Contents

Fidelity Savings and Mortgage Bank vs. Cenzon, 184 SCRA 141 (1990) ................................................................................. 4
Cancio vs. Court of Appeals, 154 SCRA 731 (1987)............................................................................................................... 12
Salvacion vs. Central Bank, 278 SCRA 27 (1997)................................................................................................................... 19
Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360 (1990).................................................................... 39
Bank of the Philippine Islands vs. Intermediate Appellate Court, 206 SCRA 408 (1992)...................................................... 46
Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641 (2000) .......................................................................... 52
Consolidated Bank and Trust Corporation vs. Court of Appeals, 410 SCRA 562 (2003)....................................................... 64
Philippine Banking Corporation vs. Court of Appeals, 419 SCRA 487 (2004) ....................................................................... 79
Samsung Construction Company Philippines, Inc. vs. Far East Bank, 436 SCRA 402 (2004) ................................................ 85
Heirs of Eduardo Manlapat vs. Court of Appeals, 459 SCRA 412 (2005) ............................................................................ 101
Philippine National Bank vs. Pike, 470 SCRA 328 (2005) .................................................................................................... 118
Cadiz vs. Court of Appeals, 474 SCRA 232 (2005) ............................................................................................................... 141
Far East Bank and Trust Company vs. Pacilan, Jr., 465 SCRA 372 (2005)............................................................................ 153
Citibank, N.A. vs. Cabamongan, 488 SCRA 517 (2006) ....................................................................................................... 165
Citibank, N.A. vs. Sabeniano, 504 SCRA 378 (2006)............................................................................................................ 179
Demosthenes P. Agan, Jr., et al. vs. PIATCO, et al.,402 SCRA 612 (2003)........................................................................... 250
Dio vs. Japor, 463 SCRA 170 (2005) .................................................................................................................................... 348
Consolidated Bank and Trust Corporation vs. Court of Appeals, 365 SCRA 671 (2001)..................................................... 356
Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009 ....................................................... 365
China Banking Corporation vs. Court of Appeals, 461 SCRA 162 (2005) ............................................................................ 376
Development Bank of the Philippines vs. Arcilla, Jr., 462 SCRA 599 (2005) ....................................................................... 381
Ejercito vs. Sandiganbayan (Special Division), 509 ............................................................................................................. 392
China Banking Corporation vs. Court of Appeals, 511 SCRA 110 (2006) ............................................................................ 412
Ana Rivera vs. People's Bank and Trust Company, 73 Phil. 546 (1942).............................................................................. 421
Vitug vs. Court of Appeals, 183 SCRA 755 (1990) ............................................................................................................... 426
Feati Bank and Trust Company vs. Court of Appeals, 196 SCRA 576 (1990) ...................................................................... 433
Transfield Philippines, Inc. vs. Luzon Hydro Corporation, 442 SCRA 307 (2004)................................................................ 453

Philippine National Bank vs. Pineda, 197 SCRA 1 (1991) .................................................................................................... 472
Insular Bank of Asia & America vs. IAC, 167 SCRA 450 (1988)............................................................................................ 480
Ong vs. Philippine Commercial International Bank, 448 SCRA 705 (2005)......................................................................... 491
International Finance Corporation vs. Imperial Textile Mills, Inc., 475 SCRA 149 (2005) .................................................. 495
JN Development Corporation vs. Philippine Export and Foreign Loan Guarantee Corporation, 468 SCRA 555 (2005)..... 507
People's Bank and Trust Co. vs. Odom, 64 Phil. 126 (1937) ............................................................................................... 515
Lopez vs. Court of Appeals, 114 SCRA 671 (1982) .............................................................................................................. 520
Manila Banking Corporation vs. Teodoro, 169 SCRA 95 (1989).......................................................................................... 535
Integrated Realty Corp. vs Philippine National Bank,174 SCRA 295 (1989) ....................................................................... 546
Yau Chu vs. Court of Appeals, 177 SCRA 793 (1989) .......................................................................................................... 562
Caltex (Philippines), Inc. vs. Court of Appeals, 212 SCRA 448 (1992) ................................................................................. 565
Allied Banking Corp. vs. Ordofiez, 192 SCRA 246 (1990) .................................................................................................... 578
Colinares vs. Court of Appeals, 339 SCRA 609 (2000)......................................................................................................... 587
Development Bank of the Philippines vs. Prudential Bank, 475 SCRA 623 (2005) ............................................................. 598
Rosario Textile Mills vs. Home Bankers Savings and Trust Company, 462 SCRA 88 (2005) ............................................... 610
Vintola vs. IBAA, 150 SCRA 578 (1987) ............................................................................................................................... 618
People vs. Nitafan, 207 SCRA 726 (1992)............................................................................................................................ 624
Torres vs. Limjap, 56 Phil. 141 (1931) ................................................................................................................................. 630
People's Bank and Trust Co. vs. Dahican Lumber Company, 20 SCRA 84 (1967) ............................................................... 636
Belgian Catholic Missionaries vs. Magallanes Press, 49 Phil. 647 (1926) ........................................................................... 650
Acme Shoe, Rubber and Plastic Corp. vs. Court of Appeals, 260 SCRA 714 (1996)............................................................ 658
Ong Liong Tiak vs. Luneta Motor Co., 66 Phil. 459 (1938) .................................................................................................. 664
Prudential Bank vs. Alviar, 464 SCRA 353 (2005)................................................................................................................ 668
Cuyco vs. Cuyco, 487 SCRA 693 (2006) ............................................................................................................................... 679
Garrido vs. Tuason, 24 SCRA 727 (1968)............................................................................................................................. 690
Magna Financial Services Group, Inc. vs. Colarina, 477 SCRA 245(2005) ........................................................................... 693
Register of Deeds vs. China Banking Corporation, 4 SCRA 1145 (1962)............................................................................. 703
Paderes vs. Court of Appeals, 463 SCRA 504 (2005)........................................................................................................... 708

Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64 (2005) ..................................................... 729
Bukidnon Doctors' Hospital, Inc. vs. Metropolitan Bank & Trust Co., 463 SCRA 222 (2005).............................................. 740
Tanchan vs. Allied Banking Corporation, 571 SCRA 512 (2008).......................................................................................... 754
Onapal Philippines Commodities, Inc. vs. Court of Appeals, 218 SCRA 281 (1993) ........................................................... 771
First Philippine International Bank vs. Court of Appeals, 252 SCRA 259 (1996)................................................................. 782

Fidelity Savings and Mortgage Bank vs. Cenzon, 184 SCRA 141
(1990)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. L-46208 April 5, 1990
FIDELITY
SAVINGS
AND
MORTGAGE
BANK,
petitioner,
vs.
HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the Court
of First Instance of Manila (Branch XL) and SPOUSES TIMOTEO AND
OLIMPIA SANTIAGO, respondents.
Agapito S. Fajardo and Marino E. Eslao for petitioner.
Leovillo C. Agustin Law Offices for private respondents.

REGALADO, J.:
The instant petition seeks the review, on pure questions of law, of the
decision rendered by the Court of First Instance of Manila (now Regional
Trial Court), Branch XL, on December 3, 1976 in Civil Case No. 84800, 1
ordering herein petitioner to pay private respondents the following amounts:
(a) P90,000.00 with accrued interest in accordance with Exhibits
A and B until fully paid;
(b) P30,000,00 as exemplary damages; and
(c) P10,000.00 as and for attorney's fees.
The payment by the defendant Fidelity Savings and Mortgage
Bank of the aforementioned sums of money shall be subject to
the Bank Liquidation Rules and Regulations embodied in the
Order of the Court of First Instance of Manila, Branch XIII, dated

October 3, 1972, Civil Case No. 86005, entitled, "IN RE:

Liquidation of the Fidelity Savings Bank versus Central Bank of
the Philippines, Liquidator."
With costs against the defendant Fidelity Savings and Mortgage
Bank.
SO ORDERED.
Private respondents instituted this present action for a sum of money with
damages against Fidelity Savings and Mortgage Bank, Central Bank of the
Philippines, Eusebio Lopez, Jr., Arsenio M. Lopez, Sr., Arsenio S. Lopez,
Jr., Bibiana E. Lacuna, Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi
and Ernani A. Pacana. On motion of herein private respondents, as
plaintiffs, the amended complaint was dismissed without prejudice against
defendants Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani
A. Pacana. 2 In its aforesaid decision of December 3, 1976, the court a quo
dismissed the complaint as against defendants Central Bank of the
Philippines, Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr.
and Bibiana S. Lacuna.
Back on August 10, 1973, the plaintiffs (herein private respondents) and the
defendants Fidelity Savings and Mortgage Bank (petitioner herein), Central
Bank of the Philippines and Bibiana E. Lacuna had filed in said case in the
lower court a partial stipulation of facts, as follows:
COME NOW herein plaintiffs, SPOUSES TIMOTEO M.
SANTIAGO and OLIMPIA R. SANTIAGO, herein defendants
FIDELITY SAVINGS AND MORTGAGE BANK and the CENTRAL
BANK OF THE PHILIPPINES, and herein defendant BIBIANA E.
LACUNA, through their respective undersigned counsel, and
before this Honorable Court most respectfully submit the following
Partial Stipulation of Facts:
1. That herein plaintiffs are husband and wife, both of legal age,
and presently residing at No. 480 C. de la Paz Street, Sta. Elena,
Marikina, Rizal;
2. That herein defendant Fidelity Savings and Mortgage Bank is a
corporation duly organized and existing under and by virtue of the

laws of the Philippines; that defendant Central Bank of the

Philippines is a corporation duly organized and existing under and
by virtue of the laws of the Philippines;
3. That herein defendant Bibiana E. Lacuna is of legal age and a
resident of No. 42 East Lawin Street, Philamlife Homes, Quezon
City, said defendant was an assistant Vice-President of the
defendant fidelity Savings and Mortgage Bank,
4. That sometime on May 16, 1968, here in plaintiffs deposited
with the defendant Fidelity Savings Bank the amount of FIFTY
THOUSAND PESOS (P50,000.00) under Savings Account No.
16-0536; that likewise, sometime on July 6, 1968, herein plaintiff,deposited with the defendant Fidelity Savings and Mortgage Bank
the amount of FIFTY THOUSAND PESOS (P50,000.00) under
Certificate of Time Deposit No. 0210; that the aggregate amount
of deposits of the plaintiffs with the defendant Fidelity Savings and
Mortgage Bank is ONE HUNDRED THOUSAND PESOS
(P100,000.00);
5. That on February 18, 1969, the Monetary Board, after finding
the report of the Superintendent of Banks, that the condition of the
defendant Fidelity Savings and Mortgage Bank is one of
insolvency, to be true, issued Resolution No. 350 deciding,
among others, as follows:
1) To forbid the Fidelity Savings Bank to do
business in the Philippines;
2) To instruct the Acting Superintendent of
Banks to take charge, in the name of the
Monetary Board, of the Bank's assets
6. That pursuant to the above-cited instructions of the Monetary
Board, the Superintendent of Banks took charge in the name of
the Monetary Board, of the assets of defendant Fidelity Savings
Bank on February 19, 1969; and that since that date up to this
date, the Superintendent of Banks (now designated as Director,
Department of Commercial and Savings Banks) has been taking

charge of the assets of defendant Fidelity Savings and Mortgage

Bank;
7. That sometime on October 10, 1969 the Philippine Deposit
Insurance Corporation paid the plaintiffs the amount of TEN
THOUSAND PESOS (P10,000.00) on the aggregate deposits of
P100,000.00 pursuant to Republic Act No. 5517, thereby leaving
a deposit balance of P90,000.00;
8. That on December 9, 1969, the Monetary Board issued its
Resolution No. 2124 directing the liquidation of the affairs of
defendant Fidelity Savings Bank;
9. That on January 25, 1972, the Solicitor General of the
Philippines filed a "Petition for Assistance and Supervision in
Liquidation" of the affairs of the defendant Fidelity Savings and
Mortgage Bank with the Court of First Instance of Manila,
assigned to Branch XIII and docketed as Civil Case No. 86005;
10. That on October 3, 1972, the Liquidation Court promulgated
the Bank Rules and Regulations to govern the liquidation of the
affairs of defendant Fidelity Savings and Mortgage Bank,
prescribing the rules on the conversion of the Bank's assets into
money, processing of claims against it and the manner and time
of distributing the proceeds from the assets of the Bank;
11. That the liquidation proceedings has not been terminated and
is still pending up to the present;
12. That herein plaintiffs, through their counsel, sent demand
letters to herein defendants, demanding the immediate payment
of the aforementioned savings and time deposits.
WHEREFORE, it is respectfully prayed that the foregoing Partial
Stipulation of Facts be approved by this Honorable Court, without
prejudice to the presentation of additional documentary or
testimonial evidence by herein parties.
Manila, Philippines, August 10, 1973. 3

Assigning error in the judgment of the lower court quoted ab antecedents,

petitioner raises two questions of law, to wit:
1. Whether or not an insolvent bank like the Fidelity Savings and Mortgage
Bank may be adjudged to pay interest on unpaid deposits even after its
closure by the Central Bank by reason of insolvency without violating the
provisions of the Civil Code on preference of credits; and
2. Whether or not an insolvent bank like the Fidelity Savings and Mortgage
Bank may be adjudged to pay moral and exemplary damages, attorney's
fees and costs when the insolvency is caused b the anomalous real estate
transactions without violating the provisions of the Civil Code on preference
of credits.
There is merit in the petition.
It is settled jurisprudence that a banking institution which has been declared
insolvent and subsequently ordered closed by the Central Bank of the
Philippines cannot be held liable to pay interest on bank deposits which
accrued during the period when the bank is actually closed and nonoperational.
In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia,
we held that:

It is a matter of common knowledge, which We take judicial notice

of, that what enables a bank to pay stipulated interest on money
deposited with it is that thru the other aspects of its operation it is
able to generate funds to cover the payment of such interest.
Unless a bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or their
proceeds and generally engage in other banking and financing
activities from which it can derive income, it is inconceivable how
it can carry on as a depository obligated to pay stipulated interest.
Conventional wisdom dictates this inexorable fair and just
conclusion. And it can be said that all who deposit money in
banks are aware of such a simple economic proposition.
Consequently, it should be deemed read into every contract of
deposit with a bank that the obligation to pay interest on the
deposit ceases the moment the operation of the bank is

completely suspended by the duly constituted authority, the

Central Bank.
This was reiterated in the subsequent case of The Overseas Bank of Manila
vs. The Hon. Court of Appeals and Julian R. Cordero. 5 and in the recent
cases of Integrated Realty Corporation, et al. vs. Philippine National Bank,
et al. and the Overseas Bank of Manila vs. Court of appeals, et al. 6
From the aforecited authorities, it is manifest that petitioner cannot be held
liable for interest on bank deposits which accrued from the time it was
prohibited by the Central Bank to continue with its banking operations, that
is, when Resolution No. 350 to that effect was issued on February 18, 1969.
The order, therefore, of the Central Bank as receiver/liquidator of petitioner
bank allowing the claims of depositors and creditors to earn interest up to
the date of its closure on February 18, 1969, 7 in line with the doctrine laid
down in the jurisprudence above cited.
Although petitioner's formulation of the second issue that it poses is slightly
inaccurate and defective, we likewise find the awards of moral and
exemplary damages and attorney's fees to be erroneous.
The trial court found, and it is not disputed, that there was no fraud or bad
faith on the part of petitioner bank and the other defendants in accepting the
deposits of private respondents. Petitioner bank could not even be faulted in
not immediately returning the amount claimed by private respondents
considering that the demand to pay was made and Civil Case No. 84800
was filed in the trial court several months after the Central Bank had ordered
petitioner's closure. By that time, petitioner bank was no longer in a position
to comply with its obligations to its creditors, including herein private
respondents. Even the trial court had to admit that petitioner bank failed to
pay private respondents because it was already insolvent. 8 Further, this
case is not one of the specified or analogous cases wherein moral damages
may be recovered. 9
There is no valid basis for the award of exemplary damages which is
supposed to serve as a warning to other banks from dissipating their assets
in anomalous transactions. It was not proven by private respondents, and
neither was there a categorical finding made by the trial court, that petitioner
bank actually engaged in anomalous real estate transactions. The same

were raised only during the testimony of the bank examiner of the Central
Bank, 10 but no documentary evidence was ever presented in support
thereof. Hence, it was error for the lower court to impose exemplary
damages upon petitioner bank since, in contracts, such sanction requires
that the offending party acted in a wanton, fraudulent, reckless, oppressive
or malevolent manner. 11 Neither does this case present the situation where
attorney's fees may be awarded. 12
In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank
may, therefore, not be held responsible for damages which may be
reasonably attributed to the non-performance of the obligation. 13
Consequently, we reiterate that under the premises and pursuant to the
aforementioned provisions of law, it is apparent that private respondents are
not justifiably entitled to the payment of moral and exemplary damages and
attorney's fees.
While we tend to agree with petitioner bank that private respondents' claims
should he been filed in the liquidation proceedings in Civil Case No. 86005,
entitled "In Re: Liquidation of the Fidelity Savings and Mortgage Bank,"
pending before Branch XIII of the then Court of First Instance of Manila, we
do not believe that the decision rendered in the instant case would be
violative of the legal provisions on preference and concurrence of credits.
As the trial court puts it:
. . . But this order of payment should not be understood as raising
these deposits to the category of preferred credits of the
defendant Fidelity Savings and Mortgage Bank but shall be paid
in accordance with the Bank Liquidation Rules and Regulations
embodied in the Order of the. Court of First Instance of Manila,
Branch XIII dated October 3, 1972 (Exh. 3). . . . 14
WHEREFORE, the judgment appealed from is hereby MODIFIED.
Petitioner Fidelity Savings and Mortgage Bank is hereby declared liable to
pay private respondents Timoteo and Olimpia Santiago the sum of
P90,000.00, with accrued interest in accordance with the terms of Savings
Account Deposit No. 16-0536 (Exhibit A) and Certificate of Time Deposit
No. 0210 (Exhibit B) until February 18, 1969. The awards for moral and
exemplary damages, and attorney's fees are hereby DELETED. No costs.
SO ORDERED.

Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

Cancio vs. Court of Appeals, 154 SCRA 731 (1987)

Republic
SUPREME
Manila

of

the

Philippines
COURT

SPECIAL FORMER FIRST DIVISION

G.R. No. 73882 October 22, 1987
ROSA
CANCIO,
petitioner,
vs.
HON. COURT OF TAX APPEALS and HON. COMMISSIONER OF
CUSTOMS, respondents.

MELENCIO-HERRERA, J.:
Before us is petitioner's Motion for Reconsideration of this Court's
Resolution of August 11, 1986, which denied for lack of merit her Petition for
Review on certiorari of respondent Court of Tax Appeals' (CTA) Decision in
C.T.A. Case No. 3398.
During the pendency of this case, or on April 23, 1986, petitioner had
passed away and her legal heirs were ordered substituted in her stead and
Jose Cancio, Jr., was appointed guardian ad-litem for the minors Ma. Irene
and Roberto, both surnamed Cancio, in this Court's Resolution of August
11, 1986.
There is no substantial dispute on the background facts and the evidentiary
aspects Vol the controversy, summarized in said
Decision as follows:
The records show that claimant Mrs. Rosa Cancio bearing
Philippine Passport No. 11797799 while clearing through the PreBoarding (AVSECOM) Area of MIA with her husband and three
(3) children to board PR 306 for Hongkong in the morning of June
12, 1981, was apprehended with One Hundred Two Thousand
Nine Hundred Dollars (US$102,900.00) in cash, six hundred

dollars (US$600.00) in two travelers checks, and one thousand

five hundred (Pl,500.00) Pesos; that such apprehension was
effected only thru an alarm sounded by the scanner (metal
detecting device) of the AVSECOM men, when Mrs. Cancio who
did not declare her currency had already passed the Customs
inspection area; that subject currencies were placed and
concealed inside the two fairly-sized carton boxes for local
chocolates, securely wrapped and taped with tin foil-back paper;
and, that in view of claimant's failure, upon being required, to
present the Central Bank Authority, the said currencies were
accordingly confiscated and a seizure Receipt No. 013 was
issued to her; hence, this seizure proceedings.
At the hearing of this case, claimant, thru counsel, presented
certified xerox copy of her Bank Book (Exhibit "I") for foreign
currency deposit with the Philippine Commercial and Industrial
Bank under Account FCDU No. 0265, dollar remittances in
telegraphic transfers from abroad for deposits in her account from
May 13, 1981 to May 21, 1981, and withdrawal cards (Exhibit "lA" to "1-E", inclusive), attesting to the fact that claimant Rosa
Cancio had withdrawn from her FCDU Account a certain amount
of United States currency which tended to show that claimant
herein was a foreign currency depositor pursuant to the provisions
of Republic Act No. 6426, as implemented by Central Bank
Circular No. 343. And herein claimant testified that because her
foreign currency deposit could not be withdrawn at one time, she
made her withdrawal on several occasions starting from May 14,
1981 up to May 27, 1981 when she closed her account
preparatory to her departure which was scheduled in the morning
of June 12, 1981 for Hongkong; that from Hongkong, she and her
family intended to proceed to the United States for medical
treatment of her heart ailment as advised by her two attending
physicians from the UST Hospital; that the US currency that they
were carrying and confiscated from them on June 12, 1981 was
intended principally for such medical purpose and for other
miscellaneous and necessary expenses, and, that the subject
currencies were concealed and hidden by them inside the two
chocolate boxes solely for security reasons. 1

By reason of the forfeiture decreed by respondent Commissioner of

Customs of both the foreign and local currencies due to petitioner's failure to
present a Central Bank (CB) authority to bring said currencies out of the
country, petitioner appealed to respondent Court of Tax Appeals. The latter
Court affirmed the forfeiture of the US$102,900.00 in cash, and US$600.00
in travellers' checks for having been in violation of Central Bank Circulars
Nos. 265 and 534, in relation to Section 2530(f) of the Tariff and Customs
Code, as amended. It reversed, however, the forfeiture of P1,500.00 on the
ground that since petitioner was travelling with her husband and three (3)
children, the said amount did not exceed the P500.00 at that each traveller
is allowed to bring out of the country without a CB permit pursuant to
paragraph 4 of CB Circular No. 383.
Petitioner's unimpugned evidence shows that she was a foreign currency
depositor at the Philippine Commercial and Industrial Bank at Makati, Metro
Manila, and that the subject foreign currency was part of the total amount of
US$116,000.00 she had withdrawn from said bank from May 14 to 27, 1981
for her travel and medical expenses in the United States via Hongkong. 2
Admitted, too, is the fact that petitioner failed to present to the apprehending
customs authorities a Central Bank authority to bring out of the country the
said currencies while at the pre-boarding area of the Manila International
Airport on June 12, 1981 on her scheduled flight to Hongkong together with
her husband and three children.
The primordial issue for resolution is whether or not respondent Court had
committed reversible error in upholding the forfeiture of the foreign
currencies in question.
A second look at the facts and the equity of the case, the pertinent laws,
and the CB Circulars involved constrains us to rule in the affirmative and,
accordingly, to grant reconsideration of our Resolution of August 11, 1986
denying review.
It is true that in so far as the exportation or taking out of foreign currency
from the country is concerned, Central Bank Circular No. 265, issued on
November 20, 1968, particularly paragraph 3 thereof, mandates:
3. No person shall take out or export from the Philippines foreign
currency or any other foreign exchange except as otherwise
authorized by the Central Bank.

