Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-43682 March 31, 1938

In Re Liquidation of Mercantile Bank of China. TAN TIONG TICK, claimant-appellant, vs.AMERICAN APOTHECARIES CO., ET AL., claimants-appellees.

Cirilo Lim and Antonio Gonzalez for appellant.Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso., et al.Marcelo Nubla for appellees Ang Cheng Lian, et al.

IMPERIAL, J.:

In the proceedings for the liquidation of the Mercantile Bank of China, the appellant presented a written claim alleging: that when this bank ceased to operate on September 19, 1931, his current account in said bank showed a balance of P9,657.50 in his favor; that on the same date his savings account in the said bank also showed a balance in his favor of P20,000 plus interest then due amounting to P194.78; that on the other hand, he owed the bank in the amount of P13,262.58, the amount of the trust receipts which he signed because of his withdrawal from the bank of certain merchandise consigned to him without paying the drafts drawn upon him by the remittors thereof; that the credits thus described should be set off against each other according to law, and on such set off being made it appeared that he was still the creditor of the bank in the sum of P16,589.70. And he asked that the court order the Bank Commissioner to pay him the aforesaid balance and that the same be declared as preferred credit. The claim was referred to the commissioner appointed by the court, who at the same time acted as referee, and this officer recommended that the balance claimed be paid without interest and as an ordinary credit. The court approved the recommendation and entered judgment in the accordance therewith. The claimant took an appeal.

In his report the commissioner classified the claims presented under the following six groups: "(First) Current accounts, savings and fixed deposits. (Second) Checks or drafts sold by the Mercantile Bank of China and not paid by the correspondents or banks against which they were drawn. (Third) Checks or drafts issued by the Mercantile Bank of China in payment or reimbursement of drafts or goods sent to it for collection by banks and foreign commercial houses against merchants or commercial entities of Manila. (Fourth) Drafts for collection received by the Mercantile Bank of China to be collected from merchants and commercial entities in Manila and which were pending collection on the date of the suspension of payments. (Fifth) Claims of depositors who are at the same time debtor of the Mercantile Bank of China.(Sixth Various claims." And referring to the claims of the appellant, he states:

Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of P 27,597.80, the total amount of the following sums which he has in his favor in said bank including the corresponding interest:

Balance on the current account . . . . . . . . . . . P7,390.11

Balance of savings account No. 2266 . . . . . 20,000.00

Total . . . . . . . . . . . . . . . . . . 27,390.11

Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is, P194.78 on the saving account and P12.91 on the current account, the amount claimed makes a total of P27,597.80.

Notwithstanding the fact that the Bank Commissioner found the claim in accordance with the books of the Mercantile Bank of China, he declined to issue the corresponding certificate of proof of claim because the said claimant has pending in the said bank obligations for accepting draft amounting to a total of $6 631.29.

At the hearing of this claim, the claimant admitted such pending obligations, alleging at the same time that to guarantee the payment of drafts accepted by him, he pledged his bank book No. 2266, which also answered for the payment of any credit which the said bank may extend to him.

In Exhibit A presented by the claimant as evidence, consisting of a letter dated November 4, 1931 addressed by Mr. H. J. Belden to the then Bank Commissioner, Mr. Leo. H. Martin it appears that the said savings account was constituted for the sole purpose of securing the payment of drafts against the claimants, the bill of lading of where delivered to him upon trust-receipts and that according to the records of that bank Mr. Tan Tiong Tick did not obtain any other accomodation from the bank except the trust-receipts.

RECOMMENDATION

Having established the existence of such deposits in the name of the bank alleged by the Bank Commissioner, for the securities of which he constituted the savings deposit in the amount of P20,000, it is recommended that from this amount there be deducted the amount of the obligation of P13,778.90 which the claimant acknowledge in favor of the Mercantile Bank of China, and that the difference, plus the other current account deposit of P7,390.11, be considered as ordinary credits subject to the equal division of the funds of the said bank.

As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the rejection thereof is recommended in view of the fact that the Bank Commissioner has not credited any interest to the current and savings account of the Merchantile Bank of China, and would be unfair that interest, not credited to the others, be allowed to this claimant.

It will be noted that in the report of the commissioner the credit of the claimant for the balance of his deposit on current account has been reduced to P7,390.11, instead of P9,657.50 alleged in his claim, the total balance recommended in favor of the appellant being P13,611.21, without including interest, instead of P16,589.70. In his brief the appellant admits the figures appearing in the report, with the exception of the interest on which we shall presently dwell.

1. Resolving the claims under the first group the recommendation of this official to the effect that they declared ordinary credits only, and approved them as preferred credits. However, in considering the other claims among them that of that of the appellant, classified under the fifth group, the court approved the recommendation of the commissioner that they be declared ordinary credits; in otherwords, the court considered and declared the claim of the appellant as an ordinary credit just because the latter is at the same time a debtor of the bank, notwithstanding the fact that his claim is of the same kind as those classified under the first group, inasmuch as they are also current account and savings deposits. To this part of the decision is addressed the appellant's first assignment of error.

In truth if the current account, savings, and fixed deposits are preferred credits for the reason states by the court in its decision, we see no reason why the preference should disappear when the depositors are at the same time debtors of the

bank less than their credits. If the ground to declare them preferred credits is sound, the balances resulting after the set should likewise be preferred, unless there be a law providing that a set off, when it take place, produces such an effect, a law which does not exist as far as we know.

But we are of the opinion, for the reason presently to be stated, that current account and savings deposits are not preferred credits in the cases, like the present, involving the insolvency and liquidation of a bank, where there are various creditors and it becomes necessary to ascertain the preference of various credits.

The court held that these deposits should be governed by the Civil Code, and applying articles 1758 and 1868 of the said Code, ruled that the so-called irregular deposits being still in vogue, as Manresa, the commentator, maintain and as held by this court in the case Rogers vs. Smith, Bell & Co. (10 Phil., 319), the former are preferred credits because partaking of the nature of the irregular deposits.

In our opinion, these deposits are essentially merchantile contracts and should, therefore, be governed by the provisions of the Code of Commerce, pursuant to its article 2 reading:

ART. 2 Commercial transactions, be they performed by merchants or not, whether they are specified in this Code or not, shall be governed by the provisions contained in the same; in the absence of such provisions, by the commercial customs generally observed in each place; and in the absence of such provisions, by the commercial customs generally observed in each place; and in the absence of both, by those of the common law.

Commercial transactions shall be considered those enumerated in this Code and any others of a similar character.

There is cited in support of the application of the Civil Code to these deposits article 310 of the Code of Commerce providing:

ART. 310. Notwithstanding the provisions of the foregoing articles, deposits made banks, with general warehouse, with loan or any other associations, shall be governed in the place by the by-laws of the same in the second by the provisions of this Code, and finally by the rules of common law, which are applicable to all deposits.

But apparently there was a failure to consider that, according to the order established by the article, the Civil Code or the common law is mentioned after Code of Commerce, which means that the provisions of the latter Code should first be applied before resorting to those of the Civil Code which are supplementary in character.

The Code of Commerce contains express provisions regulating deposits of the nature under consideration, and they are articles 303 to 310. The first and the second to the last of the said articles are as follows:

ART. 303. In order that a deposit may be considered commercial, it is necessary —

1. That the depositary, at least, be a merchant.

2. That the things deposited be commercial objects.

3. That the deposit constitute in itself a commercial transaction, or be made by reason or as a consequently of commercial transaction.

ART. 309. Whatever, with the consent of the depositor, the depositary disposes of the articles on deposit either for himself or for his business, or for transactions intrusted to him by the former, the rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to the commercial loans, commissions, or contract which took the place of the deposit shall be observed.

In accordance with article 309, the so-called current account and savings deposits have lost the character of deposits properly so-called, and are converted into simple commercial loans, because the bank disposed of the funds deposited by the claimant for its ordinary transactions and for the banking business in which it was engaged. That the bank had the authority of the claimant to make use of the money deposited on current and savings account is deducible from the fact that the bank has been paying interest on both deposits, and the claimant himself asks that he be allowed interest up to the time when the bank ceased its operations. Moreover, according to section 125 of the Corporation Law and 9 of Act No. 3154, said bank is authorized to make use of the current account, savings, and fixed deposits provided it retains in its treasury a certain percentage of the amounts of said deposits. Said sections read:

SEC. 125. Every such commercial banking corporation shall at all times have on hand in lawful money of the Philippines Islands or of the United States, an amount equal to at least eighteen per centum of the aggregate amount of its deposits in current which are payable on demand and of its fixed deposits coming due within thirty days. Such commercial banking corporations shall also at all times maintain equal in amount to at least five per centum of its total savings deposits. The said reserve may be maintained in the form of lawful money of the Philippines Islands of the United States, or in bonds issued or guaranteed by the Government of the Philippines Islands or to the United States. . . .

The percentage of reserve to deposits in the case of the Philippine National Bank and Bank of the Philippine Islands is hereby fixed at eighteen per centum of demand deposits and fixed deposits payable within thirty days and five per centum of savings deposits, in the same manner as is prescribed in this section for commercial banking corporations in general, which reserve against savings deposit may consists of Philippine Government of United States Government Bonds.

SEC. 9. Every bank organized under this Act shall at all times have on hand, in lawful money of the Philippine Islands of the United States, an amount equal to at least twenty per centum of the aggregate amount of its deposits. The Treasury certificates authorized by Act Numbered Three thousand and fifty-eight, and the term lawful money of the United States shall include gold and silver certificates of the United States and bank notes issued by the Federal Reserve Bank.

Therefore, the bank, without the necessity of the claimant consent, was by law authorized to dispose of the deposits, subject to the limitations indicated.

We, therefore, conclude that the law applicable to the appellant's claim is the Code of Commerce and that his current and savings account have converted into simple commercial loans.

2. The next point to decide is the applicable law, if any, to determine the preference of the appellant's credits, considering that there happens to be other creditors. Section V of Title I Book IV of the Code of Commerce contains provisions relative to the rights of creditors in case of bankruptcy and their respective gradations, but these provisions have been repealed by section 524 of the Code of Civil Procedure reading as follows:

SEC. 524. No new proceedings to be instituted. — No new bankrupt proceedings shall be instituted until a new bankruptcy law shall come into force in the Islands. All existing laws and other relating to bankruptcy and

proceedings therein are hereby repealed: Provided, That nothing in this section shall be deemed in any manner to affect pending litigation in bankruptcy proceedings.

The Philippine Legislature subsequently enacted Act No. 1956, also known as the Insolvency Law, which took effect on May 20, 1909, containing provisions regarding preference of credits; but its section 52 provides that all the provisions of the law shall not apply to corporations engaged principally in the banking business, and among them should be understood included the Merchantile Bank of China. Said section provide:

SEC. 48. Merchantile, effect, and any other kind of property found among the property of the insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title, shall be considered to be the property of other persons shall be placed at the disposal of its lawful owners on order of the court made at the hearing in section forty-three or at any ordinary hearing, if the assignee or any creditor whose right in the estate of the insolvent has been established shall petition in writing for such hearing and the court in its discretion shall so order, the creditors, however, retaining such rights in said property as belong to the insolvent, and subrogating him whenever they shall have with all obligations concerning said property.

The following shall be included in this section:

1. Drowy property inestimado and such property estimado which may remain in the possession of the husband where the receipt thereof is matter of record in a public instrument registered under the provisions of section twenty-one and twenty-seven of the Code of Commerce in force.

2. Paraphernal property which the wife may have acquired by inheritance, legacy, or donation whether remaining in the form in which it was received or subrogated or invested in other property, provided that such investment or subrogation has been registered in the registro mercantile in accordance with the provisions of the sections of the Code of Commerce mentioned in the next preceding paragraph.

3. Property and effects deposited with the bankrupt, or administered, least, rented, or held in usufruct by him.

4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale, forwarding, or delivery.

5. Bills of exchange or promissory notes without indorsement or other expression transferring ownership remitted to the insolvent for collection and all other acquired by him for the account of another person, drawn or indorsed to the remitter direct.

6. Money remitted to the insolvent, otherwise than on current account, and which is in his possession for delivery to a definite person in the name and for the account of the remitter or for the settlement of claims which are to be met at the insolvent domicile.

7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange and promissory notes delivered therefrom in his possession, even when the same are not made payable to the owner of the merchandise sold, provided it is proven that the obligation to the insolvent is derived therefrom and that said bills of exchange and promissory notes were in the possession of the insolvent for account of the owner of the merchandise to be cashed and remitted, in due time, to the said owners; all of

which shall be a legal presumption when the amount involved in any such shall not been credited on the book of both the owner of the merchantile and of the insolvent.

8. Merchandise bought on credit by the insolvent so long as the actual thereof has not been made to him at his store at any other place stipulated for such delivery, and merchandise the bills of lading or shipping receipts of which have been sent him after the same has been loaded by order of the purchaser and for his account and risk.

In all cases arising under this paragraph assignees may retain the merchandise so purchased or claim it for the creditors by paying the price thereof to the vendor.

9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in his possession or the amount of the value thereof.

SEC. 49. All creditors, except those whose debts are duly proved and allowed shall be entitled to share in the property and estate pro rata, after the property belonging to other persons referred to in the last preceding section has been deducted therefrom, without priority or preference whatever: Provided, That any debt proved by any person liable as bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so providing the same until satisfactory evidence shall be produced of the payment of such debt by such person so liable, and the share to which such debt would be entitled may be paid into court, or otherwise held, for the benefit of the party entitled thereto, as the court may direct.

SEC. 50. The following are preferred claims which shall be paid in the order named:

(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their parental authority and have no property of their own, when approved by the court;

(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic servants immediately preceding the commencement of proceedings in insolvency;

(c) Compensation due the laborers or their dependents under the provisions of Act Numbered Thirty-four hundred and twenty-eight, known as the Workmen's Compensation Act, as amended by Act Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered Eighteen hundred and seventy-four known as the Employers' Liability Act, and of the other laws providing for payment of indemnity for damages in cases of labor accidents;

(d) Legal expenses, and expenses incurred in the administration of the insolvent estate for the common interest of the creditors, when properly authorized and approved by the court;

(e) Debts, taxes and assessments due the Insular Government;

(f ) Debts, taxes and assessments due to any province of provinces of the Philippines Islands;

(g) Debts, taxes and assessment due to any municipality or municipalities of the Philippine Islands;

All other creditors shall be paid pro rata. (As amended by Act No. 3962.)

ART. 52 . . . The provisions of this Act shall not apply to corporations engaged principally in the banking business, or to any other corporation as to which there is any special provisions of law for its liquidation in case of insolvency.

It appears that even after the enactment of the Insolvency Law there was no law in this jurisdiction governing the order or preference of credits in case of insolvency and liquidation of a bank. But the Philippine Legislature subsequently enacted Act No. 3519, amended various sections of the Revised Administrative Code, which took effect on February 20, 1929, and section 1641 of this latter Code. as amended by said Act provides:

SEC. 1641. Distribution of assets. — In the case of the liquidation of a bank or banking institution, after payment of the costs of the proceeding, including reasonable expenses, commissions and fees of the Bank Commissioner, to be allowed by the court, the Bank Commissioner shall pay the debts of the institution, under of the court in the order of their legal priority.

From this section 1641 we deduce that the intention of the Philippine Legislature, in providing that the Bank Commissioner shall pay the debts of the company by virtue of an order of the court in the order of their priority, was to enforce the provisions of section 48, 49 and 50 of the Insolvency Law in the sense that they are made applicable to cases of insolvency or bankruptcy and liquidation of banks. No other deduction can be made from the phrase "in the order of their legal priority" employed by the law, for there being no law establishing any priority in the order of payment of credits, the legislature could not reasonably refer to any legislation upon the subject, unless the interpretation above stated is accepted.

Examining now the claims of the appellant, it appears that none of them falls under any of the cases specified by section 48, 49 and 50 of the Insolvency Law; wherefore, we conclude that the appellant's claims, consisting of his current and savings account, are not preferred credits.

3. The commissioner set off the claims of the appellant against what the bank had against him. The court approved this set off over the objection of the appellant. The appellees contend that the set off does not lie in this case because otherwise it would prejudice them and the other creditors in the liquidation. We hold that the court's ruling is not error. "It may be stated as a general rule that when a depositor is indebted to a bank, and the debts are mutual — that is, between the same parties and in the same right — the bank may apply the deposit, or such portion thereof as may be necessary, to the payment of the debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is not specially applicable to some other particular purposes." (7 Am. Jur., par. 629, p.455; United States vs. Butterworth-Judson Corp., 267 U.S., 387; National Bank vs. Morgan, 207 Ala.., 65; Bank of Guntersville vs. Crayter, 199 Ala., 699; Tatum vs. Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co. vs. Quilling, 118 Ark., 114; Holloway vs. First Nat. Bank, 45 Idaho, 746; Wyman vs. Ft. Dearborn Nat Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517; First Nat Bank vs. Stapf., 165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind., 584.) The situation referred to by the appellees is inevitable because section 1639 of the Revised Administrative Code, as amended by Act No. 3519, provides that the Bank Commissioner shall reduce the assets of the bank into cash and this cannot be done without first liquidating individually the accounts of the debtors of said bank, and in making this individual liquidation the debtors are entitled to set off, by way of compensation, their claims against the bank.

4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and this is the object of the second assignment of error. Upon this point a distinction must be made between the interest which the deposits should ear from their existence until the bank ceased to operate, and that which they may earn from the time the bank's operations were stopped until the date of payment of the deposits. As to the first class, we hold that it should be paid because such interest has been earned in the ordinary course of the bank's business and before the latter has been

declared in a state or liquidation. Moreover, the bank being authorized by law to make us of the deposits, with the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the date of the said claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, we hold that the said interest should not be paid. Under articles 1101 and 1108 of the Civil Code, interest is allowed by way of indemnity for damages suffered, in the cases wherein the obligation consists in the payment of money. In view of this, we hold that in the absence of any express law or any applicable provision of the Code of Commerce, it is not proper to pay this last kind of interest to the appellant upon his deposits in the bank, for this would be anomalous and unjustified in a liquidation or insolvency of a bank. This rule should be strictly observed in the instant case because it is understood that the assets should be prorated among all the creditors as they are insufficient to pay all the obligations of the bank.

5. The last assignment of error has to do with the denial by the court of the claimant's motion for new trial. No new arguments have been made in its support and it appears that the assigned error was inserted as a mere corollary of the preceding ones.

In view of all the foregoing considerations, we affirm the part of the appealed decision for the reasons stated herein, and it is ordered that the net claim of the appellant, amounting to P13,611.21, is an ordinary and not a preferred credit, and that he is entitled to charge interest on said amount up to September 19, 1931, without special pronouncement up to September 19, 1931, without special pronouncement as to the costs. So ordered.

Avanceña, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 32576 November 6, 1930

FULTRON IRON WORKS CO., plaintiff-appellee, vs.CHINA BANKING CORPORATION, ET AL., defendants. CHINA BANKING CORPORATION, appellant.

Feria and La O, and Gibbs and McDonough for appellant.Claro M. Recto and DeWitt, Perkins and Brady for appellee.

