higher than that fixed by the
Commission after taking into consideration; the experience and qualifications of the official
concerned; the amount and nature of securities issued by the company; the size and
standing of the company in the business community; the volume of business done by the
company; the number of years the company has been in business; and other pertinent
conditions and circumstances: Provided, however, That in no case shall the operational
expenses of such company exceed ten per cent of the total investment fund received from
the investors; And provided, finally, That non-compliance with the provisions of this Act
shall cause the cancellation of its registration and the liquidation of its assets for
redistribution to investors.

Section 16. Transactions of certain affiliated persons and underwriters — (a) It shall be
unlawful for any affiliated person or promoter of or principal underwriter for a registered
investment company (other than a company of the character described in section nine (b)
(3) (A) and (B) or any affiliated person of such a person, promoter, or principal
underwriter, acting as principal —

(1) knowingly to sell any security or other property to such registered company or to any

238 | P a g e
company controlled by such registered company, unless such sale involves solely (A)
securities of which the buyer is the issuer, or (B) securities of which the seller is the issuer
and which are part of a general offering to the holders of a class of its securities;

(2) knowingly to purchase from such registered company, or from any company
controlled by such registered company, any security or other property (except securities of
which the seller is the issuer); or

(3) to borrow money or other property from such registered company or from any
company controlled by such registered company (unless the borrower is controlled by the
lender) except as permitted in section twenty (b).

(b) Notwithstanding subsection (a), any person may file with the Commission an
application for an order exempting a proposed transaction of the applicant from one or
more provisions of said subsection. The Commission shall grant such application and issue
such order of exemption if evidence establishes that —

(1) the terms of the proposed transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on the part of any person
concerned;

(2) the proposed transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and reports filed under this
Act; and

(3) the proposed transaction is consistent with the general purposes of this Act.

(c) Notwithstanding subsection (a), a person may, in the ordinary course of business, sell
to or purchase from any company merchandise or may enter into a lessor-lessee
relationship with any person and furnish the services incident thereto.

(d) It shall be unlawful for any affiliated person of or principal underwriter for a
registered investment company (other than a company of the character described in
section nine (b) (3) (A) and (B), or any affiliated person of such a person or principal
underwriter, acting as principal to effect any transaction in which such registered
company, or a company controlled by such registered company, is a joint or a joint and
several participant with such person, principal underwriter, or affiliated person, in
contravention of such rules and regulations as the Commission may prescribe for the
purpose of limiting or preventing participating by such registered or controlled company
on a basis different from or less advantageous than that of such other participant. Nothing
contained in this subsection shall be deemed to preclude any affiliated person from acting
as manager of any underwriting syndicate or other group in which such registered or
controlled company is a participant and receiving compensation therefor.

(e) It shall be unlawful for any affiliated person of a registered investment company, or
any affiliated person of such person —

(1) acting as agent, to accept from any source any compensation (other than a regular
salary or wages from such registered company) for the purchase or sale of any property to
or for such registered company or any controlled company thereof, except in the course of
such person's business as an underwriter or broker; or

(2) acting as broker, in connection with the sale of securities to or by such registered
company or any controlled company thereof, to receive from any source a commission, fee,
or other remuneration for effecting such transaction which exceeds (A) the usual and

239 | P a g e
customary broker's commission if the sale is effected on a securities exchange, or (B) two
per centum of the sales price if the sale is effected in connection with a secondary
distribution of such securities, or (C) one per centum of the purchase or sale price of such
securities if the sale is otherwise effected unless the Commission shall, by rules and
regulations or order in the public interest and consistent with the protection of investors,
permit a larger commission.

(f) Every registered investment company shall place and maintain its securities and
similar investments in the custody of (1) a duly organized local commercial bank of good
repute; or (2) a company which is a member of a securities exchange as defined in the
Securities Act, subject to such rules and regulations as the Commission may from time to
time prescribe for the protection of investors; or (3) such registered company, but only in
accordance with such rules and regulations or orders as the Commission may from time to
time prescribe for the protection of investors. Rules, regulations, and orders of the
Commission under this subsection, among other things, shall make appropriate provision
with respect to such matters as the earmarking, segregation, and hypothecation of such
securities and investments, and shall provide for or require periodic or other inspections
by any or all of the following: independent public accountants, employees and agents of the
Commission, and such other persons as the Commission may designate. No such member
who trades in securities for his own account may act as custodian except in accordance
with rules and regulations prescribed by the Commission for the protection of investors.

(g) The Commission is authorized to require by rules and regulations or orders for the
protection of investors that any officer and employee of a registered investment company
who may singly, jointly with others, have access to securities of funds of any registered
company, either directly or through authority to draw upon such funds or to direct
generally the disposition of such securities, be bonded by a reputable fidelity insurance
company against larceny and embezzlement in such reasonable minimum amounts as the
Commission may prescribe.

(h) After the effective date of this Act neither the charter, certificate of incorporation,
articles of association, nor the by-laws of any registered investment company, nor any
other instrument pursuant to which such a company is organized or administered, shall
contain any provision which protects or purports to protect any director or officer of such
company against any liability to the company or to its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.

In the event that any such instrument does not at the effective date of this Act comply with
the requirements of this subsection and is not amended to comply therewith, such
company may nevertheless continue to be a registered investment company and shall not
be deemed to violate this subsection if each such director or officer shall immediately file
with the Commission a waiver in writing of any protective provision of the instrument to
the extent that it does not comply with this subsection, and each such person subsequently
elected or appointed shall before assuming office file a similar waiver.

(i) After one year from the effective date of this Act no contract or agreement under which
any person undertakes to act as investment adviser of, or principal underwriter for, a
registered investment company shall contain any provision which protects or purports to
protect such person against any liability to such company or its security holders to which
he would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of his duties, or by reason of his reckless disregard of his
obligations and duties under such contract or agreement.

In the event that any such contract or agreement does not at the effective date of this Act

240 | P a g e
comply with the requirements of this subsection and is not amended to comply therewith
prior to the expiration of said one year, this subsection shall not be deemed to have been
violated if prior to said expiration date each such investment adviser as principal
underwriter shall have filed with the Commission a waiver in writing of any protective
provisions of the contract or agreement to the extent that it does not comply with this
subsection.

Section 17. Capital structure of investment companies. — (a) It shall be unlawful for any
registered closed-end company to issue any class of senior security, or to sell any such
security of which it is the issuer, unless —

(1) if such class of senior security represents an indebtedness —

(A) immediately after such issuance or sale, it will have an asset coverage of at least three
hundred per centum;

(B) provision is made to prohibit the declaration of any dividend (except a dividend
payable in stock of the issuer), or the declaration of any other distribution, upon any class
of the capital stock of such investment company, or the purchase of any such capital stock,
unless, in every such case, such class of senior securities has at the time of the declaration
of any such dividend or distribution or at the time of any such purchase an asset coverage
of at least three hundred per centum after deducting the amount of such dividend,
distribution, or purchase price, as the case may be, except that dividends may be declared
upon any preferred stock if such senior security representing indebtedness has an asset
coverage of at least two hundred per centum at the time of declaration thereof after
deducting the amount of such dividend; and

(C) provision is made either —

(i) that, if on the last business day of each twelve consecutive calendar months such class
of senior securities shall have an asset coverage of less than one hundred per centum, the
holders of such securities voting as a class shall be entitled to elect at least a majority of the
members of the board of directors of such registered company, such voting right to
continue until such class of senior security shall have an asset coverage of one hundred and
ten per centum or more on the last business day of each of three consecutive calendar
months or

(ii) that, if on the last business day of each twenty-four consecutive calendar months such
class of senior securities shall have an asset coverage of less than one hundred per centum
an event of default shall be deemed to have occurred;

(2) if such class of senior security is a stock —

(A) immediately after the issuance or sale it will have an asset coverage of at least two
hundred per centum;

(B) provision is made to prohibit the declaration of any dividend (except a dividend
payable in common stock of the issuer), or the declaration of any other distribution, upon
the common stock of such investment company, or the purchase of any such common stock,
unless in every such case such class of senior security has at the time of the declaration of
any such dividend or distribution or at the time of any such purchase an asset coverage of
at least two hundred per centum after deducting the amount of such dividend, distribution
or purchase price, as the case may be;

(C) provision is made to entitle the holders of such senior securities, voting as a class, to

241 | P a g e
elect at last two directors at all times, and, subject to the prior rights, if any of the holders of
any other class of senior securities outstanding, to elect a majority of the directors if at any
time dividends on such class of securities shall be unpaid in an amount equal to two full
years' dividends on such securities, and to continue to be so represented until all dividends
in arrears shall have been paid or otherwise provided for;

(D) provision is made requiring approval by the vote of a majority of such securities,
voting as a class, of any plan of reorganization adversely affecting such securities or of any
action requiring a vote of security holders as in section twelve (a) provides; and

(E) such class of stock shall have complete priority over any other class as to distribution
of assets and payment of dividends, which dividends shall be cumulative.