Similarly, Central bank Circular No. 534, issued on July 19, 1976, reiterates
and provides in Sec. 3 thereof as follows:
Sec. 3. Unless specifically authorized by the Central Bank or
allowed under existing international agreements or Central Bank
regulations, no person shall take or transmit or attempt to take or
transmit foreign exchange, in any form out of the Philippines only,
through other persons, through the mails, or through international
carriers.
The provisions of this Section shall not apply to tourists and nonresident temporary visitors who are taking or sending out of the
Philippines their own foreign exchange brought in by them.
However, peculiar to the present controversy is the fact that, as stated
previously, petitioner is a foreign currency depositor. Relevant and
applicable to her is the following provision of the "Foreign Currency Deposit
Act of the Philip pines" (Republic Act No. 6426, as amended), which took
effect upon its approval on April 4,1972:
SEC. 5. Withdrawability and transferability of deposits. There
shall be no restriction on the withdrawal by the depositor of his
deposit or on the transferability of the same abroad except those
arising from the contract between the depositor and the bank.11
(Emphasis Ours).
Under the foregoing provision, the transferability abroad of foreign currency
deposits is unrestricted. Only one exception is provided for therein, which is,
any restriction " from the contract between the depositor and the bank."
Neither is a Central Bank authority required for the transferability abroad of
foreign currency deposits.
Attention is called, however, to the implementing rules and regulations to
said Republic Act 6426, as embodied in CB Circular No. 343 issued on April
24, 1972, which provides:
SEC. 11. Withdrawability and Liquidity of Deposits.
a. x x x x x x x x x

b. Subject only to the terms of the contract between the bank and
the depositor, the latter shall have a general license to withdraw
his deposit, notwithstanding any change in policy or regulations.
xxx xxx xxx
(Emphaisis supplied)
Respondent Court has taken the position that the foregoing provision its the
right of the depositor to that of withdrawal and withholds from him the right
of transferability abroad. That is not so. Circular-Letter, dated August 3,
1978, issued by the Central Bank reads in explicit terms:
TO: ALL BANKS AUTHORIZED TO ACCEPT FOREIGN CURRENCY
DEPOSITS UNDER THE PROVISIONS OF RA 6426, AS AMENDED AND
PRESIDENTIAL DECREE NO. 1035.
Effective immediately, the banks authorized to accept foreign
currency deposits under the provisions of RA 6426, as amended,
and PD 1035 and as implemented by Central Bank Circular 343
and 547, are hereby instructed to advise their foreign currency
depositors who are withdrawing funds for travel purposes to carry
with them the certificate of withdrawal that the banks shall issue.
The travellers shall present the certifications to the Customs and
Central Bank personnel at the MIA, if requested.
The banks shall issue a uniform certification, as follows:
___________________
Date
TO WHOM IT MAY CONCERN:
This certifies that ________________________whose signature
appears below has withdrawn today, the amount of
____________in cash (US$ _______________) and Travellers
Check (US$___________________________) against his/her
foreign currency account maintained with us.

The funds herein withdrawn are represented to be used in

connection with the depositor's foreign travel scheduled on or
about ____________________197_________.
___________________________
(Signature of Authorized
Official OverPrinted Name)
_______________________
(Signature of Depositor)
Please be guided accordingly.
(SGD.) R.D.RUIZ
Director
It is a fact that petitioner could not present a certificate of withdrawal at the
Manila International Airport when she was about to depart. As she had
explained, however, she was unaware of this requirement. And if she had
wrapped her dollar currency inside a chocolate box it was for "security
reasons." Besides, as instructed in the Circular-Letter abovequoted, it is the
authorized depository bank which should advise its depositors to carry with
them the certificate of withdrawal. At any rate, respondent Court has found
that petitioner has presented in evidence her foreign currency bank book 3
and her withdrawal cards. 4 These may be considered as substantial
compliance for purposes of this case.
Indeed, given the underlying objective of the Foreign Currency Deposit Act,
as amended, which is to attract and invite the deposit of foreign currencies
which are acceptable as part of the international reserve in duly authorized
banks in order that they may be put into the stream of the banking system, it
would be to defeat the very purpose of the law to place undue restrictions
on the transferability of such funds. The countervailing effect would be to
discourage prospective foreign currency depositors to the detriment of the
banking system.

In fine, Central Bank Circulars Nos. 265 and 534 requiring prior Central
Bank authority for the taking out of the country of foreign currency should
not be made to encompass foreign currency depositors whose rights are
expressly defined and guaranteed in a special law, the Foreign Currency
Deposit Act (RA 6426, as amended). As a foreign currency depositor,
therefore, petitioner cannot be adjudged to have violated the aforestated
Central Bank Circulars. It follows that neither is there room for the
application of Section 2530(f) of the Tariff and Customs Code, as amended,
which provides for the forfeiture of any article and other objects, the
exportation of which is effected or attempted contrary to law.
This is not to condone petitioner's failure to declare the foreign currency she
was carrying out of the country but just to stress that the Foreign Currency
Deposit Act grants petitioner the right of transferability of her funds abroad
except that she was not advised by her bank to secure, and consequently
was unable to present, the necessary certificate of withdrawal from said
bank.
ACCORDINGLY, the Decision of respondent Court of Tax Appeals is
hereby SET ASIDE in so far as it upheld the forfeiture by respondent
Commissioner of Customs of the sums of US$102,900.00 in cash, and
US$600.00 in traveller's checks, which amounts should now be returned to
petitioner's heirs, but AFFIRMED in so far as it reversed the forfeiture by the
same official of the sum of P1,500.00. No costs.
SO ORDERED.

Salvacion vs. Central Bank, 278 SCRA 27 (1997)

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC

G.R. No. 94723 August 21, 1997

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

TORRES, JR., J.:

In our predisposition to discover the "original intent" of a statute, courts
become the unfeeling pillars of the status quo. Ligle do we realize that
statutes or even constitutions are bundles of compromises thrown our way
by their framers. Unless we exercise vigilance, the statute may already be
out of tune and irrelevant to our day.
The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued
restraining the respondents from applying and enforcing Section
113 of Central Bank Circular No. 960;
b.) After hearing, judgment be rendered:
1.) Declaring the respective rights and duties of petitioners and
respondents;

2.) Adjudging Section 113 of Central Bank Circular No. 960 as

contrary to the provisions of the Constitution, hence void; because
its provision that "Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative
body whatsoever
i.) has taken away the right of petitioners to have the
bank deposit of defendant Greg Bartelli y Northcott
garnished to satisfy the judgment rendered in
petitioners' favor in violation of substantive due process
guaranteed by the Constitution;
ii.) has given foreign currency depositors an undue
favor or a class privilege in violation of the equal
protection clause of the Constitution;
iii.) has provided a safe haven for criminals like the
herein respondent Greg Bartelli y Northcott since
criminals could escape civil liability for their wrongful
acts by merely converting their money to a foreign
currency and depositing it in a foreign currency deposit
account with an authorized bank.
The antecedent facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed
and lured petitioner Karen Salvacion, then 12 years old to go with him to his
apartment. Therein, Greg Bartelli detained Karen Salvacion for four days, or
up to February 7, 1989 and was able to rape the child once on February 4,
and three times each day on February 5, 6, and 7, 1989. On February 7,
1989, after policemen and people living nearby, rescued Karen, Greg
Bartelli was arrested and detained at the Makati Municipal Jail. The
policemen recovered from Bartelli the following items: 1.) Dollar Check No.
368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK
Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account China
Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine
Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy
Bear) used in seducing the complainant.

On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed

against Greg Bartelli, Criminal Case No. 801 for Serious Illegal Detention
and Criminal Cases Nos. 802, 803, 804, and 805 for four (4) counts of
Rape. On the same day, petitioners filed with the Regional Trial Court of
Makati Civil Case No. 89-3214 for damages with preliminary attachment
against Greg Bartelli. On February 24, 1989, the day there was a scheduled
hearing for Bartelli's petition for bail the latter escaped from jail.
On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte Motion
for the Issuance of Warrant of Arrest and Hold Departure Order. Pending
the arrest of the accused Greg Bartelli y Northcott, the criminal cases were
archived in an Order dated February 28, 1989.
Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated
February 22, 1989 granting the application of herein petitioners, for the
issuance of the writ of preliminary attachment. After petitioners gave Bond
No. JCL (4) 1981 by FGU Insurance Corporation in the amount of
P100,000.00, a Writ of Preliminary Attachment was issued by the trial court
on February 28, 1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of
Garnishment on China Banking Corporation. In a letter dated March 13,
1989 to the Deputy Sheriff of Makati, China Banking Corporation invoked
Republic Act No. 1405 as its answer to the notice of garnishment served on
it. On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman sent
his reply to China Banking Corporation saying that the garnishment did not
violate the secrecy of bank deposits since the disclosure is merely incidental
to a garnishment properly and legally made by virtue of a court order which
has placed the subject deposits in custodia legis. In answer to this letter of
the Deputy Sheriff of Makati, China Banking Corporation, in a letter dated
March 20, 1989, invoked Section 113 of Central Bank Circular No. 960 to
the effect that the dollar deposits or defendant Greg Bartelli are exempt from
attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body,
whatsoever.
This prompted the counsel for petitioners to make an inquiry with the
Central Bank in a letter dated April 25, 1989 on whether Section 113 of CB
Circular No. 960 has any exception or whether said section has been
repealed or amended since said section has rendered nugatory the

substantive right of the plaintiff to have the claim sought to be enforced by

the civil action secured by way of the writ of preliminary attachment as
granted to the plaintiff under Rule 57 of the Revised Rules of Court. The
Central Bank responded as follows:
May 26, 1989
Ms.
Erlinda
12
Pres.
South
Paranaque, Metro Manila

S.
Osmena
Admiral

Carolino
Avenue
Village

Dear Ms. Carolino:

This is in reply to your letter dated April 25, 1989 regarding your
inquiry on Section 113, CB Circular No. 960 (1983).
The cited provision is absolute in application. It does not admit of
any exception, nor has the same been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the
country's banking system which would help in the development of
the economy. There is no intention to render futile the basic rights
of a person as was suggested in your subject letter. The law may
be harsh as some perceive it, but it is still the law. Compliance is,
therefore, enjoined.
Very truly yours,
(SGD)
Director 1

AGAPITO

S.

FAJARDO

Meanwhile, on April 10, 1989, the trial court granted petitioners' motion for
leave to serve summons by publication in the Civil Case No. 89-3214
entitled "Karen Salvacion, et al. vs. Greg Bartelli y Northcott." Summons
with the complaint was a published in the Manila Times once a week for
three consecutive weeks. Greg Bartelli failed to file his answer to the
complaint and was declared in default on August 7, 1989. After hearing the
case ex-parte, the court rendered judgment in favor of petitioners on March
29, 1990, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs

and against defendant, ordering the latter:
1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00
as moral damages;
2. To pay her parents, plaintiffs spouses Federico N. Salvacion,
Jr., and Evelina E. Salvacion the amount of P150,000.00 each or
a total of P300,000.00 for both of them;
3. To pay plaintiffs exemplary damages of P100,000.00; and
4. To pay attorney's fees in an amount equivalent to 25% of the
total amount of damages herein awarded;
5. To pay litigation expenses of P10,000.00; plus
6. Costs of the suit.
SO ORDERED.
The heinous acts of respondent Greg Bartelli which gave rise to the award
were related in graphic detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the
municipal jail of Makati but was able to escape therefrom on
February 24, 1989 as per report of the Jail Warden of Makati to
the Presiding Judge, Honorable Manuel M. Cosico of the
Regional Trial Court of Makati, Branch 136, where he was
charged with four counts of Rape and Serious Illegal Detention
(Crim. Cases Nos. 802 to 805). Accordingly, upon motion of
plaintiffs, through counsel, summons was served upon defendant
by publication in the Manila Times, a newspaper of general
circulation as attested by the Advertising Manager of the Metro
Media Times, Inc., the publisher of the said newspaper.
Defendant, however, failed to file his answer to the complaint
despite the lapse of the period of sixty (60) days from the last
publication; hence, upon motion of the plaintiffs, through counsel,
defendant was declared in default and plaintiffs were authorized
to present their evidence ex parte.

In support of the complaint, plaintiffs presented as witnesses the

minor Karen E. Salvacion, her father, Federico N. Salvacion, Jr., a
certain Joseph Aguilar and a certain Liberato Madulio, who gave
the following testimony:
Karen took her first year high school in St. Mary's Academy in
Pasay City but has recently transferred to Arellano University for
her second year.
In the afternoon of February 4, 1989, Karen was at the Plaza Fair
Makati Cinema Square, with her friend Edna Tangile whiling away
her free time. At about 3:30 p.m. while she was finishing her
snack on a concrete bench in front of Plaza Fair, an American
approached her. She was then alone because Edna Tangile had
already left, and she was about to go home. (TSN, Aug. 15, 1989,
pp. 2 to 5)
The American asked her name and introduced himself as Greg
Bartelli. He sat beside her when he talked to her. He said he was
a Math teacher and told her that he has a sister who is a nurse in
New York. His sister allegedly has a daughter who is about
Karen's age and who was with him in his house along Kalayaan
Avenue. (TSN, Aug. 15, 1989, pp. 4-5)
The American asked Karen what was her favorite subject and she
told him it's Pilipino. He then invited her to go with him to his
house where she could teach Pilipino to his niece. He even gave
her a stuffed toy to persuade her to teach his niece. (Id., pp. 5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to
reach the defendant's house along Kalayaan Avenue. (Id., p. 6)
When they reached the apartment house, Karen noticed that
defendant's alleged niece was not outside the house but
defendant told her maybe his niece was inside. When Karen did
not see the alleged niece inside the house, defendant told her
maybe his niece was upstairs, and invited Karen to go upstairs.
(Id., p. 7)

Upon entering the bedroom defendant suddenly locked the door.

Karen became nervous because his niece was not there.
Defendant got a piece of cotton cord and tied Karen's hands with
it, and then he undressed her. Karen cried for help but defendant
strangled her. He took a packing tape and he covered her mouth
with it and he circled it around her head. (Id., p. 7)
Then, defendant suddenly pushed Karen towards the bed which
was just near the door. He tied her feet and hands spread apart to
the bed posts. He knelt in front of her and inserted his finger in
her sex organ. She felt severe pain. She tried to shout but no
sound could come out because there were tapes on her mouth.
When defendant withdrew his finger it was full of blood and Karen
felt more pain after the withdrawal of the finger. (Id., p. 8)
He then got a Johnson's Baby Oil and he applied it to his sex
organ as well as to her sex organ. After that he forced his sex
organ into her but he was not able to do so. While he was doing it,
Karen found it difficult to breathe and she perspired a lot while
feeling severe pain. She merely presumed that he was able to
insert his sex organ a little, because she could not see. Karen
could not recall how long the defendant was in that position. (Id.
pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also
told Karen to take a shower and he untied her hands. Karen could
only hear the sound of the water while the defendant, she
presumed, was in the bathroom washing his sex organ. When she
took a shower more blood came out from her. In the meantime,
defendant changed the mattress because it was full of blood.
After the shower, Karen was allowed by defendant to sleep. She
fell asleep because she got tired crying. The incident happened at
about 4:00 p.m. Karen had no way of determining the exact time
because defendant removed her watch. Defendant did not care to
give her food before she went to sleep. Karen woke up at about
8:00 o'clock the following morning. (Id., pp. 9-10)
The following day, February 5, 1989, a Sunday, after a breakfast
of biscuit and coke at about 8:30 to 9:00 a.m. defendant raped
Karen while she was still bleeding. For lunch, they also took

biscuit and coke. She was raped for the second time at about
12:00 to 2:00 p.m. In the evening, they had rice for dinner which
defendant had stored downstairs; it was he who cooked the rice
that is why it looks like "lugaw". For the third time, Karen was
raped again during the night. During those three times defendant
succeeded in inserting his sex organ but she could not say
whether the organ was inserted wholly.
Karen did not see any firearm or any bladed weapon. The
defendant did not tie her hands and feet nor put a tape on her
mouth anymore but she did not cry for help for fear that she might
be killed; besides, all the windows and doors were closed. And
even if she shouted for help, nobody would hear her. She was so
afraid that if somebody would hear her and would be able to call
the police, it was still possible that as she was still inside the
house, defendant might kill her. Besides, the defendant did not
leave that Sunday, ruling out her chance to call for help. At
nighttime he slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times,
once in the morning for thirty minutes after a breakfast of biscuits;
again in the afternoon; and again in the evening. At first, Karen
did not know that there was a window because everything was
covered by a carpet, until defendant opened the window for
around fifteen minutes or less to let some air in, and she found
that the window was covered by styrofoam and plywood. After
that, he again closed the window with a hammer and he put the
styrofoam, plywood, and carpet back. (Id., pp. 14-15)
That Monday evening, Karen had a chance to call for help,
although defendant left but kept the door closed. She went to the
bathroom and saw a small window covered by styrofoam and she
also spotted a small hole. She stepped on the bowl and she cried
for help through the hole. She cried: "Maawa no po kayo so akin.
Tulungan n'yo akong makalabas dito. Kinidnap ako!" Somebody
heard her. It was a woman, probably a neighbor, but she got
angry and said she was "istorbo". Karen pleaded for help and the
woman told her to sleep and she will call the police. She finally fell
asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)

She woke up at 6:00 o'clock the following morning, and she saw
defendant in bed, this time sleeping. She waited for him to wake
up. When he woke up, he again got some food but he always kept
the door locked. As usual, she was merely fed with biscuit and
coke. On that day, February 7, 1989, she was again raped three
times. The first at about 6:30 to 7:00 a.m., the second at about
8:30 9:00, and the third was after lunch at 12:00 noon. After he
had raped her for the second time he left but only for a short
while. Upon his return, he caught her shouting for help but he did
not understand what she was shouting about. After she was
raped the third time, he left the house. (TSN, Aug. 15, 1989, pp.
16-17) She again went to the bathroom and shouted for help.
After shouting for about five minutes, she heard many voices. The
voices were asking for her name and she gave her name as
Karen Salvacion. After a while, she heard a voice of a woman
saying they will just call the police. They were also telling her to
change her clothes. She went from the bathroom to the room but
she did not change her clothes being afraid that should the
neighbors call for the police and the defendant see her in different
clothes, he might kill her. At that time she was wearing a T-shirt of
the American because the latter washed her dress. (Id., p. 16)
Afterwards, defendant arrived and he opened the door. He asked
her if she had asked for help because there were many policemen
outside and she denied it. He told her to change her clothes, and
she did change to the one she was wearing on Saturday. He
instructed her to tell the police that she left home and willingly;
then he went downstairs but he locked the door. She could hear
people conversing but she could not understand what they were
saying. (Id., p. 19)
When she heard the voices of many people who were conversing
downstairs, she knocked repeatedly at the door as hard as she
could. She heard somebody going upstairs and when the door
was opened, she saw a policeman. The policeman asked her
name and the reason why she was there. She told him she was
kidnapped. Downstairs, he saw about five policemen in uniform
and the defendant was talking to them. "Nakikipag-areglo po sa

mga pulis," Karen added. "The policeman told him to just explain
at the precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in
front of the house. They rode the car of a certain person she
called Kuya Boy together with defendant, the policeman, and two
of her neighbors whom she called Kuya Bong Lacson and one
Ate Nita. They were brought to Sub-Station I and there she was
investigated by a policeman. At about 2:00 a.m., her father
arrived, followed by her mother together with some of their
neighbors. Then they were brought to the second floor of the
police headquarters. (Id., p. 21)
At the headquarters, she was asked several questions by the
investigator. The written statement she gave to the police was
marked as Exhibit A. Then they proceeded to the National Bureau
of Investigation together with the investigator and her parents. At
the NBI, a doctor, a medico-legal officer, examined her private
parts. It was already 3:00 in the early morning of the following day
when they reached the NBI. (TSN, Aug. 15, 1989, p. 22) The
findings of the medico-legal officer has been marked as Exhibit B.
She was studying at the St. Mary's Academy in Pasay City at the
time of the incident but she subsequently transferred to Apolinario
Mabini, Arellano University, situated along Taft Avenue, because
she was ashamed to be the subject of conversation in the school.
She first applied for transfer to Jose Abad Santos, Arellano
University along Taft Avenue near the Light Rail Transit Station
but she was denied admission after she told the school the true
reason for her transfer. The reason for their denial was that they
might be implicated in the case. (TSN, Aug. 15, 1989, p. 46)
xxx xxx xxx
After the incident, Karen has changed a lot. She does not play
with her brother and sister anymore, and she is always in a state
of shock; she has been absent-minded and is ashamed even to
go out of the house. (TSN, Sept. 12, 1989, p. 10) She appears to
be restless or sad, (Id., p. 11) The father prays for P500,000.00
moral damages for Karen for this shocking experience which

probably, she would always recall until she reaches old age, and
he is not sure if she could ever recover from this experience.
(TSN, Sept. 24, 1989, pp. 10-11)
Pursuant to an Order granting leave to publish notice of decision, said
notice was published in the Manila Bulletin once a week for three
consecutive weeks. After the lapse of fifteen (15) days from the date of the
last publication of the notice of judgment and the decision of the trial court
had become final, petitioners tried to execute on Bartelli's dollar deposit with
China Banking Corporation. Likewise, the bank invoked Section 113 of
Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down to
two:
May this Court entertain the instant petition despite the fact that original
jurisdiction in petitions for declaratory relief rests with the lower court?
Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A.
6426, as amended by P.D. 1246, otherwise known as the Foreign Currency
Deposit Act be made applicable to a foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank
Circular No. 960 providing that "Foreign currency deposits shall be exempt
from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body
whatsoever." should be adjudged as unconstitutional on the grounds that:
1.) it has taken away the right of petitioners to have the bank deposit of
defendant Greg Bartelli y Northcott garnished to satisfy the judgment
rendered in petitioners' favor in violation of substantive due process
guaranteed by the Constitution; 2.) it has given foreign currency depositors
an undue favor or a class privilege in violation of the equal protection clause
of the Constitution; 3.) it has provided a safe haven for criminals like the
herein respondent Greg Bartelli y Northcott since criminals could escape
civil liability for their wrongful acts by merely converting their money to a
foreign currency and depositing it in a foreign currency deposit account with
an authorized bank; and 4.) The Monetary Board, in issuing Section 113 of
Central Bank Circular No. 960 has exceeded its delegated quasi-legislative
power when it took away: a.) the plaintiffs substantive right to have the claim