STREET, J.:

This action was instituted on June 23, 1926, in the Court of First Instance of the City of Manila by the Fulton Iron Works Co., a Delaware corporation having its principal place of business in St. Louis, Missouri, and duly authorized under the laws of the Philippine Islands to engage in business in this country. The defendants named in the complaint are the China Banking Corporation, a domestic corporation having its principal place of business in the City of Manila, and one S. C. Schwarzkopf. In the petitory part of the complaint judgment is sought against the two defendants jointly and severally for the sum of P131,197.10, with interest. As a ground of action against the two defendants it is asserted in the complaint that the amount claimed by the plaintiff is part of a larger sum of money (P176, 197.10) belonging to the plaintiff which had been deposited in the defendant bank by Schwarzkopf during the year 1922, and which had been misappropriated and embezzled by him, with the full knowledge and consent of the defendant bank. The idea underlying the action, as against the bank, is that it has been guilty of what may perhaps be styled a civil complicity in the misappropriation of the money for which recovery is sought.

Upon hearing the cause, upon the separate answers of the two defendants, the trial court absolved Schwarckopf from the complaint, for the reason that in two prior criminal proceedings he had been convicted of the offense of estafa, based upon his misappropriated of the same money, and in said proceedings the obligation to indemnify the plaintiff had been imposed upon him in the amount of P146,197.40. His Honor, however, gave judgment in favor of the plaintiff, the Fulton Iron Works Co., to recover of the defendant bank the sum of P127,200.36, with lawful interest from June 23, 1926, the date of the filing of the complaint, and with costs. From this judgment the defendant bank appealed.

It appears that in the month of March, 1921, the plaintiff the Fulton Iron Works Co., of St. Louis, Missouri, sold to the Binalbagan Estate, Inc., a Philippine corporation, machinery for a sugar mill, for which the purchaser executed three notes amounting to about $80,000. The first of these notes became due October 1, 1921, and the other two on April 1, 1922. Neither of the three notes was paid at maturity, owing to the fact that, before the notes fell due, the Binalbagan Estate, Inc. suspended payments and passed into the hands of the Philippine National Bank, its principal creditor, for administration.

The consequently delay in the payments of the notes caused the plaintiff to employ a firm of lawyers in Manila, of which S. C. Schwarzkopf was then a member, to represent the plaintiff in an effort to obtain security for the indebtedness, with a view to its later collection. At the time this retainer was effect, Schwarzkopf was in St. Louis, on a visit to the United States, and in order that the plaintiff might comply with the laws of the Philippine Islands in the matter of obtaining a license to transact business here, the plaintiff executed a formal power of attorney authorizing the members of Schwarzkopf's firm jointly and severally to accept service in actions and to do other things necessary to enable the plaintiff to secure the contemplated license. It is noteworthy that the authority of Schwarzkopf's firm to represent the plaintiff in the collection of the claims above mentioned did not proceed from this power, but had its origin in the employment of said firm as attorneys in the matter.

Schwarzkopf returned to Manila in the early part of November, 1921, and the law firm to which he pertained was dissolved on November 15, 1921. Under the dissolution agreement the matter of handling this collection devolved upon Schwarzkopf, and he alone was thereafter concerned in the matter.

On December 13, 1921, Schwarzkopf opened a personal account, as a depositor, in the China Banking Corporation by making a deposit, on that date, of the sum of P578. This account was at all times modest in sized, and on January 1, 1922, the credit balance therein was P543.35. This account has little or no significance in the case, and it became defunct by September 1, 1922. It may be observed, however, that a few of the deposits in this account appear to have been taken from account No. 2 to which reference will presently be made.

In the early part of the year 1922, the financial condition of the Binalbagan Estate, Inc. began to improve; and on January 13, 1922, D. M. Semple, manager of the Philippine Sugar Centrals Agency, a department of the Philippine National Bank, drew check No. 574 for the sum of P10,000, payable to the order of Sydney C. Schwarzkopf, and delivered the same to him in part payment of the indebtedness owing to the plaintiff from the Binalbagan Estate, Inc. Upon receiving this check Schwarzkopf signed a receipt as "attorney-in-fact of Fulton Iron Works Co." The character of attorney-in-fact, thus assumed by Schwarzkopf, was of course a mere fiction, as the power of attorney which he really possessed was limited to other matters. The point, however, is really of no moment.

The check for P10,000 above mentioned was duly indorsed by Schwarzkopf and deposited by him in a new account with the defendant bank, known as "No. 2 account." This money was thereafter withdrawn from the bank from time to time by Schwarzkopf, upon his personal checks, and used for his individual purposes. In the appealed judgment the defendant is held liable for this money, a mere oversight resulting apparently, from a confusion of this matter with the more important issues involved in other parts of the case. There is no proof that the defendant bank had any knowledge, or was chargeable with notice, that the P10,000 thus deposited and drawn out belonged to any person other than Schwarzkopf himself; and, as depositor, Schwarzkopf of course had absolute control of the account. A depositor is presumed to be the owner of funds standing in his name in a bank deposit; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and cannot be liable to any other person as the true owner. It is hardly necessary to cite authority upon a proposition so manifestly in accord with the usage and the common sense of the commercial community. The proposition stated is implicit in all the cases concerned with the question of the liability of a bank to its depositors and other persons claiming an interest in the deposits.

Proceeding to the next collection effected by Schwarzkopf upon account of the plaintiff's claim against the Binalbagan Estate, Inc., we find that on April 11, 1922, Schwarkopf received, from the manager of the Philippine Sugar Centrals Agency, a check for the sum of P61,237.50. This check was made payable on its face to "S. C. Schwarkopf Attorney-in-Fact, Fulton Iron Works Co., or order." After indorsing this check in the form in which it was drawn, Schwarzkopf opened a new account with the defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact, Fulton Iron Works Co.," and deposited said check therein. This account remained undisputed on the books of the bank for some two months, during which period it had an accretion of about P130.

Meanwhile, the No. 2 account which had been established back in January, became depleted, but the manager of the bank, in view, no doubt, of the funds to Schwarzkopf's credit in the third account conceded to him a credit in No. 2 account of P25,000. By June 15, 1922, said account became overdrawn to the extend of P22, 144.39, and it was obvious that the limit of the conceded credit would soon be reached. The manager of the bank then intervened and requested Schwarzkopf to settle the overdraft. To accomplish this Schwarkopf merely transferred, by check, the money to his credit in his special account as plaintiff's attorney-in-fact to the No. 2 account. The amount thus transferred was P61,360.81, and the effect of the transfer was to absorb the overdraft and place a credit balance of nearly P40,000 in No. 2 account. Schwarzkopf then purchased a draft on New York in the amount of $15,000, and after some delay transmitted the same by mail to the plaintiff. This draft cost Schwarzkopf the sum of P30,375.02, and it was the only remittance ever made by him to his client.

The principal question that arises upon the facts above stated is, whether the defendant bank is liable to the plaintiff for the sum of P22, 144.39 which was thus applied to the payment of Schwarzkopf's personal indebtedness resulting from his overdraft in the No. 2 account. Upon this point the first thing to be noted is that the very form in which the third account was carried on the books of the defendant bank was sufficient to charge the bank with notice of the fact that the money deposited in said account belonged to the Fulton Iron Works Co. and not to Schwarzkopf. It is commonly said, and truly said in a legal sense, that money has no earmarks. But bank accounts and commercial paper can have earmarks, and these earmarks consist of the word or words which infallibly convey to the mind notice that the money or credit represented by the account with which they are associated or the instrument upon which they are written rightfully belongs to some other person than the one having control thereof. A bank cannot permit, much less require, a depositor who is in control of a trust fund to apply any part of the same to his individual indebtedness to the bank. The decisions to this effect are uniformly accordant and it is believed no creditable authority to the contrary can be produced from any source. The expression "trust fund," in this connection, is not a technical term, and is applied in a loose sense to indicate the situation where a bank account or negotiable securities of any sort are under the control of a person other than the true owner. The following decisions are instructive as illustrating different phases of the rule above stated, the selection having been made with a view to the fact that the cases cited are for the most part accessible in one or more series of annotated reports; Central Nat. Bank of Baltimore vs. Conn. Mut. Life Ins. Co., 104 U. S., 54; 26 Law. ed., 693; Union Stock Yards Nat. Bank vs. Moore, 25 C. C. A., 150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466; 15 L. R. A., 544; Am. Trust & Banking Co. vs. Boone, 102 Ga., 202; 40 L. R. A., 250; 66 Am. St. Rep., 167; First Denton Nat. Bank vs. Kenney, 116 Md., 24; Ann. Cas. 19193B, 1337; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518 (and note); Emerado Farmers' El. Co. vs. Farmers' Bank, 20 N. D., 270; 29 L. R. A. (N. S.), 567; Baird vs. Lorenz (N. D.), 61 L. R. A., 1385, 1389 (note); Walters Nat. Bank vs. Bantock, 41 Okla.,, 153; L. R. A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97 Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep., 885; Boyle vs. Northwestern Nat. Bank of Superior, 125 Wis., 498; 1 L. R. A. (N. S.) 1110 Am. St. Rep., 851; United States Fidelity & Gy. Co. vs. Adoue, 104 Tex., 379; 37 L. R. A. (N. S.), 409; Ann. Cas. 1914B, 667; Underwood Ltd. vs. Bank of Liverpool (1924), 1 K. B., 755.

Upon the facts before us it is evident that when credit to the extent of P25,000 was conceded to Schwarzkopf in his personal account No. 2, the eye of the banker was fixed upon the large amount then upon deposit to Schwarkopf's credit in his account as attorney-in-fact; but of course, if a bank cannot apply the money in such an account, or even permit it to be applied, to the personal indebtedness of the fiduciary depositor, it is not permissible for the bank to extend personal credit to such depositor upon the faith of the trust account. From any point that the matter be viewed, the liability of the bank is clear to the extent of P22144.39 this being the amount derived from Schwarkopf's account as attorney-in-fact which was absorbed by his overdraft in account No. 2 when the transfer of the balance in the former account to the latter account was effected, in the manner already stated.

We next proceed to consider the disposition made of the proceeds of the third check collected by Schwarzkopf upon account of plaintiff's claim against the Binalbagan Estate, Inc., from the Philippine National Bank. The amount of this collection was P104, 959.60, and it was paid, on October 11, 1922, by a cashier's check on the Philippine National Bank, payable "to the order of S. C. Schwarzkopf, attorney-in-fact, Fulton Iron Works Co." Upon receiving this check, Schwarzkopf indorsed it in proper form, by writing thereon the words "S. C. Schwarzkopf, attorney-in-fact, Fulton Iron Works Co.," to which he added another indorsement consisting of his own name alone, and deposited the check in his personal account No. 2 with the defendant bank. The check thus delivered to the bank was collected by it from the Philippine National Bank in ordinary course. Thereafter, in the course of the next few months, Schwarzkopf withdrew, upon checks written by himself, the entire amount of the money to his credit in account No. 2, thus misappropriating the money in said account to his own use.

It will be noted that the money thus squandered comprised not only the proceeds of the check last mentioned but the residue, consisting of a few thousand pesos, which had been left in No. 2 account after the overdraft had been paid and Schwarzkopf had remitted the draft of $15,000 to his principal in the United States. We consider that, from a legal

point of view, the situation with respect to this money is precisely the same as that presented with respect to the money which came into the account later by deposit of the check for P104,959.60 above mentioned, because as to both funds, liability is sought to be fixed upon the bank by reason of its knowledge of the source from which said funds were derived; and in this connection it should be noted that there is no proof showing that the defendant bank had any knowledge of the misappropriation of this money by Schwarzkopf other than such as might have been derived from an inspection of its own books and the checks by which the money was paid in and paid out.

The feature of the case now under consideration brings us, it must be admitted, into debatable territory, but a discriminating analysis of the legal principles involved leads to the conclusion that the defendant cannot be held liable for money paid out by it in ordinary course on checks, in regular form, drawn by Schwarzkopf on the No. 2 account.

The specialized function of bank is to serve as a place of deposit for money, to keep it safely while on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order. A bank is not a guardian of trust funds deposited with it in the sense that it must see to their proper application nor is it its business to pry into the uses to which moneys on deposit in its vault are being put; and so long as it serves its function and pays the money out in good faith to the person who deposited it, or upon his order, without knowledge or notice that it is in fact assisting in the misappropriation of the fund, the bank will be protected. As is well said by the author of the monographic article on Banks and Banking in Ruling Case Law, It would seriously interfere with commercial transactions to charge banks with the duty of supervising the administration of trust funds, when, in due course of business, they receive checks and drafts in proper form drawn upon such funds in their custody. The law imposes no such duty upon them (3 R. C. L., 549; see also cases cited in 7 C. J., 644, 645, note 25).

There are, it is true, decisions from a few courts, deservedly held in high esteem, to the effect that a bank makes itself an effective accomplice in the conversion of a trust fund when, with notice of the character of such fund, it permits the person in control thereof to deposit it in his personal account. But the decided weight of judicial authority is to the contrary; and it is generally held that the mere act of a bank in entering a trust fund to the personal account of the fiduciary, knowing it to be a trust fund, will not make the bank liable in case of the subsequent misappropriation of the money by the fiduciary. (United States Fidelity & Gy. Co. vs. First Nat. Bank, 18 Cal. App., 437: Goodwin vs. Am. Nat. Bank, 48 Conn., 550; Batchelder vs. Cen. Nat. Bank of Boston, 188 Mass., 25; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518; Gate City Bldg. & Loan Assoc. vs. National Bank of Commerce, 126 Mo., 82; 27 L. R. A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218 N. Y., 106; Havana C. R. Co. vs. Knickerbocker Trust Co., 198 N. Y., 422; L. R. A. 1915B, 720). The bank has the right to presume that the fiduciary will apply a trust fund to its proper purpose, and at any rate the bank is not required to send a courier with the money to see that it reaches a proper destination.

In the case before us an intimate study of the checks which came into the defendant bank against account No. 2 over a series of months, would have led a discerning person to the conclusion that the plaintiff's money was being squandered, but such an inference could not legitimately have been drawn from the first few checks which were drawn upon the fund, and it would be hard to say just where the bank, supposing its suspicions to have been aroused, should have intervened. No such a duty is imposed. Of course, when the bank became a party to the application of part of the plaintiff's money to the satisfaction of the overdraft in No. 2 account, it was directly chargeable with knowledge of the misappropriation of the fund to the extent of the overdraft and that fact, as we have already said, made the bank liable. But this rule cannot be extented to subsequent acts of malversation and misappropriation committed by the fiduciary against the real owner of the fund.

Furthermore, it is undeniable that a bank may incur liability by assisting the fiduciary to accomplish a misappropriation, although the bank does not actually profit by the misappropriation. A decision illustrating this aspect of the law is found in Washborn vs. Linscott State Bank (87 Kan., 698), where a bank, to help the treasurer of a lodge to

conceal his defalcations, permitted him to overdraw, and when his account were to be audited, issued to him a deposit certificate for the shortage, payable to the lodge. After the audit was made, the certificate was returned and cancelled, and the shortage reappeared. The court held that a loan had been made to the treasurer personally, and that the bank became liable to the lodge upon cancelling the deposit certificate.lawphil.net

Our discussion of this phase of the case should not be concluded without reference to Bischoff vs. Yorville Bank (218 N. Y., 106), which undoubtedly affords some support to the contention of the appellee that the defendant bank is liable not only for the proceeds of the last check collected by Schwarzkopf, but for all of the money which was transferred to account No. 2 from the account of Schawarzkopf as attorney-in-fact. This decision comes, it must be admitted, from a court of high repute. But we are unable to accept the court's conclusions, as applicable to the facts before us. In the case mentioned it appeared that an executor, named Poggenburg, having money on deposit in a certain bank to his credit as executor, gradually withdrew about $13,000 from said deposit by checks drawn by him, over a long period of time, in the character of executor. These checks were indorsed by Poggenburg in his own name simply and deposited in the defendant Yorkville Bank to his personal credit. At the inception of this series of transactions Poggenburg was indebted by note to the defendant and payments were made on this note and other notes thereafter executed in favor of the bank, out of the funds transferred as above stated. The court held, upon the facts before, it that the defendant knew at all times that the credits created by the various deposits through checks of the executor were assets pertaining to the estate of which Poggenburg was executor; and from this fact, in connection with the misapplication of part of the money to the payment of the personal notes of Poggenburg, the court held that the defendant bank was liable to the extent of the whole amount misappropriated by means of the personal account.

It will be noted that this decision was made in third instance, after a trial in first instance possibly before a jury and after the judgment against the bank been affirmed upon appeal in the appellate division of the Supreme Court. The prior history of the case was therefore such as to entitle the findings of fact of the two prior courts of great weight, and these courts had found in effect that the defendant bank had acted in bad faith. If not explicable upon this ground, the decision in the Court of Appeals must be considered a unique variant from accepted doctrine in this that while repudiating the idea, favored by a few courts that the act of depositing a trust fund in the personal accounts of the fiduciary is an effective act of conversion on the part both of bank and fiduciary, the court nevertheless held that the act of the bank in permitting the application of part of the money to the personal indebtedness of the fiduciary afforded a sufficient basis for finding the bank to have been an accomplice in the subsequent misapplication, by the fiduciary, of other portions of the deposit. We can accede to the first of these propositions but not to the second. In this connection we refer to the Annotation appended to Allen vs. Puritan Trust Co. (L. R. A. 1915C, 518, 529), where the pertinent cases are analyzed and the conclusion stated 1 that, by the weight of authority, the placing of a trust fund in the personal account of the fiduciary does not make the bank liable for a subsequent misappropriation of the money by the former. For the rest it is enough to say that there is no proof in this case that the defendant bank had any guilty connection in fact with the dishonest acts of Schwarzkopf, in squandering the contents of the No. 2 account after he had made his remittance of $15,000 to his principal.

In conclusion we ought to add that the legal principles involved in this decision are not directly deducible from the provisions of the Negotiable Instruments Law, which is in force in this jurisdiction (Act No. 2031); and there is no provision of the Civil Code or Code of Commerce directly bearing upon the point under consideration. The liability of the defendant bank, to the extent recognized in this decision proceeds upon the fundamental idea that a creditor cannot apply to the obligation of his debtor money which as he knows belongs to another, without the consent of the latter, — a principle implicit in all law. We note that the attorneys for the appellant bank have suggested in their brief that, supposing the bank to have been an accomplice of Schwarzkopf in the misappropriation of the plaintiff's money, its subsidiary liability was extinguished as a result of the criminal proceedings against Schwarzkopf. This suggestion is clearly untenable, with respect to the liability which is fixed upon the bank by this decision.