(b) The assets coverage in respect of a senior security provided for in subsection (a) may
be determined on the basis of values calculated as of a time within forty-eight hours (not
including Sundays or holidays) next preceding the time of such determination. The time of
issue or sale shall, in the case of an offering of such securities to existing stockholders of the
issuer, be deemed to be the first date on which such offering is made, and in all other cases
shall be deemed to be the time as of which a firm commitment to issue or sell and to take or
purchase such securities shall be made.

(c) Notwithstanding the provisions of subsection (a) it shall be unlawful for any
registered closed-end investment company to issue or sell any senior security representing
indebtedness if immediately thereafter such company will have outstanding more than one
class of senior security representing indebtedness, or to issue or sell any senior security
which is a stock if immediately thereafter such company will have outstanding more than
one class of senior security which is a stock, except that (1) any such class of indebtedness
or stock may be issued in one or more series: Provided, That no such series shall have a
preference or priority over any other series upon the distribution of the assets of such
registered closed-end company or-in respect of the payment of interest or dividends, and
(2) promissory notes or other evidence of indebtedness issued in consideration of any loan,
extension, or renewal thereof, made by a bank or other person and privately arranged, and
not intended to be publicly distributed, shall not be deemed to be a separate class or senior
securities representing indebtedness within the meaning of this subsection.

(d) It shall be unlawful for any registered investment company to issue any warrant or
right to subscribe to or purchase a security of which such company is the issuer, except in
the form of warrants or rights to subscribe expiring not later than one hundred and twenty
days after their issuance and issued exclusively and ratably to be a class or classes of such
company's security holders; except that any warrant may be issued in exchange for
outstanding warrants in connection with a plan of reorganization.

(e) The provisions of this section shall not apply to any senior security issued or sold by
any registered closed-end company —

(1) pursuant to any firm contract to purchase or sell entered into prior to the effective
date of this Act;

(2) for the purpose of refunding through payment, purchase, redemption, retirement, or
exchange, any senior security of such registered investment company except that no senior
security representing indebtedness shall be so issued or sold for the purpose of refunding
any senior security which is a stock; or

(3) pursuant to any plan of reorganization (other than for refunding as referred to in
subsection (e) (2), provided —

242 | P a g e
(A) that such senior securities are issued or sold for the purpose of substituting or
exchanging such senior securities for outstanding senior securities, and if such senior
securities represent indebtedness they are issued or sold for the purpose of substituting or
exchanging such senior securities for outstanding senior securities representing
indebtedness, of any registered investment company which is a party to such plan of
reorganization; or

(B) that the total amount of such senior securities so issued or sold pursuant to such plan
does not exceed that total amount of senior securities of all the companies which are
parties to such plan, and the total amount of senior securities representing indebtedness so
issued or sold pursuant to such plan does not exceed the total amount of senior securities
representing indebtedness of all such companies, or, alternatively the total amount of such
senior securities so issued or sold pursuant to such plan does not have the effect of
increasing the ratio of senior securities representing indebtedness to the securities
representing stock or the ratio of senior securities representing stock to securities junior
thereto when compared with such ratios as they existed before such reorganization.

(f) (1) It shall be unlawful for any registered opened company to issue any class of senior
security or to sell any senior security of which it is the issuer, except that any such
registered company shall be permitted to borrow from any bank: Provided, That
immediately after any such borrowing there is an asset coverage of at least three hundred
per centum for all borrowing of such registered company: And provided, further, That in
the event that such asset coverage shall at any time fall below three hundred per centum
such registered company shall, within three days thereafter (not including Sundays and
holidays) or such longer period as the Commission may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least three hundred per centum. Notwithstanding the provisions of
this section, however, a registered open-end company may guarantee the senior securities
of a controlled person: Provided, That such guarantee is limited to a percentage of the value
of the senior securities equivalent to the percentage of the company's interest in the
controlled person: And provided, further, That such senior securities have an asset
coverage by the said controlled person of at least two hundred per centum.

(2) "Senior security" shall not, in the case a registered open-end company, include a class
or classes or a number of series or preferred or special stock each of which is preferred
over all other classes or series in respect of assets specifically allocated to that class or
series; Provided, (A) That such company has outstanding no class or series of stock which
is not so preferred over all other classes or series; or (B) that the only other outstanding
class of the issuer's stock consist of a common stock upon which no dividend (other than a
liquidating dividend) is permitted to be paid and which in the aggregate represents not
more than one-half of one per centum of the issuer's outstanding voting securities.

(g) Unless otherwise provided: "Senior security" means any bond, debenture, note, or
similar obligation or instrument constituting a security and evidencing indebtedness, and
any stock of a class having priority over any other class as to distribution of assets or
payment of dividends; and "senior security representing indebtedness" means any senior
security other than stock.

The term "senior security", when used in subparagraphs (B) and (C) of paragraph (1) of
subsection (a), shall not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a bank or other
person and privately arranged, and not intended to be publicly distributed; nor shall such
term, when used in this section, include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in an

243 | P a g e
amount not exceeding five per centum of the value of the total assets of the issuer at the
time when the loan is made. A loan shall be presumed to be for temporary purposes if it is
repaid within sixty days and is not extended or renewed; otherwise it shall be presumed
not to be for temporary purposes. Any such presumption may be rebutted by evidence.

(h) "Asset coverage" of a class of senior security representing an indebtedness of an

issuer means the ratio which the value of the total assets of such issuer, less all liabilities
and indebtedness not represented by senior securities, bears to the aggregate amount of
senior securities representing indebtedness of such issuer. "Asset coverage" of a class of
senior security of an issuer which is a stock means the ratio which the value of the total
assets of such issuer, less all liabilities and indebtedness not represented by senior
securities, bears to the aggregate amount of senior securities representing indebtedness of
such issuer plus the aggregate of the involuntary liquidation preference of such class of
senior security which is a stock. The involuntary liquidation preference of a class of senior
security which is a stock shall be deemed to mean the amount to which such class of senior
security would be entitled on involuntary liquidation of the issuer in preference to a
security junior to it.

(i) Except as provided in subsection (a) of this section, or as otherwise required by law,
every share of stock hereafter issued by a registered investment company shall be a voting
stock and have equal voting rights with every other outstanding voting stock: Provided,
That this subsection shall not apply to shares issued pursuant to the terms of any warrant
or subscription right outstanding prior to the effective date of this Act, or any firm contract
entered into before the effective date of this Act to purchase such securities from such
company nor to shares issued in accordance with any rules, regulations, or orders which
the Commission may make permitting such issue.

Section 18. Dividends. — It shall be unlawful for any registered investment company to
pay any dividend, or to make any distribution in the nature of a dividend payment, wholly
or partly from any source other than —

(1) such company's accumulated undistributed net income, determined in accordance

with good accounting practice and including profits or losses realized upon the sale of
securities or other properties; or

(2) such company's earned surplus so determined for current or preceding fiscal year;
unless such payment is accompanied by a written statement which adequately discloses
the source or sources of such payment. The Commission may prescribe the form of such
statement by rules and regulations or by order in the public interest and for the protection
of investors.

It shall likewise be unlawful to advertise such dividends in terms of centavos or pesos per
share without also stating the percentage they bear to the par value per share.

Section 19. Proxies; voting trusts. — (a) It shall be unlawful for any person except the
duly constituted custodian to solicit or to permit the use of his name to solicit any proxy or
consent or authorization in respect of any security of which a registered investment
company is the issuer in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the protection of
investors: Provided, however, That no proxies shall be used as a device to control the
management of any investment company.

(b) It shall be unlawful for any registered investment company or affiliated person
thereof, any issuer of voting-trust certificate relating to any security of a registered
investment company, or any underwriter of such a certificate to offer for sale, sell, or

244 | P a g e
deliver after sale, in connection with a public offering, any such voting-trust certificate. The
prohibitions of this subsection shall not apply to a class of voting-trust certificates, if any
certificate of such class was made the subject of a public offering by the issuer or by or
through an underwriter prior to the effective date of this Act.

Sec. 20. Loans by investment companies. — It shall be unlawful for any registered
investment company to lend money or property to any person, directly or indirectly, if —

(a) the investment policies of such registered company, as recited in its registration
statement and reports filed under this Act, do not permit such a loan; or

(b) such person controls or is under common control with such registered company;
except that the provision of this paragraph shall not apply to the extension or renewal of
any such loan made prior to the effective date of this Act or to any loan from a registered
company to a company which owns all of the outstanding securities of such registered
company, except directors' qualifying shares.