sought to be enforced by the civil action secured by way of the writ of

preliminary attachment as granted by Rule 57 of the Revised Rules of
Court; b.) the plaintiffs substantive right to have the judgment credit satisfied
by way of the writ of execution out of the bank deposit of the judgment
debtor as granted to the judgment creditor by Rule 39 of the Revised Rules
of Court, which is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that
the Monetary Board in issuing Section 113 of CB Circular No. 960 did not
exceed its power or authority because the subject Section is copied
verbatim from a portion of R.A. No. 6426 as amended by P.D. 1246. Hence,
it was not the Monetary Board that grants exemption from attachment or
garnishment to foreign currency deposits, but the law (R.A. 6426 as
amended) itself; that it does not violate the substantive due process
guaranteed by the Constitution because a.) it was based on a law; b.) the
law seems to be reasonable; c.) it is enforced according to regular methods
of procedure; and d.) it applies to all members of a class.
Expanding, the Central Bank said; that one reason for exempting the foreign
currency deposits from attachment, garnishment or any other order or
process of any court, is to assure the development and speedy growth of
the Foreign Currency Deposit System and the Offshore Banking System in
the Philippines; that another reason is to encourage the inflow of foreign
currency deposits into the banking institutions thereby placing such
institutions more in a position to properly channel the same to loans and
investments in the Philippines, thus directly contributing to the economic
development of the country; that the subject section is being enforced
according to the regular methods of procedure; and that it applies to all
foreign currency deposits made by any person and therefore does not
violate the equal protection clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is
needed to promote the public interest and the general welfare; that the State
cannot just stand idly by while a considerable segment of the society suffers
from economic distress; that the State had to take some measures to
encourage economic development; and that in so doing persons and
property may be subjected to some kinds of restraints or burdens to secure
the general welfare or public interest. Respondent Central Bank also alleges
that Rule 39 and Rule 57 of the Revised Rules of Court provide that some

properties are exempted from execution/attachment especially provided by

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

money, could not, however get the award of damages because of this
unreasonable law. This questioned law, therefore makes futile the favorable
judgment and award of damages that she and her parents fully deserve. As
stated by the trial court in its decision,
Indeed, after hearing the testimony of Karen, the Court believes
that it was undoubtedly a shocking and traumatic experience she
had undergone which could haunt her mind for a long, long time,
the mere recall of which could make her feel so humiliated, as in
fact she had been actually humiliated once when she was refused
admission at the Abad Santos High School, Arellano University,
where she sought to transfer from another school, simply because
the school authorities of the said High School learned about what
happened to her and allegedly feared that they might be
implicated in the case.
xxx xxx xxx
The reason for imposing exemplary or corrective damages is due
to the wanton and bestial manner defendant had committed the
acts of rape during a period of serious illegal detention of his
hapless victim, the minor Karen Salvacion whose only fault was in
her being so naive and credulous to believe easily that defendant,
an American national, could not have such a bestial desire on her
nor capable of committing such a heinous crime. Being only 12
years old when that unfortunate incident happened, she has
never heard of an old Filipino adage that in every forest there is a
snake, . . . . 4
If Karen's sad fate had happened to anybody's own kin, it would be difficult
for him to fathom how the incentive for foreign currency deposit could be
more important than his child's rights to said award of damages; in this
case, the victim's claim for damages from this alien who had the gall to
wrong a child of tender years of a country where he is a mere visitor. This
further illustrates the flaw in the questioned provisions.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time
when the country's economy was in a shambles; when foreign investments
were minimal and presumably, this was the reason why said statute was
enacted. But the realities of the present times show that the country has

recovered economically; and even if not, the questioned law still denies
those entitled to due process of law for being unreasonable and oppressive.
The intention of the questioned law may be good when enacted. The law
failed to anticipate the iniquitous effects producing outright injustice and
inequality such as the case before us.
It has thus been said that
But I also know, 5 that laws and institutions must go hand in hand
with the progress of the human mind. As that becomes more
developed, more enlightened, as new discoveries are made, new
truths are disclosed and manners and opinions change with the
change of circumstances, institutions must advance also, and
keep pace with the times. . . We might as well require a man to
wear still the coat which fitted him when a boy, as civilized society
to remain ever under the regimen of their barbarous ancestors.
In his Comment, the Solicitor General correctly opined, thus:
The present petition has far-reaching implications on the right of a
national to obtain redress for a wrong committed by an alien who
takes refuge under a law and regulation promulgated for a
purpose which does not contemplate the application thereof
envisaged by the alien. More specifically, the petition raises the
question whether the protection against attachment, garnishment
or other court process accorded to foreign currency deposits by
PD No. 1246 and CB Circular No. 960 applies when the deposit
does not come from a lender or investor but from a mere transient
or tourist who is not expected to maintain the deposit in the bank
for long.
The resolution of this question is important for the protection of
nationals who are victimized in the forum by foreigners who are
merely passing through.
xxx xxx xxx
. . . Respondents China Banking Corporation and Central Bank of
the Philippines refused to honor the writ of execution issued in

Civil Case No. 89-3214 on the strength of the following provision

of Central Bank Circular No. 960:
Sec. 113. Exemption from attachment. Foreign
currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court,
legislative body, government agency or any
administrative body whatsoever.
Central Bank Circular No. 960 was issued pursuant to Section 7
of Republic Act No. 6426:
Sec. 7. Rules and Regulations. The Monetary Board of
the Central Bank shall promulgate such rules and
regulations as may be necessary to carry out the
provisions of this Act which shall take effect after the
publication of such rules and regulations in the Official
Gazette and in a newspaper of national circulation for at
least once a week for three consecutive weeks. In case
the Central Bank promulgates new rules and
regulations decreasing the rights of depositors, the
rules and regulations at the time the deposit was made
shall govern.
The aforecited Section 113 was copied from Section 8 of Republic
Act NO. 6426, as amended by P.D. 1246, thus:
Sec. 8. Secrecy of Foreign Currency Deposits. All
foreign currency deposits authorized under this Act, as
amended by Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential
Decree No. 1034, are hereby declared as and
considered of an absolutely confidential nature and,
except upon the written permission of the depositor, in
no instance shall such foreign currency deposits be
examined, inquired or looked into by any person,
government official, bureau or office whether judicial or
administrative or legislative or any other entity whether
public or private: Provided, however, that said foreign
currency deposits shall be exempt from attachment,

garnishment, or any other order or process of any court,

legislative body, government agency or any
administrative body whatsoever.
The purpose of PD 1246 in according protection against
attachment, garnishment and other court process to foreign
currency deposits is stated in its whereases, viz.:
WHEREAS, under Republic Act No. 6426, as amended
by Presidential Decree No. 1035, certain Philippine
banking institutions and branches of foreign banks are
authorized to accept deposits in foreign currency;
WHEREAS, under the provisions of Presidential Decree
No. 1034 authorizing the establishment of an offshore
banking system in the Philippines, offshore banking
units are also authorized to receive foreign currency
deposits in certain cases;
WHEREAS, in order to assure the development and
speedy growth of the Foreign Currency Deposit System
and the Offshore Banking System in the Philippines,
certain incentives were provided for under the two
Systems such as confidentiality of deposits subject to
certain exceptions and tax exemptions on the interest
income of depositors who are nonresidents and are not
engaged in trade or business in the Philippines;
WHEREAS, making absolute the protective cloak of
confidentiality over such foreign currency deposits,
exempting such deposits from tax, and guaranteeing
the vested rights of depositors would better encourage
the inflow of foreign currency deposits into the banking
institutions authorized to accept such deposits in the
Philippines thereby placing such institutions more in a
position to properly channel the same to loans and
investments in the Philippines, thus directly contributing
to the economic development of the country;

Thus, one of the principal purposes of the protection accorded to

foreign currency deposits is "to assure the development and
speedy growth of the Foreign Currency Deposit system and the
Offshore Banking in the Philippines" (3rd Whereas).
The Offshore Banking System was established by PD No. 1034.
In turn, the purposes of PD No. 1034 are as follows:
WHEREAS, conditions conducive to the establishment
of an offshore banking system, such as political
stability, a growing economy and adequate
communication facilities, among others, exist in the
Philippines;
WHEREAS, it is in the interest of developing countries
to have as wide access as possible to the sources of
capital funds for economic development;
WHEREAS, an offshore banking system based in the
Philippines will be advantageous and beneficial to the
country by increasing our links with foreign lenders,
facilitating the flow of desired investments into the
Philippines, creating employment opportunities and
expertise in international finance, and contributing to
the national development effort.
WHEREAS, the geographical location, physical and
human resources, and other positive factors provide the
Philippines with the clear potential to develop as
another financial center in Asia;
On the other hand, the Foreign Currency Deposit system was
created by PD. No. 1035. Its purposes are as follows:
WHEREAS, the establishment of an offshore banking
system in the Philippines has been authorized under a
separate decree;
WHEREAS, a number of local commercial banks, as
depository bank under the Foreign Currency Deposit
Act (RA No. 6426), have the resources and managerial

competence to more actively engage in foreign

exchange transactions and participate in the grant of
foreign currency loans to resident corporations and
firms;
WHEREAS, it is timely to expand the foreign currency
lending authority of the said depository banks under RA
6426 and apply to their transactions the same taxes as
would be applicable to transaction of the proposed
offshore banking units;
It is evident from the above [Whereas clauses] that the Offshore
Banking System and the Foreign Currency Deposit System were
designed to draw deposits from foreign lenders and investors
(Vide second Whereas of PD No. 1034; third Whereas of PD No.
1035). It is these deposits that are induced by the two laws and
given protection and incentives by them.
Obviously, the foreign currency deposit made by a transient or a
tourist is not the kind of deposit encouraged by PD Nos. 1034 and
1035 and given incentives and protection by said laws because
such depositor stays only for a few days in the country and,
therefore, will maintain his deposit in the bank only for a short
time.
Respondent Greg Bartelli, as stated, is just a tourist or a transient.
He deposited his dollars with respondent China Banking
Corporation only for safekeeping during his temporary stay in the
Philippines.
For the reasons stated above, the Solicitor General thus submits
that the dollar deposit of respondent Greg Bartelli is not entitled to
the protection of Section 113 of Central Bank Circular No. 960
and PD No. 1246 against attachment, garnishment or other court
processes. 6
In fine, the application of the law depends on the extent of its justice.
Eventually, if we rule that the questioned Section 113 of Central Bank
Circular No. 960 which exempts from attachment, garnishment, or any other
order or process of any court, legislative body, government agency or any

administrative body whatsoever, is applicable to a foreign transient, injustice

would result especially to a citizen aggrieved by a foreign guest like accused
Greg Bartelli. This would negate Article 10 of the New Civil Code which
provides that "in case of doubt in the interpretation or application of laws, it
is presumed that the lawmaking body intended right and justice to prevail.
"Ninguno non deue enriquecerse tortizeramente con dano de otro." Simply
stated, when the statute is silent or ambiguous, this is one of those
fundamental solutions that would respond to the vehement urge of
conscience. (Padilla vs. Padilla, 74 Phil. 377).
It would be unthinkable, that the questioned Section 113 of Central Bank
No. 960 would be used as a device by accused Greg Bartelli for
wrongdoing, and in so doing, acquitting the guilty at the expense of the
innocent.
Call it what it may but is there no conflict of legal policy here? Dollar
against Peso? Upholding the final and executory judgment of the lower
court against the Central Bank Circular protecting the foreign depositor?
Shielding or protecting the dollar deposit of a transient alien depositor
against injustice to a national and victim of a crime? This situation calls for
fairness against legal tyranny.
We definitely cannot have both ways and rest in the belief that we have
served the ends of justice.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960
and PD No. 1246, insofar as it amends Section 8 of R.A. No. 6426 are
hereby held to be INAPPLICABLE to this case because of its peculiar
circumstances. Respondents are hereby REQUIRED to COMPLY with the
writ of execution issued in Civil Case No. 89-3214, "Karen Salvacion, et al.
vs. Greg Bartelli y Northcott, by Branch CXLIV, RTC Makati and to
RELEASE to petitioners the dollar deposit of respondent Greg Bartelli y
Northcott in such amount as would satisfy the judgment.
SO ORDERED.

Simex International (Manila), Inc. vs. Court of Appeals, 183

SCRA 360 (1990)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 88013 March 19, 1990
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK,
respondents.
Don P. Porcuincula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:
We are concerned in this case with the question of damages, specifically
moral and exemplary damages. The negligence of the private respondent
has already been established. All we have to ascertain is whether the
petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation
engaged in the exportation of food products. It buys these products from
various local suppliers and then sells them abroad, particularly in the United
States, Canada and the Middle East. Most of its exports are purchased by
the petitioner on credit.
The petitioner was a depositor of the respondent bank and maintained a
checking account in its branch at Romulo Avenue, Cubao, Quezon City. On
May 25, 1981, the petitioner deposited to its account in the said bank the
amount of P100,000.00, thus increasing its balance as of that date to
P190,380.74. 1 Subsequently, the petitioner issued several checks against

its deposit but was suprised to learn later that they had been dishonored for
insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California
Manufacturing Company, Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau
of Internal Revenue in the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg
Pedreo in the amount of P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon
Longlife Trading Corporation in the amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon
Longlife Trading Corporation in the amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land
Services, Inc. in the amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio
Country Club Corporation in the amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta
Bayla in the amount of P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June
9, 1981, a letter of demand to the petitioner, threatening prosecution if the
dishonored check issued to it was not made good. It also withheld delivery
of the order made by the petitioner. Similar letters were sent to the petitioner
by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U.
Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit
line and demanded that future payments be made by it in cash or certified
check. Meantime, action on the pending orders of the petitioner with the
other suppliers whose checks were dishonored was also deferred.
The petitioner complained to the respondent bank on June 10, 1981. 3
Investigation disclosed that the sum of P100,000.00 deposited by the

petitioner on May 25, 1981, had not been credited to it. The error was
rectified on June 17, 1981, and the dishonored checks were paid after they
were re-deposited. 4
In its letter dated June 20, 1981, the petitioner demanded reparation from
the respondent bank for its "gross and wanton negligence." This demand
was not met. The petitioner then filed a complaint in the then Court of First
Instance of Rizal claiming from the private respondent moral damages in the
sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00,
plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered judgment holding that moral
and exemplary damages were not called for under the circumstances.
However, observing that the plaintiff's right had been violated, he ordered
the defendant to pay nominal damages in the amount of P20,000.00 plus
P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by
the respondent court. 6
The respondent court found with the trial court that the private respondent
was guilty of negligence but agreed that the petitioner was nevertheless not
entitled to moral damages. It said:
The essential ingredient of moral damages is proof of bad faith
(De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was
the omission by the defendant-appellee bank to credit appellant's
deposit of P100,000.00 on May 25, 1981. But the bank rectified its
records. It credited the said amount in favor of plaintiff-appellant in
less than a month. The dishonored checks were eventually paid.
These circumstances negate any imputation or insinuation of
malicious, fraudulent, wanton and gross bad faith and negligence
on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it
cannot share some of the conclusions of the lower courts. It seems to us
that the negligence of the private respondent had been brushed off rather
lightly as if it were a minor infraction requiring no more than a slap on the
wrist. We feel it is not enough to say that the private respondent rectified its
records and credited the deposit in less than a month as if this were

sufficient repentance. The error should not have been committed in the first
place. The respondent bank has not even explained why it was committed
at all. It is true that the dishonored checks were, as the Court of Appeals put
it, "eventually" paid. However, this took almost a month when, properly, the
checks should have been paid immediately upon presentment.
As the Court sees it, the initial carelessness of the respondent bank,
aggravated by the lack of promptitude in repairing its error, justifies the grant
of moral damages. This rather lackadaisical attitude toward the complaining
depositor constituted the gross negligence, if not wanton bad faith, that the
respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent
bank, the decision practically ignored the prejudice suffered by the
petitioner. This was simply glossed over if not, indeed, disbelieved. The fact
is that the petitioner's credit line was canceled and its orders were not acted
upon pending receipt of actual payment by the suppliers. Its business
declined. Its reputation was tarnished. Its standing was reduced in the
business community. All this was due to the fault of the respondent bank
which was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory
damages may be received "(2) for injury to the plaintiff s business standing
or commercial credit." There is no question that the petitioner did sustain
actual injury as a result of the dishonored checks and that the existence of
the loss having been established "absolute certainty as to its amount is not
required." 7 Such injury should bolster all the more the demand of the
petitioner for moral damages and justifies the examination by this Court of
the validity and reasonableness of the said claim.
We agree that moral damages are not awarded to penalize the defendant
but to compensate the plaintiff for the injuries he may have suffered. 8 In the
case at bar, the petitioner is seeking such damages for the prejudice
sustained by it as a result of the private respondent's fault. The respondent
court said that the claimed losses are purely speculative and are not
supported by substantial evidence, but if failed to consider that the amount
of such losses need not be established with exactitude precisely because of
their nature. Moral damages are not susceptible of pecuniary estimation.
Article 2216 of the Civil Code specifically provides that "no proof of
pecuniary loss is necessary in order that moral, nominal, temperate,

liquidated or exemplary damages may be adjudicated." That is why the

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

Art. 2229. Exemplary or corrective damages are imposed, by way

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

What is especially deplorable is that, having been informed of its error in not
crediting the deposit in question to the petitioner, the respondent bank did
not immediately correct it but did so only one week later or twenty-three
days after the deposit was made. It bears repeating that the record does not
contain any satisfactory explanation of why the error was made in the first
place and why it was not corrected immediately after its discovery. Such
ineptness comes under the concept of the wanton manner contemplated in
the Civil Code that calls for the imposition of exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its
discretion, hereby imposes upon the respondent bank exemplary damages
in the amount of P50,000.00, "by way of example or correction for the public
good," in the words of the law. It is expected that this ruling will serve as a
warning and deterrent against the repetition of the ineptness and
indefference that has been displayed here, lest the confidence of the public
in the banking system be further impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the
private respondent is ordered to pay the petitioner, in lieu of nominal
damages, moral damages in the amount of P20,000.00, and exemplary
damages in the amount of P50,000.00 plus the original award of attorney's
fees in the amount of P5,000.00, and costs.
SO ORDERED.

Bank of the Philippine Islands vs. Intermediate Appellate

Court, 206 SCRA 408 (1992)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION

G.R. No. 69162 February 21, 1992

BANK
OF
THE
PHILIPPINE
ISLANDS,
petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and the SPOUSES ARTHUR
CANLAS and VIVIENE CANLAS, respondents.
Leonen, Ramirez & Associates for petitioner.
L. Emmanuel B. Canilao for private respondents.

GRIO-AQUINO, J.:
In a decision dated September 3, 1984, the Intermediate Appellate Court
(now Court of Appeals) in AC-G.R. CV No. 69178 entitled, "Arthur A.
Canlas, et al., Plaintiff-Appellees vs. Commercial Bank and Trust Company
of the Philippines, Defendant-Appellant," reduced to P105,000 the P465,000
damage-award of the trial court to the private respondents for an error of a
bank teller which resulted in the dishonor of two small checks which the
private respondents had issued against their joint current account. This
petition for review of that decision was filed by the Bank.
The respondent spouses, Arthur and Vivienne Canlas, opened a joint
current account No. 210-520-73 on April 25, 1977 in the Quezon City
branch of the Commercial Bank and Trust Company of the Philippines
(CBTC) with an initial deposit of P2,250. Prior thereto, Arthur Canlas had an
existing separate personal checking account No. 210-442-41 in the same
branch.

When the respondent spouses opened their joint current account, the "new
accounts" teller of the bank pulled out from the bank's files the old and
existing signature card of respondent Arthur Canlas for Current Account No.
210-442-41 for use as I D and reference. By mistake, she placed the old
personal account number of Arthur Canlas on the deposit slip for the new
joint checking account of the spouses so that the initial deposit of P2,250 for
the joint checking account was miscredited to Arthur's personal account (p.
9, Rollo). The spouses subsequently deposited other amounts in their joint
account.
However, when respondent Vivienne Canlas issued a check for Pl,639.89 in
April 1977 and another check for P1,160.00 on June 1, 1977, one of the
checks was dishonored by the bank for insufficient funds and a penalty of
P20 was deducted from the account in both instances. In view of the
overdrawings, the bank tried to call up the spouses at the telephone number
which they had given in their application form, but the bank could not
contact them because they actually reside in Porac, Pampanga. The city
address and telephone number which they gave to the bank belonged to
Mrs. Canlas' parents.
On December 15, 1977, the private respondents filed a complaint for
damages against CBTC in the Court of First Instance of Pampanga (p. 113,
Rollo).
On February 27, 1978, the bank filed a motion to dismiss the complaint for
improper venue. The motion was denied.
During the pendency of the case, the Bank of the Philippine Islands (BPI)
and CBTC were merged. As the surviving corporation under the merger
agreement and under Section 80 (5) of the Corporation Code of the
Philippines, BPI took over the prosecution and defense of any pending
claims, actions or proceedings by and against CBTC.
On May 5, 1981, the Regional Trial Court of Pampanga rendered a decision
against BPI, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
defendant to pay the plaintiff the following:
1. P 5,000.00 as actual damages;

sentencing

2. P 150,000.00 for plaintiff Arthur Canlas and P150,000.00 for

plaintiff Vivienne S. Canlas representing moral damages;
3. P 150.000.00 as exemplary damages;
4. P 10,000.00 as attorney's fees; and
5. Costs. (p. 36, Rollo).
On appeal, the Intermediate Appellate Court deleted the actual damages
and reduced the other awards. The dispositive portion of its decision reads:
WHEREFORE, the judgment appealed from is hereby modified as
follows:
1. The award of P50,000.00 in actual damages is herewith
deleted.
2. Moral damages of P50,000.00 is awarded to plaintiffsappellees Arthur Canlas and Vivienne S. Canlas, not P50,000.00
each.
3. Exemplary damages is likewise reduced to the sum of
P50,000.00 and attorney's fees to P5,000.00.
Costs against the defendants appellant. (p. 40, Rollo.)
Petitioner filed this petition for review alleging that the appellate court erred
in holding that:
1. The venue of the case had been properly laid at Pampanga in
the light of private respondents' earlier declaration that Quezon
City is their true residence.
2. The petitioner was guilty of gross negligence in the handling of
private respondents' bank account.
3. Private respondents are entitled to the moral and exemplary
damages and attorney's fees adjudged by the respondent
appellate court.