From what has been said it follows that the appealed judgment must be modified and the same is hereby modified by reducing the amount of the judgment against the bank to the sum of P22,144.39 with lawful interest from June 23, 1926 until date of payment, 2without pronouncement as to costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, Romualdez, and Villa-Real, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners, vs.THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:ñé+.£ªwph!1

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

On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David,

with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners' obligation is civil in nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment dated June 28,1982, as follows:têñ.£îhqwâ£

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):têñ.£îhqwâ£

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated the following.têñ.£îhqwâ£

"That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and served as such until October 30, 1980, while Santos was General Manager up to November 1980; that because NSLA was urgently in need of funds and at David's insistence, his investments were treated as special- accounts with interest above the legal rate, an recorded in separate confidential documents only a portion of which were to be reported because he did not want the Australian government to tax his total earnings (nor) to know his total investments; that all transactions with David were recorded except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because

of a pending transaction with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 82-1695 in the Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership, Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were civil in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:têñ.£îhqwâ£

"That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was provided that the mortgage over one (1) parcel shall be cancelled upon payment of one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land conveyed to David under second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant petition because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:têñ.£îhqwâ£

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:têñ.£îhqwâ£

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:têñ.£îhqwâ£

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered

by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction.

WE have already laid down the rule that:têñ.£îhqwâ£

In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the some money, goods or personal property that he receivedPetitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.têñ.£îhqwâ£

"Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum.

"Commodatum is essentially gratuitous.

"Simple loan may be gratuitous or with a stipulation to pay interest.

"In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower.

"Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:têñ.£îhqwâ£

As pointed out in People vs. Nery, novation prior to the filing of the criminal information — as in the case at bar — may convert the relation between the parties into an ordinary creditor-debtor relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:têñ.£îhqwâ£

The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other related regulations regarding foreign exchange transactions by accepting foreign currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by respondent David for

deposit were all converted into Philippine currency before acceptance and deposit into Nation Savings and Loan Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his case, respondent David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice.

While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:têñ.£îhqwâ£

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or injunction." Exceptions, however, are allowed in the following instances:têñ.£îhqwâ£

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:têñ.£îhqwâ£

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the accused in the case could have appealed in due time from the order complained of, our action in the premises being based on the public welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted, they could have appealed. We gave due course to their petition for the orderly administration of justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended information was sustained despite the availability of appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.

SO ORDERED.1äwphï1.ñët

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-43191 November 13, 1935

PAULINO GULLAS, plaintiff-appellant, vs.THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.Jose Delgado for defendant-appellant.

MALCOLM, J.:

Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already received the sum represented by the United States treasury, warrant, which is in question, the appeal will thus determine the amount, if any, which should be paid to the plaintiff by the defendant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the Philippine Bar, resident in the City of Cebu. The second named is a banking corporation with a branch in the same city. Attorney Gullas has had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance he had issued certain cheeks which could not be paid when the money was sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not be delivered to him at that time because he was in Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has been returned by our Manila office with the notation that the payment of his check has been stopped by the Insular Treasurer. "In view of this therefore we have applied the outstanding balances of your current accounts with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United States Treasury warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In the first place, as above indicated, checks including one for his insurance were not paid because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the vicinity gave prominence to the news to the great mortification of Gullas.lawphil.net

A variety of incidental questions have been suggested on the record which it can be taken for granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as to the amount damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been held a long line of authorities that notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the deposit of money with a banker. With freedom of selection and after full preference to the minority rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the doctrine that the relationship is that of creditor and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank would not be primarily liable. The same remark could be made relative to the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That

caused a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and have finally determined that the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that the judgment of the trial court will be modified by sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both instances.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 82027 March 29, 1990

ROMARICO G. VITUG, petitioner, vs.THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, respondents.

Rufino B. Javier Law Office for petitioner.

Quisumbing, Torres & Evangelista for private respondent.

SARMIENTO, J.:

This case is a chapter in an earlier suit decided by this Court 1 involving the probate of the two wills of the late Dolores Luchangco Vitug, who died in New York, U. S.A., on November 10, 1980, naming private respondent Rowena Faustino-Corona executrix. In our said decision, we upheld the appointment of Nenita Alonte as co-special administrator of Mrs. Vitug's estate with her (Mrs. Vitug's) widower, petitioner Romarico G. Vitug, pending probate.

On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate court to sell certain shares of stock and real properties belonging to the estate to cover allegedly his advances to the estate in the sum of P667,731.66, plus interests, which he claimed were personal funds. As found by the Court of Appeals, 2the alleged advances consisted of P58,147.40 spent for the payment of estate tax, P518,834.27 as deficiency estate tax, and P90,749.99 as "increment thereto." 3 According to Mr. Vitug, he withdrew the sums of P518,834.27 and P90,749.99 from savings account No. 35342-038 of the Bank of America, Makati, Metro Manila.

On April 12, 1985, Rowena Corona opposed the motion to sell on the ground that the same funds withdrawn from savings account No. 35342-038 were conjugal partnership properties and part of the estate, and hence, there was allegedly no ground for reimbursement. She also sought his ouster for failure to include the sums in question for inventory and for "concealment of funds belonging to the estate." 4

Vitug insists that the said funds are his exclusive property having acquired the same through a survivorship agreement executed with his late wife and the bank on June 19, 1970. The agreement provides:

We hereby agree with each other and with the BANK OF AMERICAN NATIONAL TRUST AND SAVINGS ASSOCIATION (hereinafter referred to as the BANK), that all money now or hereafter deposited by us or any or either of us with the BANK in our joint savings current account shall be the property of all or both of us and shall be payable to and collectible or withdrawable by either or any of us during our lifetime, and after the death of either or any of us shall belong to and be the sole property of the survivor or survivors, and shall be payable to and collectible or withdrawable by such survivor or survivors.

We further agree with each other and the BANK that the receipt or check of either, any or all of us during our lifetime, or the receipt or check of the survivor or survivors, for any payment or withdrawal made for our above-mentioned account shall be valid and sufficient release and discharge of the BANK for such payment or withdrawal. 5

The trial courts 6 upheld the validity of this agreement and granted "the motion to sell some of the estate of Dolores L. Vitug, the proceeds of which shall be used to pay the personal funds of Romarico Vitug in the total sum of P667,731.66 ... ." 7

On the other hand, the Court of Appeals, in the petition for certiorari filed by the herein private respondent, held that the above-quoted survivorship agreement constitutes a conveyance mortis causa which "did not comply with the formalities of a valid will as prescribed by Article 805 of the Civil Code," 8 and secondly, assuming that it is a mere donation inter vivos, it is a prohibited donation under the provisions of Article 133 of the Civil Code. 9

The dispositive portion of the decision of the Court of Appeals states:

WHEREFORE, the order of respondent Judge dated November 26, 1985 (Annex II, petition) is hereby set aside insofar as it granted private respondent's motion to sell certain properties of the estate of Dolores L. Vitug for reimbursement of his alleged advances to the estate, but the same order is sustained in all other respects. In addition, respondent Judge is directed to include provisionally the deposits in Savings Account No. 35342-038 with the Bank of America, Makati, in the inventory of actual properties possessed by the spouses at the time of the decedent's death. With costs against private respondent. 10

In his petition, Vitug, the surviving spouse, assails the appellate court's ruling on the strength of our decisions inRivera v. People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in which we sustained the validity of "survivorship agreements" and considering them as aleatory contracts. 13

The petition is meritorious.

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in a will. A will has been defined as "a personal, solemn, revocable and free act by which a capacitated person disposes of his property and rights and declares or complies with duties to take effect after his death." 14 In other words, the bequest or device must pertain

to the testator. 15 In this case, the monies subject of savings account No. 35342-038 were in the nature of conjugal funds In the case relied on, Rivera v. People's Bank and Trust Co., 16 we rejected claims that a survivorship agreement purports to deliver one party's separate properties in favor of the other, but simply, their joint holdings:

xxx xxx xxx

... Such conclusion is evidently predicated on the assumption that Stephenson was the exclusive owner of the funds-deposited in the bank, which assumption was in turn based on the facts (1) that the account was originally opened in the name of Stephenson alone and (2) that Ana Rivera "served only as housemaid of the deceased." But it not infrequently happens that a person deposits money in the bank in the name of another; and in the instant case it also appears that Ana Rivera served her master for about nineteen years without actually receiving her salary from him. The fact that subsequently Stephenson transferred the account to the name of himself and/or Ana Rivera and executed with the latter the survivorship agreement in question although there was no relation of kinship between them but only that of master and servant, nullifies the assumption that Stephenson was the exclusive owner of the bank account. In the absence, then, of clear proof to the contrary, we must give full faith and credit to the certificate of deposit which recites in effect that the funds in question belonged to Edgar Stephenson and Ana Rivera; that they were joint (and several) owners thereof; and that either of them could withdraw any part or the whole of said account during the lifetime of both, and the balance, if any, upon the death of either, belonged to the survivor. 17

xxx xxx xxx

In Macam v. Gatmaitan, 18 it was held:

xxx xxx xxx

This Court is of the opinion that Exhibit C is an aleatory contract whereby, according to article 1790 of the Civil Code, one of the parties or both reciprocally bind themselves to give or do something as an equivalent for that which the other party is to give or do in case of the occurrence of an event which is uncertain or will happen at an indeterminate time. As already stated, Leonarda was the owner of the house and Juana of the Buick automobile and most of the furniture. By virtue of Exhibit C, Juana would become the owner of the house in case Leonarda died first, and Leonarda would become the owner of the automobile and the furniture if Juana were to die first. In this manner Leonarda and Juana reciprocally assigned their respective property to one another conditioned upon who might die first, the time of death determining the event upon which the acquisition of such right by the one or the other depended. This contract, as any other contract, is binding upon the parties thereto. Inasmuch as Leonarda had died before Juana, the latter thereupon acquired the ownership of the house, in the same manner as Leonarda would have acquired the ownership of the automobile and of the furniture if Juana had died first. 19

xxx xxx xxx

There is no showing that the funds exclusively belonged to one party, and hence it must be presumed to be conjugal, having been acquired during the existence of the marita. relations. 20

Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was to take effect after the death of one party. Secondly, it is not a donation between the spouses because it involved no conveyance of a spouse's own properties to the other.

It is also our opinion that the agreement involves no modification petition of the conjugal partnership, as held by the Court of Appeals, 21 by "mere stipulation" 22 and that it is no "cloak" 23 to circumvent the law on conjugal property relations. Certainly, the spouses are not prohibited by law to invest conjugal property, say, by way of a joint and several bank account, more commonly denominated in banking parlance as an "and/or" account. In the case at bar, when the spouses Vitug opened savings account No. 35342-038, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. And since the funds were conjugal, it can not be said that one spouse could have pressured the other in placing his or her deposits in the money pool.

The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in reality, that contract imposed a mere obligation with a term, the term being death. Such agreements are permitted by the Civil Code. 24

Under Article 2010 of the Code:

ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time.

Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time." A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value of currency, and insurance have been held to fall under the first category, while a contract for life annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25 In either case, the element of risk is present. In the case at bar, the risk was the death of one party and survivorship of the other.

However, as we have warned:

xxx xxx xxx

But although the survivorship agreement is per se not contrary to law its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds. No such vice has been imputed and established against the agreement involved in this case. 26

xxx xxx xxx

There is no demonstration here that the survivorship agreement had been executed for such unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills, donations, and conjugal partnership.

The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the latter has acquired upon her death a vested right over the amounts under savings account No. 35342-038 of the Bank of America. Insofar as the

respondent court ordered their inclusion in the inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate property of petitioner, it forms no more part of the estate of the deceased.

WHEREFORE, the decision of the respondent appellate court, dated June 29, 1987, and its resolution, dated February 9, 1988, are SET ASIDE.

No costs.

SO ORDERED.

Republic of the PhilippinesSupreme Court

Manila

THIRD DIVISION

BSB GROUP, INC., represented by its President, Mr. RICARDO BANGAYAN, Petitioner,

-versus-

SALLY GO a.k.a. SALLY GO-BANGAYAN, Respondent.

G.R. No. 168644 Present:

CORONA, J., Chairperson, VELASCO, JR., NACHURA, PERALTA, and MENDOZA, JJ. Promulgated: February 16, 2010

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

D E C I S I O N

PERALTA, J.:

This is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals in

CA-G.R. SP No. 87600[1] dated April 20, 2005, which reversed and set aside the September 13, 2004[2] and November 5,

2004[3] Orders issued by the Regional Trial Court of Manila, Branch 36[4] in Criminal Case No. 02-202158 for qualified

theft. The said orders, in turn, respectively denied the motion filed by herein respondent Sally Go for the suppression of

the testimonial and documentary evidence relative to a Security Bank account, and denied reconsideration.

The basic antecedents are no longer disputed.

Petitioner, the BSB Group, Inc., is a duly organized domestic corporation presided by its herein representative,

Ricardo Bangayan (Bangayan). Respondent Sally Go, alternatively referred to as Sally Sia Go and Sally Go-Bangayan, is

Bangayan’s wife, who was employed in the company as a cashier, and was engaged, among others, to receive and account

for the payments made by the various customers of the company.

In 2002, Bangayan filed with the Manila Prosecutor’s Office a complaint for estafa and/or qualified theft[5] against

respondent, alleging that several checks[6] representing the aggregate amount of P1,534,135.50 issued by the company’s

customers in payment of their obligation were, instead of being turned over to the company’s coffers, indorsed by

respondent who deposited the same to her personal banking account maintained at Security Bank and Trust Company

(Security Bank) in Divisoria, Manila Branch.[7] Upon a finding that the evidence adduced was uncontroverted, the assistant

city prosecutor recommended the filing of the Information for qualified theft against respondent.[8]

Accordingly, respondent was charged before the Regional Trial Court of Manila, Branch 36, in an Information, the

inculpatory portion of which reads:

That in or about or sometime during the period comprised (sic) between January 1988 [and] October 1989, inclusive, in the City of Manila, Philippines, the said accused did then and there willfully, unlawfully and feloniously with intent [to] gain and without the knowledge and consent of the owner thereof, take, steal and carry away cash money in the total amount of P1,534,135.50 belonging to BSB GROUP OF COMPANIES represented by RICARDO BANGAYAN, to the damage and prejudice of said owner in the aforesaid amount of P1,534,135.50, Philippine currency.

That in the commission of the said offense, said accused acted with grave abuse of confidence,

being then employed as cashier by said complainant at the time of the commission of the said offense and as such she was entrusted with the said amount of money.

Contrary to law.[9]

Respondent entered a negative plea when arraigned. [10] The trial ensued. On the premise that respondent had

allegedly encashed the subject checks and deposited the corresponding amounts thereof to her personal banking account,

the prosecution moved for the issuance of subpoena duces tecum /ad testificandum against the respective managers or

records custodians of Security Bank’s Divisoria Branch, as well as of the Asian Savings Bank (now Metropolitan Bank &

Trust Co. [Metrobank]), in Jose Abad Santos, Tondo, Manila Branch. [11] The trial court granted the motion and issued the

corresponding subpoena.[12]

Respondent filed a motion to quash the subpoena dated November 4, 2003, addressed to Metrobank, noting to

the court that in the complaint-affidavit filed with the prosecutor, there was no mention made of the said bank account, to

which respondent, in addition to the Security Bank account identified as Account No. 01-14-006, allegedly deposited the

proceeds of the supposed checks. Interestingly, while respondent characterized the Metrobank account as irrelevant to

the case, she, in the same motion, nevertheless waived her objection to the irrelevancy of the Security

Bank account mentioned in the same complaint-affidavit, inasmuch as she was admittedly willing to address the

allegations with respect thereto.[13]

Petitioner, opposing respondent’s move, argued for the relevancy of the Metrobank account on the ground that

the complaint-affidavit showed that there were two checks which respondent allegedly deposited in an account with the

said bank.[14] To this, respondent filed a supplemental motion to quash, invoking the absolutely confidential nature of the

Metrobank account under the provisions of Republic Act (R.A.) No. 1405. [15] The trial court did not sustain respondent;

hence, it denied the motion to quash for lack of merit.[16]

Meanwhile, the prosecution was able to present in court the testimony of Elenita Marasigan (Marasigan), the

representative of Security Bank. In a nutshell, Marasigan’s testimony sought to prove that between 1988 and 1989,

respondent, while engaged as cashier at the BSB Group, Inc., was able to run away with the checks issued to the company

by its customers, endorse the same, and credit the corresponding amounts to her personal deposit account with Security

Bank. In the course of the testimony, the subject checks were presented to Marasigan for identification and marking as the

same checks received by respondent, endorsed, and then deposited in her personal account with Security Bank. [17] But

before the testimony could be completed, respondent filed a Motion to Suppress, [18]seeking the exclusion of Marasigan’s

testimony and accompanying documents thus far received, bearing on the subject Security Bank account. This time

respondent invokes, in addition to irrelevancy, the privilege of confidentiality under R.A. No. 1405.

The trial court, nevertheless, denied the motion in its September 13, 2004 Order. [19] A motion for reconsideration

was subsequently filed, but it was also denied in the Order dated November 5, 2004. [20] These two orders are the subject

of the instant case.

Aggrieved, and believing that the trial court gravely abused its discretion in acting the way it did, respondent

elevated the matter to the Court of Appeals via a petition for certiorari under Rule 65. Finding merit in the petition, the

Court of Appeals reversed and set aside the assailed orders of the trial court in its April 20, 2005 Decision. [21] The decision

reads:

WHEREFORE, the petition is hereby GRANTED. The assailed orders dated September 13, 2004 and November 5, 2004 are REVERSED and SET ASIDE. The testimony of the SBTC representative is ordered stricken from the records.

SO ORDERED.[22]

With the denial of its motion for reconsideration,[23] petitioner is now before the Court pleading the same issues as

those raised before the lower courts.

In this Petition[24] under Rule 45, petitioner averred in the main that the Court of Appeals had seriously erred in

reversing the assailed orders of the trial court, and in effect striking out Marasigan’s testimony dealing with respondent’s

deposit account with Security Bank.[25] It asserted that apart from the fact that the said evidence had a direct relation to

the subject matter of the case for qualified theft and, hence, brings the case under one of the exceptions to the coverage

of confidentiality under R.A. 1405.[26] Petitioner believed that what constituted the subject matter in litigation was to be

determined by the allegations in the information and, in this respect, it alluded to the assailed November 5, 2004 Order of

the trial court, which declared to be erroneous the limitation of the present inquiry merely to what was contained in the

information.[27]

For her part, respondent claimed that the money represented by the Security Bank account was neither relevant

nor material to the case, because nothing in the criminal information suggested that the money therein deposited was the

subject matter of the case. She invited particular attention to that portion of the criminal Information which averred that

she has stolen and carried away cash money in the total amount of P1,534,135.50. She advanced the notion that the term

“cash money” stated in the Information was not synonymous with the checks she was purported to have stolen from

petitioner and deposited in her personal banking account. Thus, the checks which the prosecution had Marasigan identify,

as well as the testimony itself of Marasigan, should be suppressed by the trial court at least for violating respondent’s right

to due process.[28] More in point, respondent opined that admitting the testimony of Marasigan, as well as the evidence

pertaining to the Security Bank account, would violate the secrecy rule under R.A. No. 1405.[29]

In its reply, petitioner asserted the sufficiency of the allegations in the criminal Information for qualified theft, as the

same has sufficiently alleged the elements of the offense charged. It posits that through Marasigan’s testimony, the Court

would be able to establish that the checks involved, copies of which were attached to the complaint-affidavit filed with the

prosecutor, had indeed been received by respondent as cashier, but were, thereafter, deposited by the latter to her

personal account with Security Bank. Petitioner held that the checks represented the cash money stolen by respondent

and, hence, the subject matter in this case is not only the cash amount represented by the checks supposedly stolen by

respondent, but also the checks themselves.[30]

We derive from the conflicting advocacies of the parties that the issue for resolution is whether the testimony of

Marasigan and the accompanying documents are irrelevant to the case, and whether they are also violative of the

absolutely confidential nature of bank deposits and, hence, excluded by operation of R.A. No. 1405. The question of

admissibility of the evidence thus comes to the fore. And the Court, after deliberative estimation, finds the subject

evidence to be indeed inadmissible.