Sec. 21. Investment Company prohibited to guarantee obligations. — It shall be unlawful

for any investment company to guarantee any obligation of whatever kind or nature.

Sec. 22. Distribution, redemption, and repurchase of securities. — (a) No registered

investment company shall sell any redeemable security issued by it to any person except
either to or through a principal underwriter for distribution or at a current public offering
price described in the prospectus, and, if such class of security is being currently offered to
the public by or through an underwriter, no principal underwriter of such security and no
dealer shall sell any such security to any person except a dealer, a principal underwriter or
the issuer, except at a current public offering price described in the prospectus: Provided,
however, That nothing in this subsection shall prevent a sale made (i) pursuant to an offer
of exchange permitted by section 10 including any offer made pursuant to clause (1) or (2)
of section ten (b); (ii) pursuant to an offer made solely to all registered holders of the
securities, or of a particular class or series of securities issued by the company
proportionate to their holdings or proportionate to any cash distribution made to them by
the company (subject to appropriate qualifications designed solely to avoid issuance of
fractional securities); or (iii) in accordance with rules and regulations of the Commission
made pursuant to section eleven (b); Provided, further, That no investment Company shall
sell any security issued by it to any person who is not a Filipino citizen or any company or
entity sixty per cent of the capital of which is not owned by Filipino citizens, when the
effect of such sale would be a violation or circumvention of Section one, Article XIII of the
Constitution on the limitation of the disposition, exploitation, development or utilization of
the natural resources of the Philippines nor shall said company sell any such security to
any person when the effect of such sale would be a violation or circumvention of Section
thirteen, subparagraph five of the Corporation Law regarding the limitation of ownership
by individuals or corporations to fifteen per cent of the capital of corporations engaged in
mining or agriculture.

(b) The provisions of the Corporation Law (Act Numbered Fourteen hundred and fifty-
nine, as amended) notwithstanding, no registered investment company shall suspend the
right of redemption or postpone the date of payment or satisfaction upon redemption of
any redeemable security in accordance with its terms as appears in its prospectus, for more
than seven days after the tender of such security to the company or its agent designated for
that purpose for redemption except —

(1) for any period (A) during which the Manila Stock Exchange is closed other than
customary weekend and holiday closings or (B) during which trading on the Manila Stock
Exchange is restricted;

245 | P a g e
(2) for any period during which an emergency exists as a result of which (A) disposal by
the company of securities owned by it is not reasonably practicable or (B) it is not
reasonably practicable for such company fairly to determine the value of its net assets; or

(3) for such other periods as the Commission may by order permit for the protection of
security holders of the company.

The Commission shall by rules and regulations determine the conditions under which (i)
trading shall be deemed to be restricted and (ii) an emergency shall be deemed to exist
within the meaning of this subsection. Any company which, prior to the effective date of
this Act, was required by provision of its charter, certificate of incorporation, article of
association, or trust indenture, or of a by-law or regulation duly adopted thereunder, to
postpone the date of payment or satisfaction upon redemption of redeemable securities
issued by it, shall be exempt from the requirements of this subsection; but such exemption
shall terminate upon the expiration of one year from the effective date of this Act, or upon
the repeal or amendment of such provision, or upon the sale by such company after the
effective date of this Act of any security (other than short-term paper) of which it is the
issuer, whichever first occurs.

(c) No registered open-end company shall restrict the transferability or negotiability of

any security of which it is the issuer except in conformity with the statements with respect
thereto contained in its registration statement nor in contravention of such rules and
regulations as the Commission may prescribe in the interests of the holders of all of the
outstanding securities of such investment company.

(d) No registered open-end company shall issue any of its securities (1) for services; or
(2) for property other than cash or securities (including securities of which such registered
company is the issuer), except as a dividend or distribution to its security holders or in
connection with a reorganization.

(e) The pertinent provisions of section seventeen of the Corporation Law (Act Numbered
Fourteen hundred and fifty-nine, as amended) or any other provision of the said law in
conflict with this section, shall not apply to a registered open-end company.

Sec. 23. Distribution and repurchase of securities; closed-end companies. — (a) No

registered closed-end company shall issue any of its securities (1) for services; or (2) for
property other than cash or securities (including securities of which such registered
company is the issuer), except as a dividend or distribution to its security holders or in
connection with a reorganization.

(b) No registered closed-end company shall sell any common stock of which it is the
issuer at a price below the current net asset value of such stock exclusive of any
distributing commission or discount (which net asset value shall be determined as of a time
within forty-eight hours, excluding Sundays and holidays, next preceding the time of such
determination), except (1) in connection with an offering to the holders of one or more
classes of its capital stock; (2) with the consent of a majority of its common stockholders;
(3) upon conversion of a convertible security in accordance with its terms; (4) upon the
exercise of any warrant outstanding prior to the effective date of this Act or issued in
accordance with the provisions of section eighteen (d); (5) under such other circumstances
as the Commission may permit by rules and regulations or orders for the protection of
investors.

(c) No registered closed-end company shall purchase any securities of any class of which
it is the issuer except —

246 | P a g e
(1) on a securities exchange or such other open market as the Commission may designate
by rules and regulations or orders; Provided, That if such securities are stock, such
registered company shall, within the preceding six months, have informed stockholders of
its intention to purchase stock of such class by letter or report addressed to stockholders of
such class; or

(2) pursuant to tenders, after reasonable opportunity to submit tenders given to all
holders of securities of the class to be purchased; or

(3) under such other circumstances as the Commission may permit by rules and
regulations or orders for the protection of investors in order to insure that such purchases
are made in a manner or on a basis which does not unfairly discriminate against any
holders of the class of classes of securities to be purchased.

Sec. 24. Registration of securities under the Securities Act. — (a) In registering under the
Securities Act any security of which it is the issuer, a registered investment company, in
lieu of furnishing a registration statement containing the information and documents
specified in section seven of the said Act, may file a registration statement containing the
information and documents:

(1) such copies of the registration statement filed by such company under this Act and of
such reports filed by such company pursuant to section twenty-seven or such copies of
portions of such registration statement and reports as the Commission shall designate by
rules and regulations; and

(2) such additional information and documents (including a prospectus) as the

Commission shall prescribe by rules and regulations as necessary or appropriate in the
public interest or for the protection of investors.

(b) Where the registered statement which an investment company filed under this Act
includes a description of its securities and the requirements for the registration and/or
licensing thereof under the Securities Act have already been complied with, no separate
registration of such securities under the latter Act shall be necessary.

(c) It shall be unlawful for any registered open-end company or for any underwriter for
such a company, in connection with a public offering of any security of which such
company is the issuer, to transmit any advertisement, pamphlet, circular, form letter, or
other sales literature addressed to or intended for distribution to prospective investors
unless three copies of the full text thereof have been filed with the Commission or are filed
with the Commission within ten days thereafter.

(d) The Commission is authorized to require, by rules and regulations or order, that the
information contained in any prospectus relating to any periodic payment plan certificate
registered under the Securities Act on or after the effective date of this Act be presented in
such form and order of items, and such prospectus contain such summaries of any portion
of such information, as are necessary or appropriate in the public interest or for the
protection of investors.

(e) The exemption provided by section five of the Securities Act shall not apply to any
security of which an investment company is the issuer, except that periodic payment plan
certificates issued by a registered investment company or its agent, sub-agent, or
underwriter or by a dealer pursuant to a contract with said company, or its agent, sub-
agent, or underwriter, the proceeds of the payments under which are invested wholly in
securities of which the registered investment company is the issuer, need not be registered

247 | P a g e
under the Securities Act: Provided, That (1) the said securities purchased with the
proceeds of the payments under the periodic payment plan certificates shall be issued in
the name of the holder of the said certificates and (2) the said securities of the issuer
investment company are registered under the Securities Act: And provided, That an
exemption from such registration is secured from the Commission.

Sec. 25. Reorganization plans, reports by Commission. — (a) Any person who solicits or
permits the use of his name to solicit any proxy, consent, authorization, power of attorney,
ratification, deposit, or dissent in respect of any plan of reorganization of any registered
investment company shall file with, or mail to, the Commission for, its information, within
twenty-four hours after the commencement of any such solicitation, a copy of such plan
and any deposit agreement relating thereto and of any proxy, consent, authorization,
power of attorney, ratification, instrument of deposit, or instrument of dissent in respect
thereto, if or to the extent that such documents shall not already have been filed with the
Commission.