On the question of venue raised by petitioner, it is evident that personal

actions may be instituted in the Court of First Instance (now Regional Trial
Court) of the province where the defendant or any of the defendants resides
or may be found, or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff (Section 2[b], Rule 4 of the Rules of Court). In this
case, there was ample proof that the residence of the plaintiffs is B. Sacan,
Porac, Pampanga (p. 117, Rollo). The city address of Mrs. Canlas' parents
was placed by the private respondents in their application for a joint
checking account, at the suggestion of the new accounts teller, presumably
to facilitate mailing of the bank statements and communicating with the
private respondents in case any problems should arise involving the
account. No waiver of their provincial residence for purposes of determining
the venue of an action against the bank may be inferred from the so-called
"misrepresentation" of their true residence.
The appellate court based its award of moral and exemplary damages, and
attorney's fees on its finding that the mistake committed by the new
accounts teller of the petitioner constituted "serious" negligence (p. 38,
Rollo). Said court further stressed that it cannot absolve the petitioner from
liability for damages to the private respondents, even on the assumption of
an honest mistake on its part, because of the embarrassment that even an
honest mistake can cause its depositors (p. 31, Rollo).
There is no merit in petitioner's argument that it should not be considered
negligent, much less held liable for damages on account of the inadvertence
of its bank employee for Article 1173 of the Civil Code only requires it to
exercise the diligence of a good father of family.
In Simex International (Manila), Inc. vs. Court of Appeals (183 SCRA 360,
367), this Court stressed the fiduciary nature of the relationship between a
bank and its depositors and the extent of diligence expected of it in handling
the accounts entrusted to its care.
In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as

and to whomever he directs. A blunder on the part of the bank,

such as the dishonor of a check without good reason, can cause
the depositor not a little embarrassment if not also financial loss
and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. . . .
The bank is not expected to be infallible but, as correctly observed by
respondent Appellate Court, in this instance, it must bear the blame for not
discovering the mistake of its teller despite the established procedure
requiring the papers and bank books to pass through a battery of bank
personnel whose duty it is to check and countercheck them for possible
errors. Apparently, the officials and employees tasked to do that did not
perform their duties with due care, as may be gathered from the testimony
of the bank's lone witness, Antonio Enciso, who casually declared that "the
approving officer does not have to see the account numbers and all those
things. Those are very petty things for the approving manager to look into"
(p. 78, Record on Appeal). Unfortunately, it was a "petty thing," like the
incorrect account number that the bank teller wrote on the initial deposit slip
for the newly-opened joint current account of the Canlas spouses, that
sparked this half-a-million-peso damage suit against the bank.
While the bank's negligence may not have been attended with malice and
bad faith, nevertheless, it caused serious anxiety, embarrassment and
humiliation to the private respondents for which they are entitled to recover
reasonable moral damages (American Express International, Inc. vs. IAC,
167 SCRA 209). The award of reasonable attorney's fees is proper for the
private respondents were compelled to litigate to protect their interest (Art.
2208, Civil Code). However, the absence of malice and bad faith renders
the award of exemplary damages improper (Globe Mackay Cable and Radio
Corp. vs. Court of Appeals, 176 SCRA 778).
WHEREFORE, the petition for review is granted. The appealed decision is
MODIFIED by deleting the award of exemplary damages to the private
respondents. In all other respects, the decision of the Intermediate Appellate
Court, now Court of Appeals, is AFFIRMED. No costs.

SO ORDERED.

Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA

641 (2000)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 112392

February 29, 2000

BANK
OF
THE
PHILIPPINE
ISLANDS,
petitioner,
vs.
COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents.
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of
Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial
Court of Makati, Branch 139,2 which dismissed the complaint filed by
petitioner Bank of the Philippine Islands against private respondent
Benjamin C. Napiza for sum of money.
On September 3, 1987, private respondent deposited in Foreign Currency
Deposit Unit (FCDU) Savings Account No. 028-1873 which he maintained in
petitioner bank's Buendia Avenue Extension Branch, Continental Bank
Manager's Check No. 000147574 dated August 17, 1984, payable to "cash"
in the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly
endorsed by private respondent on its dorsal side.5 It appears that the check
belonged to a certain Henry who went to the office of private respondent
and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private
respondent acceded, and agreed to deliver to Chan a signed blank
withdrawal slip, with the understanding that as soon as the check is cleared,
both of them would go to the bank to withdraw the amount of the check
upon private respondent's presentation to the bank of his passbook.
Using the blank withdrawal slip given by private respondent to Chan, on
October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount
of $2,541.67 from FCDU Savings Account No. 028-187. Notably, the

withdrawal slip shows that the amount was payable to Ramon A. de

Guzman and Agnes C. de Guzman and was duly initialed by the branch
assistant manager, Teresita Lindo.6
On November 20, 1984, petitioner received communication from the Wells
Fargo Bank International of New York that the said check deposited by
private respondent was a counterfeit check7 because it was "not of the type
or style of checks issued by Continental Bank International."8 Consequently,
Mr. Ariel Reyes, the manager of petitioner's Buendia Avenue Extension
Branch, instructed one of its employees, Benjamin D. Napiza IV, who is
private respondent's son, to inform his father that the check bounced.9
Reyes himself sent a telegram to private respondent regarding the dishonor
of the check. In turn, private respondent's son wrote to Reyes stating that
the check been assigned "for encashment" to Ramon A. de Guzman and/or
Agnes C. de Guzman after it shall have been cleared upon instruction of
Chan. He also said that upon learning of the dishonor of the check, his
father immediately tried to contact Chan but the latter was out of town.10
Private respondent's son undertook to return the amount of $2,500.00 to
petitioner bank. On December 18, 1984, Reyes reminded private
respondent of his son's promise and warned that should he fail to return that
amount within seven (7) days, the matter would be referred to the bank's
lawyers for appropriate action to protect the bank's interest.11 This was
followed by a letter of the bank's lawyer dated April 8, 1985 demanding the
return of the $2,500.00.12
In reply, private respondent wrote petitioner's counsel on April 20, 198513
stating that he deposited the check "for clearing purposes" only to
accommodate Chan. He added:
Further, please take notice that said check was deposited on
September 3, 1984 and withdrawn on October 23, 1984, or a total
period of fifty (50) days had elapsed at the time of withdrawal. Also, it
may not be amiss to mention here that I merely signed an authority to
withdraw said deposit subject to its clearing, the reason why the
transaction is not reflected in the passbook of the account. Besides, I
did not receive its proceeds as may be gleaned from the withdrawal
slip under the captioned signature of recipient.1wphi1.nt

If at all, my obligation on the transaction is moral in nature, which (sic) I

have been and is (sic) still exerting utmost and maximum efforts to
collect from Mr. Henry Chan who is directly liable under the
circumstances.
xxx

xxx

xxx

On August 12, 1986, petitioner filed a complaint against private respondent,

praying for the return of the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to date of full payment, a
sum equivalent to 20% of the total amount due as attorney's fees, and
litigation and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a
"blank" withdrawal slip with the understanding that the amount deposited
would be withdrawn only after the check in question has been cleared. He
likewise alleged that he instructed the party to whom he issued the signed
blank withdrawal slip to return it to him after the bank draft's clearance so
that he could lend that party his passbook for the purpose of withdrawing
the amount of $2,500.00. However, without his knowledge, said party was
able to withdraw the amount of $2,541.67 from his dollar savings account
through collusion with one of petitioner's employees. Private respondent
added that he had "given the Plaintiff fifty one (51) days with which to clear
the bank draft in question." Petitioner should have disallowed the withdrawal
because his passbook was not presented. He claimed that petitioner had no
one to blame except itself "for being grossly negligent;" in fact, it had
allegedly admitted having paid the amount in the check "by mistake" . . . "if
not altogether due to collusion and/or bad faith on the part of (its)
employees." Charging petitioner with "apparent ignorance of routine bank
procedures," by way of counterclaim, private respondent prayed for moral
damages of P100,000.00, exemplary damages of P50,000.00 and
attorney's fees of 30% of whatever amount that would be awarded to him
plus an honorarium of P500.00 per appearance in court.
Private respondent also filed a motion for admission of a third party
complaint against Chan. He alleged that "thru strategem and/or
manipulation," Chan was able to withdraw the amount of $2,500.00 even
without private respondent's passbook. Thus, private respondent prayed
that third party defendant Chan be made to refund to him the amount

withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium

per appearance.
Petitioner filed a comment on the motion for leave of court to admit the third
party complaint, whenever it asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private respondent alone was
liable "for the value of the credit given on account of the draft or check
deposited." It contended that private respondent was estopped from
disclaiming liability because he himself authorized the withdrawal of the
amount by signing the withdrawal slip. Petitioner prayed for the denial of the
said motion so as not to unduly delay the disposition of the main case
asserting that private respondent's claim could be ventilated in another
case.
Private respondent replied that for the parties to obtain complete relief and
to avoid multiplicity of suits, the motion to admit third party complaint should
be granted. Meanwhile, the trial court issued orders on August 25, 1987 and
October 28, 1987 directing private respondent to actively participate in
locating Chan. After private respondent failed to comply, the trial court, on
May 18, 1988, dismissed the third party complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint.
The lower court held that petitioner could not hold private respondent liable
based on the check's face value alone. To so hold him liable "would render
inutile the requirement of "clearance" from the drawee bank before the value
of a particular foreign check or draft can be credited to the account of a
depositor making such deposit." The lower court further held that "it was
incumbent upon the petitioner to credit the value of the check in question to
the account of the private respondent only upon receipt of the notice of final
payment and should not have authorized the withdrawal from the latter's
account of the value or proceeds of the check." Having admitted that it
committed a "mistake" in not waiting for the clearance of the check before
authorizing the withdrawal of its value or proceeds, petitioner should suffer
the resultant loss.
On appeal, the Court of Appeals affirmed the lower court's decision. The
appellate court held that petitioner committed "clears gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money without presenting private
respondent's passbook and, before the check was cleared and in crediting
the amount indicated therein in private respondent's account. It stressed

that the mere deposit of a check in private respondent's account did not
mean that the check was already private respondent's property. The check
still had to be cleared and its proceeds can only be withdrawn upon
presentation of a passbook in accordance with the bank's rules and
regulations. Furthermore, petitioner's contention that private respondent
warranted the check's genuineness by endorsing it is untenable for it would
render useless the clearance requirement. Likewise, the requirement of
presentation of a passbook to ascertain the propriety of the accounting
reflected would be a meaningless exercise. After all, these requirements are
designed to protect the bank from deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos,
Inc. v. IAC,14 where this Court stated that a personal check is not legal
tender or money, and held that the check deposited in this case must be
cleared before its value could be properly transferred to private
respondent's account.
Without filing a motion for the reconsideration of the Court of Appeals'
Decision, petitioner filed this petition for review on certiorari, raising the
following issues:
1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER
HIS WARRANTIES AS A GENERAL INDORSER.
2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED
BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON.
3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT
IN ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the
dorsal side of the check, should be liable for the amount stated therein in
accordance with the following provision of the Negotiable Instruments Law
(Act No. 2031):
Sec. 66. Liability of general indorser. Every indorser who indorses
without qualification, warrants to all subsequent holders in due course

(a) The matters and things mentioned in subdivisions (a), (b), and (c)
of the next preceding section; and

(b) That the instrument is at the time of his indorsement, valid and
subsisting.
And, in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its tenor,
and that if it be dishonored, and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or
to any subsequent indorser who may be compelled to pay it.
Sec. 65, on the other hand, provides for the following warranties of a person
negotiating an instrument by delivery or by qualified indorsement: (a) that
the instrument is genuine and in all respects what it purports to be; (b) that
he has a good title to it, and (c) that all prior parties had capacity to
contract.15 In People v. Maniego,16 this Court described the liabilities of an
indorser as follows:
Appellant's contention that as mere indorser, she may not be liable on
account of the dishonor of the checks indorsed by her, is likewise
untenable. Under the law, the holder or last indorsee of a negotiable
instrument has the right "to enforce payment of the instrument for the
full amount thereof against all parties liable thereon. Among the
"parties liable thereon." Is an indorser of the instrument, i.e., "a person
placing his signature upon an instrument otherwise than as a maker,
drawer or acceptor * * unless he clearly indicated by appropriate words
his intention to be bound in some other capacity." Such an indorser
"who indorses without qualification," inter alia "engages that on due
presentment, * * (the instrument) shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored,
and the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or any subsequent indorser who may
be compelled to pay it." Maniego may also be deemed an
"accommodation party" in the light of the facts, i.e., a person "who has
signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value thereof, and for the purpose of lending his name to
some other person." As such, she is under the law "liable on the
instrument to a holder for value, notwithstanding such holder at the
time of taking the instrument knew * * (her) to be only an
accommodation party," although she has the right, after paying the
holder, to obtain reimbursement from the party accommodated, "since

the relation between them is in effect that of principal and surety, the
accommodation party being the surety.
It is thus clear that ordinarily private respondent may be held liable as an
indorser of the check or even as an accommodation party.17 However, to
hold private respondent liable for the amount of the check he deposited by
the strict application of the law and without considering the attending
circumstances in the case would result in an injustice and in the erosion of
the public trust in the banking system. The interest of justice thus demands
looking into the events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent
"presented the opportunity for the withdrawal of the amount in question."
Petitioner relied "on the genuine signature on the withdrawal slip, the
personality of private respondent's son and the lapse of more than fifty (50)
days from date of deposit of the Continental Bank draft, without the same
being returned yet."18 We hold, however, that the propriety of the withdrawal
should be gauged by compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private respondent, the following
rules on withdrawal of deposits appear:
4. Withdrawals must be made by the depositor personally but in some
exceptional circumstances, the Bank may allow withdrawal by another
upon the depositor's written authority duly authenticated; and neither a
deposit nor a withdrawal will be permitted except upon the presentation
of the depositor's savings passbook, in which the amount deposited
withdrawn shall be entered only by the Bank.
5. Withdrawals may be made by draft, mail or telegraphic transfer in
currency of the account at the request of the depositor in writing on the
withdrawal slip or by authenticated cable. Such request must indicate
the name of the payee/s, amount and the place where the funds are to
be paid. Any stamp, transmission and other charges related to such
withdrawals shall be for the account of the depositor and shall be paid
by him/her upon demand. Withdrawals may also be made in the form
of travellers checks and in pesos. Withdrawals in the form of notes/bills
are allowed subject however, to their (availability).

6. Deposits shall not be subject to withdrawal by check, and may be

withdrawal only in the manner above provided, upon presentation of
the depositor's savings passbook and with the withdrawal form
supplied by the Bank at the counter.19
Under these rules, to be able to withdraw from the savings account deposit
under the Philippine foreign currency deposit system, two requisites must be
presented to petitioner bank by the person withdrawing an amount: (a) a
duly filled-up withdrawal slip, and (b) the depositor's passbook. Private
respondent admits he signed a blank withdrawal slip ostensibly in violation
of Rule No. 6 requiring that the request for withdrawal must name the
payee, the amount to be withdrawn and the place where such withdrawal
should be made. That the withdrawal slip was in fact a blank one with only
private respondent's two signatures affixed on the proper spaces is
buttressed by petitioner's allegation in the instant petition that had private
respondent indicated therein the person authorized to receive the money,
then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner
contends that "(I)n failing to do so (i.e., naming his authorized agent), he
practically authorized any possessor thereof to write any amount and to
collect the same."20
Such contention would have been valid if not for the fact that the withdrawal
slip itself indicates a special instruction that the amount is payable to
"Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case,
petitioner's personnel should have been duly warned that Gayon, who was
also employed in petitioner's Buendia Ave. Extension branch,21 was not the
proper payee of the proceeds of the check. Otherwise, either Ramon or
Agnes de Guzman should have issued another authority to Gayon for such
withdrawal. Of course, at the dorsal side of the withdrawal slip is an
"authority to withdraw" naming Gayon the person who can withdraw the
amount indicated in the check. Private respondent does not deny having
signed such authority. However, considering petitioner's clear admission
that the withdrawal slip was a blank one except for private respondent's
signature, the unavoidable conclusion is that the typewritten name of
"Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by
Gayon or whoever was allowed by petitioner to withdraw the amount. Under
these facts, there could not have been a principal-agent relationship
between private respondent and Gayon so as to render the former liable for
the amount withdrawn.

Moreover, the withdrawal slip contains a boxed warning that states: "This
receipt must be signed and presented with the corresponding foreign
currency savings passbook by the depositor in person. For withdrawals thru
a representative, depositor should accomplish the authority at the back."
The requirement of presentation of the passbook when withdrawing an
amount cannot be given mere lip service even though the person making
the withdrawal is authorized by the depositor to do so. This is clear from
Rule No. 6 set out by petitioner so that, for the protection of the bank's
interest and as a reminder to the depositor, the withdrawal shall be entered
in the depositor's passbook. The fact that private respondent's passbook
was not presented during the withdrawal is evidenced by the entries therein
showing that the last transaction that he made with the bank was on
September 3, 1984, the date he deposited the controversial check in the
amount of $2,500.00.22
In allowing the withdrawal, petitioner likewise overlooked another rule that is
printed in the passbook. Thus:
2. All deposits will be received as current funds and will be repaid in
the same manner; provided, however, that deposits of drafts, checks,
money orders, etc. will be accented as subject to collection only and
credited to the account only upon receipt of the notice of final payment.
Collection charges by the Bank's foreign correspondent in effecting
such collection shall be for the account of the depositor. If the account
has sufficient balance, the collection shall be debited by the Bank
against the account. If, for any reason, the proceeds of the deposited
checks, drafts, money orders, etc., cannot be collected or if the Bank is
required to return such proceeds, the provisional entry therefor made
by the Bank in the savings passbook and its records shall be deemed
automatically cancelled regardless of the time that has elapsed, and
whether or not the defective items can be returned to the depositor;
and the Bank is hereby authorized to execute immediately the
necessary corrections, amendments or changes in its record, as well
as on the savings passbook at the first opportunity to reflect such
cancellation. (Emphasis and underlining supplied.)
As correctly held by the Court of Appeals, in depositing the check in his
name, private respondent did not become the outright owner of the amount
stated therein. Under the above rule, by depositing the check with petitioner,

private respondent was, in a way, merely designating petitioner as the

collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager's check or ordinary check,
is not legal tender.23 As such, after receiving the deposit, under its own
rules, petitioner shall credit the amount in private respondent's account or
infuse value thereon only after the drawee bank shall have paid the amount
of the check or the check has been cleared for deposit. Again, this is in
accordance with ordinary banking practices and with this Court's
pronouncement that "the collecting bank or last endorser generally suffers
the loss because has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of the endorsements."24 The rule
finds more meaning in this case where the check involved is drawn on a
foreign bank and therefore collection is more difficult than when the drawee
bank is a local one even though the check in question is a manager's
check.25
In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank
in Madrid, Spain, paid the amounts represented in three (3) checks to
Virginia Boncan, the finance officer of the Philippine Embassy in Madrid.
The bank did so without previously clearing the checks with the drawee
bank, the Philippine National Bank in New York, on account of the "special
treatment" that Boncan received from the personnel of Banco Atlantico's
foreign department. The Court held that the encashment of the checks
without prior clearance is "contrary to normal or ordinary banking practice
specially so where the drawee bank is a foreign bank and the amounts
involved were large." Accordingly, the Court approved the Auditor General's
denial of Banco Atlantico's claim for payment of the value of the checks that
was withdrawn by Boncan.
Said ruling brings to light the fact that the banking business is affected with
public interest. By the nature of its functions, a bank is under obligation to
treat the accounts of its depositors "with meticulous care, always having in
mind the fiduciary nature of their relationship."27 As such, in dealing with its
depositors, a bank should exercise its functions not only with the diligence
of a good father of a family but it should do so with the highest degree of
care.28

In the case at bar, petitioner, in allowing the withdrawal of private

respondent's deposit, failed to exercise the diligence of a good father of a
family. In total disregard of its own rules, petitioner's personnel negligently
handled private respondent's account to petitioner's detriment. As this Court
once said on this matter:
Negligence is the omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent
and reasonable man would do. The seventy-eight (78)-year-old, yet
still relevant, case of Picart v. Smith, provides that test by which to
determine the existence of negligence in a particular case which may
be stated as follows: Did the defendant in doing the alleged negligent
act use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then he is guilty
of negligence. The law here in effect adopts the standard supposed to
be supplied by the imaginary conduct of the discreet pater-familias of
the Roman law. The existence of negligence in a given case is not
determined by reference to the personal judgment of the actor in the
situation before him. The law considers what would be reckless,
blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that.29
Petitioner violated its own rules by allowing the withdrawal of an amount that
is definitely over and above the aggregate amount of private respondent's
dollar deposits that had yet to be cleared. The bank's ledger on private
respondent's account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00.30 Upon private respondent's
deposit of $2,500.00 on September 3, 1984, that amount was credited in his
ledger as a deposit resulting in the corresponding total balance of
$3,250.00.31 On September 10, 1984, the amount of $600.00 and the
additional charges of $10.00 were indicated therein as withdrawn thereby
leaving a balance $2,640.00. On September 30, 1984, an interest of $11.59
was reflected in the ledger and on October 23, 1984, the amount of
$2,541.67 was entered as withdrawn with a balance of $109.92.32 On
November 19, 1984 the word "hold" was written beside the balance of
$109.92.33 That must have been the time when Reyes, petitioner's branch
manager, was informed unofficially of the fact that the check deposited was
a counterfeit, but petitioner's Buendia Ave. Extension Branch received a

copy of the communication thereon from Wells Fargo Bank International in

New York the following day, November 20, 1984.34 According to Reyes,
Wells Fargo Bank International handled the clearing of checks drawn
against U.S. banks that were deposited with petitioner.35
From these facts on record, it is at once apparent that petitioner's personnel
allowed the withdrawal of an amount bigger than the original deposit of
$750.00 and the value of the check deposited in the amount of $2,500.00
although they had not yet received notice from the clearing bank in the
United States on whether or not the check was funded. Reyes' contention
that after the lapse of the 35-day period the amount of a deposited check
could be withdrawn even in the absence of a clearance thereon, otherwise it
could take a long time before a depositor could make a withdrawal,36 is
untenable. Said practice amounts to a disregard of the clearance
requirement of the banking system.
While it is true that private respondent's having signed a blank withdrawal
slip set in motion the events that resulted in the withdrawal and encashment
of the counterfeit check, the negligence of petitioner's personnel was the
proximate cause of the loss that petitioner sustained. Proximate cause,
which is determined by a mixed consideration of logic, common sense,
policy and precedent, is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury,
and without which the result would not have occurred."37 The proximate
cause of the withdrawal and eventual loss of the amount of $2,500.00 on
petitioner's part was its personnel's negligence in allowing such withdrawal
in disregard of its own rules and the clearing requirement in the banking
system. In so doing, petitioner assumed the risk of incurring a loss on
account of a forged or counterfeit foreign check and hence, it should suffer
the resulting damage.1wphi1.nt
WHEREFORE, the petition for review on certiorari is DENIED. The Decision
of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED.
SO ORDERED.