Prefatorily, fundamental is the precept in all criminal prosecutions, that the constitutive acts of the offense

must be established with unwavering exactitude and moral certainty because this is the critical and only requisite to a

finding of guilt. [31] Theft is present when a person, with intent to gain but without violence against or intimidation of

persons or force upon things, takes the personal property of another without the latter’s consent. It is qualified when,

among others, and as alleged in the instant case, it is committed with abuse of confidence. [32] The prosecution of this

offense necessarily focuses on the existence of the following elements: (a) there was taking of personal property belonging

to another; (b) the taking was done with intent to gain; (c) the taking was done without the consent of the owner; (d) the

taking was done without violence against or intimidation of persons or force upon things; and (e) it was done with abuse

of confidence.[33] In turn, whether these elements concur in a way that overcomes the presumption of guiltlessness, is a

question that must pass the test of relevancy and competency in accordance with Section 3 [34] Rule 128 of the Rules of

Court.

Thus, whether these pieces of evidence sought to be suppressed in this case the testimony of Marasigan, as well

as the checks purported to have been stolen and deposited in respondent’s Security Bank account are relevant, is to be

addressed by considering whether they have such direct relation to the fact in issue as to induce belief in its existence or

non-existence; or whether they relate collaterally to a fact from which, by process of logic, an inference may be made as

to the existence or non-existence of the fact in issue.[35]

The fact in issue appears to be that respondent has taken away cash in the amount of P1,534,135.50 from the

coffers of petitioner. In support of this allegation, petitioner seeks to establish the existence of the elemental act of taking

by adducing evidence that respondent, at several times between 1988 and 1989, deposited some of its checks to her

personal account with Security Bank. Petitioner addresses the incongruence between the allegation of theft of cash in the

Information, on the one hand, and the evidence that respondent had first stolen the checks and deposited the same in her

banking account, on the other hand, by impressing upon the Court that there obtains no difference between cash and

check for purposes of prosecuting respondent for theft of cash. Petitioner is mistaken.

In theft, the act of unlawful taking connotes deprivation of personal property of one by another with intent to

gain, and it is immaterial that the offender is able or unable to freely dispose of the property stolen because the

deprivation relative to the offended party has already ensued from such act of execution. [36] The allegation of theft of

money, hence, necessitates that evidence presented must have a tendency to prove that the offender has unlawfully

taken money belonging to another. Interestingly, petitioner has taken pains in attempting to draw a connection between

the evidence subject of the instant review, and the allegation of theft in the Information by claiming that respondent had

fraudulently deposited the checks in her own name. But this line of argument works more prejudice than favor, because it

in effect, seeks to establish the commission, not of theft, but rather of some other crime probablyestafa.

Moreover, that there is no difference between cash and check is true in other instances. In estafa by conversion,

for instance, whether the thing converted is cash or check, is immaterial in relation to the formal allegation in an

information for that offense; a check, after all, while not regarded as legal tender, is normally accepted under commercial

usage as a substitute for cash, and the credit it represents in stated monetary value is properly capable of

appropriation. And it is in this respect that what the offender does with the check subsequent to the act of unlawfully

taking it becomes material inasmuch as this offense is a continuing one. [37] In other words, in pursuing a case for this

offense, the prosecution may establish its cause by the presentation of the checks involved. These checks would then

constitute the best evidence to establish their contents and to prove the elemental act of conversion in support of the

proposition that the offender has indeed indorsed the same in his own name.[38]

Theft, however, is not of such character. Thus, for our purposes, as the Information in this case accuses

respondent of having stolen cash, proof tending to establish that respondent has actualized her criminal intent by

indorsing the checks and depositing the proceeds thereof in her personal account, becomes not only irrelevant but also

immaterial and, on that score, inadmissible in evidence.

We now address the issue of whether the admission of Marasigan’s testimony on the particulars of respondent’s

account with Security Bank, as well as of the corresponding evidence of the checks allegedly deposited in said account,

constitutes an unallowable inquiry under R.A. 1405.

It is conceded that while the fundamental law has not bothered with the triviality of specifically addressing privacy

rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy

governing such accounts. The source of this right of expectation is statutory, and it is found in R.A. No. 1405, [39] otherwise

known as the Bank Secrecy Act of 1955. [40]

R.A. No. 1405 has two allied purposes. It hopes to discourage private hoarding and at the same time encourage

the people to deposit their money in banking institutions, so that it may be utilized by way of authorized loans and thereby

assist in economic development.[41] Owing to this piece of legislation, the confidentiality of bank deposits remains to be a

basic state policy in the Philippines.[42] Section 2 of the law institutionalized this policy by characterizing as absolutely

confidential in general all deposits of whatever nature with banks and other financial institutions in the country. It

declares:

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

Subsequent statutory enactments[43] have expanded the list of exceptions to this policy yet the secrecy of bank

deposits still lies as the general rule, falling as it does within the legally recognized zones of privacy. [44] There is, in fact,

much disfavor to construing these primary and supplemental exceptions in a manner that would authorize unbridled

discretion, whether governmental or otherwise, in utilizing these exceptions as authority for unwarranted inquiry into

bank accounts. It is then perceivable that the present legal order is obliged to conserve the absolutely confidential nature

of bank deposits.[45]

The measure of protection afforded by the law has been explained in China Banking Corporation v. Ortega.[46] That case principally addressed the issue of whether the prohibition against an examination of bank deposits

precludes garnishment in satisfaction of a judgment. Ruling on that issue in the negative, the Court found guidance in the

relevant portions of the legislative deliberations on Senate Bill No. 351 and House Bill No. 3977, which later became the

Bank Secrecy Act, and it held that the absolute confidentiality rule in R.A. No. 1405 actually aims at protection from

unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely to determine the existence

and nature, as well as the amount of the deposit in any given bank account. Thus,

x x x The lower court did not order an examination of or inquiry into the deposit of B&B Forest Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform the court whether or not the defendant B&B Forest Development Corporation had a deposit in the China Banking Corporation only for purposes of the garnishment issued by it, so that the bank would hold the same intact and not allow any withdrawal until further order. It will be noted from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977which later became Republic Act No. 1405, that it was not the intention of the lawmakers to place banks deposits beyond the reach of execution to satisfy a final judgment. Thus:

x x x Mr. Marcos: Now, for purposes of the record, I should like the Chairman of the Committee on Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held liable by the Bureau of Internal Revenue [(BIR)] or, say, P1,000.00 worth of tax liability, and because of this the deposit of this individual [has been] attached by the [BIR].

Mr. Ramos: The attachment will only apply after the court has pronounced

sentence declaring the liability of such person. But where the primary aim is to

determine whether he has a bank deposit in order to bring about a proper assessment by the [BIR], such inquiry is not allowed by this proposed law.

Mr. Marcos: But under our rules of procedure and under the Civil Code, the

attachment or garnishment of money deposited is allowed. Let us assume for instance that there is a preliminary attachment which is for garnishment or for holding liable all moneys deposited belonging to a certain individual, but such attachment or garnishment will bring out into the open the value of such deposit. Is that prohibited by... the law?

Mr. Ramos: It is only prohibited to the extent that the inquiry... is made only for

the purpose of satisfying a tax liability already declared for the protection of the right in favor of the government; but when the object is merely to inquire whether he has a deposit or not for purposes of taxation, then this is fully covered by the law. x x x

Mr. Marcos: The law prohibits a mere investigation into the existence and the

amount of the deposit. Mr. Ramos: Into the very nature of such deposit. x x x[47]

In taking exclusion from the coverage of the confidentiality rule, petitioner in the instant case posits that the

account maintained by respondent with Security Bank contains the proceeds of the checks that she has fraudulently

appropriated to herself and, thus, falls under one of the exceptions in Section 2 of R.A. No. 1405 that the money kept in

said account is the subject matter in litigation. To highlight this thesis, petitioner avers, citing Mathay v. Consolidated

Bank and Trust Co.,[48] that the subject matter of the action refers to the physical facts; the things real or personal; the

money, lands, chattels and the like, in relation to which the suit is prosecuted, which in the instant case should refer to the

money deposited in the Security Bank account.[49] On the surface, however, it seems that petitioner’s theory is valid to a

point, yet a deeper treatment tends to show that it has argued quite off-tangentially. This, because, whileMathay did

explain what the subject matter of an action is, it nevertheless did so only to determine whether the class suit in that case

was properly brought to the court.

What indeed constitutes the subject matter in litigation in relation to Section 2 of R.A. No. 1405 has been

pointedly and amply addressed in Union Bank of the Philippines v. Court of Appeals,[50] in which the Court noted that the

inquiry into bank deposits allowable under R.A. No. 1405 must be premised on the fact that the money deposited in the

account is itself the subject of the action.[51] Given this perspective, we deduce that the subject matter of the action in the

case at bar is to be determined from the indictment that charges respondent with the offense, and not from the evidence

sought by the prosecution to be admitted into the records. In the criminal Information filed with the trial court,

respondent, unqualifiedly and in plain language, is charged with qualified theft by abusing petitioner’s trust and

confidence and stealing cash in the amount of P1,534,135.50. The said Information makes no factual allegation that in

some material way involves the checks subject of the testimonial and documentary evidence sought to be suppressed.

Neither do the allegations in said Information make mention of the supposed bank account in which the funds

represented by the checks have allegedly been kept.

In other words, it can hardly be inferred from the indictment itself that the Security Bank account is the ostensible

subject of the prosecution’s inquiry. Without needlessly expanding the scope of what is plainly alleged in the Information,

the subject matter of the action in this case is the money amounting to P1,534,135.50 alleged to have been stolen by

respondent, and not the money equivalent of the checks which are sought to be admitted in evidence. Thus, it is that,

which the prosecution is bound to prove with its evidence, and no other.

It comes clear that the admission of testimonial and documentary evidence relative to respondent’s Security Bank

account serves no other purpose than to establish the existence of such account, its nature and the amount kept in it. It

constitutes an attempt by the prosecution at an impermissible inquiry into a bank deposit account the privacy and

confidentiality of which is protected by law. On this score alone, the objection posed by respondent in her motion to

suppress should have indeed put an end to the controversy at the very first instance it was raised before the trial court.

In sum, we hold that the testimony of Marasigan on the particulars of respondent’s supposed bank account with

Security Bank and the documentary evidence represented by the checks adduced in support thereof, are not only

incompetent for being excluded by operation of R.A. No. 1405. They are likewise irrelevant to the case, inasmuch as they

do not appear to have any logical and reasonable connection to the prosecution of respondent for qualified theft. We find

full merit in and affirm respondent’s objection to the evidence of the prosecution. The Court of Appeals was, therefore,

correct in reversing the assailed orders of the trial court.

A final note. In any given jurisdiction where the right of privacy extends its scope to include an individual’s

financial privacy rights and personal financial matters, there is an intermediate or heightened scrutiny given by courts and

legislators to laws infringing such rights.[52] Should there be doubts in upholding the absolutely confidential nature of bank

deposits against affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of the

former. This attitude persists unless congress lifts its finger to reverse the general state policy respecting the absolutely

confidential nature of bank deposits.[53]

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 87600 dated April 20,

2005, reversing the September 13, 2004 and November 5, 2004 Orders of the Regional Trial Court of Manila, Branch 36 in

Criminal Case No. 02-202158, is AFFIRMED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-34964 January 31, 1973

CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants, vs.HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila, Branch VIII, and VICENTE G. ACABAN, respondents-appellees.

Sy Santos, Del Rosario and Associates for petitioners-appellants.

Tagalo, Gozar and Associates for respondents-appellees.

MAKALINTAL, J.:

The only issue in this petition for certiorari to review the orders dated March 4, 1972 and March 27, 1972, respectively, of the Court of First Instance of Manila in its Civil Case No. 75138, is whether or not a banking institution may validly refuse to comply with a court process garnishing the bank deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405. *

On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista Logging Co., Inc., B & B Forest Development Corporation and Marino Bautista for the collection of a sum of money. Upon motion of the plaintiff the trial court declared the defendants in default for failure to answer within the reglementary period, and authorized the Branch Clerk of Court and/or Deputy Clerk to receive the plaintiff's evidence. On January 20, 1970 judgment by default was rendered against the defendants.

To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the defendant B & B Forest Development Corporation with the China Banking Corporation. Accordingly, a notice of garnishment was issued by the Deputy Sheriff of the trial court and served on said bank through its cashier, Tan Kim Liong. In reply, the bank' cashier invited the attention of the Deputy Sheriff to the provisions of Republic Act No. 1405 which, it was alleged, prohibit the disclosure of any information relative to bank deposits. Thereupon the plaintiff filed a motion to cite Tan Kim Liong for contempt of court.

In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim Liong was ordered "to inform the Court within five days from receipt of this order whether or not there is a deposit in the China Banking Corporation of defendant B & B Forest Development Corporation, and if there is any deposit, to hold the same intact and not allow any withdrawal until further order from this Court." Tan Kim Liong moved to reconsider but was turned down by order of March 27, 1972. In the same order he was directed "to comply with the order of this Court dated March 4, 1972

within ten (10) days from the receipt of copy of this order, otherwise his arrest and confinement will be ordered by the Court." Resisting the two orders, the China Banking Corporation and Tan Kim Liong instituted the instant petition.

The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads:

Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

Sec 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits.

Sec. 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

The petitioners argue that the disclosure of the information required by the court does not fall within any of the four (4) exceptions enumerated in Section 2, and that if the questioned orders are complied with Tan Kim Liong may be criminally liable under Section 5 and the bank exposed to a possible damage suit by B & B Forest Development Corporation. Specifically referring to this case, the position of the petitioners is that the bank deposit of judgment debtor B & B Forest Development Corporation cannot be subject to garnishment to satisfy a final judgment against it in view of the aforequoted provisions of law.

We do not view the situation in that light. The lower court did not order an examination of or inquiry into the deposit of B & B Forest Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform the court whether or not the defendant B & B Forest Development Corporation had a deposit in the China Banking Corporation only for purposes of the garnishment issued by it, so that the bank would hold the same intact and not allow any withdrawal until further order. It will be noted from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that it was not the intention of the lawmakers to place bank deposits beyond the reach of execution to satisfy a final judgment. Thus:

Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the Committee on Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held liable by the Bureau of Internal Revenue for, say, P1,000.00 worth of tax liability, and because of this the deposit of this individual is attached by the Bureau of Internal Revenue.

Mr. RAMOS. The attachment will only apply after the court has pronounced sentence declaring the liability of such person. But where the primary aim is to determine whether he has a bank deposit in order to bring about a proper assessment by the Bureau of Internal Revenue, such inquiry is not authorized by this proposed law.

Mr. MARCOS. But under our rules of procedure and under the Civil Code, the attachment or garnishment of money deposited is allowed. Let us assume, for instance, that there is a preliminary attachment which is for garnishment or for holding liable all moneys deposited belonging to a certain individual, but such

attachment or garnishment will bring out into the open the value of such deposit. Is that prohibited by this amendment or by this law?

Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the inquiry is made only for the purpose of satisfying a tax liability already declared for the protection of the right in favor of the government; but when the object is merely to inquire whether he has a deposit or not for purposes of taxation, then this is fully covered by the law.

Mr. MARCOS. And it protects the depositor, does it not?

Mr. RAMOS. Yes, it protects the depositor.

Mr. MARCOS. The law prohibits a mere investigation into the existence and the amount of the deposit.

Mr. RAMOS. Into the very nature of such deposit.

Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment or attachment of the deposit is not allowed?

Mr. RAMOS. No, without judicial authorization.

Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as well as the substantive law on the matter is amended?

Mr. RAMOS. Yes. That is the effect.

Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the liability of an individual for taxation purposes and this judgment is sought to be executed ... in the execution of that judgment, does this bill, or this proposed law, if approved, allow the investigation or scrutiny of the bank deposit in order to execute the judgment?

Mr. RAMOS. To satisfy a judgment which has become executory.

Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and the deposit is half a million, will this bill allow scrutiny into the deposit in order that the judgment may be executed?

Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation to the Government, but not to determine whether a deposit has been made in evasion of taxes.

xxx xxx xxx

Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery of a sum of money the plaintiff wishes to attach the properties of the defendant to insure the satisfaction of the judgment. Once the judgment is rendered, does the gentleman mean that the plaintiff cannot attach the bank deposit of the defendant?

Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to which I replied that outside the very purpose of this law it could be reached by attachment.

Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?

Mr. RAMOS. That is so.

(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840, July 27, 1955).

It is sufficiently clear from the foregoing discussion of the conference committee report of the two houses of Congress that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.

WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby affirmed, with costs against the petitioners-appellants.

Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

Concepcion, C.J. and Teehankee, J., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 84526 January 28, 1991

PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES, petitioners, vs.THE HON. COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION, respondents.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for petitioners.

Rexes V. Alejano for private respondent.

SARMIENTO, J.:p

This is a petition for review on certiorari which assails both the resolution 1 dated June 27, 1988 of the Court of Appeals 2 which reconsidered and set aside its earlier decisions 3 dated February 26, 1988 reversing the decision4 of the trial court and the subsequent resolution 5 dated August 3, 1988 which denied the petitioners' motion for reconsideration. The dispositive portion of the resolution in question dated June 27, 1988 reads as follows:

xxx xxx xxx

For the reasons above adduced, We are constrained to reconsider Our aforesaid decision and to set it aside and in lieu thereof hereby enter another decision AFFIRMING the decision dated January 15, 1985 of the Regional Trial Court of Manila, Branch 11, in Civil Case No. 103100 entitled "Marinduque Mining and Industrial Corporation (MMIC) vs. Philippine Commercial and Industrial Bank, et al." 6

The undisputed facts 7 as gathered from the findings of the trial court are as follows:

The instant case originated from an action 8 filed with the National Labor Relations Commission (NLRC) by a group of laborers who obtained therefrom a favorable judgment for the payment of backwages amounting to P205,853.00 against the private respondent.

On April 26, 1976, the said Commission issued a writ of execution directing the Deputy Sheriff of Negros Occidental, one Damian Rojas, to enforce the aforementioned judgment. The pertinent portion of the said writ reads as follows:

xxx xxx xxx

Further, you are to collect from same respondent the total amount of P205,853.00 as their backwage (sic) for twelve (12) months and then turn over said amount to this commission for further disposition. In case you fail to collect said amount in cash, you are to cause the satisfaction of the same on the movable or immovable properties of the respondent not exempt from execution. (Exhs. G, G-1 and G-3, also Exh. 3; Emphasis supplied). 9

Accordingly, on April 28, 1976, the aforenamed deputy sheriff went to the mining site of the private respondent and served the writ of execution on the persons concerned, but nothing seemed to have happened thereat.