(b) No plan for the reorganization of a registered investment company shall be carried
out without the prior approval of the Commission.

Sec. 26. Periodic payment plan. — (a) It shall be unlawful for any registered investment
company issuing periodic payment plan certificates, or for any underwriter for such
company, to sell any such certificates, if —

(1) the sales load on such certificates exceeds eight per centum of the total payments to
be made thereon;

(2) more than one-half of any of the first twelve monthly payments thereon, or their
equivalent, is deducted for sales load;

(3) the amount of sales load deducted from any one of such first payments exceeds
proportionately the amount deducted from any other such payment, or the amount
deducted from any subsequent payment exceeds proportionately the amount deducted
from any other subsequent payment;

(4) the first payment on such certificate is less than ten pesos or any subsequent payment
is less than ten pesos.

Sec. 27. Reports and financial statements of investment companies and affiliated persons.
— (a) Every registered investment company shall file with the Commission —

(1) such information and documents including financial statements as the Commission
may require, on a semiannual or quarterly basis, to keep reasonably current the
information and documents contained in the registration statement of such company filed
under this Act; and

(2) copies of every periodic or interim report or similar communication containing

financial statements and transmitted to any class of such company's security holders, such
copies to be filed not later than ten days after transmission.

Any information or documents contained in a report or other communication to security

holders filed pursuant to paragraph (2) may be incorporated by reference in any report
subsequently or concurrently filed pursuant to paragraph (1).

(b) The Commission shall issue rules and regulations permitting the filing with the
Commission or copies of periodic reports, or of extracts therefrom, filed by any registered

248 | P a g e
investment company pursuant to subsection (a).

(c) Every registered investment company shall transmit to its stockholders, at least
semiannually, reports containing such of the following information and financial
statements or their equivalent, as of a reasonably current date, as the Commission may
prescribe by rules, and regulations for the protection of investors, which reports shall not
be misleading in any material respect in the light of the reports required to be filed
pursuant to subsection (a):

(1) a balance sheet accompanied by a statement of the aggregate value of investments on

the date of such balance sheet;

(2) a list showing the amounts and values of securities owned on the date of such balance
sheet;

(3) a statement of income, for the period covered by the report, which shall be itemized at
least with respect to each category of income and expense representing more than five per
centum of total income or expense;

(4) a statement of surplus, which shall be itemized at least with respect to each charge or
credit to the surplus account which represents more than five per centum of the total
charges or credit during the report covered by the report;

(5) a statement of the aggregate remuneration paid by the company during the period
covered by the report (A) to all directors and to all members of any advisory board for
regular compensation; (B) to each director and to each member of an advisory board for
special compensation; (C) to all officers; and (D) to each person of whom any officer or
director of the company is an affiliated person; and

(6) a statement of the aggregate peso amounts of purchases and sales of investment
securities, other than Government securities, made during the period covered by the
report; Provided, That if in the judgment of the Commission any item required under this
subsection is inapplicable or inappropriate to any specified type or types of investment
company, the Commission may by rules and regulations permit in lieu thereof the inclusion
of such item of a comparable character as it may deem applicable or appropriate to such
type or types of investment company.

(d) Financial statements contained in annual reports required pursuant to subsections (a)
and (c), if required by the rules and regulations of the Commission, shall be accompanied
by a certificate of independent public accountants. The certificate of such independent
public accountants shall be based upon an audit not less in scope or procedures followed
than that which independent public accountants would ordinarily make for the purpose of
presenting comprehensive and dependable financial statements, and shall contain such
information as the Commission may prescribe, by rules and regulations in the public
interest or for the protection of investors, as to the nature and scope of the audit and the
findings and opinion of the accountants. Each such report shall state that such independent
public accountants have verified securities owned, either by actual examination, or by
receipt of a certificate from the custodian, as the Commission may prescribe by rules and
regulations.

(e) Every person who is directly or indirectly the beneficial owner of more than ten per
centum of any class of outstanding securities (other than short-term paper) of which a
registered closed-end company is the issuer or who is an officer, director, member of an
advisory board, investment advisor, or affiliated person of an investment adviser of such a
company shall in respect of his transactions in any securities of such company (other than

249 | P a g e
short term paper) be subject to the same duties and liabilities as those imposed by section
twenty-six (a) of the Securities Act upon certain beneficial owners, directors, and officers in
respect of their transactions in certain equity securities.

Sec. 28. Accounts and records. — (a) Every registered investment company, and every
underwriter, broker, dealer, or investment adviser which is a majority-owned subsidiary of
such a company, shall maintain and preserve for such period or periods as the Commission
may prescribe by rules and regulations, such accounts, books, and other documents as
constituting the record forming the basis for financial statements required to be filed
pursuant to section twenty-seven of this Act, and of the auditor's certificates relating
thereto. Every investment adviser not a majority-owned subsidiary of, and every depositor
of any registered investment company, and every principal underwriter for any registered
investment company other than a closed-end company, shall maintain and preserve for
such period or periods as the Commission shall prescribe by rules and regulations, such
accounts, books, and other documents as are necessary or appropriate to record such
person's transactions with such registered company.

(b) All accounts, books, and other records, required to be maintained and preserved by
any person pursuant to subsection (a), shall be subject at any time and from time to time to
such reasonable periodic, special and other examinations by the Commission, or any
member or representative thereof, as the Commission may prescribe. Any such person
shall furnish to the Commission, within such reasonable time as the Commission may
prescribe, copies of or extracts from such records which may be prepared without undue
effort, expense, or delay, as the Commission may by order require.

(c) The Commission may, in the public interest or for the protection of investors, issue
rules and regulations providing for a reasonable degree of uniformity in the accounting
policies and principles to be followed by registered investment companies in maintaining
their accounting records and in preparing financial statements required pursuant to this
Act.

(d) The Commission, upon application made by any registered investment company, may
be order exempt a specific transaction or transactions from the provisions of any rule or
regulation made pursuant to subsection (c), if the Commission finds that such rule or
regulation should not reasonably be applied to such transaction.

Sec. 29. Accountants and auditors. — (a) After one year from the effective date of this Act,
it shall be unlawful for any registered investment company to file with the Commission any
financial statement signed or certified by an independent certified public accountant,
unless —

(1) such accountant shall have been selected at a meeting held within thirty days before
or after the beginning of the fiscal year or before the annual meeting of stockholders in that
year by a majority of those members of the board of directors who are not investment
advisers of, or affiliated persons of an investment adviser of, or officer or employees of
such, registered company;

(2) such selection shall have been submitted for ratification or rejection at the next
succeeding annual meeting of stockholders if such meeting be held, except that any vacancy
occurring between annual meetings, due to the death or resignation of the accountant, may
be filled by the board of directors;

(3) the employment of such accountant shall have been conditioned upon the right of the
company by vote of a majority of the outstanding voting securities at any meeting called for
the purpose to terminate such employment forthwith without any penalty; and

250 | P a g e
(4) such certificate or report of such accountant shall be addressed both to the board of
directors of such registered company and to the security holders thereof:

Provided, That if the selection of an accountant has been rejected pursuant to paragraph
(2) or his employment terminated pursuant to paragraph (3) the vacancy so occurring may
be filed by a vote of a majority of the outstanding voting securities either at the meeting at
which the rejection or termination occurred or if not so filled then at a subsequent meeting
which shall be called for the purpose.

(b) No registered investment company shall file with the Commission any financial
statement in the preparation of which the controller or other principal accounting officer
or employee of such company participated, unless such controller, officer or employee was
selected, either by vote of the holders of such company's voting securities at the last annual
meeting of such security holders, or by the board of directors of such company.

(c) The Commission is authorized, by rules and regulations or order in the public interest
or for the protection of investors, to require accountants and auditors to keep reports,
work sheets, and other documents and papers relating to registered investment companies
for such period or periods as the Commission may prescribe, and the make the same
available for inspection by the Commission or any member or representative thereof.

Sec. 30. Report of settlement of civil actions. — (a) Every registered investment company
which is a party and every affiliated person of such company who is a party defendant to
any action or claim by a registered investment company or a security holder thereof in a
derivative capacity against an officer, director, investment adviser, trustee, or depositor of
such company for an alleged breach of official duty, which such action or claim is
commerced or asserted after the effective date of this Act, shall transmit; unless already
transmitted to the Commission, the documents specified in subsection (b) if —

(1) such action has been compromised or settled and such settlement or compromise has
had the approval of a court having jurisdiction to approve such settlement or compromise;
or

(2) a final judgment has been entered on the merits in such action.