Consolidated Bank and Trust Corporation vs. Court of

Appeals, 410 SCRA 562 (2003)
Republic
SUPREME
Manila

of

the

Philipppines
COURT

FIRST DIVISION
[G.R. No. 138569. September 11, 2003]
THE CONSOLIDATED BANK and TRUST CORPORATION, Petitioner, vs.
COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs,
Respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision[1] of the Court of Appeals
dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed
decision reversed the Decision[2] of the Regional Trial Court of Manila,
Branch 8, absolving petitioner Consolidated Bank and Trust Corporation,
now known as Solidbank Corporation (Solidbank), of any liability. The
questioned resolution of the appellate court denied the motion for
reconsideration of Solidbank but modified the decision by deleting the award
of exemplary damages, attorneys fees, expenses of litigation and cost of
suit.
The Facts
Solidbank is a domestic banking corporation organized and existing under
Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C.
Diaz), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya
(Macaraya), filled up a savings (cash) deposit slip for P990 and a savings

(checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit
slips and the passbook. The teller acknowledged receipt of the deposit by
returning to Calapre the duplicate copies of the two deposit slips. Teller No.
6 stamped the deposit slips with the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time
and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he
left the passbook with Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that somebody got the passbook.[3] Calapre went back to L.C.
Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a
check of P200,000. Macaraya, together with Calapre, went to Solidbank and
presented to Teller No. 6 the deposit slip and check. The teller stamped the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE
on the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but
she could not remember to whom she gave the passbook. When Macaraya
asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then
standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for
the deposit of a check for P90,000 drawn on Philippine Banking Corporation
(PBC). This PBC check of L.C. Diaz was a check that it had long closed.[4]
PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBCs specimen signature.
Failing to get back the passbook, Macaraya went back to her office and
reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel
Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive
Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction
using the same passbook until L.C. Diaz could open a new account.[5] On
the same day, Diaz formally wrote Solidbank to make the same request. It
was also on the same day that L.C. Diaz learned of the unauthorized

withdrawal the day before, 14 August 1991, of P300,000 from its savings
account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal slip. A certain Noel
Tamayo received the P300,000.
In an Information[6] dated 5 September 1991, L.C. Diaz charged its
messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa
through Falsification of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City Prosecutor filed a Motion
to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from
Solidbank the return of its money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of
Money against Solidbank with the Regional Trial Court of Manila, Branch 8.
After trial, the trial court rendered on 28 December 1994 a decision
absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998,
the Court of Appeals issued its Decision reversing the decision of the trial
court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the
motion for reconsideration of Solidbank. The appellate court, however,
modified its decision by deleting the award of exemplary damages and
attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that possession of this book shall
raise the presumption of ownership and any payment or payments made by
the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor
personally.[9]
At the time of the withdrawal, a certain Noel Tamayo was not only in
possession of the passbook, he also presented a withdrawal slip with the
signatures of the authorized signatories of L.C. Diaz. The specimen

signatures of these persons were in the signature cards. The teller stamped
the withdrawal slip with the words Saving Teller No. 5. The teller then
passed on the withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the
signatures on the withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care and observed the
rules on savings account when it allowed the withdrawal of P300,000 from
the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz
to prove that the signatures on the withdrawal slip were forged. The trial
court admonished L.C. Diaz for not offering in evidence the National Bureau
of Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not
offer this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor
must keep the passbook under lock and key.[10] When another person
presents the passbook for withdrawal prior to Solidbanks receipt of the
notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the
questioned transaction was now out of the lock and key and presumptively
ready for a business transaction.[11]
Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbanks act of allowing the
withdrawal of P300,000 was not the direct and proximate cause of the loss.
The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession
of the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and
(3) the possession by an unauthorized person of a PBC check long closed
by L.C. Diaz, which check was deposited on the day of the fraudulent
withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow
the precautionary procedures observed by the two parties whenever L.C.
Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a
letter must accompany withdrawals of more than P20,000. The letter must

request Solidbank to allow the withdrawal and convert the amount to a

managers check. The bearer must also have a letter authorizing him to
withdraw the same amount. Another person driving a car must accompany
the bearer so that he would not walk from Solidbank to the office in making
the withdrawal. The trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew
P82,554 without any separate letter of authorization or any communication
with Solidbank that the money be converted into a managers check.
The trial court further justified the dismissal of the complaint by holding that
the case was a last ditch effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING
the complaint.
The Court further renders judgment in favor of defendant bank pursuant to
its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as
attorneys fees.
With costs against plaintiff.
SO ORDERED.[12]
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbanks negligence was the proximate
cause of the unauthorized withdrawal of P300,000 from the savings account
of L.C. Diaz. The appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault
or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this
chapter.
The appellate court held that the three elements of a quasi-delict are
present in this case, namely: (a) damages suffered by the plaintiff; (b) fault

or negligence of the defendant, or some other person for whose acts he

must respond; and (c) the connection of cause and effect between the fault
or negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received
the withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller
called up L.C. Diaz, Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found Solidbank liable for its
negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in
entrusting its deposits to its messenger and its messenger in leaving the
passbook with the teller, Solidbank could not escape liability because of the
doctrine of last clear chance. Solidbank could have averted the injury
suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from
Solidbank is more than that of a good father of a family. The business and
functions of banks are affected with public interest. Banks are obligated to
treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship with their clients. The Court of
Appeals found Solidbank remiss in its duty, violating its fiduciary relationship
with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby
REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank and Trust
Corporation to pay plaintiff-appellant the sum of Three Hundred
Thousand Pesos (P300,000.00), with interest thereon at the rate
of 12% per annum from the date of filing of the complaint until
paid, the sum of P20,000.00 as exemplary damages, and
P20,000.00 as attorneys fees and expenses of litigation as well as
the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the

amount of P30,000.00 as attorneys fees.
SO ORDERED.[13]
Acting on the motion for reconsideration of Solidbank, the appellate court
affirmed its decision but modified the award of damages. The appellate
court deleted the award of exemplary damages and attorneys fees. Invoking
Article 2231[14] of the Civil Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with gross negligence.
Since Solidbank was guilty of simple negligence only, the award of
exemplary damages was not justified. Consequently, the award of attorneys
fees was also disallowed pursuant to Article 2208 of the Civil Code. The
expenses of litigation and cost of suit were also not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998
is affirmed with modification by deleting the award of exemplary damages
and attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the Court of
Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE
ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL
OF
P300,000.00
TO
RESPONDENTS
MESSENGER EMERANO ILAGAN, SINCE THERE IS NO
AGREEMENT BETWEEN THE PARTIES IN THE OPERATION
OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING
LAW, WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A
WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE

DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT
PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY
TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED
THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE
RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND
CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE
SELECTION AND SUPERVISION OF ITS MESSENGER
EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS
CHECKS AND OTHER FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE
RESPONDENT TO RECOVER ITS P300,000.00 AFTER
FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM
ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE
DAMAGES AWARDED AGAINST PETITIONER UNDER
ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS
FINDING THAT PETITIONER BANKS NEGLIGENCE WAS
ONLY CONTRIBUTORY.[16]
The Ruling of the Court
The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the
application of the law. The trial court pinned the liability on L.C. Diaz based
on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the
law on quasi-delict to determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is generally applicable
when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or

culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan.[17] Article 1980 of the Civil
Code expressly provides that x x x savings x x x deposits of money in banks
and similar institutions shall be governed by the provisions concerning
simple loan. There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor
on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (RA 8791),[18] which took
effect on 13 June 2000, declares that the State recognizes the fiduciary
nature of banking that requires high standards of integrity and
performance.[19] This new provision in the general banking law, introduced
in 2000, is a statutory affirmation of Supreme Court decisions, starting with
the 1990 case of Simex International v. Court of Appeals,[20] holding that
the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their
relationship.[21]
This fiduciary relationship means that the banks obligation to observe high
standards of integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of
a good father of a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good father of a
family.[22] Section 2 of RA 8791 prescribes the statutory diligence required
from banks that banks must observe high standards of integrity and
performance in servicing their depositors. Although RA 8791 took effect
almost nine years after the unauthorized withdrawal of the P300,000 from
L.C. Diazs savings account, jurisprudence[23] at the time of the withdrawal
already imposed on banks the same high standard of diligence required
under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not

convert the contract between the bank and its depositors from a simple loan
to a trust agreement, whether express or implied. Failure by the bank to pay
the depositor is failure to pay a simple loan, and not a breach of trust.[24]
The law simply imposes on the bank a higher standard of integrity and
performance in complying with its obligations under the contract of simple
loan, beyond those required of non-bank debtors under a similar contract of
simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but
to earn money for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the highest possible
interest rate on their own borrowers. The interest spread or differential
belongs to the bank and not to the depositors who are not cestui que trust of
banks. If depositors are cestui que trust of banks, then the interest spread or
income belongs to the depositors, a situation that Congress certainly did not
intend in enacting Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that responsibility arising from
negligence in the performance of every kind of obligation is demandable.
For breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time
and he had to go to Allied Bank for another transaction. The passbook was
still in the hands of the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully guarded by the depositor
and kept under lock and key, if possible. When the passbook is in the
possession of Solidbanks tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding
the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in
insuring that they return the passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the rules on savings
account provide that any person in possession of the passbook is

presumptively its owner. If the tellers give the passbook to the wrong
person, they would be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that person. For failing to
return the passbook to Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to observe such high
degree of diligence in safeguarding the passbook, and in insuring its return
to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a
presumption that the defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or negligent. In contrast, in
culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was
no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the
trial court Teller No. 6, the teller with whom Calapre left the passbook and
who was supposed to return the passbook to him. The record does not
indicate that Teller No. 6 verified the identity of the person who retrieved the
passbook. Solidbank also failed to adduce in evidence its standard
procedure in verifying the identity of the person retrieving the passbook, if
there is such a procedure, and that Teller No. 6 implemented this procedure
in the present case.
Solidbank is bound by the negligence of its employees under the principle of
respondeat superior or command responsibility. The defense of exercising
the required diligence in the selection and supervision of employees is not a
complete defense in culpa contractual, unlike in culpa aquiliana.[25]
The bank must not only exercise high standards of integrity and
performance, it must also insure that its employees do likewise because this
is the only way to insure that the bank will comply with its fiduciary duty.
Solidbank failed to present the teller who had the duty to return to Calapre
the passbook, and thus failed to prove that this teller exercised the high
standards of integrity and performance required of Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed
that L.C. Diazs negligence in not securing its passbook under lock and key
was the proximate cause that allowed the impostor to withdraw the
P300,000. For the appellate court, the proximate cause was the tellers
negligence in processing the withdrawal without first verifying with L.C. Diaz.
We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without
which the result would not have occurred.[26] Proximate cause is
determined by the facts of each case upon mixed considerations of logic,
common sense, policy and precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was
processing the deposit. After completion of the transaction, Solidbank had
the contractual obligation to return the passbook only to Calapre, the
authorized representative of L.C. Diaz. Solidbank failed to fulfill its
contractual obligation because it gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the
withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbanks rules on savings account, mere possession of
the passbook raises the presumption of ownership. It was the negligent act
of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of
the passbook. Had the passbook not fallen into the hands of the impostor,
the loss of P300,000 would not have happened. Thus, the proximate cause
of the unauthorized withdrawal was Solidbanks negligence in not returning
the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause
of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to
verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to
confirm the withdrawal. There is no arrangement between Solidbank and
L.C. Diaz to this effect. Even the agreement between Solidbank and L.C.
Diaz pertaining to measures that the parties must observe whenever

withdrawals of large amounts are made does not direct Solidbank to call up
L.C. Diaz.
There is no law mandating banks to call up their clients whenever their
representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of money. L.C.
Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on
guard to verify the withdrawal. Prior to the withdrawal of P300,000, the
impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to
deflect suspicion from the withdrawal of a much bigger amount of money.
The appellate court thus erred when it imposed on Solidbank the duty to call
up L.C. Diaz to confirm the withdrawal when no law requires this from banks
and when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal.
Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he
was familiar with its teller so that there was no more need for the teller to
verify the withdrawal. Solidbank relies on the following statements in the
Booking and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC
and indicated the amount of P90,000 which he deposited in favor of L.C.
Diaz and Company. After successfully withdrawing this large sum of money,
accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan
then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his
home province at Bauan, Batangas. Ilagan extravagantly and lavishly spent
his money but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his guilt.[28]
(Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing out that the person who
withdrew the P300,000 was a certain Noel Tamayo. Both the trial and
appellate courts stated that this Noel Tamayo presented the passbook with
the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel
Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no
justifiable reason to reverse the factual finding of the trial court and the
Court of Appeals. The tellers who processed the deposit of the P90,000
check and the withdrawal of the P300,000 were not presented during trial to
substantiate Solidbanks claim that Ilagan deposited the check and made the
questioned withdrawal. Moreover, the entry quoted by Solidbank does not
categorically state that Ilagan presented the withdrawal slip and the
passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that of the
other, or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the loss
but failed to do so, is chargeable with the loss.[29] Stated differently, the
antecedent negligence of the plaintiff does not preclude him from recovering
damages caused by the supervening negligence of the defendant, who had
the last fair chance to prevent the impending harm by the exercise of due
diligence.[30]
We do not apply the doctrine of last clear chance to the present case.
Solidbank is liable for breach of contract due to negligence in the
performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor his
last clear chance to avoid the loss, would exonerate the defendant from
liability.[31] Such contributory negligence or last clear chance by the plaintiff
merely serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract.[32]
Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be regulated by the
courts, according to the circumstances. This means that if the defendant
exercised the proper diligence in the selection and supervision of its
employee, or if the plaintiff was guilty of contributory negligence, then the
courts may reduce the award of damages. In this case, L.C. Diaz was guilty
of contributory negligence in allowing a withdrawal slip signed by its

authorized signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court
held the depositor guilty of contributory negligence, we allocated the
damages between the depositor and the bank on a 40-60 ratio. Applying the
same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the
actual damages awarded by the appellate court. Solidbank must pay the
other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
MODIFICATION. Petitioner Solidbank Corporation shall pay private
respondent L.C. Diaz and Company, CPAs only 60% of the actual damages
awarded by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company,
CPAs. Proportionate costs.
SO ORDERED.

Philippine Banking Corporation vs. Court of Appeals, 419

SCRA 487 (2004)
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 133710

January 13, 2004

PHILIPPINE
BANKING
CORPORATION,
petitioner,
vs.
COURT OF APPEALS and AMALIO L. SARMIENTO, doing business under
the firm name "A.L. SARMIENTO CONSTRUCTION," respondents.
DECISION
CORONA, J.:
Before us is a petition for review seeking the reversal of the decision of the
Court of Appeals1 dated October 22, 1997, which affirmed with modification
the decision of the Regional Trial Court, Branch 20, Makati City, dismissing
the complaint filed by petitioner Philippine Banking Corporation against
private respondent Amalio L. Sarmiento, as well as the resolution of the
Court of the Appeals dated May 14, 1998 denying petitioners motion for
reconsideration.
The facts follow.
Amalio L. Sarmiento, registered owner of A.L. Sarmiento Construction,
applied for a loan from Philippine Banking Corporation in the sum of
P4,126,000, evidenced by promissory note no. 626-84. Pursuant thereto,
Sarmiento obligated himself to pay the amount with interest at the rate of
29% per annum. Additionally, it was stipulated that if payment was not made
upon maturity of the loan, penalty charges of 1% per month and 25% of the
total amount due would be charged against him. Sarmiento signed the
aforesaid promissory note together with the disclosure statement on
loan/credit transaction provided by the bank.

Sarmiento failed to pay the aforesaid obligation on maturity, prompting

Philippine Banking Corporation to send him a letter of demand dated
January 2, 1989. Despite the demand, however, Sarmiento still failed to
settle his indebtedness. Thus, on February 20, 1989, Philippine Banking
Corporation filed a complaint for a sum of money against him. In his answer,
Sarmiento denied that he received the proceeds of the loan transaction and
prayed that the case against him be dismissed.
On August 26, 1991, the trial court rendered its decision, thus:
WHEREFORE, in view of the foregoing, plaintiff has miserably failed to
prove its case by preponderance of evidence. The above-entitled case
is ordered dismissed with costs against plaintiff.
Judgment over counterclaim in the sum of P30,000.00 as attorneys
fees and P20,000.00 as litigation expenses is hereby awarded in favor
of the defendant. No moral or exemplary damages adjudged.2
On September 25, 1991, Philippine Banking Corporation filed a motion for
new trial which the trial court subsequently granted despite the opposition of
Sarmiento.
On August 3, 1992, after the reception of evidence, the trial court rendered
a decision finding the evidence adduced by the bank to be insufficient to
substantiate its claim. The trial court reinstated its earlier dismissal of the
case against Sarmiento and denied Philippine Banking Corporations
subsequent motion for reconsideration.
Aggrieved, Philippine Banking Corporation appealed to the Court of Appeals
raising the following assignments of error:
First Assignment of Error
THE TRIAL COURT ERRED IN NOT FINDING THAT PLAINTIFFAPPELLANT HAS ESTABLISHED ITS CAUSE OF ACTION WITH AN
OVERWHELMING PREPONDERANCE OF EVIDENCE
Second Assignment of Error
THE TRIAL COURT ERRED IN CONCLUDING THAT WHEN PLAINTIFFAPPELLANT
WITHDREW
THE
AMOUNT
OF
P4,126,000.00

SIMULTANEOUSLY TO THE TIME THAT IT CREDITED THE SAME TO

DEFENDANTS ACCOUNT, PLAINTIFF BANK ABORTED THE LOAN
TRANSACTION UNDER PROMISSORY NOTE 626-84
Third Assignment of Error
THE TRIAL COURT SERIOUSLY ERRED IN AWARDING DEFENDANTAPPELLEE P30,000.00 AS ATTORNEYS FEES AND P20,000.00 AS
LITIGATION EXPENSES, THE SAME BEING WITHOUT FACTUAL AND
LEGAL BASIS, AND EXCESSIVE UNDER THE CIRCUMSTANCES.3
On October 22, 1997, the Court of Appeals affirmed with modification the
trial courts decision:
WHEREFORE, the August 3, 1992 decision appealed from is
MODIFIED to delete the trial courts award of attorneys fees. The rest
is AFFIRMED in toto.4
Hence, the instant petition anchoring its plea for reversal on the following
errors allegedly committed by the Court of Appeals:
IN NOT HOLDING THAT PETITIONER HAS OVERCOME ITS BURDEN
OF PROOF THROUGH THE PRESENTATION OF OVERWHELMING
PREPONDERANCE OF EVIDENCE ESTABLISHING ITS CAUSE OF
ACTION
IN NOT HOLDING THAT THE RESPONDENTS EVIDENCE FAILED TO
SUCCESSFULLY CONTROVERT HIS OWN JUDICIAL ADMISSION OF
THE GENUINENESS AND DUE EXECUTION OF THE ACTIONABLE
DOCUMENTS UPON WHICH THE PETITIONERS CAUSE OF ACTION IS
BASED
IN NOT HOLDING THAT THE SUBJECT PROMISSORY NOTE WAS
EXECUTED BY THE RESPONDENT FOR A VALID CONSIDERATION
IN NOT HOLDING THAT PETITIONERS EVIDENCE HAS SUFFICIENTLY
SHOWN THAT THE RESPONDENT RECEIVED THE PROCEEDS OF THE
SUBJECT PROMISSORY NOTE
IN AWARDING LITIGATION EXPENSES FOR P20,000.00 WITHOUT
LEGAL BASIS.

Petitioner contends that the appellate court incorrectly upheld the trial
courts misinterpretation of the clear import of the entries in the bank
statement. Said document showed that the proceeds of the loan obtained by
respondent Sarmiento under promissory note no. 626-64 had been credited
to his current account no. 1025-00815-0 maintained at petitioners New
Manila Branch in the name of A.L. Sarmiento Construction. Petitioner further
alleges that its cause of action against respondent Sarmiento was
predicated upon actionable documents, the due execution and authenticity
of which respondent admitted. Thus, no proof was required of petitioner to
establish the contents of the said documents because such judicial
admissions of respondent created a prima facie case in petitioners favor.
We disagree.
It is undisputed that respondent Sarmiento signed the promissory note and
the accompanying disclosure statement on loan/credit transaction. But said
pieces of evidence proved only the existence of such documents. There
was even no question as to that because respondent Sarmiento himself
admitted the due execution thereof. The important issue was whether or not
respondent Sarmiento actually received the proceeds of the subject loan so
as to make him liable therefor, a matter which should have been ventilated
before the trial court.
The trial court did in fact make a finding that the documentary evidence of
petitioner failed to prove anything showing that respondent indeed received
the proceeds of the loan. The Court of Appeals affirmed the conclusions of
the trial court and declared:
A pre-existing obligation, it may be conceded, constitutes value and
may, of and by itself, serve as valuable and sufficient consideration for
a contract such as the loan sued upon. As an essential element of a
contract, however, the same should have been satisfactorily proved by
the appellant particularly when, as in the instant case, the absence of
consideration was precisely put in issue by the pleadings and was
buttressed by both oral and documentary evidence. Having failed in
this material respect, the appellants withdrawal of the amount
supposedly credited to the appellees account was understandably
interpreted by the court a quo as a termination/cancellation of the loan
the latter applied for. Considering further that contracts without
consideration do not exist in contemplation of law and produce no

effect whatsoever (Article 1352, Civil Code of the Philippines), the trial,
likewise, correctly dismissed the appellants case.5 (emphasis
supplied)
A statement in a written instrument regarding the payment of consideration
is merely in the nature of a receipt and may be contradicted.6 Respondent
Sarmiento denied having received the proceeds of the loan and in fact
presented evidence showing that on the day petitioner claimed to have
credited the subject amount, it was again debited or withdrawn by petitioner,
admittedly upon the instruction of the officials from petitioners head office.
Petitioner attempted to controvert this fact by claiming that the proceeds of
the loan were applied to respondents previous obligations to the bank. But
we find nothing in the records showing that respondent had other
obligations to which the proceeds of the loan could or should have been
applied. Moreover, petitioner failed to explain just exactly what said
obligations were or to what extent the purported proceeds were applied in
satisfaction thereof. What appeared clearly was that the proceeds of the
loan were deposited then withdrawn the same day by petitioner itself, thus
negating its claim that respondent actually received it. Petitioner therefore
failed to establish its case against respondent Sarmiento.
Be that as it may, the general rule is that only questions of law may be
raised in a petition for review on certiorari. The appellate jurisdiction of this
Court in cases brought to it from the Court of Appeals is limited to reviewing
and correcting the errors of law committed by the latter, the findings of fact
of the Court of Appeals being final and conclusive. In other words, the
power of this Court is limited to determining whether the legal conclusions
drawn from the findings of fact are correct. Barring a showing that the
findings of fact complained of are totally devoid of support in the records,
such determination must stand for the Court is neither expected nor
required to examine or refute the oral and documentary evidence submitted
by the parties.7
Finally, the award of litigation expenses in the sum of P20,000 should be
deleted for lack of legal basis.
WHEREFORE, the instant petition for certiorari is hereby DENIED. The
assailed decision and resolution of the Court of Appeals are AFFIRMED,
subject to the MODIFICATION that the award of P20,000 as litigation
expenses is hereby deleted.

SO ORDERED.

Samsung Construction Company Philippines, Inc. vs. Far East

Bank, 436 SCRA 402 (2004)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS,
respondents.