Thereafter, the Sheriff prepared on his own a Notice of Garnishment dated April 29, 1976 addressed to six (6) banks, all located in Bacolod City, one of which being the petitioner herein, directing the bank concerned to immediately issue a check in the name of the Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the amount of the garnishment and that proper receipt would be issued therefor.

Incidentally, the house lawyer of the private respondent, Atty. Rexes V. Alejano, acting on a tip regarding the existence of the said notice of garnishment, communicated with the bank manager, the petitioner Jose Henares, verbally at first at around 2:00 o'clock in the afternoon of that day, April 29, 1976, and later confirmed in a formal letter received by the petitioner Henares at about 5:00 o'clock of that same day, requesting the withholding of any release of the deposit of the private respondent with the petitioner bank.

Meanwhile, at about 9:30 in the morning of April 29, 1976, the deputy sheriff presented the Notice of Garnishment and the Writ of Execution attached therewith to the petitioner Henares and later in the afternoon, demanded from the latter, under pain of contempt, the release of the deposit of the private respondent.

The petitioner Henares, upon knowing from the Acting Provincial Sheriff that there was no restraining order from the National Labor Relations Commission and on the favorable advice of the bank's legal counsel, issued a debit memo for the full balance of the private respondent's account with the petitioner bank. Thereafter, he issued a manager's check in the name of the Deputy Provincial Sheriff of Negros Occidental for the amount of P37,466.18, which was the exact balance of the private respondent's account as of that day.

On the following day, April 30, 1976, at about 1:00 o'clock in the afternoon, the deputy sheriff returned to the bank in order to encash the check but before the actual encashment, the petitioner Henares once again inquired about any existing restraining order from the NLRC and upon being told that there was none, the latter allowed the said encashment.

On July 6, 1976, the private respondent, then plaintiff, filed a complaint before the Regional Trial Court of Manila, Branch II, against the petitioners and Damian Rojas, the Deputy Provincial Sheriff of Negros Occidental, then defendants, alleging that the former's current deposit with the petitioner bank was levied upon, garnished, and with undue haste unlawfully allowed to be withdrawn, and notwithstanding the alleged unauthorized disclosure of the said current deposit and unlawful release thereof, the latter have failed and refused to restore the amount of P37,466.18 to the former's account despite repeated demands.

Both the petitioners and the Deputy Sheriff filed their respective answers denying the material averments of the said complaint and alleged that their actuations were all in accordance with law and likewise filed counterclaims for damages, including a cross-claim of the former against the latter. The third-party complaint of the petitioners against the forty-nine (49) laborers in the NLRC case was, however, dismissed for failure of the sheriff to serve summons upon the latter.

On January 23, 1982, after several postponements, the pre-trial was finally conducted and terminated with only the petitioners and the private respondent participating, through their respective counsel.

On January 15, 1985, the trial court rendered its judgment in favor of the private respondent, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the three (3) defendants by ordering the latter to pay, jointly and severally, the plaintiff the following amounts, to wit:

(a) the sum of P37,466.18, with interest thereon at the rate of 12% per annum from date of first demand on April 29, 1976 until the amount shall have been fully and completely restored and paid;

(b) the sum of P10,000.00 as attorney's fees.

Defendants are ordered to pay, jointly and severally, double costs. 10

xxx xxx xxx

On appeal, the respondent court in a decision dated February 26, 1988, first reversed the said judgment of the lower court, but however, on the motion for reconsideration filed by the private respondent, subsequently annulled and set aside its said decision in the resolution dated June 27, 1988. On August 3, 1988, the respondent court denied the petitioner's own motion for reconsideration.

Hence, this petition.

The petitioners raise two issues, 11 to wit:

1. Whether or not petitioners had legal basis in releasing the garnished deposit of private respondent to the sheriff.

2. Whether or not petitioners violated Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act, when they allowed the sheriff to garnish the deposit of private respondent.

The petition is impressed with merit.

The crux of the instant controversy boils down to the question of whether or not a bank is liable for releasing its depositor's funds on the strength of the notice of garnishment made by the deputy sheriff pursuant to a writ of execution issued by the National Labor Relations Commission (NLRC).

The respondent court in its questioned resolution dated June 27, 1988, held that the petitioners were liable, in this wise:

In the case at bar, defendant-appellant PCIB, despite vigorous objections from plaintiff-appellee, with indecent haste disclosed and released the deposit of plaintiff-appellee on the strength of a mere notice of garnishment which the Honorable Supreme Court ruled upon is no authority for the release of the deposit, thus:

In the second place, the mere garnishment of funds belonging to a party upon order of the court does not have the effect of delivering the money garnished to the sheriff or to the party in whose favor the attachment is issued. The fund is retained by the garnishee or the person holding the money for the defendant.

The garnishee, or one in whose hands property is attached or garnished, is universally regarded as charged with its legal custody pending outcome of the attachment or garnishment unless, by local statute and practice, he is permitted to surrender or pay the garnished property or funds into court, to the attaching officer, or to a receiver or trustee appointed to receive them. (5 Am. Jur. 14)

The effect of the garnishment, therefore, was to require the Philippine Trust Company, holder of the funds of the Luzon Surety Co., to set aside said amount from the funds of the Luzon Surety Co., and keep the same subject to the final orders of the Court. In the case at bar there was never an order to deliver the full amount garnished to the plaintiff-appellee; all that was ordered to be delivered after the judgment had become final was the amount found by the Court of Appeals to be due. The balance of the amount garnished, therefore, remained all the time in the possession of the bank as part of the funds of the Luzon Surety Co. although the same could not be disposed of by the owner. (De la Rama vs. Villarosa, et al., L-17927, June 29, 1963, 8 SCRA 413, 418-419; Emphasis supplied). 12

The above-mentioned contention citing De la Rama is not exactly on all fours with the facts of the case at bar. InDe la Rama, the amount garnished was not actually taken possession of by the sheriff, even from the time of garnishment, because the judgment debtor was able to appeal to the Court of Appeals and obtain from the Court an injunction prohibiting execution of the judgment.

On the other hand, nowhere in the record of the present case is there any evidence of an appeal by the private respondent from the decision of the NLRC or the existence of any restraining order to prevent the release of the private respondent's deposit to the deputy sheriff at the time of the service of the notice of garnishment and writ of execution to the petitioners.

On the contrary, the uncontroverted statements in the deposition of the petitioner Henares that he had previously sought the advice of the bank's counsel and that he had checked twice with the Acting Provincial Sheriff who had informed him of the absence of any restraining order, belie any allegation of undue and indecent haste in the release of the said deposit in question.

The cases more in point to the present controversy are the recent decisions in Engineering Construction Inc. v. National Power Corporation 13 and Rizal Commercial Banking Corporation (RCBC) vs. De Castro 14 where the Court absolved both garnishees, MERALCO and RCBC, respectively, from any liability for their prompt compliance in the release of garnished funds,

The rationale behind Engineering Construction, Inc. and which was quoted in Rizal Commercial Banking Corporation is persuasive

xxx xxx xxx

But while partial restitution is warranted in favor of NPC, we find that the Appellate Court erred in not absolving MERALCO, the garnishee, from its obligations to NPC with respect to the payment to ECI of P1,114,543.23, thus in effect subjecting MERALCO to double liability. MERALCO should not have been faulted for its prompt obedience to a writ of garnishment. Unless there are compelling reasons such as: a defect on the face of the writ or actual knowledge on the part of the garnishee of lack of entitlement on the part of the garnisher, it is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is valid.

Section 8, Rule 57 of the Rules of Court provides:

Effect of attachment of debts and credits. — All persons having in their possession or under their control any credits or other similar personal property belonging to the party against whom attachment is issued, or owing any debts to the same, at the time of service upon them of a copy of the order of attachment and notice as provided in the last preceding section, shall be liable to the applicant of the amount of such credits, debts or other property, until the attachment be discharged, or any judgment recovered by him be satisfied, unless such property be delivered or transferred, or such debts be paid, to the clerk, sheriff or other proper officer of the court issuing the attachment.

Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and owing to him from a stranger to the litigation. Under the above-cited rule, the garnishee [the third person] is obliged to deliver the credits, etc. to the proper officer issuing the writ and "the law exempts from liability the person having in his possession or under his control any credits or other personal property belonging to the defendant, . . . if such property be delivered or transferred, . . . to the clerk, sheriff, or other officer of the court in which the action is pending."

Applying the foregoing to the case at bar, MERALCO, as garnishee, after having been judicially compelled to pay the amount of the judgment represented by funds in its possession belonging to the judgment debtor or NPC, should be released from all responsibilities over such amount after delivery thereof to the sheriff. The reason for the rule is self evident. To expose garnishees to risks for obeying court orders and processes would only undermine the administration of justice. (Emphasis ours.) 15

xxx xxx xxx

Moreover, there is no issue concerning the indebtedness of the petitioner bank to the private respondent since the latter has never denied the existence of its deposit with the former, the said deposit being considered a credit in favor of the depositor against the bank. 16 We therefore see no application for Sec. 39, Rule 39 of the Rules of Court invoked by the private respondent as to necessitate the "examination of the debtor of the judgment debtor."17

Rather, we find the immediate release of the funds by the petitioners on the strength of the notice of garnishment and writ of execution, whose issuance, absent any patent defect, enjoys the presumption of regularity, sufficiently supported by Sec. 41, Rule 39 of the Rules of Court which reads:

xxx xxx xxx

After an execution against property has issued, a person indebted to the judgment debtor, may pay to the officer holding the execution the amount of his debt or so much thereof as may be necessary to satisfy the execution, and the officer's receipt shall be a sufficient discharge for the amount so paid or directed to be credited by the judgment creditor on the execution.

xxx xxx xxx

Finally, we likewise take cognizance of the subject of the judgment sought to be enforced in the writ of execution in question, namely, laborers' backwages. We believe that the petitioners should rather be commended for having acted with urgent dispatch despite attempts by the private respondent, as with so many scheming employers, to frustrate or unjustifiably delay the prompt satisfaction of final judgments which often result in undue prejudice to the legitimate claims of labor.

With regard to the second issue, we find no violation whatsoever by the petitioners of Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court in China Banking Corporation vs. Ortega 18 had the occasion to dispose of this issue when it stated, thus:

It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.

Since there is no evidence that the petitioners themselves divulged the information that the private respondent had an account with the petitioner bank and it is undisputed that the said account was properly the object of the notice of

garnishment and writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, we can not therefore hold the petitioners liable under R.A. 1405.

While the general rule is that the findings of fact of the appellate court are binding on this Court, the said rule however admits of exceptions, such as when the Court of Appeals clearly misconstrued and misapplied the law, drawn from the incorrect conclusions of fact established by evidence and otherwise at certain conclusions which are based on misapprehension of facts, 19 as in the case at bar.

The petitioners are therefore absolved from any liability for the disclosure and release of the private respondent's deposit to the custody of the deputy sheriff in satisfaction of the final judgment for the laborers' backwages.

WHEREFORE, the petition is GRANTED and the challenged Resolutions dated June 27, 1988 and August 13, 1988 of the Court of Appeals are hereby ANNULLED and SET ASIDE and its Decision dated February 26, 1988 dismissing the complaint is hereby REINSTATED. With costs against the private respondent.

SO ORDERED.

FIRST DIVISION

[G.R. No. 118917. December 22, 1997]

PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ROSA AQUERO, GERARD YU, ERIC YU, MINA YU, ELIZABETH NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA, LORNA ACUB, represented by their Attorney-in-Fact, JOHN FRANCIS COTAACO,respondents.

D E C I S I O N

KAPUNAN, J.:

Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the Court of Appeals affirming with modification the decision of the Regional Trial Court holding petitioner liable for the value of thirteen (13) certificates of time deposit (CTDs) in the possession of private respondents.

The facts, as found by the Court of Appeals, are as follows:

On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere Financing Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among others, that the same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the

certificate is insured up to P15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983 (Exhs. “B”, “B-1” to “B-12”).

On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an extension of a few days to enable the RSB to raise the amount to pay for the same (Exh. “D”). Cotaoco agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.

Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh. ‘2’, Records, p. 159) suspending the operations of the RSB. Eventually, the records of RSB were secured and its deposit liabilities were eventually determined. On December 7, 1984, the Monetary Board issued Resolution No. 1496 (Exh. ‘1’) liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities was prepared. However, the certificates of time deposit of plaintiffs-appellees were not included in the list on the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB.

On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of the certificates (Exhs. “C”, “C-1”, to “C-12”). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh. “B”) issued by PFC for the aforementioned certificates was returned by the drawee bank for having been drawn against insufficient funds; and said check was not replaced by the PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB.[1]

Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB and the Central Bank.

On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer.

On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter’s certificates of time deposit.

Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari, prohibition and mandamus before the Court of Appeals praying that the writ of execution issued by the trial court against it be set aside.

On February 8, 1995, the Court of Appeals rendered its decision granting the Central Bank’s petition but dismissing the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following errors:

I

THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS

II

THE CA ERRED INHOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND CONSIDERATION

III

THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE INSURED, PETITIONER SHOULD BE HELD LIABLE FOR THE SAME.

We deal jointly with petitioner’s first and third assigned errors.

Relying on this Court’s ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and Trust Company,[2] the Court of Appeals concluded that the subject CTDs are negotiable. Petitioner, on the other hand, contends that the CTDs are non-negotiable since they do not contain an unconditional promise or order to pay a sum in money are they made payable to order or bearer, as required by Section 1 of the Negotiable Instruments Law.

Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special law creating it.[3] The liability of the PDIC for insured deposits therefore is statutory and, under Republic Act No. 3591,[4] as amended, such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits.

The authority for this conclusion finds support in decisions by American state courts applying their respective bank guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of the certificates of deposits in their possession entitled them to be paid out of the bank guaranty fund, a contention that the courts uniformly rejected.

Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson[5] argued that:

x x x the court should hold the certificates to be guaranteed because they are negotiable instruments, and were acquired by the present holders in due course; otherwise it is said certificates of deposit will be deprived of the quality of commercial paper. Certificates of deposit have been regarded as the highest form of collateral. They are of wide currency in the banking and business worlds, and are particularly useful to persons of small means, because they bear interest, and may be readily cashed; therefore to deprive them of the benefit of the guaranty fund would be a calamity. x x x

The Supreme Court of Kansas, however, found the plaintiffs’ contention to be without merit, ruling thus:

x x x The argument confuses negotiability of commercial paper with statutory guaranty of deposits. The guaranty is something extrinsic to all forms of evidence of bank obligation; and negotiability of instruments has no dependence on existence or nonexistence of the guaranty.

x x x Whatever the status of the plaintiffs may be as holders in due course under the Negotiable Instruments Law, they cannot be assignees of a deposit which was not made, and cannot be entitled to the benefit of a guaranty which did not come into existence. x x x

In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American State Bank v. Foster, [6] which arose from the same facts as the Fourth National Bank case. There, the Court held:

x x x Even if the plaintiff were to be regarded as an innocent purchaser of the certificates as negotiable instruments, its situation would be in no wise bettered so far as relate to a claim against the guaranty fund. The fund protects deposits only. And if no deposit is made, or no deposit within the protection of the guaranty law, the transfer of a certificate cannot impose a liability on the fund. xxx where a certificate of deposit is given under such circumstances that it is not protected by the guaranty fund, although that fact is not indicated by anything on its face, its indorsement to an innocent holder cannot confer that qualify upon it.

In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State v. Farmers’ State Bank:[7]

In this contention we think the appellants fail to distinguish between the liability of the maker of a negotiable instrument, which rests upon the law pertaining to negotiable paper, and the liability of the guaranty fund, which is purely

statutory. The circumstances under which the guaranty fund may be liable are entirely apart from the law pertaining to negotiable paper. A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund liable for its payment must show that the transaction leading up to the issuance of the certificate was such that the law holds the guaranty fund liable for its payment. x x x

The Farmers’ State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home State Bank of Dunning[8] and in State v. Kilgore State Bank.[9] The same ruling was adopted by the Supreme Court of South Dakota in Mildenstein v. Hirning.[10]

In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable. Subsequently, however, respondent court deemed the issue immaterial, albeit for entirely different reasons.

x x x Besides, whether the certificates are negotiable or not is of no moment. The fact remains that the certificates categorically state that their bearer [sic] have a deposit in the RSB; that the same will mature on November 3, 1993; and that the certificates are insured by PDIC.[11]

We disagree with respondent court’s rationale. The fact that the certificates state that the certificates are insured by PDIC does not ipso factomake the latter liable for the same should the contingency insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter.

x x x The mere fact that a certificate recites on its face that a certain sum has been deposited, or that officers of the bank may have stated that the deposit is protected by the guaranty law, does not make the guaranty fund liable for payment, if in fact a deposit has not been made xxx. The banks have nothing to do with the guaranty fund as such. It is a fund raised by assessments against all state banks, administered by officers of the state to protect deposits in banks. x x x[12]

We come now to petitioner’s second assigned error.

In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. This is implicit from a reading of the following provisions of R.A. 3519:

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation. xxx which shall insure, as provided, the deposits of all banks which are entitled to the benefits of insurance under this Act xxx. (Italics supplied).

xxx

SEC. 10 (a) xxx

xxx

( c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in such bank shall be made by the Corporation as soon as possible xxx. (Italics supplied.)

A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is received by a bank:

SEC. 3. As used in this Act-

(f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidence by passbook, check and/or certificate of deposit printed or issued in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank xxx. (Italics ours.)

Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in resolving who between RSB and PFC issued the certificates to private respondents, answered this question in the negative. A perusal of the impugned decision, however, reveals that such finding is grounded entirely on speculation, and thus, cannot bind this Court: [13]

Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire the same for value because the check issued by the latter for the certificates bounced for insufficiency of funds. First, granting arguendo that the certificates were originally issued in favor of PFC, such issuance could only give rise to the presumption that the amount stated in the certificates have been deposited to RSB. Had not PFC deposited the amount stated therein, then RSB would have surely refused to issue the certificates certifying to such fact. Second, why did not RSB demand that PFC pay the certificates or file a claim against PFC on the ground that the latter failed to pay for the value of the certificates? It could very well be that the reason why RSB did not run after PFC for payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or were already paid to RSB by plaintiffs-appellees. Third, if it is true at the time RSB issued the certificates to PFC, the instruments were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates that the validity thereof hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount stated in the certificates, the latter is not be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the amount stated therein to whoever is the bearer upon its presentment for encashment. Truly, there is no reason to depart from the established principle that were a bank issues a certificate of deposit acknowledging a deposit made with a third person or an officer of the bank, or with another bank representing it to be the certificate of the bank, upon which assurance the depositor accepts it, the bank is liable for the amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).[14]

Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified that RSB received three (3) checks in consideration for the issuance of several CTDs, including the ones in dispute. The first check amounted toP159,153.93, the second, P121,665.95, and the third, P125,846.07. In consideration of the third check, private respondents received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of P10,000.00 each or a total of P130,000.00. To conform with the value of the third check, CTD No. 09648 was “chopped,” and only the sum of P5,846.07 was credited in favor of private respondents. The first two checks “made good in the clearing” while the third was returned for being “drawn” against insufficient funds.”