(b) Within thirty days after such settlement or compromise or final judgment, copies of all
pleadings and any written record made in such action, together with a statement of the
terms of settlement or compromise, if such terms be not included in the record, shall be
transmitted to the Commission; and any information contained in any such documents may
be used by the Commission in connection with any report or study which may be made by
the Commission of lawsuits whether of investment companies or companies generally:
Provided, That the names of persons involved shall not be disclosed.

Sec. 31. Destruction and falsification of reports and records. — (a) It shall be unlawful for
any person, except as permitted by rule, regulation, or order of the Commission, wilfully to
destroy, mutilate, or alter any account, book, or other document the preservation of which
has been required pursuant to section twenty-eight (a) or twenty-nine (c).

(b) It shall unlawful for any person to make any untrue statement of a material fact in any
registration statement, application, report, account, record, or other document filed or
transmitted pursuant to this Act or the keeping of which is required pursuant to section
twenty-eight (a). It shall be unlawful for any person so filing, transmitting, or keeping any
such document to omit to state therein any fact necessary in order to prevent the
statements made therein, in the light of the circumstances under which they were made,

251 | P a g e
from being materially misleading. For the purposes of this subsection, any part of any such
document which is signed or certified by an accountant or auditor in his capacity as such
shall be deemed to be made, filed, transmitted, or kept by such accountant or auditor, as
well as by the person filing, transmitting or keeping the complete document.

Sec. 32. Unlawful representations and names. — (a) It shall be unlawful for any person, in
issuing or selling any security of which a registered investment company is the issuer, to
represent or imply in any manner whatsoever that such security or company has been
guaranteed, sponsored, recommended, or approved by the Republic of the Philippines or
any agency or officer thereof.

(b) It shall be unlawful for any person registered under any section of this Act to
represent or imply in any manner whatsoever that such person has been sponsored
recommended, or approved, or that his abilities or qualifications have in any respect been
passed upon by the Republic of the Philippines or any agency or officer thereof.

(c) No provision of subsection (a) or (b) shall be construed to prohibit a statement that a
person or security is registered under this Act or the Securities Act if such statement is true
in fact and if the effect of such registration is not misrepresented.

(d) It shall be unlawful for any registered investment company hereafter to adopt as a
part of the name or title of such company, or of any security of which it is the issuer, any
word or words which the Commission finds and by order declares to be deceptive or
misleading. The Commission is authorized to deny the registration of an investment
company using such name or title.

Sec. 33. Injunctions against gross misconduct and abuse of trust. — The Commission is
authorized to require a registered investment company to remove or suspend a person
serving or acting in one or more of the following capacities who has been found guilty, after
proper investigation and hearing by said Commission, of gross misconduct or gross abuse
of trust in respect of any such investment company for which such person so serves or
acts:

(1) as officer, director, member of an advisory board, investment adviser, or depositor; or

(2) as principal underwriter, if such registered company is an open-end company.

The suspension shall be for such period of time as the Commission in its discretion, shall
deem appropriate.

Sec. 34. Theft and estafa. — Whoever steals, unlawfully abstracts, unlawfully and wilfully
converts to his own use or to the use of another, or embezzles any of the moneys, funds
securities, credits, property, or assets of any registered investment company shall be
deemed guilty of a crime, and upon conviction thereof shall be subject to the penalties
provided in section forty of the Securities Act.

Sec. 35. Rules, regulations, and orders; general powers of Commission. — (a) The
Commission shall have authority from time to time to make, issue, amend, and rescind such
rules and regulations and such orders as are necessary or appropriate to the exercise of the
powers conferred upon the Commission elsewhere in this Act, including rules and
regulations defining accounting, technical, and trade terms used in this Act, and prescribing
the form or forms in which information required in registration statements, applicants, and
reports to the Commission shall be set forth. For the purposes of its rules or regulations the
Commission may classify, persons, securities, and other matters within its jurisdiction and
prescribe different requirements for different classes of persons, securities, or matters.

252 | P a g e
(b) The Commission, by such rules and regulations or order as it deems necessary or
appropriate in the public interest or for the protection of investors, may suspend the
operation of the stocks of companies registered in the stock exchange the quotations for
which are greatly in excess of the book value of the shares of stocks and may authorize the
filing of any information or documents required to be filed with the Commission under this
Act by incorporating by reference any information or documents heretofore or
concurrently filed with the Commission under this Act.

(c) No provision of this Act imposing any liability shall apply to any act done or omitted in
good faith in conformity with any rule, regulation, or order of the Commission,
notwithstanding that such rule, regulation, or order may, after such act or omission, be
amended or rescinded or be determined by judicial or other authority to be invalid for any
reason.

Sec. 36. Rules and regulations; procedure for issuance. — The rules and regulations of the
Commission under this Act, and amendments thereof, shall be effective upon publication in
the manner which the Commission shall prescribe, or upon such later date as may be
provided in such rules and regulations.

Sec. 37. Orders; procedure for issuance. — (a) Orders of the Commission under this Act
shall be issued only after appropriate notice and opportunity for hearing. Notice to the
parties on a proceeding before the Commission shall be given by personal service upon
each party or by registered mail or confirmed telegraphic notice to the party's last known
business address. Notice to interested persons, if any, other than parties may be given in
the same manner.

(b) The Commission may provide, by appropriate rules or regulations, that an application
verified under oath may be admissible in evidence in a proceeding before the Commission
and that the record in such a proceeding may consist, in whole or in part, of such
application.

(c) In any proceeding before the Commission, the Commission, in accordance with such
rules and regulations as it may prescribe, shall admit as a party any interested Government
agency, and may admit as a party any representative of interest security holders, or any
other person whose participation in the proceeding may be in the public interest or for the
protection of investors.

Sec. 38. Hearings by Commission. — Hearing may be public and may be held before the
Commission or any officer or officers of the Commission designated by it, and appropriate
records thereof shall be kept.

Sec. 39. Enforcement of this Act. — (a) The Commission may make such, investigations as
it deems necessary to determine whether any person has violation or is about to violate
any provision of this Act or of any rule, regulation, or order thereunder, or to determine
whether any action or any court or any proceeding before the Commission shall be
instituted under this Act against a particular person or persons, or with respect to a
particular transaction or transactions. The Commission shall permit any person to file with
it a statement in writing, under oath or otherwise as the Commission shall determine, as to
all the facts and circumstances concerning the matter to be investigated.

(b) For the purpose of any investigation or any other proceeding under this Act, the
Commission, or any officer thereof designated by it, empowered to administer oaths and
affirmations, subpoena witnesses, compel their attendance, take evidence, and require the
production of any books, papers, correspondence, memoranda, contracts, agreements, or

253 | P a g e
other records which are relevant or material to the inquiry.

(c) In case of contumacy by, or refusal to obey a subpoena issued to, any person, the
Commission may avail itself of its powers under republic Act Numbered Eleven hundred
forty-three or, if the same is ineffective, may invoke thed of any Court of First Instance
within the jurisdiction of which such investigation or proceeding is carried on, or where
such person resides or carries on business, in requiring the attendance and testimony of
witnesses and the production of books, papers, correspondence, memoranda, contracts,
agreements, and other records. And such court may issue an order requiring such person to
appear before the Commission or officer designated by the Commission, there to produce
records if so ordered, to give testimony touching the matter under investigation or in
question; any failure to obey such order of the court may be punished by such court as a
contempt thereof. Any person who without just cause shall fail or refuse to attend and
testify or to answer any lawful inquiry or to produce books, papers, correspondence,
memoranda, contracts, agreements, or other records, if in his or its power so to do, in
obedience to the subpoena of the Commission, shall upon convictions, be subject to a fine of
not more than two thousand pesos or to imprisonment for a term of not more than one
year, or both.

(d) No person shall be excused from attending and testifying or from producing books,
papers, correspondence, memoranda, contracts, agreements, or other records and
documents before the Commission, or in obedience to the subpoena of the Commission or
any officer designated by it, or in any cause or proceeding instituted by the Commission, on
the ground that the testimony or evidence, documentary or otherwise, required of him may
tend to incriminate him or subject him to a penalty or forfeiture; but no individual shall be
prosecuted or subject to any penalty or forfeiture for or on account of any transaction,
matter, or thing concerning which he is compelled to testify or produce evidence,
documentary or otherwise, after having claimed his privilege against self-incrimination,
except that such individual so testifying shall not be exempt from prosecution and
punishment for perjury committed in so testifying.