DECISION

TINGA, J.:
Called to fore in the present petition is a classic textbook question if a
bank pays out on a forged check, is it liable to reimburse the drawer from
whose account the funds were paid out? The Court of Appeals, in reversing
a trial court decision adverse to the bank, invoked tenuous reasoning to
acquit the bank of liability. We reverse, applying time-honored principles of
law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung
Construction"), while based in Bian, Laguna, maintained a current account
with defendant Far East Bank and Trust Company1 ("FEBTC") at the latters
Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions
account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks
remained in the custody of the companys accountant, Kyu Yong Lee
("Kyu").4

On 19 March 1992, a certain Roberto Gonzaga presented for payment

FEBTC Check No. 432100 to the banks branch in Bel-Air, Makati. The
check, payable to cash and drawn against Samsung Constructions current
account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first
checked the balance of Samsung Constructions account. After ascertaining
there were enough funds to cover the check,5 she compared the signature
appearing on the check with the specimen signature of Jong as contained in
the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature
appearing on the check. She then asked Gonzaga to submit proof of his
identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank branch
officers approve checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked the signature on
the check as against that on the signature card. He too concluded that the
check was indeed signed by Jong. Velez then forwarded the check and
signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III ("Sempio"), the assistant accountant of
Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to Sempio, who vouched for
the genuineness of Jongs signature. Confirming the identity of Gonzaga,
Sempio said that the check was for the purchase of equipment for Samsung
Construction. Satisfied with the genuineness of the signature of Jong, Syfu
authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined
the balance of the bank account and discovered that a check in the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00)
had been encashed. Aware that he had not prepared such a check for
Jongs signature, Kyu perused the checkbook and found that the last blank
check was missing.7 He reported the matter to Jong, who then proceeded to
the bank. Jong learned of the encashment of the check, and realized that
his signature had been forged. The Bank Manager reputedly told Jong that
he would be reimbursed for the amount of the check.8 Jong proceeded to

the police station and consulted with his lawyers.9 Subsequently, a criminal
case for qualified theft was filed against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel,
demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response,
FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for
the payment of the amount debited as a result of the questioned check plus
interest, and attorneys fees.12 The case was docketed as Civil Case No. 9261506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to
testify on the claim that Jongs signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI, presented Senior
NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jongs signature had been forged on the
check. On the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP),14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jongs signature on the check was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held
that Jongs signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Constructions account the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and
attorneys fees in the amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the
Special Fourteenth Division of the Court of Appeals rendered a Decision,16
reversing the RTC Decision and absolving FEBTC from any liability. The
Court of Appeals held that the contradictory findings of the NBI and the PNP
created doubt as to whether there was forgery.17 Moreover, the appellate
court also held that assuming there was forgery, it occurred due to the
negligence of Samsung Construction, imputing blame on the accountant
Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto.18 The Court of

Appeals invoked the ruling in PNB v. National City Bank of New York19 that,
if a loss, which must be borne by one or two innocent persons, can be
traced to the neglect or fault of either, such loss would be borne by the
negligent party, even if innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTCs finding of forgery. It
also contends that the appellate court erred in finding that it had been
negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right
to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or
under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of
authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly
inoperative," and payment made "through or under such signature" is
ineffectual or does not discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawers account. The traditional justification
for the result is that the drawee is in a superior position to detect a forgery
because he has the makers signature and is expected to know and
compare it.22 The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the
signature cards they have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against

which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that
of debtor and creditor. So far as the legal relationship between the two
is concerned, the situation is the same as though the bank had
borrowed money from the depositor, agreeing to repay it on demand,
or had bought goods from the depositor, agreeing to pay for them on
demand. The bank owes the depositor money in the same sense that
any debtor owes money to his creditor. Added to this, in the case of
bank and depositor, there is, of course, the banks obligation to pay
checks drawn by the depositor in proper form and presented in due
course. When the bank receives the deposit, it impliedly agrees to pay
only upon the depositors order. When the bank pays a check, on
which the depositors signature is a forgery, it has failed to comply with
its contract in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection by
the depositor himself. And yet, if a bank pays the check, it is paying out
its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential
agent. The bank still must bear the loss. Even in a case where the
forged check was drawn by the depositors partner, the loss was
placed upon the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit
against the defendant bank for money which had been deposited to the
plaintiffs credit and which the bank had paid out on checks bearing
forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that
the plaintiff waited eight or nine months after discovering the forgery,
before notifying the bank, did not, as a matter of law, constitute a
ratification of the payment, so as to preclude the plaintiff from holding
the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is
bound to know its depositors signature." The rule is variously

expressed in the many decisions in which the question has been

considered. But they all sum up to the proposition that a bank must
know the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer
determines who can draw against the customers account by
specifying whose signature is necessary on checks that are
chargeable against the customers account. Therefore, a check drawn
against the account of an individual customer that is signed by
someone other than the customer, and without authority from her, is
not properly payable and is not chargeable to the customers account,
inasmuch as any "unauthorized signature on an instrument is
ineffective" as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or
absolute defense by the party whose signature is forged.26 On the premise
that Jongs signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a
bank has been so deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived.27 The forgery may be
so near like the genuine as to defy detection by the depositor himself, and
yet the bank is liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged.
A document formally presented is presumed to be genuine until it is proved
to be fraudulent. In a forgery trial, this presumption must be overcome but
this can only be done by convincing testimony and effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by

handwriting experts from the NBI and the PNP, both agencies of the
government.
xxx
These contradictory findings create doubt on whether there was indeed
a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230
SCRA 550, the Supreme Court held that forgery cannot be presumed;
it must be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponents expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will
have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts, both
clothed with the presumption of official duty, in order to draw a conclusion,
especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate
tier in the judicial hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it has the appropriate
skill and competence to plough through the minutiae that scatters the factual
field. In failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of Appeals was
sadly remiss. Of course, courts, like humans, are fallible, and not every error
deserves a stern rebuke. Yet, the appellate courts error in this case
warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every
court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary "expert"
opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as
more credible than that of the PNP, and explained its reason behind the
conclusion:
After subjecting the evidence of both parties to a crucible of analysis,
the court arrived at the conclusion that the testimony of the NBI

document examiner is more credible because the testimony of the

PNP Crime Laboratory Services document examiner reveals that there
are a lot of differences in the questioned signature as compared to the
standard specimen signature. Furthermore, as testified to by Ms.
Rhoda Flores, NBI expert, the manner of execution of the standard
signatures used reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of the signatures
whereas the questioned signature is a hesitating slow drawn execution
stroke. Clearly, the person who executed the questioned signature was
hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted
that "apparently, there [are] differences on that questioned signature and
the standard signatures."31 This Court, in examining the signatures, makes
a similar finding. The PNP expert excused the noted "differences" by
asserting that they were mere "variations," which are normal deviations
found in writing.32 Yet the RTC, which had the opportunity to examine the
relevant documents and to personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the testimony of the
PNP expert as unconvincing. During the trial, she was confronted several
times with apparent differences between strokes in the questioned signature
and the genuine samples. Each time, she would just blandly assert that
these differences were just "variations,"33 as if the mere conjuration of the
word would sufficiently disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value unless supported
by sufficiently cogent reasons which might amount almost to a
demonstration.34
The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the
point to the short stroke of the terminal in the capital letter L," as referred to
by the PNP examiner who had marked it in her comparison chart as "point
no. 6." To the plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90) angle with the previous stroke. Of the
twenty one (21) other genuine samples examined by the PNP, at least nine
(9) ended with an upward stroke.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are looped,
while the upward stroke of the seventh36 forms a severe forty-five degree

(45) with the previous stroke. The difference is glaring, and indeed, the
PNP examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is
directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic)
point 6 is repeated or the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in
the questioned signature as a mere variation,38 the same excuse she
proffered for the other marked differences noted by the Court and the
counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of
the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior Document Examiner
with the NBI, and had held that rank for twelve years prior to her testimony.
She had placed among the top five examinees in the Competitive Seminar
in Question Document Examination, conducted by the NBI Academy, which
qualified her as a document examiner.40 She had trained with the Royal
Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had
examined more than fifty to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day.42 In comparison, PNP
document examiner Perez admitted to having examined only around five
hundred documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific
comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She compared the
questioned signature as against ten (10) other sample signatures of Jong.

Five of these signatures were executed on checks previously issued by

Jong, while the other five contained in business letters Jong had signed.45
The NBI found that there were significant differences in the handwriting
characteristics existing between the questioned and the sample signatures,
as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiners testimony, and
explained her reasons in its Decisions. While the Court of Appeals
disagreed and upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than those of the NBI
expert. As a throwaway, the assailed Decision noted that the PNP, not the
NBI, had the opportunity to examine the specimen signature card signed by
Jong, which was relied upon by the employees of FEBTC in authenticating
Jongs signature. The distinction is irrelevant in establishing forgery. Forgery
can be established comparing the contested signatures as against those of
any sample signature duly established as that of the persons whose
signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did
compare the questioned signature against the bank signature cards. The
crucial fact in question is whether or not the check was forged, not whether
the bank could have detected the forgery. The latter issue becomes relevant
only if there is need to weigh the comparative negligence between the bank
and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs
testimony that the signature on the check was not his.47 The assertion may
seem self-serving at first blush, yet it cannot be ignored that Jong was in the
best position to know whether or not the signature on the check was his.
While his claim should not be taken at face value, any averments he would
have on the matter, if adjudged as truthful, deserve primacy in
consideration. Jongs testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw
a check for close to a million pesos and make it payable to cash or bearer,
and not to order. Jong immediately reported the forgery upon its discovery.

He filed the appropriate criminal charges against Sempio, the putative

forger.48
Now for determination is whether Samsung Construction was precluded
from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung
Construction was negligent, and invoked the doctrines that "where a loss
must be borne by one of two innocent person, can be traced to the neglect
or fault of either, it is reasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has succeeded49
or who put into the power of the third person to perpetuate the wrong."50
Applying these rules, the Court of Appeals determined that it was the
negligence of Samsung Construction that allowed the encashment of the
forged check.
In the case at bar, the forgery appears to have been made possible
through the acts of one Jose Sempio III, an assistant accountant
employed by the plaintiff Samsung [Construction] Co. Philippines, Inc.
who supposedly stole the blank check and who presumably is
responsible for its encashment through a forged signature of Jong Kyu
Lee. Sempio was assistant to the Korean accountant who was in
possession of the blank checks and who through negligence, enabled
Sempio to have access to the same. Had the Korean accountant been
more careful and prudent in keeping the blank checks Sempio would
not have had the chance to steal a page thereof and to effect the
forgery. Besides, Sempio was an employee who appears to have had
dealings with the defendant Bank in behalf of the plaintiff corporation
and on the date the check was encashed, he was there to certify that it
was a genuine check issued to purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a
party from setting up the defense of forgery if it is guilty of negligence.52 Yet,
we are unable to conclude that Samsung Construction was guilty of
negligence in this case. The appellate court failed to explain precisely how
the Korean accountant was negligent or how more care and prudence on
his part would have prevented the forgery. We cannot sustain this "tar and
feathering" resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such partys

negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees. The Courts pronouncement in PCI Bank v.
Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors
confidential employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and imposing the forged
paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel
against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that
his accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary
version was presented by FEBTC. However, such testimony cannot prove
that the checks were indeed kept in a safety box, as Jongs testimony on
that point is hearsay, since Kyu, and not Jong, would have the personal
knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there
was no negligence on Samsung Constructions part. The presumption
remains that every person takes ordinary care of his concerns,56 and that
the ordinary course of business has been followed.57 Negligence is not
presumed, but must be proven by him who alleges it.58 While the complaint
was lodged at the instance of Samsung Construction, the matter it had to
prove was the claim it had alleged - whether the check was forged. It cannot
be required as well to prove that it was not negligent, because the legal
presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact
that Samsung Construction was negligent. While the payee, as in this case,
may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption
of regularity. Proving a negative fact may be "a difficult office,"59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was
unable to dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals finding of
negligence.

The assailed Decision replicated the extensive efforts which FEBTC

devoted to establish that there was no negligence on the part of the bank in
its acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his
own negligence. The rule of equity enunciated in PNB v. National City Bank
of New York, 60 as relied upon by the Court of Appeals, deserves careful
examination.
The point in issue has sometimes been said to be that of negligence.
The drawee who has paid upon the forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if
the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all contributed to induce
the banker's negligence, then he may lose his right to cast the loss
upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon
the forged signature bears the loss. The exception to this rule arises only
when negligence can be traced on the part of the drawer whose signature
was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the
burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges the
depositors signature and collect on the checks from the bank.62 And for
another, in point of fact Samsung Construction was not negligent at all since
it reported the forgery almost immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals,64 which was also cited by
the Court of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of

the drawer and forgery of an indorsement is that the drawee is in a
position to verify the drawers signature by comparison with one in his
hands, but has ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a
check which bears either a forgery of the drawers signature or a
forged indorsement. But the bank may, as a general rule, recover back
the money which it has paid on a check bearing a forged indorsement,
whereas it has not this right to the same extent with reference to a
check bearing a forgery of the drawers signature.66
The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying
out on the forged check, we might as well comment on the banks
performance of its duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable check. Yet, there are
several troubling circumstances that lead us to believe that the bank itself
was remiss in its duty.
The fact that the check was made out in the amount of nearly one million
pesos is unusual enough to require a higher degree of caution on the part of
the bank. Indeed, FEBTC confirms this through its own internal procedures.
Checks below twenty-five thousand pesos require only the approval of the
teller; those between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the amount exceed
one hundred thousand pesos, the concurrence of two bank officers is
required.67
In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for
a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68 Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated
as the payee of the check, and who did not carry with him any written proof
that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung

Construction.69 These circumstances are already suspicious if taken

independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzagas presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity of
the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank
tried, but failed, to contact Jong over the phone to verify the check.70 She
added that calling the issuer or drawer of the check to verify the same was
not part of the standard procedure of the bank, but an "extra effort."71 Even
assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite the
absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was
even claimed that everytime FEBTC would contact Jong about problems
with his account, Jong would hand the phone over to Sempio.72 However,
the only proof of such allegations is the testimony of Gemma Velez, who
also testified that she did not know Sempio personally,73 and had met
Sempio for the first time only on the day the check was encashed.74 In fact,
Velez had to inquire with the other officers of the bank as to whether
Sempio was actually known to the employees of the bank.75 Obviously,
Velez had no personal knowledge as to the past relationship between
FEBTC and Sempio, and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not present as a
witness any other employee of their Bel-Air branch, including those who
supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio,
acting in behalf of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should have put the bank on
the highest degree of alert. The Court recently emphasized that the highest
degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it
is their duty to protect in return their many clients and depositors who

transact business with them. They have the obligation to treat their
clients account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence
required of banks, therefore, is more than that of a good father of a
family.76
Given the circumstances, extraordinary diligence dictates that FEBTC
should have ascertained from Jong personally that the signature in the
questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is
not precluded from setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a
forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor.77 A bank is
liable, irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of
Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.

Heirs of Eduardo Manlapat vs. Court of Appeals, 459 SCRA 412

(2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 125585

June 8, 2005

HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPATBANAAG

and
LEON
M.
BANAAG,
JR.,
Petitioners,
vs.
HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and
JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA,
and the REGISTER OF DEEDS of Meycauayan, Bulacan, Respondents.
DECISION
Tinga, J.:
Before this Court is a Rule 45 petition assailing the D E C I S I O N1 dated
29 September 1994 of the Court of Appeals that reversed the D E C I S I O
N2 dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch
6, Malolos. The trial court declared Transfer Certificates of Title (TCTs) No.
T-9326-P(M) and No. T-9327-P(M) as void ab initio and ordered the
restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of
Eduardo Manlapat (Eduardo), petitioners predecessor-in-interest.
The controversy involves Lot No. 2204, a parcel of land with an area of
1,058 square meters, located at Panghulo, Obando, Bulacan. The property
had been originally in the possession of Jose Alvarez, Eduardos
grandfather, until his demise in 1916. It remained unregistered until 8
October 1976 when OCT No. P-153(M) was issued in the name of Eduardo
pursuant to a free patent issued in Eduardos name3 that was entered in the
Registry of Deeds of Meycauayan, Bulacan.4 The subject lot is adjacent to a
fishpond owned by one

Ricardo Cruz (Ricardo), predecessor-in-interest of respondents Consuelo

Cruz and Rosalina Cruz-Bautista (Cruzes).5
On 19 December 1954, before the subject lot was titled, Eduardo sold a
portion thereof with an area of 553 square meters to Ricardo. The sale is
evidenced by a deed of sale entitled "Kasulatan ng Bilihang Tuluyan ng
Lupang Walang Titulo (Kasulatan)"6 which was signed by Eduardo himself
as vendor and his wife Engracia Aniceto with a certain Santiago Enriquez
signing as witness. The deed was notarized by Notary Public Manolo Cruz.7
On 4 April 1963, the Kasulatan was registered with the Register of Deeds of
Bulacan.8
On 18 March 1981, another Deed of Sale9 conveying another portion of the
subject lot consisting of 50 square meters as right of way was executed by
Eduardo in favor of Ricardo in order to reach the portion covered by the first
sale executed in 1954 and to have access to his fishpond from the
provincial road.10 The deed was signed by Eduardo himself and his wife
Engracia Aniceto, together with Eduardo Manlapat, Jr. and Patricio
Manlapat. The same was also duly notarized on 18 July 1981 by Notary
Public Arsenio Guevarra.11
In December 1981, Leon Banaag, Jr. (Banaag), as attorney-in-fact of his
father-in-law Eduardo, executed a mortgage with the Rural Bank of San
Pascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as
collateral. Banaag deposited the owners duplicate certificate of OCT No. P153(M) with the bank.
On 31 August 1986, Ricardo died without learning of the prior issuance of
OCT No. P-153(M) in the name of Eduardo.12 His heirs, the Cruzes, were
not immediately aware of the consummated sale between Eduardo and
Ricardo.
Eduardo himself died on 4 April 1987. He was survived by his heirs,
Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo,
Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat.13 Neither
did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in
favor of their predecessor-in-interest, Ricardo. Yet subsequently, the Cruzes
came to learn about the sale and the issuance of the OCT in the name of
Eduardo.

Upon learning of their right to the subject lot, the Cruzes immediately tried to
confront petitioners on the mortgage and obtain the surrender of the OCT.
The Cruzes, however, were thwarted in their bid to see the heirs. On the
advice of the Bureau of Lands, NCR Office, they brought the matter to the
barangay captain of Barangay Panghulo, Obando, Bulacan. During the
hearing, petitioners were informed that the Cruzes had a legal right to the
property covered by OCT and needed the OCT for the purpose of securing
a separate title to cover the interest of Ricardo. Petitioners, however, were
unwilling to surrender the OCT.14
Having failed to physically obtain the title from petitioners, in July 1989, the
Cruzes instead went to RBSP which had custody of the owners duplicate
certificate of the OCT, earlier surrendered as a consequence of the
mortgage. Transacting with RBSPs manager, Jose Salazar (Salazar), the
Cruzes sought to borrow the owners duplicate certificate for the purpose of
photocopying the same and thereafter showing a copy thereof to the
Register of Deeds. Salazar allowed the Cruzes to bring the owners
duplicate certificate outside the bank premises when the latter showed the
Kasulatan.15 The Cruzes returned the owners duplicate certificate on the
same day after having copied the same. They then brought the copy of the
OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed
the same to him to secure his legal opinion as to how the Cruzes could
legally protect their interest in the property and register the same.16 Flores
suggested the preparation of a subdivision plan to be able to segregate the
area purchased by Ricardo from Eduardo and have the same covered by a
separate title.17
Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla),
Land Registration Officer, Director III, Legal Affairs Department, Land
Registration Authority at Quezon City, who agreed with the advice given by
Flores.18 Relying on the suggestions of Flores and Arandilla, the Cruzes
hired two geodetic engineers to prepare the corresponding subdivision plan.
The subdivision plan was presented to the Land Management Bureau,
Region III, and there it was approved by a certain Mr. Pambid of said office
on 21 July 1989.
After securing the approval of the subdivision plan, the Cruzes went back to
RBSP and again asked for the owners duplicate certificate from Salazar.
The Cruzes informed him that the presentation of the owners duplicate

certificate was necessary, per advise of the Register of Deeds, for the
cancellation of the OCT and the issuance in lieu thereof of two separate
titles in the names of Ricardo and Eduardo in accordance with the approved
subdivision plan.19 Before giving the owners duplicate certificate, Salazar
required the Cruzes to see Atty. Renato Santiago (Atty. Santiago), legal
counsel of RBSP, to secure from the latter a clearance to borrow the title.
Atty. Santiago would give the clearance on the condition that only Cruzes
put up a substitute collateral, which they did.20 As a result, the Cruzes got
hold again of the owners duplicate certificate.
After the Cruzes presented the owners duplicate certificate, along with the
deeds of sale and the subdivision plan, the Register of Deeds cancelled the
OCT and issued in lieu thereof TCT No. T-9326-P(M) covering 603 square
meters of Lot No. 2204 in the name of Ricardo and TCT No. T-9327-P(M)
covering the remaining 455 square meters in the name of Eduardo.21
On 9 August 1989, the Cruzes went back to the bank and surrendered to
Salazar TCT No. 9327-P(M) in the name of Eduardo and retrieved the title
they had earlier given as substitute collateral. After securing the new
separate titles, the Cruzes furnished petitioners with a copy of TCT No.
9327-P(M) through the barangay captain and paid the real property tax for
1989.22
The Cruzes also sent a formal letter to Guillermo Reyes, Jr., Director,
Supervision Sector, Department III of the Central Bank of the Philippines,
inquiring whether they committed any violation of existing bank laws under
the circumstances. A certain Zosimo Topacio, Jr. of the Supervision Sector
sent a reply letter advising the Cruzes, since the matter is between them
and the bank, to get in touch with the bank for the final settlement of the
case.23
In October of 1989, Banaag went to RBSP, intending to tender full payment
of the mortgage obligation. It was only then that he learned of the dealings
of the Cruzes with the bank which eventually led to the subdivision of the
subject lot and the issuance of two separate titles thereon. In exchange for
the full payment of the loan, RBSP tried to persuade petitioners to accept
TCT No. T-9327-P(M) in the name of Eduardo.24
As a result, three (3) cases were lodged, later consolidated, with the trial
court, all involving the issuance of the TCTs, to wit:

(1) Civil Case No. 650-M-89, for reconveyance with damages filed by
the heirs of Eduardo Manlapat against Consuelo Cruz, Rosalina CruzBautista, Rural Bank of San Pascual, Jose Salazar and Jose Flores, in
his capacity as Deputy Registrar, Meycauayan Branch of the Registry
of Deeds of Bulacan;
(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against
Consuelo Cruz, et. [sic] al.; and
(3) Civil Case No. 644-M-89, for declaration of nullity of title with
damages filed by Rural Bank of San Pascual, Inc. against the spouses
Ricardo Cruz and Consuelo Cruz, et al.25
After trial of the consolidated cases, the RTC of Malolos rendered a decision
in favor of the heirs of Eduardo, the dispositive portion of which reads:
WHEREFORE, premised from the foregoing, judgment is hereby rendered:
1.Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T9327-P(M) as void ab initio and ordering the Register of Deeds,
Meycauayan Branch to cancel said titles and to restore Original
Certificate of Title No. P-153(M) in the name of plaintiffs predecessorin-interest Eduardo Manlapat;
2.-Ordering the defendants Rural Bank of San Pascual, Jose Salazar,
Consuelo Cruz and Rosalina Cruz-Bautista, to pay the plaintiffs Heirs
of Eduardo Manlapat, jointly and severally, the following:
a)P200,000.00 as moral damages;
b)P50,000.00 as exemplary damages;
c)P20,000.00 as attorneys fees; and
d)the costs of the suit.
3.Dismissing the counterclaims.
SO ORDERED."26
The trial court found that petitioners were entitled to the reliefs of
reconveyance and damages. On this matter, it ruled that petitioners were

bona fide mortgagors of an unclouded title bearing no annotation of any lien

and/or encumbrance. This fact, according to the trial court, was confirmed
by the bank when it accepted the mortgage unconditionally on 25 November
1981. It found that petitioners were complacent and unperturbed, believing
that the title to their property, while serving as security for a loan, was safely
vaulted in the impermeable confines of RBSP. To their surprise and
prejudice, said title was subdivided into two portions, leaving them a portion
of 455 square meters from the original total area of 1,058 square meters, all
because of the fraudulent and negligent acts of respondents and RBSP.
The trial court ratiocinated that even assuming that a portion of the subject
lot was sold by Eduardo to Ricardo, petitioners were still not privy to the
transaction between the bank and the Cruzes which eventually led to the
subdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M),
clearly to the damage and prejudice of petitioners.27
Concerning the claims for damages, the trial court found the same to be
bereft of merit. It ruled that although the act of the Cruzes could be deemed
fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless,
was clearly guilty of negligence in letting the Cruzes borrow the owners
duplicate certificate of the OCT. Neither the bank nor its manager had
business entrusting to strangers titles mortgaged to it by other persons for
whatever reason. It was a clear violation of the mortgage and banking laws,
the trial court concluded.
The trial court also ruled that although Salazar was personally responsible
for allowing the title to be borrowed, the bank could not escape liability for it
was guilty of contributory negligence. The evidence showed that RBSPs
legal counsel was sought for advice regarding respondents request. This
could only mean that RBSP through its lawyer if not through its manager
had known in advance of the Cruzes intention and still it did nothing to
prevent the eventuality. Salazar was not even summarily dismissed by the
bank if he was indeed the sole person to blame. Hence, the banks claim for
damages must necessarily fail.28
The trial court granted the prayer for the annulment of the TCTs as a
necessary consequence of its declaration that reconveyance was in order.
As to Flores, his work being ministerial as Deputy Register of the Bulacan
Registry of Deeds, the trial court absolved him of any liability with a stern

warning that he should deal with his future transactions more carefully and
in the strictest sense as a responsible government official.29
Aggrieved by the decision of the trial court, RBSP, Salazar and the Cruzes
appealed to the Court of Appeals. The appellate court, however, reversed
the decision of the RTC. The decretal text of the decision reads:
THE FOREGOING CONSIDERED, the appealed decision is hereby
reversed and set aside, with costs against the appellees.
SO ORDERED.30
The appellate court ruled that petitioners were not bona fide mortgagors
since as early as 1954 or before the 1981 mortgage, Eduardo already sold
to Ricardo a portion of the subject lot with an area of 553 square meters.
This fact, the Court of Appeals noted, is even supported by a document of
sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of
Eduardo, and registered with the Register of Deeds of Bulacan. The
appellate court also found that on 18 March 1981, for the second time,
Eduardo sold to Ricardo a separate area containing 50 square meters, as a
road right-of-way.31 Clearly, the OCT was issued only after the first sale. It
also noted that the title was given to the Cruzes by RBSP voluntarily, with
knowledge even of the banks counsel.32 Hence, the imposition of damages
cannot be justified, the Cruzes themselves being the owners of the property.
Certainly, Eduardo misled the bank into accepting the entire area as a
collateral since the 603-square meter portion did not anymore belong to
him. The appellate court, however, concluded that there was no conspiracy
between the bank and Salazar.33
Hence, this petition for review on certiorari.
Petitioners ascribe errors to the appellate court by asking the following
questions, to wit: (a) can a mortgagor be compelled to receive from the
mortgagee a smaller portion of the originally encumbered title partitioned
during the subsistence of the mortgage, without the knowledge of, or
authority derived from, the registered owner; (b) can the mortgagee
question the veracity of the registered title of the mortgagor, as noted in the
owners duplicate certificate, and thus, deliver the certificate to such third
persons, invoking an adverse, prior, and unregistered claim against the
registered title of the mortgagor; (c) can an adverse prior claim against a

registered title be noted, registered and entered without a competent court

order; and (d) can belief of ownership justify the taking of property without
due process of law?34
The kernel of the controversy boils down to the issue of whether the
cancellation of the OCT in the name of the petitioners predecessor-ininterest and its splitting into two separate titles, one for the petitioners and
the other for the Cruzes, may be accorded legal recognition given the
peculiar factual backdrop of the case. We rule in the affirmative.
Private
respondents
the portion titled in their names

(Cruzes)

own

Consonant with law and justice, the ultimate denouement of the property
dispute lies in the determination of the respective bases of the warring
claims. Here, as in other legal disputes, what is written generally deserves
credence.
A careful perusal of the evidence on record reveals that the Cruzes have
sufficiently proven their claim of ownership over the portion of Lot No. 2204
with an area of 553 square meters. The duly notarized instrument of
conveyance was executed in 1954 to which no less than Eduardo was a
signatory. The execution of the deed of sale was rendered beyond doubt by
Eduardos admission in his Sinumpaang Salaysay dated 24 April 1963.35
These documents make the affirmance of the right of the Cruzes
ineluctable. The apparent irregularity, however, in the obtention of the
owners duplicate certificate from the bank, later to be presented to the
Register of Deeds to secure the issuance of two new TCTs in place of the
OCT, is another matter.
Petitioners argue that the 1954 deed of sale was not annotated on the OCT
which was issued in 1976 in favor of Eduardo; thus, the Cruzes claim of
ownership based on the sale would not hold water. The Court is not
persuaded.
Registration is not a requirement for validity of the contract as between the
parties, for the effect of registration serves chiefly to bind third persons.36
The principal purpose of registration is merely to notify other persons not
parties to a contract that a transaction involving the property had been
entered into. Where the party has knowledge of a prior existing interest

which is unregistered at the time he acquired a right to the same land, his
knowledge of that prior unregistered interest has the effect of registration as
to him.37
Further, the heirs of Eduardo cannot be considered third persons for
purposes of applying the rule. The conveyance shall not be valid against
any person unless registered, except (1) the grantor, (2) his heirs and
devisees, and (3) third persons having actual notice or knowledge thereof.38
Not only are petitioners the heirs of Eduardo, some of them were actually
parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation
of the adverse claim of the Cruzes on the OCT is no longer required to bind
the heirs of Eduardo, petitioners herein.
Petitioners
had
no
mortgage over disputed portion

right

to

constitute

The requirements of a valid mortgage are clearly laid down in Article 2085 of
the New Civil Code, viz:
ART. 2085. The following requisites are essential to the contracts of pledge
and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be
legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property. (emphasis supplied)
For a person to validly constitute a valid mortgage on real estate, he must
be the absolute owner thereof as required by Article 2085 of the New Civil
Code.39 The mortgagor must be the owner, otherwise the mortgage is
void.40 In a contract of mortgage, the mortgagor remains to be the owner of
the property although the property is subjected to a lien.41 A mortgage is
regarded as nothing more than a mere lien, encumbrance, or security for a

debt, and passes no title or estate to the mortgagee and gives him no right
or claim to the possession of the property.42 In this kind of contract, the
property mortgaged is merely delivered to the mortgagee to secure the
fulfillment of the principal obligation.43 Such delivery does not empower the
mortgagee to convey any portion thereof in favor of another person as the
right to dispose is an attribute of ownership.44 The right to dispose includes
the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not
being the owner of the property, cannot dispose of the whole or part thereof
nor cause the impairment of the security in any manner without violating the
foregoing rule.45 The mortgagee only owns the mortgage credit, not the
property itself.46
Petitioners submit as an issue whether a mortgagor may be compelled to
receive from the mortgagee a smaller portion of the lot covered by the
originally encumbered title, which lot was partitioned during the subsistence
of the mortgage without the knowledge or authority of the mortgagor as
registered owner. This formulation is disingenuous, baselessly assuming, as
it does, as an admitted fact that the mortgagor is the owner of the
mortgaged property in its entirety. Indeed, it has not become a salient issue
in this case since the mortgagor was not the owner of the entire mortgaged
property in the first place.
Issuance of OCT No. P-153(M), improper
It is a glaring fact that OCT No. P-153(M) covering the property mortgaged
was in the name of Eduardo, without any annotation of any prior disposition
or encumbrance. However, the property was sufficiently shown to be not
entirely owned by Eduardo as evidenced by the Kasulatan. Readily
apparent upon perusal of the records is that the OCT was issued in 1976,
long after the Kasulatan was executed way back in 1954. Thus, a portion of
the property registered in Eduardos name arising from the grant of free
patent did not actually belong to him. The utilization of the Torrens system
to perpetrate fraud cannot be accorded judicial sanction.
Time and again, this Court has ruled that the principle of indefeasibility of a
Torrens title does not apply where fraud attended the issuance of the title,
as was conclusively established in this case. The Torrens title does not
furnish a shied for fraud.47 Registration does not vest title. It is not a mode of
acquiring ownership but is merely evidence of such title over a particular
property. It does not give the holder any better right than what he actually

has, especially if the registration was done in bad faith. The effect is that it is
as if no registration was made at all.48 In fact, this Court has ruled that a
decree of registration cut off or extinguished a right acquired by a person
when such right refers to a lien or encumbrance on the landnot to the right
of ownership thereofwhich was not annotated on the certificate of title
issued thereon.49
Issuance
of
and T-9327-P(M), Valid

TCT

Nos.

T-9326-P(M)

The validity of the issuance of two TCTs, one for the portion sold to the
predecessor-in-interest of the Cruzes and the other for the portion retained
by petitioners, is readily apparent from Section 53 of the Presidential Decree
(P.D.) No. 1529 or the Property Registration Decree. It provides:
SEC 53. Presentation of owners duplicate upon entry of new certificate.
No voluntary instrument shall be registered by the Register of Deeds, unless
the owners duplicate certificate is presented with such instrument, except in
cases expressly provided for in this Decree or upon order of the court, for
cause shown.
The production of the owners duplicate certificate, whenever any voluntary
instrument is presented for registration, shall be conclusive authority from
the registered owner to the Register of Deeds to enter a new certificate or to
make a memorandum of registration in accordance with such instrument,
and the new certificate or memorandum shall be binding upon the registered
owner and upon all persons claiming under him, in favor of every purchaser
for value and in good faith.
In all cases of registration procured by fraud, the owner may pursue all his
legal and equitable remedies against the parties to such fraud without
prejudice, however, to the rights of any innocent holder of the decree of
registration on the original petition or application, any subsequent
registration procured by the presentation of a forged duplicate certificate of
title, or a forged deed or instrument, shall be null and void. (emphasis
supplied)
Petitioners argue that the issuance of the TCTs violated the third paragraph
of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted
that the provision speaks of forged duplicate certificate of title and forged

deed or instrument. Neither instance obtains in this case. What the Cruzes
presented before the Register of Deeds was the very genuine owners
duplicate certificate earlier deposited by Banaag, Eduardos attorney-in-fact,
with RBSP. Likewise, the instruments of conveyance are authentic, not
forged. Section 53 has never been clearer on the point that as long as the
owners duplicate certificate is presented to the Register of Deeds together
with the instrument of conveyance, such presentation serves as conclusive
authority to the Register of Deeds to issue a transfer certificate or make a
memorandum of registration in accordance with the instrument.
The records of the case show that despite the efforts made by the Cruzes in
persuading the heirs of Eduardo to allow them to secure a separate TCT on
the claimed portion, their ownership being amply evidenced by the
Kasulatan and Sinumpaang Salaysay where Eduardo himself
acknowledged the sales in favor of Ricardo, the heirs adamantly rejected
the notion of separate titling. This prompted the Cruzes to approach the
bank manager of RBSP for the purpose of protecting their property right.
They succeeded in persuading the latter to lend the owners duplicate
certificate. Despite the apparent irregularity in allowing the Cruzes to get
hold of the owners duplicate certificate, the bank officers consented to the
Cruzes plan to register the deeds of sale and secure two new separate
titles, without notifying the heirs of Eduardo about it.
Further, the law on the matter, specifically P.D. No. 1529, has no explicit
requirement as to the manner of acquiring the owners duplicate for
purposes of issuing a TCT. This led the Register of Deeds of Meycauayan
as well as the Central Bank officer, in rendering an opinion on the legal
feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No.
1529 simply requires the production of the owners duplicate certificate,
whenever any voluntary instrument is presented for registration, and the
same shall be conclusive authority from the registered owner to the Register
of Deeds to enter a new certificate or to make a memorandum of
registration in accordance with such instrument, and the new certificate or
memorandum shall be binding upon the registered owner and upon all
persons claiming under him, in favor of every purchaser for value and in
good faith.
Quite interesting, however, is the contention of the heirs of Eduardo that the
surreptitious lending of the owners duplicate certificate constitutes fraud

within the ambit of the third paragraph of Section 53 which could nullify the
eventual issuance of the TCTs. Yet we cannot subscribe to their position.
Impelled by the inaction of the heirs of Eduardo as to their claim, the Cruzes
went to the bank where the property was mortgaged. Through its manager
and legal officer, they were assured of recovery of the claimed parcel of
land since they are the successors-in-interest of the real owner thereof.
Relying on the bank officers opinion as to the legality of the means sought
to be employed by them and the suggestion of the Central Bank officer that
the matter could be best settled between them and the bank, the Cruzes
pursued the titling of the claimed portion in the name of Ricardo. The
Register of Deeds eventually issued the disputed TCTs.
The Cruzes resorted to such means to protect their interest in the property
that rightfully belongs to them only because of the bank officers
acquiescence thereto. The Cruzes could not have secured a separate TCT
in the name of Ricardo without the banks approval. Banks, their business
being impressed with public interest, are expected to exercise more care
and prudence than private individuals in their dealings, even those involving
registered lands.50 The highest degree of diligence is expected, and high
standards of integrity and performance are even required of it.51
Indeed, petitioners contend that the mortgagee cannot question the veracity
of the registered title of the mortgagor as noted in the owners duplicate
certificate, and, thus, he cannot deliver the certificate to such third persons
invoking an adverse, prior, and unregistered claim against the registered
title of the mortgagor. The strength of this argument is diluted by the
peculiar factual milieu of the case.
A mortgagee can rely on what appears on the certificate of title presented
by the mortgagor and an innocent mortgagee is not expected to conduct an
exhaustive investigation on the history of the mortgagors title. This rule is
strictly applied to banking institutions. A mortgagee-bank must exercise due
diligence before entering into said contract. Judicial notice is taken of the
standard practice for banks, before approving a loan, to send
representatives to the premises of the land offered as collateral and to
investigate who the real owners thereof are.52
Banks, indeed, should exercise more care and prudence in dealing even
with registered lands, than private individuals, as their business is one

affected with public interest. Banks keep in trust money belonging to their
depositors, which they should guard against loss by not committing any act
of negligence that amounts to lack of good faith. Absent good faith, banks
would be denied the protective mantle of the land registration statute, Act
496, which extends only to purchasers for value and good faith, as well as
to mortgagees of the same character and description.53 Thus, this Court
clarified that the rule that persons dealing with registered lands can rely
solely on the certificate of title does not apply to banks.54
Bank Liable for Nominal Damages
Of deep concern to this Court, however, is the fact that the bank lent the
owners duplicate of the OCT to the Cruzes when the latter presented the
instruments of conveyance as basis of their claim of ownership over a
portion of land covered by the title. Simple rationalization would dictate that
a mortgagee-bank has no right to deliver to any stranger any property
entrusted to it other than to those contractually and legally entitled to its
possession. Although we cannot dismiss the banks acknowledgment of the
Cruzes claim as legitimized by instruments of conveyance in their
possession, we nonetheless cannot sanction how the bank was inveigled to
do the bidding of virtual strangers. Undoubtedly, the banks cooperative
stance facilitated the issuance of the TCTs. To make matters worse, the
bank did not even notify the heirs of Eduardo. The conduct of the bank is as
dangerous as it is unthinkably negligent. However, the aspect does not
impair the right of the Cruzes to be recognized as legitimate owners of their
portion of the property.
Undoubtedly, in the absence of the banks participation, the Register of
Deeds could not have issued the disputed TCTs. We cannot find fault on the
part of the Register of Deeds in issuing the TCTs as his authority to issue
the same is clearly sanctioned by law. It is thus ministerial on the part of the
Register of Deeds to issue TCT if the deed of conveyance and the original
owners duplicate are presented to him as there appears on theface of the
instruments no badge of irregularity or nullity.55 If there is someone to blame
for the shortcut resorted to by the Cruzes, it would be the bank itself whose
manager and legal officer helped the Cruzes to facilitate the issuance of the
TCTs.1avvphi1
The bank should not have allowed complete strangers to take possession of
the owners duplicate certificate even if the purpose is merely for

photocopying for a danger of losing the same is more than imminent. They
should be aware of the conclusive presumption in Section 53. Such act
constitutes manifest negligence on the part of the bank which would
necessarily hold it liable for damages under Article 1170 and other relevant
provisions of the Civil Code.56
In the absence of evidence, the damages that may be awarded may be in
the form of nominal damages. Nominal damages are adjudicated in order
that a right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.57 This award rests on
the mortgagors right to rely on the banks observance of the highest
diligence in the conduct of its business. The act of RBSP of entrusting to
respondents the owners duplicate certificate entrusted to it by the
mortgagor without even notifying the mortgagor and absent any prior
investigation on the veracity of respondents claim and character is a patent
failure to foresee the risk created by the act in view of the provisions of
Section 53 of P.D. No. 1529. This act runs afoul of every banks mandate to
observe the highest degree of diligence in dealing with its clients. Moreover,
a mortgagor has also the right to be afforded due process before deprivation
or diminution of his property is effected as the OCT was still in the name of
Eduardo. Notice and hearing are indispensable elements of this right which
the bank miserably ignored.
Under the circumstances, the Court believes the award of P50,000.00 as
nominal damages is appropriate.
Five-Year
Prohibition
or encumbrance under the Public Land Act

against

alienation

One vital point. Apparently glossed over by the courts below and the parties
is an aspect which is essential, spread as it is all over the record and
intertwined with the crux of the controversy, relating as it does to the validity
of the dispositions of the subject property and the mortgage thereon.
Eduardo was issued a title in 1976 on the basis of his free patent
application. Such application implies the recognition of the public dominion
character of the land and, hence, the five (5)-year prohibition imposed by
the Public Land Act against alienation or encumbrance of the land covered
by a free patent or homestead58 should have been considered.

The deed of sale covering the fifty (50)-square meter right of way executed
by Eduardo on 18 March 1981 is obviously covered by the proscription, the
free patent having been issued on 8 October 1976. However, petitioners
may recover the portion sold since the prohibition was imposed in favor of
the free patent holder. In Philippine National Bank v. De los Reyes,59 this
Court ruled squarely on the point, thus:
While the law bars recovery in a case where the object of the contract is
contrary to law and one or both parties acted in bad faith, we cannot here
apply the doctrine of in pari delicto which admits of an exception, namely,
that when the contract is merely prohibited by law, not illegal per se, and the
prohibition is designed for the protection of the party seeking to recover, he
is entitled to the relief prayed for whenever public policy is enhanced
thereby. Under the Public Land Act, the prohibition to alienate is predicated
on the fundamental policy of the State to preserve and keep in the family of
the homesteader that portion of public land which the State has gratuitously
given to him, and recovery is allowed even where the land acquired under
the Public Land Act was sold and not merely encumbered, within the
prohibited period.60
The sale of the 553 square meter portion is a different story. It was executed
in 1954, twenty-two (22) years before the issuance of the patent in 1976.
Apparently, Eduardo disposed of the portion even before he thought of
applying for a free patent. Where the sale or transfer took place before the
filing of the free patent application, whether by the vendor or the vendee, the
prohibition should not be applied. In such situation, neither the prohibition
nor the rationale therefor which is to keep in the family of the patentee that
portion of the public land which the government has gratuitously given him,
by shielding him from the temptation to dispose of his landholding, could be
relevant. Precisely, he had disposed of his rights to the lot even before the
government could give the title to him.
The mortgage executed in favor of RBSP is also beyond the pale of the
prohibition, as it was forged in December 1981 a few months past the period
of prohibition.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject
to the modifications herein. Respondent Rural Bank of San Pascual is
hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00)
by way of nominal damages. Respondents Consuelo Cruz and Rosalina

Cruz-Bautista are hereby DIVESTED of title to, and respondent Register of

Deeds of Meycauayan, Bulacan is accordingly ORDERED to segregate, the
portion of fifty (50) square meters of the subject Lot No. 2204, as depicted in
the approved plan covering the lot, marked as Exhibit "A", and to issue a
new title covering the said portion in the name of the petitioners at the
expense of the petitioners. No costs.
SO ORDERED.

Philippine National Bank vs. Pike, 470 SCRA 328 (2005)

PHILIPPINE NATIONAL BANK, P e t i t i o n e r, vs.. NORMAN Y.
PIKE R e s p o n d e n t.
SECOND DIVISION G.R. No. 157845 September 20, 2005

DE C I S I O N

CHICO-NAZARIO, J.:
This petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, seeks to reverse the Decision[1] dated 19
December 2002, and the Resolution[2] dated 02 April 2003, both of the
Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with
modification the Decision[3] rendered by the Regional Trial Court (RTC),
Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821 in
favor of herein respondent Norman Pike (Pike).

The case stemmed from a complaint[4] filed by herein respondent Pike

for damages[5] against Philippine National Bank (PNB) on 04 January
1994.

Complainant Pike often traveled to and from Japan as a gay

entertainer in said country. Sometime in 1991, he opened U.S. Dollar
Savings Account No. 0265-704591-0 with herein petitioner PNB Buendia
branch for which he was issued a corresponding passbook. The complaint
alleged in substance that before complainant Pike left for Japan on 18
March 1993, he kept the aforementioned passbook inside a cabinet under
lock and key, in his home; that on 19 April 1993, a few hours after he arrived
from Japan, he discovered that some of his valuables were missing
including the passbook; that he immediately reported the incident to the
police which led to the arrest and prosecution of a certain Mr. Joy Manuel

Davasol; that complainant Pike also discovered that Davasol made two (2)
unauthorized withdrawals from his U.S. Dollar Savings Account No. 0265704591-0, both times at the PNB Buendia branch on the following dates:

DATE
31 March 1993
05 April 1993
TOTAL

AMOUNT
$3,500.00
4,000.00
$7,500.00

that on several occasions, complainant Pike went to defendant PNBs

Buendia branch and verbally protested the unauthorized withdrawals and
likewise demanded the return of the total withdrawn amount of U.S.
$7,500.00, on the ground that he never authorized anybody to withdraw
from his account as the signatures appearing on the subject withdrawal slips
were clearly forgeries; that defendant PNB refused to credit said amount
back to complainants U.S. Dollar Savings Account without justifiable
reason, and instead, defendant bank wrote him that it exercised due
diligence in the handling of said account; and that on 06 May 1993,
complainant Pike wrote defendant PNB simply to request that the holdaccount be lifted so that he may withdraw the remaining balance left in his
U.S.$ Savings Account and nothing else.

On the other hand, defendant PNB alleged, in its Motion to Dismiss[6]

of 18 April 1994, a counterstatement of facts. Its factual allegations read:

. . . On March 15, 1993 at PNB Buendia Branch, Mr. Norman

Y. Pike, together with a certain Joy Davasol went to see PNB
AVP Mr. Lorenzo T. Val (sic), Jr. purposely to withdraw the
amount of $2,000.00. Mr. Pike also informed AVP Val that he is
leaving for abroad (Japan) and made verbal instruction to honor
all withdrawals to be transmitted by his Talent Manager and
Choreographer, Joy Davasol who shall present pre-signed
withdrawal slips bearing his (Pikes) signature. . .