The check in question appears on the records as Exhibit “3” (for Regent), [15] and is described in RSB’s offer of evidence as “Traders Royal Bank Check No. 292555 dated September 22, 1983 covering the amount or P125,846.07 xxx issued by Premiere Financing Corporation.”[16] At the back of said check are the words “Refer to Drawer,”[17] indicating that the drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of the check’s dishonor, RSB cancelled the corresponding as evidenced by an RSB “ticket” dated November 4, 1983.[18]

These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the certificates of time deposit held by private respondents.

ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals REVERSED. Petitioner is absolved from any liability to private respondents.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-21146 September 20, 1965

RURAL BANK OF LUCENA, INC., petitioner, vs.HON. FRANCISCO ARCA, as Judge of the Court of First Instance of Manila, Branch 1, and CENTRAL BANK OF THE PHILIPPINES, respondents.

Norberto J. Quisumbing for petitioner.Nat. M. Balboa, F. E. Evangelista and Solicitor General for respondents.

REYES, J.B.L., J.:

The Rural Bank of Lucena, Inc., a banking corporation organized under Republic Act No. 720, instituted, on June 22, 1961, in the Court of First Instance of Manila (Civil Case No. 47345) an action to collect damages and to enjoin the Central Bank from enforcing Resolution No. 928 of its Monetary Board, finding that the Rural Bank of Lucena (Lucena for short), through its officers, directors, and employees, had committed acts substantially prejudicial to the Government, depositors, and creditors, and directing Lucena to reorganize its board of directors; to refrain from granting or renewing loans, or accept new deposits, and not to issue drafts or make disbursements without the approval of the supervising Central Bank examiners, and threatening Lucena that its management would be taken over if the latter should fail to comply with the resolution. After issue joined and trial of the case, and while the litigation was still undecided by the Court of First Instance, the Monetary Board, having been informed that the Director of its Department of Rural Banks recommended the liquidation of the Rural Bank of Lucena, adopted on February 2, 1962 its Resolution No. 122 (Petition, Annex "C") —

To request the Solicitor General, pursuant to Section 29 of Republic Act No. 265, to file a petition in the proper courts for the liquidation of the affairs of the Rural Bank of Lucena, Inc.

Notice was given by Central Bank officials, on February 10, 1962 that the Lucena bank was temporarily closed pending final decision of the Court, and that business be transacted with Central Bank representatives only.

Two days later (February 12, 1962), the Lucena bank filed suit in the Court of First Instance of Quezon (Tayabas) annual Resolution 122 of the Monetary Board (Case No. 6471) and enjoin its enforcement; and on February 14 the court issued ex parte a writ of preliminary injunction to such effect.

On the same day, the Court of First Instance of Manila, per Judge, now Court of Appeals Justice, Magno Gatmaitan of Branch XIV, decided Case No. 47345, enjoining enforcement of Resolution No. 928 of the Monetary Board, for having been issued without the prior hearing prescribed by section 10 of the Rural Bank Act, and ordering the Central Bank to pay P5,000.00 damages and costs. The Central Bank appealed.

Upon the other hand, the Court of First Instance of Quezon Province, in its Case No. 6741, on February, 24, 1962, dissolved its preliminary injunction against the enforcement of Resolution 122 of the Monetary Board. Other than filing a motion for reconsideration (ultimately denied on January 9, 1963) the Lucena bank took no other steps to prosecute the case it had filed.

On the 31st of March 1962, invoking section 29 of Republic Act 265, the Central Bank, as liquidator, petitioned the Court of First Instance of Manila for assistance in the liquidation of the Lucena bank (Civil Case No. 50019). Upon motion, and after hearing the parties, Judge Arca issued on interlocutory order on March 28, 1963, the dispositive portion of which is to the following effect (Petition, Annex "D"):

The Rural Bank of Lucena thru its duly authorized officers or representatives, is hereby ordered to turn over to the Central Bank, thru its duly authorized representative, within a period of five (5) days from receipt of copy of this order, the physical possession of all of said Rural Bank of Lucena's assets, properties and papers. Should the Rural Bank of Lucena or its officers fail to comply with the above order within the period indicated herein, the Central Bank, thru its authorized representatives, is hereby authorized to take actual and physical possession of all said assets, properties and papers of the Rural Bank of Lucena, duly inventoried in the presence of the Provincial Fiscal, the Provincial Commander, the Provincial Treasurer, and the Provincial Auditor of Quezon province, or their duly authorized representatives.

The Rural Bank of Lucena resorted to this Court on certiorari, claiming that Judge Arca gravely abused his discretion in issuing the above order, in that —

(a) it interferes with the immediately executory judgment of Judge Gatmaitan in Case No. 47345 of the Court of First Instance of Manila;

(b) Section 29 of the Central Bank Act (R.A. 265) does not apply;

(c) there was no prior valid take over of assets nor due hearing of the liquidated Bank;

(d) Judge Gatmaitan's decision constitutes a judicial review of the Monetary Board's action that cannot be nullified by the challenged order of Judge Area; and

(e) the turn over should not be ordered before trial on the merits.1awphîl.nèt

This Court issued a temporary restraining order until April 25, 1963, but the same was not renewed when it expired.

We see no irreconcilable conflict between section 10 (as amended) of Republic Act No. 720 (Rural Banks Act) and section 29 of Republic Act No. 265 (Central Bank Act). The former provides in substance as follows:

The director of the Department of the Central Bank designated by the Monetary Board to supervise Rural Banks ... upon proof that the Rural Bank or its board of directors or officers are conducting and managing the affairs of the bank in a manner contrary to laws, orders, instructions, rules and regulations promulgated by the Monetary Board or in any manner substantially prejudicial to the interests of the government, depositors or creditors, to take over the management of such bank when specifically authorized to do so by the Monetary Board after due hearing until a new board of directors and officers are elected and qualified. ...

It is easily seen that what this section authorized is the take over of the management by the Central Bank, until the governing body of the offending Rural Bank is recognized with a view to assuring compliance by it with the laws and regulations.

Upon the other hand, section 29 6f the Central Bank Act (R. A. 265) has in view a much more drastic step, the liquidation of a rural bank by taking over its assets and converting them into money to pay off its creditors. Said section prescribes:

SEC. 29. Proceedings upon insolvency. — Whenever, upon examination by the Superintendent or his examiners or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the Superintendent forthwith, in writing, to inform the Monetary Board of the facts, and the Board, upon finding the statement of the Superintendent to be true, shall forthwith forbid the institution to do business in the Philippines and shall take charge of its assets and proceeds according to law.

The Monetary Board shall thereupon determine within thirty days whether the institution may be reorganized or otherwise placed in such a condition so that it may be permitted to resume business with safety to its creditors and shall prescribe the conditions under which such resumption of business shall take place. In such case the expenses and fee in the administration of the institution shall be determined by the Board and shall be paid to the Central Bank out of the assets of such banking institution.

At any time within ten days after the Monetary Board has taken charge of the assets of any banking institution, such institution may apply to the Court of First Instance for an order requiring the Monetary Board to show cause why it should not be enjoined from continuing such charge of its assets, and the court may direct the Board to refrain from further proceedings and to surrender charge of its assets.

If the Monetary Board shall determine that the banking institution cannot resume business with safety to its creditors, it shall, by the Solicitor General, file a petition in the Court of First Instance reciting the proceedings which have been taken and praying the assistance and supervision of the court in the liquidation of the affairs of the same. The Superintendent shall thereafter, upon order of the Monetary Board and under the supervision of the court and with all convenient speed, convert the assets of the banking institution to money.

Considering that section 27 of the Rural Banks law (R.A. No. 720) expressly declares that —

The provisions of Republic Acts numbered 265 and 337, in so far as applicable and not in conflict with any provision of this Act, are hereby made a part of this Act.

we find no room for questioning the applicability of section 29 of Republic Act No. 265 (Central Bank Act) to rural banks organized under Republic Act 720, whenever the Monetary Board should find that the rural bank affected is

insolvent, or that its continuance in business would involve probable loss to its depositors or creditors, and that it cannot resume business with safety.

It follows that on the assumption that under section 10 of the Rural Banks Act the Monetary Board may not take over the management of a rural bank without giving the latter a hearing, i.e., an opportunity to rebut the charge that it has contravened applicable laws, rules and regulations to the substantial prejudice of the government, its depositors and creditors, such a previous hearing is nowhere required by section 29 of the Central Bank Law. Manifestly, whether a rural bank's "continuance in business would involve probable loss" to its clients or creditors and that it "cannot resume business with safety," is a matter of appreciation and judgment that the law entrusts primarily to the Monetary Board. Equally apparent is that if the rural bank affected is in the condition previously adverted to, every minute of delay in securing its assets from dissipation inevitably increases the danger to the creditors. For this reason, the statute has provided for a subsequent judicial review of the Monetary Board, in lieu of a previous hearing.

In point of fact, the petitioner Rural Bank of Lucena did file a petition (Annex "G") for judicial review in the Court of First Instance of Quezon Province, dated February 12, 1962, and challenged the validity of Resolution No. 122 of the Monetary Board (Case No. 6471) ; but the Court of First Instance of Quezon dissolved the preliminary injunction issued in that case and allowed Resolution No. 122 to take effect, without any steps being taken for a review of such action. This being the case, and in view of the manifest reluctance the Lucena bank's officials to comply with the Monetary Board's resolution, the Central Bank had cause to seek judicial assistance for the discharge of its duties as liquidator.

The petitioner rural bank seems to take the view that the proceedings had before Judge Gatmaitan in Case No. 47345, Branch XIV, of the Court of First Instance of Manila constituted the judicial review required by section 29 of Republic Act No. 265, the Central Bank Act. Such a stand is untenable, for the case tried and decided by Judge Gatmaitan concerned an attempt by the Central Bank to take over management under section 10 of the Rural Banks law (R.A. No. 720) in connection with the Monetary Board's resolution No. 928 of June 16, 1961. Even more conclusive is the consideration that said action (Case No. 47345) was filed on June 22, 1961, and could not possibly be a judicial review of the Resolution No. 122 adopted eight months later, on February 2, 1962. A review cannot precede the adoption of the resolution being reviewed. This proposition requires no demonstration.

The narrated events also rebut the contention that the order of Judge Area, issued on March 28, 1963, in Case No. 50019, constitutes unlawful interference with the enforcement of Judge Gatmaitan's decision of February 14, 1962, the issues involved being different in each case. As heretofore pointed out one involved a take over of management under section 10 of the Rural Banks Act, and the other a seizure of assets and liquidation under section 29 of the Central Bank law (R.A. 265).

Nor can the proceedings before Judge Area be deemed judicial review of the 1962 resolution No. 122 of the Monetary Board, if only because by law (section 29, R. A. 265) such review must be asked within 10 days from notice of the resolution of the Board. Between the adoption of Resolution No. 122 and the challenged order of Judge Arca, more than one year had elapsed. Hence, the validity of the Monetary Board's resolution can no longer be litigated before Judge Arca, whose role under the fourth paragraph of section 29 is confined to assisting and supervising the liquidation of the Lucena bank.

Whether or not the Central Bank acted with arbitrariness or bad faith in decreeing that circumstances called for the liquidation of the Lucena Rural Bank, and should be answerable in damages, should be threshed out and determined, not by Judge Arca but in Case No. 6471 of the Court of First Instance of Quezon Province, which was filed within the 10-day period prescribed by the Central Bank law, and which appears to be still pending, unless the Lucena bank had abandoned such litigation, a fact that we need not decide at present. Suffice it to say that Judge Arca had no reason to inquire into the

merits of the case before issuing the disputed order requiring the surrender of the assets and papers of the Lucena bank, because: (1) neither the statute (sec. 29, R.A. 265) nor the constitutional requirement of due process demand that the correctness of the Monetary Board's resolution to stop operation and proceed to the liquidation of the Lucena Rural Bank should first be adjudged before making the resolution effective, it being enough that a subsequent judicial review by provided (section 29, R.A. 265; 12 Am. Jur. 305, sec. 611; Bourjois vs. Chapman, 301 U.S. 183, 81 Law Ed. 1027, 1032; American Surety Co. vs. Baldwin, 77 Law Ed. 231, 86 ALR 307; Wilson vs. Standefer, 46 Law Ed. 612); (2) the period for asking such judicial review had elapsed with excess between the adoption of the Monetary Board Resolution No. 122 and the filing of the case by the Central Bank in the Court of First Instance of Manila; (3) the correctness of said resolution had already been put in issue before the Court of Quezon Province; (4) because the latter court had refused to stop implementation of the Resolution of the Monetary Board when it dissolved its own preliminary injunction; and (5) because the Lucena Bank had apparently acquiesced in the action taken by the Court of Quezon Province, since the rural bank had not sought that the action of the Quezon court be set aside by a higher court.

IN VIEW OF THE FOREGOING, the writ applied for is denied with costs against the petitioner Lucena Rural Bank, Inc.

Bengzon, C.J., Bautista Angelo, Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 97218 May 17, 1993

PROVIDENT SAVINGS BANK, petitioner, vs.COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON CHUA, respondents.

Gonzales, Batiller, Bilog & Associates for petitioner.

Resty R. Villanueva for private respondent.

MELO, J.:

The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify via the petitioner forcertiorari before us refers to respondent court's major conclusion arrived at in CA-G.R. CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ) barring petitioner from foreclosing the subject realty on account of prescription. Petitioner begs to differ, insisting that the period during which it was placed under receivership by the Central Bank is akin to a caso fortuito and should not thus be reckoned against it.

Both petitioner and private respondent accepted the synthesized factual backdrop formulated by respondent court, to wit:

This an appeal by both plaintiff and defendant from the decision of the Regional Trial Court of the National Capital Judicial 29 September 1988, in Civil Case No. 977-NW, which directed plaintiff-appellant to pay defendant-appellant the personal obligation of the spouses Guarin to defendant-appellant in the amount of P62,500.00, together with the interest, penalties, and bank charges due thereon, and ordering defendant-appellant thereafter to: (1) release the real estate mortgage executed by the spouses Lorenzo K. Guarin and Liwayway J. Guarin in favor of defendant bank on 16 February 1967; (2) return to surrender to plaintiff-appellant, as successor-in-interest of the spouses Guarin, the latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiff-appellant P20,000.00 as and for attorney's fees; and, (4) pay the costs of suit.

The established fact are:

On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin (Guarins) obtained a loan from defendant-appellant in the amount of P62,500.00 payable on or before 20 June 1967. As security for the loan, they executed a real estate mortgage in favor of defendant-appellant over a parcel of land covered by TCT No. 177014. (Exhs. C and D).

In September, 1972, defendant-appellant was placed under receivership by the Central Bank of the Philippines until 27 July 1981 when the receivership was set aside by the Honorable Supreme Court.

On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel informing that the mortgaged property would be sold at public auction on 27 December 1984, assured he and his wife had every intention of paying their obligation and requesting for a recomputation of their account and a postponement of the foreclosure sale. (Exh. 1).

On 10 February 1986, the Guarins received a Statement of Account from defendant-appellant showing two outstanding accounts as of 15 February 1986. One was account of Lorenzo K. Guarin in the amount of P591,088.80, and the other was the account of L.K. Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27 (Attachment to Exh. 2)

On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he was ready and willing to pay his obligation in the total amount of P591,088.80 as recomputed by defendant-appellant whenever defendant-appellant was already to receive the payment and inquiring as to when his mortgaged title would be available for him to pick up. (Exh. 2)

Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make payment at its office in Makati, Metro Manila, but that the mortgaged title could not be released to him even after the payment of the obligation of P591,088.80 as it also served as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to defendant-appellant which was undertaken by Lorenzo K. Guarin in his personal capacity and as president of the corporation. (Exh. 3)

On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the mortgaged property of the Guarins had been offered to him as payment of the judgment he obtained against the Guarins in Civil Case No. Q-47465 entitled, "Wilson Chua vs. Lorenzo K. Guarin", and requesting for defendant-appellant's

conformity to the assignment and expressing his willingness to pay for the obligation of Mr. Guarin so that the title could be released by defendant-appellant. (Exh. 4)

On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute Sale With Assumption of Mortgaged whereby the Guarins sold the mortgaged property to Guarins sold the appellant for the sum of P250,000.00 and plaintiff-appellant undertook to assume the mortgaged obligation of the Guarins with defendant-appellant which as of 15 February 1985 amounted to P591,088.80.(Exh. B).

On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of the judgment in Civil Case No. Q-47645, the mortgaged property had been sold to him by the Guarins, as evidenced by the Deed of Sale enclosed for guidance and information of defendant-appellant. He requested that he be allowed to pay the loan secured by the mortgaged, otherwise, he would be constrained to bring the matter to court. (Exh. 5) In reply, defendant-appellant, on 11 August 1986, informed plaintiff-appellant that his request could be granted if he would settle the obligation of L.K. Guarin Manufacturing Co., Inc., as well and defendant-appellant's letter to Mr. Guarin dated 27 February 1986. (Exh. 6)

On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendant-appellant informing that plaintiff-appellant had purchased the mortgaged property from the Guarin's and requesting that the owner's copy of TCT No. 177014 in the possession of defendant-appellant be released to him so that he can register the sale and have the title to the property transferred in his name. He likewise, informed defendant-appellant that it had lost whatever right or action had against the Guarins because of prescription. (Exh. E) Defendant-appellant replied on 10 August 1987 stating the reasons why they could not comply with plaintiff-appellant's demands. (Exh. F)

On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant to compel the latter to: (1) release the real estate mortgaged executed by the Guarins in favor of defendant-appellant on 16 February 1967; (2) return or surrender to plaintiff-appellant, as successor-in-interest of the Guarins, the latter's owner's duplicate of TCT No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual and/or consequential damages, moral damages as may be proved during the trial, exemplary damages as may be reasonably assessed by the court, and attorney's fees of P50,00.00. Defendant-appellant answered the complaint thereof and setting up special and affirmative defenses. After trial, judgment was rendered as stated in the opening paragraph hereof from which both parties appealed . . . . (pp. 35-37, Rollo.)

Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to initiate the action to compel the release of the real estate mortgage and the delivery of the owner's duplicate copy of the certificate of title, respondent court noted that Wilson Chua can be considered a real-property-in-interest because he is the successor-in-interest of the Guarins who is naturally entitled to the realty as against the so-called right of Provident Savings Bank, as mortgagee, to foreclose the mortgage which had become stale through sheer lapse of time. The matter of novation in the form of substitution of the debtor without corresponding acquiesence of the mortgagee was viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the change of obligors, which act was construed as equivalent to consent.

To the question of whether petitioner can still foreclose the subject realty, respondent court gave a negative response on account of the absence of proof to indicate that the bank was precluded from collecting indebtedness while it was under receivership from September, 1972 until July 20,1981. Thus, there was no legal interruption of the pres-criptive period to speak of, said respondent court, which intervened between June 20, 1967, the date the mortgage matured, and June 20, 1977 the last day within which petitioner could have foreclosed the mortgage.

Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's assumption of the mortgage on July 10, 1986 as tantamount to an explicit acknowledgement that the obligation was outstanding and had not yet prescribed.