(e) Whenever it shall appear to the Commission that any person has engaged or is about
to engage in any act or practice constituting a violation of any provision of this Act or of any
rule, regulation, or order thereunder it may, after proper investigation and hearing, order
such person to desist from committing such act or practice and enforce the same in
accordance with its powers under Republic Act Numbered Eleven hundred forty-three. The
Commission, in its discretion, may also bring an action in the Court of First Instance of
Manila to enjoin such acts or practices and to enforce compliance with this Act or any rule,
regulation, or order thereunder. Upon a showing that such person has engaged or is about
to engage in any such act or practice, a permanent or temporary injunction or decree or
restraining order shall be granted without bond: Provided, however, That no such
certificate of authority shall be issued by the Securities and Exchange Commissioner unless
the applicant for agent, sub-agent or investment solicitor shall have passed a written
examination given for the purpose by the Securities and Exchange Commission or the said
applicant possesses a college degree. In any proceeding under this subsection to enforce
compliance with section seven, the court as a court of equity may, to the extent it deems
necessary or appropriate, take exclusive jurisdiction and possession of the investment
company or companies involved and the books, records, and assets thereof, wherever
located; and the court shall have jurisdiction to appoint a trustee, who with the approval of
the court shall have power to dispose of any or all of such assets, subject to such terms and
conditions as the court may prescribe. The Commission may transmit such evidence as
may be available concerning any violation of the provisions of this Act or of any rule,
regulation, or order thereunder to the Secretary of Justice, who, in his discretion, may
institute the appropriate criminal proceedings under this Act.

254 | P a g e
Sec. 40. Agents and Investment Solicitors. — No investment company doing business
within the Philippines or agent thereof shall pay any commission or other compensation to
any person for services in obtaining investments in an investment company unless such
person, after passing mental and moral test, holds a certificate of authority issued by the
Securities and Exchange Commissioner to act as an agent or investment solicitor of such
company as hereafter provided. No person shall act as an agent, sub-agent, or investment
solicitor in the solicitation or procurement of investment or application for investment in
an investment company or receive for services for obtaining such investments any
commission or other compensation from any investment company doing business in the
Philippines or from the agent or underwriter thereof, without first getting a certificate of
authority so to act from the Securities and Exchange Commissioner, which must be
renewed annually in the first day of January and not later than the fifteenth day of March.
Such certificate shall be issued by the Securities and Exchange Commissioner only upon the
written applicant of the person desiring such authority, such application being approved
and countersigned by the investment company or its agent or underwriter, and shall be
upon a form approved by the Securities and Exchange Commissioner. The Securities and
Exchange Commissioner shall have the right to refuse to issue or renew and to revoke any
such certificate in his discretion. No such certificate shall be valid, however, in any event
after the fifteenth day of March of the year following the issuance of said certificate. A
renewal certificate may be issued upon application of the company, its agent or
underwriter represented by such agent or investment solicitor.

Any person who for compensation solicits or obtains investments on behalf of any
investment company or its agent or underwriter or transmits for a person other than
himself an investment or application for investment in an investment company or offers or
assumes to act as an agent or investment solicitor of an investment company, shall be an
investment agent or investment solicitor within the intent of this section and shall thereby
become liable to all the duties, requirements, liabilities, and penalties to which such a
person is subject.

Any person or company violating the provisions of this section shall upon conviction, be
subject to a fine of five hundred pesos. Upon the conviction of any person acting as agent,
sub-agent, investment solicitor, or broker for the commission of any offense connected
with the business of an investment company, the Securities and Exchange Commissioner
shall immediately revoke the certificate of authority issued to him and no such certificates
shall thereafter be issued to such convicted person.

The Securities and Exchange Commissioner shall issue such rules and regulations as he
may deem necessary for the enforcement and implementation of the provisions of this
section.

Sec. 41. Court review of orders. — Any person or party aggrieved by an order issued by
the Commission under this Act may obtain a review of such order in accordance with the
provisions of section thirty-five of the Securities Act, as amended.

Sec. 42. Disclosure of information filed with Commission; copies. — (a) The information
contained in any registration statement, application, report, or other document filed with
the Commission pursuant to any provision of this Act or of any rule or regulation
thereunder as distinguished from any information or document transmitted to the
Commission) shall be made available to the public, unless and except insofar as the
Commission, by rules and regulations upon its own motion, or by order upon application,
finds that public disclosure is neither necessary nor appropriate in the public interest or
for the protection of investors. It shall be unlawful for any officer or employee of the
Commission to use for personal benefit, or to disclose to any person other than an official
or employee of the Philippine Government, for official use, or for any such official or

255 | P a g e
employee to use for personal benefit, any information contained in any document so filed
or transmitted, if such information is not available to the public.

(b) Photostatic or other copies of information contained in documents filed with the
Commission under this Act and made available to the public shall be furnished any person
at such reasonable charge and under such reasonable limitation as the Commission shall
prescribe.

Sec. 43. Reports by Commission. — The Commission shall submit from time to time, a
report to the Congress covering the work of the Commission under this Act, with such
information, data, and recommendations for further legislation in connection therewith as
it may find advisable.

Sec. 44. Fees; additional personnel; Commissioner's Compensation. — (a) The

Commission is authorized to charge and collect the following fees:

(1) For registering an investment company — One hundred pesos. If the securities of the
company are likewise registered, the schedule of fees prescribed in the Securities Act shall
instead be applied.

(2) For every examination of the financial condition of an investment company — One
hundred pesos. The Commission is authorized to conduct such examination as often as may
be necessary in the public interest or for the protection of investors.

(3) For each exemption — Thirty pesos.

(4) For every determination granting a right or privilege — thirty pesos.

(5) For each certificate of authority issued to an agent or investment solicitor — Ten
pesos.

(6) For each instrument, document, or paper not required to be filed but which an
interested party desires to be attached to the records of an investment company — Five
pesos.

Every right, privilege, exemption or registration under this Act shall be sought from the
Commission in the form of a petition for which the corresponding fee herein authorized to
be collected shall be paid before any action is taken thereon. The grant or denial of the
petition shall be in the form an order issued by the Commission. No denial, withdrawal or
abandonment of the petition shall be a ground for the refund of the fee paid therefor.

(b) For the effective implementation and enforcement of this Act, the following additional
positions in the Securities and Exchange Commission are hereby authorized to be created
by the Commission:

One Legal Officer at six thousand five hundred fifty-two pesos per annum.

Three Legal Officers at five thousand three hundred seventy-six pesos each per annum.

Five Examiners at five thousand three hundred seventy-six pesos each per annum.

One Stenographer at three thousand one hundred eight pesos per annum; and

Two Clerks at two thousand four hundred fifty-four pesos each per annum.

256 | P a g e
Any person entering the government service who may be appointed to any of said positions
shall start at the initial rate of the salary corresponding to his position, as provided under
the pertinent laws, rules and regulations.

The Commission shall take charge of the enforcement and implementation of the
provisions of this Act. The Securities and Exchange Commissioner shall receive the
compensation and enjoy all the privileges of Judges of the Court of First Instance.

Sec. 45. Appropriation: assessment. — To carry out the purposes of this Act, the
Commission is hereby authorized to spend its income under this Act. Should the
Commission's total income under this Act in any year be less than its total expenditures as
certified by the Securities and Exchange Commissioner, the different shall be pro-rated
among all investment companies in business, and the Commission is authorized to assess
and collect from each of them its corresponding share which shall not exceed one-half of
one per centum of its net asset value.

Sec. 46. Validity of contracts. — (a) Any condition, stipulation, or provision binding any
person to waive compliance with any provision of this Act or with any rule, regulation or
order thereunder shall be void.

(b) Every contract made in violation of any provision of this Act or of any rule, regulation,
or order thereunder, and every contract heretofore or hereafter made, the performance of
which involves the violation of, or the continuance of any relationship or practice in
violation of, any provision of this Act or any rule, regulation, or order thereunder, shall be
void (1) as regards the rights of any person who, in violation of any such provision, rule,
regulation, or order, shall have made or engaged in the performance of any such contract,
and (2) as regards the rights of any person who, not being a party to such contract, shall
have acquired any right thereunder with actual knowledge of the facts by reason of which
the making or performance of such contract was in violation of any such provision, rule,
regulation, or order.

Sec. 47. Procuring violation of Act; obstructing compliance. — (a) It shall be unlawful for
any person, directly or indirectly, to cause to be done any act or thing through or by means
of any other person which it would be unlawful for such person to do under the provisions
of this Act or any rule, regulation, or order thereunder.

(b) It shall be unlawful for any person without just cause to hinder, delay, or obstruct the
making, filing, or keeping of any information, document, report, record, or account required
to be made, filed, or kept under any provision of this Act or any rule, regulation, or order
thereunder.