As a result of these observations, respondent court reversed the decision of the trial court insofar as it ordered Wilson Chua to pay the sum of P591,088.80 to the bank and affirmed the other dispositions made the court of origin (p. 42, Rollo).

Following the unfavorable judgment, the bank filed a motion for reconsideration and a motion for new trial premised on newly discovered evidence relative to a statement of account unearthed by the bank's liaison officer from the loose folders on October 18, 1990 which it believed to be of legal significance to the case. But respondent court was unperturbed, observing that the vital piece of document could have been located in the course of trial had the slightest degree of prudence been exercised, considering that the statement of account sprouted the same day the liaison officer was advised to take an inventory of the records ( p. 45, Rollo).

Hence, the petitioner at bar.

Consistent with its theory premised on fuerza major, petitioner insists that it can not be blamed for not lifting a finger, so speak, during the period when it was enjoined by the Central Bank on September 15, 1972 from transacting business until this Court affirmed on July 27,1981 the decision of the Court of Appeals annulling the proscription against petitioner in Central Bank vs. Court of Appeals (106 SCRA 143 [1981]. We are not unaware of the rule laid down in Teal Motor Co. vs. Court of First Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on the Philippine Commercial Laws, 1986 Revised ed., p.125) that the appointment of a receiver does not dissolve the corporation nor does it interfere with the exercise of its corporate rights. But this principles is, of course, applicable to a situation where there is no restraint imposed on the corporation, unlike in the case at bar where petitioner Provident Savings Bank was specifically forbidden and immobilized from doing business in the Philippines on September 15, 1972 through Monetary Board Resolution No. 1766 until 1981 when the decision in Central Bank vs. Court of Appeals (supra, at p. 150) was rendered. The question which immediately crops up is whether a foreclose proceeding falls within the purview of the phrase "doing business". In Mentholatum Co., Inc., et al. vs. Mangaliman, et al. (72 Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term was construed by Justice Laurel to refer to:

. . . a continuity of commercial dealings and arrangements, and contemplates to that extent, the exercise of some of the words or the normally incident to, and in progressive prosecution of, the purpose ands object of its organizations. (p. 528; emphasis supplied.)

Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as a preparatory measure to acquiring or holding property for petitioner as a saving bank under Section 34 of the General Banking Act. Like any other banking institution, petitioner is vested with the usual attributes and powers of a corporation under Section 36 of the Corporation Code (Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 475). The prerogative of a bank to foreclose is implicit from and is even necessary to enforce collection of secured debts under Section 36(11) and 45 of the Corporation Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher, 206; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1990 ed., p. 325).

When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such bank, that bank would not be able to do new business, i.e., to grant new loans or to accept new deposits. However, the receiver of the bank is obliged to collect debts owing to the bank, which debts form part of the assets of the bank. The receiver must assemble the assets and pay the obligation of the bank under receivership, and take steps to prevent dissipation of such assets. Accordingly, the the receiver of the bank is obliged to collect pre-existing debts due to the bank, and in connection

therewith, to foreclose mortgages securing debts. This is not to ignore The Philippine Trust Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply rejected the objections of certain creditors to the report of a receiver, that is, objections that the receiver did not report the collection made before the beginning of his receivership. It would follow that the bank is bound by the acts, or failure to act, of the receiver. At the same time, the receiver is liable to the bank for culpable or negligent failure to collect the assets of such bank and to safeguard said assets.

Having arrived at the conclusion that the foreclosure is part of bank's business activity which could not have been pursued by the receiver then because of the circumstances discussed in the Central Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the prohibition imposed by the Monetary Board against petitioner from transacting business, until the directive of the board was nullified in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far from the possession cease and when prescription starts anew, it will be entirely a new one. This concept should not be equated with suspension where the past period is included in the computation being added to the period after prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when the closure of was set aside in 1981, the period of ten years within which to foreclose under Article 1142 of the New Civil Code began to run again and, therefore, the action filed on August 21, 1986 to compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's own suit foreclosure had prescribed. What exacerbates the situation is the letter of private respondent requesting petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by the mortgage as the result of the Deed of Sale executed by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written communication is synonymous to an express acknowledgment of the obligation and had the effect of interrupting the prescription for the second time (Article 1155, New Civil Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And this piece of document necessarily estops private respondent from setting up prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right of the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo).

Contrary to respondent court's prescription of the existence of novation, the evidence at hand does not buttress a finding along this line from the mere fact that petitioner supposedly did not question the substitution when the bank reacted to private respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped respondent court's attention was the condition imposed by the petitioner that it will grant private respondent's request if the latter will also shoulder the obligation incurred by Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo). The consent of the petitioner to the substitution, as creditor, was thus erroneously appreciated.

With the conclusions reached, we need not discuss the other issues raised in the petition.

WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990, including the resolution dated February 6, 1991 of respondent court are hereby set aside and another one entered dismissing Wilson Chua's complaint. No special pronouncement is made to costs.

Bidin, Davide, Jr., and Romero, JJ., concur.

Feliciano, J., concurs in the result.

THIRD DIVISION

[G.R. No. 95326. March 11, 1999]

ROMEO P. BUSUEGO, CATALINO F. BANEZ and RENATO F. LIM, petitioners, vs. THE HONORABLE COURT OF APPEALS and THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, respondents.

D E C I S I O N

PURISIMA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking a reversal of the Decision [1], dated September 14, 1990, of the Court of Appeals in CA-G.R. CV No. 23656.

As culled from the records, the facts of the case are as follows:

The 16th regular examination of the books and records of the PAL Employees Savings and Loan Association, Inc. ("PESALA") was conducted from March 14 to April 16, 1988 by a team of CB examiners headed by Belinda Rodriguez. Following the said examination, several anomalies and irregularities committed by the herein petitioners; PESALA's directors and officers, were uncovered, among which are:

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

2. Conflict of interest in the conduct of business

3. Unwarranted declaration and payment of dividends

4. Commission of unsound and unsafe business practices.

On July 19, 1988,, Central Bank ("CB") Supervision and Examination Section ("SES") Department IV Director Ricardo. F. Lirio sent a letter to the Board of Directors of PESALA inviting them to a conference on July 21, 1988 to discuss subject findings noted in the said 16th regular examination, but petitioners did not attend such conference.

On July 28, 1988, petitioner Renato Lim wrote the PESALA's Board of Directors explaining his side on the said examination of PESALA's records and requesting that a copy of his letter be furnished the CB, which was fortwith made by the Board.[2]

On July 29, 1988, PESALA's Board of Directors sent to Director Lirio a letter concerning the 16th regular examination of PESALA's records.

On September 9, 1988, the Monetary Board adopted and issued MB Resolution No. 805 the pertinent provisions of which are as follows:

"1. To note the report on the examination of the PAL Employees' Savings and Loan Association, Inc. (PESALA) as of December 31, 1987, as submitted in a memorandum of the Director, Supervision and Examination Section (SES) Department IV, dated August 19, 1988;

2. To require the board of directors of PESALA to immediately inform the members of PESALA of the results of the Central Bank examination and their effects on the financial condition of the Association;

x x x

5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato Lim in the Sector's watchlist to prevent them from holding responsible positions in any institution under Central Bank supervision;

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

7. To require the board of directors of PESALA to file civil and criminal cases against Messrs. Catalino Banez, Romeo Busuego and Renato Lim for all the misfeasance and malfeasance committed by them, as warranted by the evidence;

8. To require the board of directors of PESALA to improve the operations of the Association, correct all violations noted, and adopt internal control measures to prevent the recurrence of similar incidents as shown in Annex E of the subject memorandum of the Director, SES Department IV;"[3]

xxx xxx xxx

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

On January 26 1989, the said court issued a temporary restraining order [5] enjoining the defendant, the Monetary Board of the Central Bank, (now Banko Sentral ng Pilipinas) from including the names of petitioners in the watchlist.

On February 10, 1989, the same trial court issued a writ of preliminary injunction [6], conditioned upon the filing by petitioners of a bond in the amount of Ten Thousand (P10,000.00) Pesos each. The Monetary Board presented a Motion for Reconsideration[7] of the said Order, but the same was denied.

On September 11, 1989, the trial court handed down its Decision,[8] disposing thus:

"WHEREFORE, judgment is hereby rendered declaring Monetary Board Resolution No. 805 as void and inexistent. The writ of preliminary prohibitory injunctions issued on February 10, 1989 is deemed permanent. Costs against respondent."

The Monetary Board appealed the aforesaid Decision to the Court of Appeals which came out with a Decision [9] of reversal on September 14, 1990, the decretal portion of which is to the following effect:

"WHEREFORE, the decision appealed from is hereby reversed and another one entered dismissing the petition for injunction."

Dissatisfied with the said Decision of the Court of Appeals, petitioners have come to this Court via the present petition for review on certiorari.

On June 5, 1992, petitioners filed an "Urgent Motion for the Immediate Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction against the Secretary of Justice and the City Prosecutor of Pasay" [10] stating that several complaints were lodged against the petitioners before the Office of the City Prosecutor of Pasay City pursuant to Monetary Board Resolution No. 805; that the said complaints were dismissed by the City Prosecutor and the dismissals were appealed to the Secretary of Justice for review, some of which have been reversed already. Petitioners prayed that a Temporary Restraining Order and/or Writ of Preliminary Injunction issue "restraining and enjoining the Secretary of Justice and the City Prosecutor of Pasay City from proceeding and taking further actions, and more specially from filing Informations in I.S. Nos.-90-1836; 90-1831; 90-1835; 90-1832; 90-1248; 90-1249; 90-3031; 90-3032; 90-1837; 90-1834, pending the final resolution of the case at bar xxx." However, in the Resolution[11] dated September 9, 1992, the court denied the said motion.

The petition poses as issues for resolution.

I

WHETHER OR NOT THE PETITIONERS WERE DEPRIVED OF THEIR RIGHT TO A NOTICE AND THE OPPORTUNITY TO BE HEARD BY THE MONETARY BOARD PRIOR TO ITS ISSUANCE OF MONETARY BOARD RESOLUTION NO. 805.

II

WHETHER OR NOT THE RESPONDENT BOARD IS LEGALLY BOUND TO OBSERVE THE ESSENTIAL REQUIREMENTS OF DUE PROCESS OF A VALID CHARGE, NOTICE AND OPPORTUNITY TO BE HEARD INSOFAR AS THE PETITIONERS' SUBJECT CASE IS CONCERNED.

III

WHETHER OR NOT MONETARY BOARD RESOLUTION NO. 805 IS NULL AND VOID FOR BEING VIOLATIVE OF PETITIONERS' RIGHTS TO DUE PROCESS.

With respect to the first issue, the trial court said:

"The evidence submitted preponderates in favor of petitioners. The deprivation of petitioners' rights in the Resolution undermines the constitutional guarantee of due process. Petitioners were never notified that they were being investigated, much so, they were not informed of any charges against them and were not afforded the opportunity to adduce countervailing evidence so as to deserve the punitive measures promulgated in Resolution No. 805 of the Monetary Board. xxx”[12]

The foregoing disquisition by the trial court is untenable under the facts and circumstances of the case. Petitioners were duly afforded their right to due process by the Monetary Board, it appearing that:

1. Petitioners were invited by Director Lirio to a conference scheduled for July 21, 1988 to discuss the findings made in the 16th regular examination of PESALA's records. Petitioners did not attend, said conference;

2. Petitioner Renato Lim's letter of July 28, 1988 to PESALA's Board of Directors, explaining his side of the controversy, was forwarded to the Monetary Board which the latter considered in adopting Monetary Board Resolution No. 805; and

3. PESALA's Board of Director's letter, dated July 29, 1988, to the Monetary Board, explaining the Board's side of the controversy, was properly considered in the adoption of Monetary Board Resolution No. 805.

Petitioners therefore cannot complain of deprivation of their right to due process, as they were given ample opportunity by the Monetary Board to air their Submission and defenses as to the findings of irregularity during the said 16th regular examination. The essence of due process is to be afforded a reasonable opportunity to be heard and to submit any evidence one may have in support of his defense. [13] What is offensive to due process is the denial of the opportunity to be heard.[14] Petitioners having availed of their opportunity to present their position to the Monetary Board by their letters-explanation, they were not denied due process[15].

Petitioners cite Ang Tibay v. CIR[16] and assert that the following requisites of procedural due process were not observed by the Monetary Board:

1. The right to a hearing, which includes the right to present one's case and submit evidence in support thereof;

2. The tribunal must consider the evidence presented;

3. The decision must have something to support itself;

4. The evidence must be substantial;

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

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

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

Contrary to petitioners' allegation, it appears that the requisites of procedural due process were complied with by the Monetary Board before it issued the questioned Monetary Board Resolution No. 805. Firstly, the petitioners were invited to a conference to discuss the findings gathered during the 16th regular examination of PESALA's records. (The requirement of a hearing is complied with as long as there was an opportunity to be heard, and not necessarily that an actual hearing was conducted.[17]) Secondly, the Monetary Board considered the evidence presented. Thirdly, fourthly and fifthly, Monetary Board Resolution No. 805 was adopted on the basis of said findings unearthed during the 16th regular examination of PESALA's records and derived from the letter-comments submitted by the parties. Sixthly, the members of the Monetary Board acted independently on their own in issuing subject Resolution, placing reliance on the said findings made during the 16th regular examination. Lastly, the reason for the issuance of Monetary Board Resolution No. 805 is readily apparent, which is to prevent further irregularities from being committed and to prosecute the officials responsible therefor.

With respect to the second issue, there is tenability in petitioners' contention that the Monetary Board, as an administrative agency, is legally bound to observe due process, although they are free from the rigidity of certain procedural requirements. As held in Adamson and Adamson, Inc. v. Amores[18]:

"While administrative tribunals exercising quasi-judicial functions are free from the rigidity of certain procedural requirements they are bound by law and practice to observe the fundamental and essential requirements of due process in justiciable cases presented before them. However, the standard of due process that must be met in administrative tribunals allows a certain latitude as long as the element of fairness is not ignored. Hence, there is no denial of due process where records show that hearings were held with prior notice to adverse parties. But even in the absence of previous notice, there is no denial of procedural due, process as long as the parties are given the opportunity to be heard."

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

“x x x

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

(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for unsafe and unsound practices or for reason of insolvency. x x x

x x x.

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

x x x" (italics supplied)

Anent the third issue, petitioners theorize that Monetary Board Resolution No. 805 is null and void for being violative of petitioners' right to due process. To support their stance, they cite the trial court's ruling, to wit:

"A reading of Monetary Board Resolution No. 805 discloses that it imposes administrative sanctions against petitioners. In fact, it does not only penalize petitioners by including them in the watchlist to prevent them from holding responsible positions in any institution under Central Bank supervision,' it mandates the PESALA Board of Directors as well to file Civil and Criminal charges against them 'for all the misfeasance and malfeasance committed by them, as warranted by the evidence.' Monetary Board Resolution No. 805 virtually deprives petitioners their respective gainful employment, and at the same time marks them for judicial prosecution. The crucial question here is that were petitioners afforded due process in the investigations conducted which prompted the issuance of Monetary Board Resolution No. 805?

x x x Although the Monetary Board is free from the rigidity of certain procedural requirements, it failed 'to observe the essential requirement of due process' (Adamson and Adamson, Inc. v. Amores, 152 SCRA 237) specifically its failure to afford petitioners the opportunity to be heard. In short, there is a clear showing of arbitrariness resulting in an irreparable injury against petitioners as the Resolution certainly affects their 'life, liberty and property.'

Monetary Board Resolution No. 805 Violates basic and essential requirements. It must therefore be, as it is hereby, declared, as void and inexistent because among other things, it openly derogates the fundamental rights of petitioners."

Petitioners opine that with the issuance of Monetary Board Resolution No. 805, "they are now barred from being elected or designated as officers again of PESALA, and are likewise prevented from future engagements or employments in all institutions under the supervision of the Central Bank thereby virtually depriving them of the opportunity to seek employments in the field which they can excel and are best fitted." According to them, the Monetary Board is not vested with "the authority to disqualify persons from occupying positions in institutions under the supervision of the Central Bank without proper notice and hearing" nor is it vested with authority "to file civil and criminal cases against its officers/directors for suspected fraudulent acts."

Petitioners' contentions are untenable. It must be remembered that the Central Bank of the. Philippines (now Bangko Sentral ng Pilipinas), through the Monetary Board, is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country [19] and is granted the power of supervision and examination over banks and non-bank financial institutions performing quasi-banking functions, of which savings and loan associations, such as PESALA, form part of[20].

The special law governing savings and loan association is Republic Act No. 3779, as amended, otherwise known as the "Savings and Loan Association Act." Said law authorizes the Monetary Board to conduct regular yearly examinations of the books and records of savings and loan associations, to suspend, a savings and loan association for violation of law, to decide any controversy over the obligations and duties of directors and officers, and to take remedial measures, among others. Section 28 of Rep. Act No. 3779, reads:

"SEC. 28. Supervisory powers over savings and loan associations. - In addition to whatever powers have been conferred by the foregoing provisions, the Monetary Board shall have the power to exercise the following:

x x x

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

x x x

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

x x x

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

x x x

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

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

The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as investigations or examinations may be conducted with or without prior notice "but always with fairness and reasonable opportunity for the association or any of its officials to give their side." As may be gathered from the records, the said requirement was properly complied with by the respondent Monetary Board.

We sustain the ruling of the Court of Appeals that petitioners' suspension was only preventive in nature and therefore, no notice or, hearing was necessary. Until such time that the petitioners have proved their innocence, they may be preventively suspended from holding office so as not to influence the conduct of investigation, and to prevent the commission of further irregularities.

Neither were petitioners deprived of their lawful calling as they are free to look for another employment so long as the agency or company involved is not subject to Central Bank control and supervision. Petitioners can still practise their profession or engage in business as long as these are not within the ambit of Monetary Board Resolution No. 805.

All things studiedly considered, the court upholds the validity of Monetary Board Resolution No. 805 and affirms the decision of the respondent court.

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

SO ORDERED.

Romero, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 169617 April 4, 2007

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners, vs.SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO LANDRITO, as their Attorney-in-Fact, Respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals,1 dated 31 August 2005, reversing the Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the interest rate of the loan between the parties at 12% per annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both died during the pendency of the case before the Honorable Court of Appeals.2

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by their son and attorney-in-fact, Zoilo Landrito.3

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a real estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as interest for the first month which was equivalent to five percent of the principal debt, andP7,500.00 was further deducted as service fee. Thus, they actually received a net amount of P325,000.00. The agreement, however, provided that the principal indebtedness earns "interest at the legal rate."4

After three months, when the debt became due and demandable, the Spouses Landrito were unable to pay the principal, and had not been able to make any interest payments other than the amount initially deducted from the proceeds of the loan. On 29 December 1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real Estate Mortgage. The loan was restructured in such a way that the unpaid interest became part of the principal, thus increasing the principal to P385,000. The new loan agreement adopted all other terms and conditions contained in first agreement.5

Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent renewals, the same terms and conditions found in the first agreement were retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March 1988, it was increased to P647,000.00. And on 21 October 1988, the principal was increased to P874,125.00.6 At the hearing before the trial court, Zoilo Espiritu testified that the increase in the principal in each amendment of the loan agreement did not correspond to the amount delivered to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid interest and other charges.7

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged property on 31 October 1990. During the auction sale, the property was sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriff’s Certificate of Sale was annotated on the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to redeem the property. 8

The Spouses Landrito failed to redeem the subject property although they alleged that they negotiated for the redemption of the property as early as 30 October 1991. While the negotiated price for the land started atP1,595,392.79, it was allegedly increased by the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two manager’s checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to accept the same. They also alleged that the Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until July 1992 to pay the said amount. However, upon inquiry, they found out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of Ownership and registered the mortgaged property in their name, and that the Register of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against the Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.9 Among the allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to one’s moral senses."10

The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial court ordered in its Decision, dated 13 December 1995:11

WHEREFORE, all the foregoing premises considered, the herein complaint is hereby dismissed forthwith.