Sec. 48. Penalties. — Unless otherwise specifically provided elsewhere in this Act, any
person who violates any provision of this Act or of any rule, regulation, or order
thereunder, or any person who in any registration statement, application, report, account,
record, or other document filed or transmitted pursuant to this Act or the keeping of which
is required pursuant to section twenty-eight (a) of this Act makes any untrue statement of
fact or omits to state any fact necessary in order to prevent the statements made therein
from being materially misleading in the light of the circumstances under which they were
made, shall upon conviction be fined not more than fifty thousand pesos or imprisoned for
not more than five years or both.

Sec. 49. Effect on existing law and repealing clause. — The rights and remedies provided
by this Act shall be in addition to any and all other rights and remedies that may now exist,
but no person permitted to maintain a suit for damages under the provisions of this Act
shall recover, through satisfaction of judgment in one or more actions, a total amount in

257 | P a g e
excess of his actual damages on account of the act complained of.

Paragraph (r) of section one hundred ninety-four of Commonwealth Act Numbered Four
hundred sixty-six, as amended by section three of Republic Act Numbered Forty-two, is
further amended to read as follows:

"Stockbroker" includes all persons whose business it is, for themselves as such brokers or
for other brokers, to negotiate purchases or sales of stock, bonds, exchange, bullion, coined
money, bank notes, promissory notes, or other securities; but does not include
underwriters for one or more investment companies as defined in the Investment
Company Act; "dealer in securities" includes all persons who for their own account are
engaged in the sale of stock, bonds, exchange, bullion, coined money, bank notes,
promissory notes or other securities."

All laws, Acts, parts of Acts, Rules of Court, executive orders, and administrative regulations
which are inconsistent with this Act are hereby repealed.

Sec. 50. Separability of provisions. — If any provision of this Act shall be held invalid, the
remainder of the Act shall not be affected thereby.

Sec. 51. Effective date. — This Act shall take effect upon its approval.

258 | P a g e
 SECOND DIVISION

[G.R. No. 128703. October 18, 2000]

TEODORO BAAS,* C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, petitioners,

vs. ASIA PACIFIC FINANCE CORPORATION,[1] substituted by INTERNATIONAL
CORPORATE BANK now known as UNION BANK OF THE
PHILIPPINES, respondent.

DECISION

BELLOSILLO, J.:

C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the
reversal of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for
lack of merit and affirming in toto the decision of the trial court holding them liable to Asia
Pacific Finance Corporation in the amount of P87,637.50 at 14% interest per annum in
addition to attorney's fees and costs of suit, as well as its 21 March 1997 Resolution
denying reconsideration thereof.[2]

On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a
complaint for a sum of money with prayer for a writ of replevin against Teodoro Baas, C. G.
Dizon Construction and Cenen Dizon. Sometime in August 1980 Teodoro Baas executed
a Promissory Note in favor of C. G. Dizon Construction whereby for value received he
promised to pay to the order of C. G. Dizon Construction the sum of P390,000.00 in
installments of "P32,500.00 every 25th day of the month starting from September 25, 1980
up to August 25, 1981."[3]

Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA
PACIFIC, and to secure payment thereof, C. G. Dizon Construction, through its corporate
officers, Cenen Dizon, President, and Juliette B. Dizon, Vice President and Treasurer,
executed a Deed of Chattel Mortgage covering three (3) heavy equipment units of
Caterpillar Bulldozer Crawler Tractors with Model Nos. D8-14A, D8-2U and D8H in favor of
ASIA PACIFIC.[4] Moreover, Cenen Dizon executed on 25 August 1980 a Continuing
Undertaking wherein he bound himself to pay the obligation jointly and severally with C. G.
Dizon Construction.[5]

In compliance with the provisions of the Promissory Note, C. G. Dizon Construction

made the following installment payments to ASIA PACIFIC: P32,500.00 on 25 September
1980, P32,500.00 on 27 October 1980 and P65,000.00 on 27 February 1981, or a total
of P130,000.00. Thereafter, however, C. G. Dizon Construction defaulted in the payment of
the remaining installments, prompting ASIA PACIFIC to send a Statement of Account to
Cenen Dizon for the unpaid balance of P267,737.50 inclusive of interests and charges,
and P66,909.38 representing attorney's fees. As the demand was unheeded, ASIA PACIFIC
sued Teodoro Baas, C. G. Dizon Construction and Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due execution of
the Promissory Note, the Deed of Chattel Mortgage and the Continuing Undertaking, they
nevertheless maintained that these documents were never intended by the parties to be
legal, valid and binding but a mere subterfuge to conceal the loan of P390,000.00 with
usurious interests.

Defendants claimed that since ASIA PACIFIC could not directly engage in banking
business, it proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan
to them without violating banking laws: first, Cenen Dizon would secure a promissory note
from Teodoro Baas with a face value of P390,000.00 payable in installments; second, ASIA
PACIFIC would then make it appear that the promissory note was sold to it by Cenen Dizon

259 | P a g e
with the 14% usurious interest on the loan or P54,000.00 discounted and collected in
advance by ASIA PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to
answer for the loan in case of default in payment and execute a continuing guaranty to
assure continuous and prompt payment of the loan. Defendants also alleged that out of the
loan of P390,000.00 defendants actually received only P329,185.00 after ASIA PACIFIC
deducted the discounted interest, service handling charges, insurance premium,
registration and notarial fees.

Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be
delayed in meeting his monthly amortization on account of business reverses and promised
to pay instead in February 1981. Cenen Dizon made good his promise and tendered
payment to ASIA PACIFIC in an amount equivalent to two (2) monthly amortizations. But
ASIA PACIFIC attempted to impose a 3% interest for every month of delay, which he flatly
refused to pay for being usurious.

Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to

surrender to it the ownership of the two (2) bulldozer crawler tractors and, in turn, the
latter would treat the former's account as closed and the loan fully paid. Cenen Dizon
supposedly agreed and accepted the offer. Defendants averred that the value of the
bulldozer crawler tractors was more than adequate to cover their obligation to ASIA
PACIFIC.

Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant
C. G. Dizon Construction for the surrender of the bulldozer crawler tractors subject of
the Deed of Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were
actually turned over by defendants - D8-14A and D8-2U - which units were subsequently
foreclosed by ASIA PACIFIC to satisfy the obligation. D8-14A was sold for P120,000.00 and
D8-2U for P60,000.00 both to ASIA PACIFIC as the highest bidder.

During the pendency of the case, defendant Teodoro Baas passed away, and on motion
of the remaining defendants, the trial court dismissed the case against him. On the other
hand, ASIA PACIFIC was substituted as party plaintiff by International Corporate Bank after
the disputed Promissory Note was assigned and/or transferred by ASIA PACIFIC to
International Corporate Bank. Later, International Corporate Bank merged with Union
Bank of the Philippines. As the surviving entity after the merger, and having succeeded to
all the rights and interests of International Corporate Bank in this case, Union Bank of the
Philippines was substituted as a party in lieu of International Corporate Bank.[6]

On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding
the defendants jointly and severally liable for the unpaid balance of the obligation under
the Promissory Note in the amount of P87,637.50 at 14% interest per annum, and
attorney's fees equivalent to 25% of the monetary award.[7]

On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus
-

Defendant-appellants' contention that the instruments were executed merely as a

subterfuge to skirt banking laws is an untenable defense. If that were so then they too were
parties to the illegal scheme. Why should they now be allowed to take advantage of their
own knavery to escape the liabilities that their own chicanery created?

Defendant-appellants also want us to believe their story that there was an agreement
between them and the plaintiff-appellee that if the former would deliver their 2 bulldozer
crawler tractors to the latter, the defendant-appellants' obligation would fully be
extinguished. Again, nothing but the word that comes out between the teeth supports such
story. Why did they not write down such an important agreement? Is it believable that
seasoned businessmen such as the defendant-appellant Cenen G. Dizon and the other

260 | P a g e
officers of the appellant corporation would deliver the bulldozers without a receipt of
acquittance from the plaintiff-appellee x x x x In our book, that is not credible.

The pivotal issues raised are: (a) Whether the disputed transaction between
petitioners and ASIA PACIFIC violated banking laws, hence, null and void; and (b) Whether
the surrender of the bulldozer crawler tractors to respondent resulted in the
extinguishment of petitioners' obligation.

On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment
house which could not engage in the lending of funds obtained from the public through
receipt of deposits. The disputed Promissory Note, Deed of Chattel Mortgage and Continuing
Undertaking were not intended to be valid and binding on the parties as they were merely
devices to conceal their real intention which was to enter into a contract of loan in violation
of banking laws.

We reject the argument. An investment company refers to any issuer which is or holds
itself out as being engaged or proposes to engage primarily in the business of investing,
reinvesting or trading in securities.[8] As defined in Sec. 2, par. (a), of the Revised
Securities Act,[9] securities "shall include x x x x commercial papers evidencing
indebtedness of any person, financial or non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in any manner conveyed to another with or without
recourse, such as promissory notes x x x x" Clearly, the transaction between petitioners
and respondent wasone involving not a loan but purchase of receivables at a discount,
well within the purview of "investing, reinvesting or trading in securities" which an
investment company, like ASIA PACIFIC, is authorized to perform and does not constitute a
violation of the General Banking Act.[10] Moreover, Sec. 2 of the General Banking
Act provides in part -

Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage
in the lending of funds obtained from the public through the receipt of deposits of any kind,
and all entities regularly conducting such operations shall be considered as banking
institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of
other pertinent laws (underscoring supplied).

Indubitably, what is prohibited by law is for investment companies to lend funds

obtained from the public through receipts of deposit, which is a function of banking
institutions. But here, the funds supposedly "lent" to petitioners have not been shown to
have been obtained from the public by way of deposits, hence, the inapplicability of
banking laws.

On petitioners' submission that the true intention of the parties was to enter into a
contract of loan, we have examined the Promissory Note and failed to discern anything
therein that would support such theory. On the contrary, we find the terms and conditions
of the instrument clear, free from any ambiguity, and expressive of the real intent and
agreement of the parties. We quote the pertinent portions of the Promissory Note -

FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon
Construction, Inc. the sum of THREE HUNDRED NINETY THOUSAND ONLY (P390,000.00),
Philippine Currency in the following manner:

P32,500.00 due every 25th of the month starting from September 25, 1980 up to August
25, 1981.

I/We agree that if any of the said installments is not paid as and when it respectively falls
due, all the installments covered hereby and not paid as yet shall forthwith become due and
payable at the option of the holder of this note with interest at the rate of 14% per annum
on each unpaid installment until fully paid.

261 | P a g e
If any amount due on this note is not paid at its maturity and this note is placed in the
hands of an attorney for collection, I/We agree to pay in addition to the aggregate of the
principal amount and interest due, a sum equivalent to TEN PERCENT (10%) thereof as
Attorney's fees, in case no action is filed, otherwise, the sum will be equivalent to TWENTY
FIVE (25%) of the said principal amount and interest due x x x x

Makati, Metro Manila, August 25, 1980.

(Sgd) Teodoro Baas

ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON

CONSTRUCTION, INC.

By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon

President VP/Treasurer

Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly
acknowledged before a notary public and, as such, have in their favor the presumption of
regularity. To contradict them there must be clear, convincing and more than merely
preponderant evidence. In the instant case, the records do not show even a preponderance
of evidence in favor of petitioners' claim that the Deed of Chattel Mortgage and Continuing
Undertaking were never intended by the parties to be legal, valid and binding. Notarial
documents are evidence of the facts in clear and unequivocal manner therein expressed.[11]

Interestingly, petitioners' assertions were based mainly on the self-serving testimony

of Cenen Dizon, and not on any other independent evidence. His testimony is not only
unconvincing, as found by the trial court and the Court of Appeals, but also self-defeating in
light of the documents presented by respondent, i.e., Promissory Note, Deed of Chattel
Mortgage and Continuing Undertaking, the accuracy, correctness and due execution of
which were admitted by petitioners. Oral evidence certainly cannot prevail over the
written agreements of the parties. The courts need only rely on the faces of the written
contracts to determine their true intention on the principle that when the parties have
reduced their agreements in writing, it is presumed that they have made the writings the
only repositories and memorials of their true agreement.

The second issue deals with a question of fact. We have ruled often enough that it is not
the function of this Court to analyze and weigh the evidence all over again, its jurisdiction
being limited to reviewing errors of law that might have been committed by the lower
court.[12] At any rate, while we are not a trier of facts, hence, not required as a rule to look
into the factual bases of the assailed decision of the Court of Appeals, we did so just the
same in this case if only to satisfy petitioners that we have carefully studied and evaluated
the case, all too mindful of the tenacity and vigor with which the parties, through their
respective counsel, have pursued this case for nineteen (19) years.

Petitioners contend that the parties already had a verbal understanding wherein ASIA
PACIFIC actually agreed to consider petitioners' account closed and the principal obligation
fully paid in exchange for the ownership of the two (2) bulldozer crawler tractors.

We are not persuaded. Again, other than the bare allegations of petitioners, the records
are bereft of any evidence of the supposed agreement. As correctly observed by the Court
of Appeals, it is unbelievable that the parties entirely neglected to write down such an
important agreement. Equally incredulous is the fact that petitioner Cenen Dizon, a
seasoned businessman, readily consented to deliver the bulldozers to respondent without a
corresponding receipt of acquittance. Indeed, even the testimony of petitioner Cenen Dizon
himself negates the supposed verbal understanding between the parties -

262 | P a g e
 Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of
the seizure order?

A: There was no seizure order. Atty. Carag during that time said if I surrender the two
equipment, we might finally close a deal if the equipment would come up to the
balance of the loan. So I voluntarily surrendered, I pulled them from the job site and
returned them to APCOR x x x x

Q: You mentioned a certain Atty. Carag, who is he?

A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked
with Atty. Carag, we have a verbal agreement if I surrender the equipment it might
suffice to pay off the debt so I did just that (underscoring ours).[13]

In other words, there was no binding and perfected contract between petitioners and
respondent regarding the settlement of the obligation, but only a conditional one, a mere
conjecture in fact, depending on whether the value of the tractors to be surrendered would
equal the balance of the loan plus interests. And since the bulldozer crawler tractors were
sold at the foreclosure sale for only P180,000.00,[14]which was not enough to cover the
unpaid balance of P267,637.50, petitioners are still liable for the deficiency.

Barring therefore a showing that the findings complained of are totally devoid of
support in the records, or that they are so glaringly erroneous as to constitute serious
abuse of discretion, we see no valid reason to discard them. More so in this case where the
findings of both the trial court and the appellate court coincide with each other on the
matter.

With regard to the computation of petitioners' liability, the records show that
petitioners actually paid to respondent a total sum of P130,000.00 in addition to
the P180,000.00 proceeds realized from the sale of the bulldozer crawler tractors at public
auction. Deducting these amounts from the principal obligation of P390,000.00 leaves a
balance of P80,000.00, to which must be added P7,637.50 accrued interests and charges as
of 20 March 1981, or a total unpaid balance of P87,637.50 for which petitioners are jointly
and severally liable. Furthermore, the unpaid balance should earn 14% interest per annum
as stipulated in the Promissory Note, computed from 20 March 1981 until fully paid.

On the amount of attorney's fees which under the Promissory Note is equivalent to 25%
of the principal obligation and interests due, it is not, strictly speaking, the attorney's fees
recoverable as between the attorney and his client regulated by the Rules of Court. Rather,
the attorney's fees here are in the nature of liquidated damages and the stipulation therefor
is aptly called a penal clause. It has been said that so long as such stipulation does not
contravene the law, morals and public order, it is strictly binding upon the obligor. It is the
litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment by
execution.[15]

Nevertheless, it appears that petitioners' failure to fully comply with their part of the
bargain was not motivated by ill will or malice, but due to financial distress occasioned by
legitimate business reverses.Petitioners in fact paid a total of P130,000.00 in three (3)
installments, and even went to the extent of voluntarily turning over to respondent their
heavy equipment consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to
settle their indebtedness in full. Article 1229 of the New Civil Code specifically empowers
the judge to equitably reduce the civil penalty when the principal obligation has
been partly or irregularly complied with. Upon the foregoing premise, we hold that the
reduction of the attorney's fees from 25% to 15% of the unpaid principal plus interests is
in order.

263 | P a g e
 Finally, while we empathize with petitioners, we cannot close our eyes to the
overriding considerations of the law on obligations and contracts which must be upheld
and honored at all times. Petitioners have undoubtedly benefited from the transaction; they
cannot now be allowed to impugn its validity and legality to escape the fulfillment of a valid
and binding obligation.

WHEREFORE, no reversible error having been committed by the Court of Appeals, its
assailed Decision of 24 July 1996 and its Resolution of 21 March 1997 are
AFFIRMED. Accordingly, petitioners C.G. Construction Inc. and Cenen Dizon are ordered
jointly and severally to pay respondent Asia Pacific Finance Corporation, substituted by
International Corporate Bank (now known as Union Bank of the Philippines), P87,637.50
representing the unpaid balance on the Promissory Note, with interest at fourteen percent
(14%) per annum computed from 20 March 1981 until fully paid, and fifteen percent
(15%) of the principal obligation and interests due by way of attorney's fees. Costs against
petitioners.

SO ORDERED.

264 | P a g e