Without pronouncements to costs.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997 Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial court’s decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on the first month and the varying interest rates imposed for the succeeding months contravened the provisions of the Real Estate Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum, would be imposed. It also ruled that although the Usury Law had been rendered ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of interest rates which are found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of the loan at the legal rate, or 12% per annum.12

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the property within the one-year redemption period provided by law, the action for reconveyance remained as a remedy available to a landowner whose property was wrongfully registered in another’s name since the subject property has not yet passed to an innocent purchaser for value.13

In the decretal portion of its Decision, the Court of Appeals ruled14:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated December 13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1) The legal rate of 12% per annum is hereby FIXED to be applied as the interest of the loan; and (2) Conditioned upon the payment of the loan, defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer Certificate of Title No. S-48948 to appellant spouses Maximo and Paz Landrito.

The case is REMANDED to the Trial Court for the above determination.

Hence, the present petition. The following issues were raised:15

I

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.

II

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN RESPONDENTS’ ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE.

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn interest at the legal rate." The agreement contained no other provision on interest or any fees or charges incident to the debt. In at least three contracts, all designated as Amendment of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that the increase in the principal in each of the Amendments of the Real Estate Mortgage consists of interest and charges. The Spouses Espiritu alleged that the parties had agreed on the interest and charges imposed in connection with the loan, hereunder enumerated:

1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service fee.

2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986.

3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986 and the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987.

4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988.

5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125 principal in the Amendment of the Real Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was accumulated over only two years and one month. These charges are not found in any written agreement between the parties. The records fail to show any computation on how much interest was charged and what other fees were imposed. Not only did lack of transparency characterize the aforementioned agreements, the interest rates and the service charge imposed, at an average of 6.39% per month, are excessive.

In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its citizens from a lack of awareness of the true cost of credit by assuring the full disclosure of such costs. Section 4, in connection with Section 3(3)16 of the said 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. Section 617 of the same law imposes on anyone who willfully violates these provisions, sanctions which include civil liability, and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already prescribed, this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed interest and charges, in connection with the loan. This is aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the law in connection with the transparency of credit transactions. In addition, the Civil Code clearly provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on interest and charges that were found excessive, iniquitous, and unconscionable. In the case of Medel v. Court of Appeals,18 the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on the interest rate and stipulated the same in a written agreement, it nevertheless declared such stipulation as void and ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly interest imposed on four separate loans with a total of P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per annum.

In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide latitude to agree on any interest rate, 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.21

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived.22 The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of the loan.23 Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.

While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings held on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriff’s Sale24 dated 5 October 1990, and in the Certificate of Sale25 dated 31 October 1990, the amount designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter26 dated 12 December 1989, Zoilo Espiritu demanded from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal of P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the amount of P874,125.00 cannot be considered as a valid demand for payment. For an obligation to become due, there must be a valid demand.27 Nor can the foreclosure proceedings be considered valid since the total amount of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous and exorbitant. If the foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the Spouses Landrito will have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their part, the Spouses Landrito failed to redeem the mortgaged property because they were unable to raise the total amount, which was grossly inflated by the excessive interest imposed. Their attempt to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October 1991, is reflected in a letter, which creditor-mortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein.28 They also attached in their Complaint copies of two checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which were allegedly refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a copy of a handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.30 In all these instances, the Spouses Landrito had tried, but failed, to pay an amount way over the indebtedness they were supposed to pay – i.e., P350,000.00 and 12% interest per annum. Thus, it is only proper that the Spouses Landrito be given the opportunity to repay the real amount of their indebtedness.

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the said amount.31 In this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid debt. The foreclosure sale conducted upon their failure to payP874,125 in 1990 should be nullified since the amount demanded as the outstanding loan was overstated; consequently it has not been shown that the mortgagors – the Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together with its reasonable rates of interest were applied to the obligation, only a small part of its original loans would actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded to said excessive and iniquitous interest.

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property. The Torrens system does not create or vest title where one does not have a rightful claim over a real property. It only confirms and records title already existing and vested. It does not permit one to enrich oneself at the expense of another.32 Thus, the decree of registration, even after the lapse of one (1) year, cannot attain the status of indefeasibility.

Significantly, the records show that the property mortgaged was purchased by the Spouses Espiritu and had not been transferred to an innocent purchaser for value. This means that an action for reconveyance may still be availed of in this case.33

Registration of property by one person in his or her name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance.34 This is based on Article 1465 of the Civil Code which states that:

Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for benefit of the person from whom the property comes.

The action for reconveyance does not prescribe until after a period of ten years from the date of the registration of the certificate of sale since the action would be based on implied trust.35 Thus, the action for reconveyance filed on 31 October 1992, more than one year after the Sheriff’s Certificate of Sale was registered on 9 January 1991, was filed within the prescription period.

It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled and the principal obligation stands. In addition, the interest is not completely removed; rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the principal, with its recomputed interest which runs from the time the loan agreement was entered into on 5 September 1986 until the present, there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file the action for reconveyance filed before the trial court or even to file the appeal from the judgment of the trial court, by virtue of the Special Power of Attorney dated 30 September 1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue.36

The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged property. It authorized Zoilo Landrito:

2. To make, sign, execute and deliver corresponding pertinent contracts, documents, agreements and other writings of whatever nature or kind and to sue or file legal action in any court of the Philippines, to collect, ask demands, encash checks, and recover any and all sum of monies, proceeds, interest and other due accruing, owning, payable or belonging to me as such owner of the afore-mentioned property. (Emphasis provided.)

Zoilo Landrito’s authority to file the case is clearly set forth in the Special Power of Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito filed the reconveyance case with the full authority of his mother, Paz Landrito, who attended the hearings of the case, filed in her behalf, without making any protest.38She even testified in the same case on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had authorized her son to file the action for reconveyance, in her behalf, before the trial court.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the interest rate of the loan between the parties at 12% per annum, and ordering the Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan together with herein fixed rate of interest. Costs against the petitioners.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 184122 January 20, 2010

BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner, vs.SPS. NORMAN AND ANGELINA YU and TUANSON BUILDERS CORPORATION represented by PRES. NORMAN YU, Respondents.

D E C I S I O N

ABAD, J.:

This case is about the propriety of a summary judgment in resolving a documented claim of alleged excessive penalty charges, interest, attorney’s fees, and foreclosure expenses imposed in an extrajudicial foreclosure of mortgage.

The Facts and the Case

Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson Trading, and Tuanson Builders Corporation (Tuanson Builders) borrowed various sums totaling P75 million from Far East Bank and Trust Company. For collateral, they executed real estate mortgages over several of their properties,1 including certain lands in Legazpi City owned by Tuanson Trading.2 In 1999, unable to pay their loans, the Yus and Tuanson Builders requested a loan restructuring,3 which the bank, now merged with Bank of the Philippine Islands (BPI), granted.4 By this time, the Yus’ loan balance stood

at P33,400,000.00. The restructured loan used the same collaterals, with the exception of Transfer Certificate of Title 40247 that secured a loan of P1,600,000.5

Despite the restructuring, however, the Yus still had difficulties paying their loan. They asked BPI to release some of the mortgaged lands since their total appraised value far exceeded the amount of the remaining debt. When BPI ignored their request, the Yus withheld payments on their amortizations. Thus, BPI extrajudicially foreclosed6 the mortgaged properties in Legazpi City and in Pili, Camarines Sur. But the Yus sought by court action against BPI and the winning bidder, Magnacraft Development Corporation (Magnacraft), the annulment of the foreclosure sale.

In the course of the proceedings, however, the Yus and Magnacraft entered into a compromise agreement7 that affirmed the latter’s ownership of three out of the 10 parcels of land that were auctioned. By virtue of this agreement, the court dismissed the complaint against Magnacraft,8 without prejudice to the Yus filing a new one against BPI.

On October 24, 2003 the Yus filed their new complaint before the Regional Trial Court (RTC) of Legazpi City, Branch 1, in Civil Case 10286 against BPI for recovery of alleged excessive penalty charges, attorney’s fees, and foreclosure expenses that the bank caused to be incorporated in the price of the auctioned properties.91avvphi1

In its answer,10 BPI essentially admitted the foreclosure of the mortgaged properties for P39,055,254.95, broken down as follows: P33,283,758.73 as principal debt; P2,110,282.78 as interest; and P3,661,213.46 as penalty charges.11 BPI qualified that the total of P39,055,254.95 corresponded only to the Yus’ debt as of date of filing of the petition.12 The notice of the auction sale said that the total was "inclusive of interest, penalty charges, attorney’s fee and expenses of this foreclosure."13

BPI further admitted that its bid of P45,090,566.41 for all the auctioned properties was broken down as follows:14

Principal P 32,188,723.07

Interest 2,763,088.93

Penalty Charges 5,568.649.09

Sub-total…………… P 40,520,461.09

Add: 10% Attorney’s Fees 4,052,046.11

Litigation Expenses & Interest 446,726.74

Cost of Publication & Interest 71,332.47

TOTAL……………. P 45,090,566.41

BPI also admitted that Magnacraft submitted the highest and winning bid of P45,500,000.00.15 The sheriff turned over this amount to BPI.16 According to BPI, it in turn remitted to the Clerk of Court the P409,433.59 difference between its bid price and that of Magnacraft’s.17 Although the proceeds of the sale exceeded the P39,055,254.95 stated in the notice of sale by P6,035,311.46,18 the bid amount increased because it now included litigation expenses and attorney’s fees as well as interests and penalties as recomputed.19

BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili, Camarines Sur that secured a remaining debt of P5,562,000.20 BPI made the lone bid21 of P1,701,934.09.22

The Yus had three causes of action against BPI.

First. The bank imposed excessive penalty charges and interests: over P5 million in penalty charges computed at 36% per annum compared to the 12% per annum that the Court fixed in the cases of State Investment House, Inc. v. Court of Appeals23 and Ruiz v. Court of Appeals.24 In addition, BPI collected a 14% yearly interest on the principal, bringing the combined penalty charges and interest to 50% of the principal per annum.

Second. BPI also imposed a charge of P4,052,046.11 in attorney’s fees, the equivalent of 10% of the principal, interest, and penalty charges.

Third. BPI did not provide documents to support its claim for foreclosure expenses of P446,726.74 and cost of publication of P518,059.21.

As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to claim more than the amount stated in its published notices. Consequently, it must turn over the excess bid of P6,035,311.46.

After pre-trial, the Yus moved for summary judgment,25 pointing out that based on the answer,26 the common exhibits of the parties,27 and the answer to the written interrogatories to the sheriff,28 no genuine issues of fact exist in the case. The Yus waived their claim for moral damages so the RTC can dispose of the case through a summary judgment.29

Initially, the RTC granted only a partial summary judgment. It reduced the penalty charge of 36% per annum30 to 12% per annum until the debt would have been fully paid but maintained the attorney’s fees as reasonable considering that BPI already waived the P1,761,511.36 that formed part of the attorney’s fees and reduced the rate of attorney’s fees it collected from 25% to 10% of the amount due. The RTC ruled that facts necessary to resolve the issues on penalties and fees had been admitted by the parties thus dispensing with the need to receive evidence.31

Still, the RTC held that it needed to receive evidence for the resolution of the issues of (1) whether or not the foreclosure and publication expenses were justified; (2) whether or not the foreclosure of the lot in Pili, Camarines Sur, was valid given that the proceeds of the foreclosure of the properties in Legazpi City sufficiently covered the debt; and (3) whether or not BPI was entitled to its counterclaim for attorney’s fees, moral damages, and exemplary damages.32

The Yus moved for partial reconsideration.33 They argued that, since BPI did not mark in evidence any document in support of the foreclosure expenses it claimed, it may be assumed that the bank had no evidence to prove such expenses. As regards their right to the pro-rating of their debt among the mortgaged properties, the Yus pointed out that BPI did not dispute the fact that the proceeds of the sale of the properties in Legazpi City fully satisfied the debt. Thus, the court could already resolve without trial the issue of whether or not the foreclosure of the Pili property was valid.

Further, the Yus sought reconsideration of the reduction of penalty charges and the allowance of the attorney’s fees. They claimed that the penalty charges should be deleted for violation of Republic Act (R.A.) 3765 or the Truth in Lending Act. BPI’s disclosure did not state the rate of penalties on late amortizations. Also, the Yus asked the court to reduce the attorney’s fees from 10% to 1% of the amount due. On January 3, 2006 the RTC reconsidered its earlier decision and rendered a summary judgment:34

1. Deleting the penalty charges imposed by BPI for non-compliance with the Truth in Lending Act;

2. Reducing the attorney’s fees to 1% of the principal and interest;

3. Upholding the reasonableness of the foreclosure expenses and cost of publication, both with interests;

4. Reiterating the turnover by the Clerk of Court to the Yus of the excess in the bid price;

5. Deleting the Yus’ claim for moral damages they having waived it;

6. Denying the Yus’ claim for attorney’s fees for lack of basis; and

7. Dismissing BPI’s counterclaim for moral and exemplary damages and for attorney’s fees for lack of merit considering that summary judgment has been rendered in favor of the Yus.

BPI appealed the decision to the Court of Appeals (CA) in CA-G.R. CV 86577. But the CA rendered judgment on January 23, 2008, affirming the RTC decision in all respects. And when BPI asked for reconsideration,35 the CA denied it on July 14, 2008,36 hence, the bank’s recourse to this Court.

The Issues Presented

BPI presents the following issues:

1. Whether or not the case presented no genuine issues of fact such as to warrant a summary judgment by the RTC; and

2. Where summary judgment is proper, whether or not the RTC and the CA a) correctly deleted the penalty charges because of BPI’s alleged failure to comply with the Truth in Lending Act; b) correctly reduced the attorney’s fees to 1% of the judgment debt; and c) properly dismissed BPI’s counterclaims for moral and exemplary damages, attorney’s fees, and litigation expenses.

The Court’s Rulings

One. A summary judgment is apt when the essential facts of the case are uncontested or the parties do not raise any genuine issue of fact.37 Here, to resolve the issue of the excessive charges allegedly incorporated into the auction bid price, the RTC simply had to look at a) the pleadings of the parties; b) the loan agreements, the promissory note, and the real estate mortgages between them; c) the foreclosure and bidding documents; and d) the admissions and other disclosures between the parties during pre-trial. Since the parties admitted not only the existence, authenticity, and genuine execution of these documents but also what they stated, the trial court did not need to hold a trial for the reception of the evidence of the parties.

BPI contends that a summary judgment was not proper given the following issues that the parties raised: 1) whether or not the loan agreements between them were valid and enforceable; 2) whether or not the Yus have a cause of action against BPI; 3) whether or not the Yus are proper parties in interest; 4) whether or not the Yus are estopped from questioning the foreclosure proceeding after entering into a compromise agreement with Magnacraft; 5) whether or not the penalty charges and fees and expenses of litigation and publication are excessive; and 6) whether or not BPI violated the Truth in Lending Act.38

But these are issues that could be readily resolved based on the facts established by the pleadings and the admissions of the parties.39 Indeed, BPI has failed to name any document or item of fact that it would have wanted to adduce at the trial of the case. A trial would have been such a great waste of time and resources.

Two. Both the RTC and CA decisions cited BPI’s alleged violation of the Truth in Lending Act and the ruling of the Court in New Sampaguita Builders Construction, Inc. v. Philippine National Bank40 to justify their deletion of the penalty charges. Section 4 of the Truth in Lending Act states that:

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.

Penalty charge, which is liquidated damages resulting from a breach,41 falls under item (6) or finance charge. A finance charge "represents the amount to be paid by the debtor incident to the extension of credit."42 The lender may provide for a penalty clause so long as the amount or rate of the charge and the conditions under which it is to be paid are disclosed to the borrower before he enters into the credit agreement.

In this case, although BPI failed to state the penalty charges in the disclosure statement, the promissory note that the Yus signed, on the same date as the disclosure statement, contained a penalty clause that said: "I/We jointly and severally, promise to further pay a late payment charge on any overdue amount herein at the rate of 3% per month." The promissory note is an acknowledgment of a debt and commitment to repay it on the date and under the conditions that the parties agreed on.43 It is a valid contract absent proof of acts which might have vitiated consent.44

The question is whether or not the reference to the penalty charges in the promissory note constitutes substantial compliance with the disclosure requirement of the Truth in Lending Act.45 The RTC and CA relied on the ruling in New Sampaguita as authority that the non-disclosure of the penalty charge renders its imposition illegal. But New Sampaguita is not attended by the same circumstances. What New Sampaguita disallowed, because it was not mentioned either in the disclosure statement or in the promissory note, was the unilateral increase in the rates of penalty charges that the creditor imposed on the borrower. Here, however, it is not shown that BPI increased the rate of penalty charge that it collected from the Yus. 46

The ruling that is more in point is that laid down in The Consolidated Bank and Trust Corporation v. Court of Appeals,47 a case cited in New Sampaguita. The Consolidated Bank ruling declared valid the penalty charges that were stipulated in the promissory notes.48 What the Court disallowed in that case was the collection of a handling charge that the promissory notes did not contain.

The Court has affirmed that financial charges are amply disclosed if stated in the promissory note in the case of Development Bank of the Philippines v. Arcilla, Jr.49 The Court there said, "Under Circular 158 of the Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and signed by the borrower. 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." In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal.

Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable and iniquitous.50Considering that BPI had already received over P2.7 million in interest and that it seeks to impose the penalty charge of 3% per month or 36% per annum on the total amount due—principal plus interest, with interest not paid when due added to and becoming part of the principal and also bearing interest at the same rate—the Court finds the ruling of the RTC in its original decision51 reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per month52 is imposed.

Three. As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same may likewise be equitably reduced.53 The CA correctly affirmed the RTC Order54 to reduce it from 10% to 1% based on the following reasons: (1) attorney’s fee is not essential to the cost of borrowing, but a mere incident of collection;55(2) 1% is just and adequate because BPI had already charged foreclosure expenses; (3) attorney’s fee of 10% of the total amount due is onerous considering the rote effort that goes into extrajudicial foreclosures.

WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals Decision in CA-G.R. CV 86577 dated January 23, 2008 subject to the RESTORATION of the penalty charge of 12% per annum or 1% per month of the amount due computed from date of nonpayment or November 25, 2001.

SO ORDERED.