On April 19, 1993, a certain Josephine Balmaceda, who

claimed to be plaintiffs sister executed an affidavit . . . . stating
therein that they discovered today (April 19, 1993) the lost (sic) of
her brothers passbook issued by PNB on account of robbery,
committed in the residence/office of her brother, promptly
reporting the matter to the police authorities and her brother
cannot report the matter to the Bank because he was currently in
Japan and therefore requesting the Bank to issue a hold-order on
her brothers passbook.
But a copy of an alarm (Police) Report dated April 19, 1993.
. . stated that plaintiff (who was the one who reported the matter)
after one month in Japan, he (complainant) arrived yesterday. . .
On April 26, 1993, Atty. Nathaniel Ifurung who claims to be
plaintiffs counsel sent a demand letter to VP Violeta T. Suquila
(then VP and Manager of PNB Buendia Branch) demanding the
bank to credit back the amount of US$7,500.00 which were
withdrawn on March 31, 1993 and April 5, 1993, because his
clients signatures were forged and the withdrawal made thereon
were unauthorized. . .
On May 5, 1993, Mr. Norman Y. Pike executed an affidavit of
loss (sic) Dollar Account Passbook and requested the PNB to
replace the same and allow him to make withdrawals thereon. He
stated that his passbook was stolen together with other valuables
which he discovered only in the early morning of April 19, 1993. . .
On May 6, 1993, plaintiff Norman Y. Pike wrote a letter. . .
addressed to the Manager of PNB, Buendia Branch the full
contents of said letter hereto quoted as follows:
May 6, 1993
The Manager
Philippine National Bank
Buendia Branch
Paseo de Roxas cor. Gil Puyat Street
Makati, Metro Manila

Sir:
In connection with the request of my sister, Mrs.
Josephine P. Balmaceda for the hold-order on my dollar
savings passbook No. 265-704591-0, I am now
requesting your good office to lift the same so I can
withdraw the remaining balance of my passbook which
was reported lost sometime in March of this year.
I also promise not to hold responsible the bank
and its officers for the withdrawal made on my dollar
savings passbook on March 19 and April 5, 1993
respectively as a result of the lost (sic) of my passbook.
Sgd. NORMAN Y. PIKE
Depositor
Philippine Passport
No. H918022
Issued at Manila on
Sept. 6, 1990
Place of Issuance

On the same day May 6, 1993 Plaintiff Norman Y. Pike was

allowed by defendant bank to withdraw the remaining balance
from his passbook .
A letter dated May 18, 1993 was sent to Plaintiffs counsel
by PNB stating that the Bank regrets that it cannot accede to
such request inasmuch as the Bank exercised due diligence of a
good father to his family in the handling of transactions covering
the deposit account of Mr. Pike .
On July 2, 1993, Plaintiffs counsel sent a letter to PNB Vice
Pres. Suquila denying that his client made any such promise not
to hold responsible the bank and its officers for the withdrawal
made .

A letter dated July 29, 1993 was sent to Plaintiffs counsel

by VP Suquila stating that plaintiffs withdrawal of the remaining
balance of his account with the Bank effectively estops him from
claiming on the alleged unauthorized withdrawals.

The trial court, in its decision dated 10 January 1997, made the
following findings of fact:

. . . [T]hat the bank is responsible for such unauthorized

withdrawals. The court is not impressed with the defense put up
by the bank. Its contention that the withdrawals were authorized
by the plaintiff because there was an arrangement between the
bank represented by its Asst. Vice President Lorenzo Bal, Jr. and
the depositor Norman Y. Pike to the effect that pre-signed
withdrawal slips, that is, withdrawal slip signed by the depositor in
the presence of Mr. Bal whereby it would be made to appear that
it was the depositor himself who presented the same to the bank
despite the fact that it was another person who presented the
same should be honored by the bank cannot be sanctioned by the
court. Firstly, the court is not satisfied that there was indeed such
an arrangement. . . It is Mr. Bals contention that such an
arrangement although not ordinarily entered into is still a legal
procedure of the bank and is resorted to accommodate the
depositors specially honored and valued depositor at that.
...
The court compared the signatures in the questioned
withdrawal slips with the known signatures of the
depositor and is convinced that the signatures in the
unauthorized withdrawal slips do not correspond to the
true signatures of the depositor.

From the evidence that it received, the court is

convinced that the bank was negligent in the performance
of its duties such that unauthorized withdrawals were
made in the deposit of plaintiff Norman Y. Pike.[7]

The dispositive portion of the trial courts decision reads:

WHEREFORE and considering the foregoing, judgment is

hereby rendered in favor of the plaintiff and against the defendant
and ordering the defendant to pay the following:
1.
2.
3.
4.

US$7,500.00 plus interest thereon at the rate of

12% per annum until the full amount is paid;
P25,000.00 for and as attorneys fees;
P50,000.00 as moral damages and P50,000.00 as
exemplary damages; and
Plus the costs of suit.[8]

Defendant PNBs motion for reconsideration was subsequently denied

by the court a quo.[9]

On appeal, the Court of Appeals issued the assailed decision dated 19

December 2002, affirming the findings of the RTC that indeed defendantappellant PNB was negligent in exercising the diligence required of a
business imbued with public interest such as that of the banking industry,
however, it modified the rate of interest and award for damages, to wit:

WHEREFORE, premises considered, the Decision dated

January 10, 1997 issued by the Regional Trial Court of Manila,
Branch 7, in Civil Case No. 94-68821, is hereby AFFIRMED with
MODIFICATION, as follows:
1.

Ordering appellant, the Philippine National Bank,

Buendia Branch, to refund appellee the amount of
$7,500.00 plus interest of 6% per annum to be
computed from the date of the filing of the complaint
which interest rate shall become 12% per annum from
the time the judgment in this case becomes final and
executory until its satisfaction;

2.

The award for moral damages is reduced to

P20,000.00; and

3.

The award for exemplary damages is likewise reduced

to P20,000.00.

Costs against appellant.[10]

The appellate court held that:

Appellant claims that appellee personally talked to its

officers to allow Joy Manuel Davasol to make
withdrawals. Appellee even left pre-signed withdrawal
slips before he went to Japan. However, appellant could
have told appellee to authorize the withdrawal by a
representative by indicating the same at the space
provided at the back portion of the withdrawal slip. This
operational flaw was observed by the trial court, when it
ruled:

The court cannot also understand why the

bank did not require the correct, proper and the
usual procedure of requiring a depositor who is
withdrawing the money through a representative
to fill up the back portion of the withdrawal slips,
which form was issued by the bank itself.

A perusal of the records discloses that appellee had

previously authorized withdrawals by a representative.
However, these withdrawals were properly accompanied
by a withdrawal by a representative form aside from a
handwritten request by appellee to allow such
withdrawals by his representative, or a typewritten letterrequest for withdrawal by a representative. Certainly,
appellant lacked the due care and caution required of
managers and employees of a firm engaged in so
sensitive and demanding business as banking.
In its desire to be exonerated from liability, appellant
advances the argument that, granting negligence on its
part, appellee condoned this negligence as shown in his
letter dated May 6, 1993, wherein appellee purportedly
undertook, not to hold the bank and its officers
responsible for the unauthorized withdrawals from his
account.
We do not agree. It should be emphasized that while
the appellee admitted signing the letter dated May 6,
1993, he, however, denied having undertook (sic) to
exonerate the appellant from liability for the unauthorized
withdrawals. Appellee questioned the second paragraph
of the said letter as being superimposed so that his
signature overlapped the text of the second paragraph of
said letter. A waiver of right, in order to be valid, should
be in a language that clearly manifests his desire to do
so. In the instant case, appellees filing of the instant
action is inconsistent with appellants contention that he

had waived his right to question appellants negligent act

of allowing the unauthorized withdrawals from his
account.[11]

Defendant-appellant PNB filed a motion for reconsideration. In

a Resolution dated 02 April 2003, the Court of Appeals denied said
motion.

Hence, this petition.

Petitioner PNB now seeks the review of the aforequoted

decision and resolution of the Court of Appeals predicated on the
following issues:

I.
WHETHER OR NOT THE PRINCIPLE OF ESTOPPEL
WAS NOT PROPERLY APPLIED IN THIS CASE;
II.
WHETHER
OR
NOT
RESPONDENT
HAVE
SUBSTANTIALLY PROVEN THAT THE SIGNATURES
APPEARING ON THE TWO (2) QUESTIONED PRESIGNED WITHDRAWAL SLIP FORMS ARE ALL
FORGERIES IN ACCORDANCE WITH SECTION 22,
RULE 132 OF THE REVISED RULES OF COURT; and
III.

WHETHER OR NOT MORAL AND EXEMPLARY

DAMAGES CAN BE AWARDED AGAINST A PARTY IN
GOOD FAITH.

Petitioner PNB contends that due to the verbal instructions[12] of

respondent Pike, a valued depositor, it allowed the withdrawal by another
person. Plus, the fact that said respondent withdrew the remaining balance
in his US Savings Account and executed a waiver releasing petitioner PNB
from any liability due to the loss of the funds should rightly negate a finding
of negligence on its part. Accordingly, petitioner PNB claims that the
appellate court, as well as the trial court erred in holding that the
withdrawals in question were unauthorized as the signatures appearing on
the subject withdrawal slips were forgeries. Petitioner PNB, therefore,
argues that it should not be held liable for the amount withdrawn from the
account of respondent Pike in the sum of $7,500.00, as well as for moral
and exemplary damages.

A priori, it is quite evident that the petition is anchored on a plea to review or

re-examine the factual conclusions reached by the trial court and affirmed
by the Court of Appeals, and for this Court to hold otherwise. Whether:
1) respondent Pikes signatures appearing on the
pertinent withdrawal slips used by Joy Manuel
Davasol[13] to withdraw the amount of $7,500.00, were
forgeries, as found by the trial court and affirmed by the
Court of Appeals, or were authentic as claimed by
petitioner bank; and
2) respondent Pike in fact executed a waiver
absolving petitioner bank from any legal responsibility
due to the unauthorized withdrawals, as maintained by
petitioner bank, or the paragraph containing said waiver
was intercalated by some other person, thus, amounting
no waiver at all, as held by the courts a quo.

are questions of fact and not of law. Inexorably, these issues call
for an inquiry into the facts and evidence on record. This, as we
have so often held, we cannot do.

Elementary is the rule that this Court is not the appropriate

venue to consider anew the factual issues as it is not a trier of
facts, and, it generally does not weigh anew the evidence already
passed upon by the Court of Appeals.[14] When this Court is
tasked to go over once more the evidence presented by both
parties, and analyze, assess and weigh them to ascertain if the
trial court and the appellate court were correct in according
superior credit to this or that piece of evidence of one party or the
other, the Court cannot and will not do the same.[15] Such task is
foreclosed by the rule enunciated under Section 1 of Rule 45[16]
of the Rules of Court:

SECTION 1. Filing of petition with Supreme Court. - . . . The

petition shall raise only questions of law[17] which must be
distinctly set forth.

We have oft ruled that factual findings of the Court of

Appeals are conclusive on the parties and not reviewable by this
Court and they carry even more weight when the Court of
Appeals affirms the factual findings of the trial court,[18] and in
the absence of any showing that the findings complained of are
totally devoid of support in the evidence on record, or that they are
so glaringly erroneous as to constitute serious abuse of discretion,
such findings must stand. The courts a quo are in a much better
position to evaluate properly the evidence.

Finding no other alternative but to affirm their finding that

petitioner PNB negligently allowed the unauthorized withdrawals
subject of the case at bar, the instant petition for review must
necessarily fail.

At this juncture, it bears emphasizing that negligence of

banking institutions should never be countenanced. The
negligence here lies in the lackadaisical attitude exhibited by
employees of petitioner PNB in their treatment of respondent
Pikes US Dollar Savings Account that resulted in the unauthorized
withdrawal of $7,500.00. Nevertheless, though its employees may
be the ones negligent, a banks liability as an obligor is not merely
vicarious but primary, as banks are expected to exercise the
highest degree of diligence in the selection and supervision of
their employees,[19] and having such obligation, this Court cannot
ignore the circumstances surrounding the case at bar how the
employees of petitioner PNB turned their heads, nay, closed their
eyes to the suspicious circumstances enfolding the two
withdrawals subject of the case at bar. It may even be said that
they went out of their ways to disregard standard operating
procedures formulated to ensure the security of each and every
account that they are handling. Petitioner PNB does not deny that
the withdrawal slips used were in breach of standard operating
procedures of banks in the ordinary and usual course of banking
operations as testified to by one of its witnesses, Mr. Lorenzo T.
Bal, Assistant Vice President of Petitioner PNBs Buendia branch,
on cross-examination[20] he stated thus:

Q:

Mr. Witness, when the original of Exhibit B[21]

was presented to you for approval, how many
signatures of depositor appears thereon?

A:

Two (2) signatures appears (sic) on the face of the

withdrawal slip.

Q:

When it (sic)
immediately?

was

(sic)

presented

to

you

A:

Yes, sir.

Q:

Are you sure of that?

A:

Yes, sir. Because it was pre signed withdrawal slip.

Q:

What does the signature appear, the word recipient

means?

A:

Received.

Q:

So, what you are saying is that, the depositor here

signed this even before receiving the amount?

A:

Because before the withdrawal was made, Mr. Pike,

the depositor came to the bank when he withdrew the
$2,000.00 and instructed me or requested us even
the supervisor to honor all withdrawal slip.

Q:

And this is a regular procedure?

A:

Yes, sir.

Q:

Are you sure of that?

A:

Yes, sir.

Q:

Do you have written manual on this particular

procedure, Mr. Witness?

A:

Of course, that includes

regulations of the bank.

Q:

in

the

Are you are (sic) are very sure of that?

Rules

and

A:

And banking is a fast transaction between the

depositor and the bank.

Q:

And then, is the use of the back portion of the

withdrawal slip with a heading of authorization?

A:

Normally, a depositor and the bank agrees on

certain terms that if you allow withdrawal from his
account, his or her account, its enough that the
signature of the depositor appears on both spaces in
the front side of the withdrawal slip. Even if you do
not have the back portion of the withdrawal slip.

Q:

You are very sure of that?

A:

Yes, sir.

Q:

And that has been done with the other withdrawal

slip of Norman Pike as stated or as shown in the
Statement of Account?

A:

Yes, sir.

Q:

That withdrawal made by representative?

A:

Yes, sir.

From the foregoing, petitioner PNBs witness was utterly

remiss in protecting the banks client, as well as the bank itself,
when he allowed an account holder to make it appear as if he was
the one actually withdrawing from an account and actually
receiving the withdrawn amount. Ordinarily, banks allow
withdrawal by someone who is not the account holder so long as
the account holder authorizes his representative to withdraw and
receive from his account by signing on the space provided
particularly for such transactions, usually found at the back of

withdrawal slips. As fittingly found by the courts a quo, if indeed,

respondent Pike signed the withdrawal slips in the presence of Mr.
Lorenzo Bal, petitioner PNBs AVP at its Buendia branch, why did
he not call respondent Pikes attention and refer him to the space
provided for authorizing representatives to withdraw from and
receive the proceeds of such withdrawal? Or, at the very least,
sign or initial the same so that he could identify the pre-signed
withdrawal slips made by Mr. Pike?

Q:

A:
Q:

You are also saying that on March 15, 1993, you

likewise met Joy Manuel Dabasol?
Yes, sir.
And you (sic) also saying on March 15, 1993, you
also met Norman Pike, the depositor,

A:

Yes, sir.

Q:

And when did you first met (sic) Norman Pike?

A:

March 15 when he withdrew $2,000.00.

Q:

That was the first time?

A:

First time, yes.

Q:

A:
Q:

And Mr. Norman Pike was already transacting with

you long before that day, is this correct? For how
long was he transacting with you?
That was my first time.
That was the first time. What I mean is, that he was
transacting with the PNB, Buendia Branch long
before you met him?

A:

Maybe.

Q:

And the withdrawal made on April 5, 1993 which

you approved, you did not look at Exhibit C, the
Savings Signature Card Individual?

A:

We do not look at that, that is kept in the vault.

Q:

Yes or no?

A:

No, sir.

Q:

And Mr. witness, Exhibit C-1[22] which is being

kept at your vault, also contains a picture?

A:

Yes, sir.

Q:

And the picture of the depositor?

A:

Yes, sir.

Q:

And are you familiar with the identity of the

depositor Norman Pike?

A:

What particular identity?

Q:

His appearance?

A:

He is gay looking fellow.

COURT:
Answer. You are familiar with his physical
appearance?
A:

Not so much. Because there are so much depositor

(sic) in the bank.[23] [Emphasis ours.]

By his own testimony, the witness negated the very reason for
the banks bizarre accommodation of the alleged verbal request
of respondent Pike that he was a valued client. From the
aforequoted, it appears that the witness, Lorenzo Bal, was not
even reasonably familiar with respondent Pike, yet, he was ready,
willing and able to accommodate the verbal request of said
depositor. Worse still, the witness still approved the withdrawal
transaction without asking for any proof of identification for the
reason that: 1) Davasol was in possession of a pre-signed
withdrawal slip; and 2) the witness recognized the signature of
respondent Pike even after admitting that he did not bother to
counter check the signature on the slip with the specimen
signature card of respondent Pike and that he met respondent
Pike just once so that he cannot seem to recall what the latter
looks like. The ensuing quoted testimony of the same witness will
justify a finding of negligence amounting to bad faith, to wit:

Q:

And you also met Joy Manuel Dabasol on March

15?

A:

Yes, sir.

Q:

And can you describe Joy Manuel Dabasol?

A:

I cannot recall his face but then he is a Talent

manager, because there are so many depositors in
the bank.
. . .

Q:

Mr. witness, you are saying that Mr. Pike, the

depositor gave you verbal authority to honor
withdrawal by Joy Manuel Dabasol?

A:
Q:

Yes, sir.
Why did you not require then that Mr. Pike instead
sign the authorization portion and that the name of
Joy Manuel Dabasol appear thereon with his
signature?
. . .

A:

I required Mr. Norman Pike to sign the withdrawal

slip on the face of the withdrawal slip.

Q:

But not the authorization portion of the said

withdrawal slip?
. . .

A:
Q:

A:
Q:

A:

No, because that is sufficient already.

And is this your normal procedure, Mr. witness?
This particular procedure that you conducted?
I dont think so.
Mr. witness, when on April 5, 1993, when Joy
Dabasol came to the office and according to you, you
do not remember him, is that correct?
I cannot recall his face.
. . .

Q:

A:

And he just showed you a withdrawal slip, is this

correct?
Yes, on April 5.

Q:

A:

Did you require him to produce any Identification

Card, yes or no?
No.

Q:

And how did you know then that it was Joy Dabasol
who was making the withdrawal on April 5?

A:

Because the
presented to me.

presigned

withdrawal

Q:

Is that all your basis?

A:

Yes, sir. Because his signature appears.

slip

was

. . .
Q:

A:
Q:

Mr. witness, this alleged authority given to you by

Norman Pike to honor withdrawal by Joy Manuel
Dabasol, was that in writing?
It was verbally requested.
And that is SPO (sic) of PNB, Buendia Branch to
accept verbal authorities?

A:

Yes.

Q:

Is that Standard Operating Procedure?

A:

It is not SPO, but when you knew the client, Your

Honor, you have to honor also the trust and
confidence. Let us say if you

Q:

According to you, you met Norman Pike only on

March 15, 1993 and immediately you allowed him to
withdraw through pre-signed withdrawal slip?

A:

Yes, Your Honor. Because a depositor requested

you to honor his signature, you have to do that or
else willand besides the request is for purpose of
expediency, Your Honor. Because most often than
that, he is out of the country, in Japan. And his
Talent Manager is the one managing the recruiting
agency. The money will be used in the operating
expenses.
. . .

Q:

A:

You did not even bother to look at the Savings

Signature Card Individual, yes or no?
No, sir.[24] [Emphases supplied.]

Having admitted that pre-signed withdrawal slips do not

constitute the normal procedure with respect to withdrawals by
representatives should have already put petitioner PNBs
employees on guard. Rather than readily validating and permitting
said withdrawals, they should have proceeded more cautiously.
Clearly, petitioner banks employee, Lorenzo T. Bal, an Assistant
Vice President at that, was exceedingly careless in his treatment
of respondent Pikes savings account.

From the foregoing, the evidence clearly showed that the

petitioner bank did not exercise the degree of diligence that it
ought to have exercised in dealing with their clients.

With banks, the degree of diligence required, contrary to the position of

petitioner PNB, is more than that of a good father of a family considering
that the business of banking is imbued with public interest due to the nature
of their functions. The stability of banks largely depends on the confidence

of the people in the honesty and efficiency of banks. Thus, the law imposes
on banks a high degree of obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of banking.
Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000,
makes a categorical declaration that the State recognizes the fiduciary
nature of banking that requires high standards of integrity and
performance.[26]

Though passed long after the unauthorized withdrawals in this case, the
aforequoted provision is a statutory affirmation of Supreme Court decisions
already in esse at the time of such withdrawals. We elucidated in the 1990
case of Simex International, Inc. v. Court of Appeals,[27] that the bank is
under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.[28]

Likewise, in the case of The Consolidated Bank and Trust Corporation v.

Court of Appeals,[29] we clarified that said fiduciary relationship means that
the banks obligation to observe highest standards of integrity and
performance is deemed written into every deposit agreement between a
bank and its depositor. The fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of a good father of a family.
Article 1172 of the New Civil Code states that the degree of diligence
required of an obligor[30] is that prescribed by law or contract, and absent
such stipulation then the diligence of a family. In every case, the depositor
expects the bank to treat his account with the utmost fidelity, whether such
accounts consist only of a few hundred pesos or of millions of pesos.[31]

Anent the issue of the propriety of the award of damages in

this case, petitioner PNB asseverates that there was no evidence
to prove that respondent Pike suffered anguish, embarrassment
and mental sufferings[32] due to its acts in allowing the alleged
unauthorized withdrawals. And, having relied on the instructions
of a valued depositor, petitioner PNB likewise avers that its

actions were made in good faith, for this reason, there is no

factual basis for said award.

Petitioner PNBs assertions fail to impress us.

The award of moral and exemplary damages is left to the

sound discretion of the court, and if such discretion is well
exercised, as in this case, it will not be disturbed on appeal.[33]
In the case of Philippine Telegraph & Telephone Corporation v.
Court of Appeals,[34] we had the occasion to reiterate the
conditions to be met in order that moral damages may be
recovered. In said case we stated:

An award of moral damages would require, firstly,

evidence of besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;
secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or
omission of the defendant is the proximate cause of the
damages sustained by the claimant; and fourthly, that
the case is predicated on any of the instances expressed
or envisioned by Articles 2219[35] and 2220[36] of the
Civil Code.

Specifically, in culpa contractual or breach of contract, as

here, moral damages are recoverable only if the defendant has
acted fraudulently or in bad faith,[37] or is found guilty of gross
negligence amounting to bad faith,[38] or in wanton disregard of
his contractual obligations.[39] Verily, the breach must be wanton,
reckless, malicious, or in bad faith, oppressive or abusive.[40]

There is no reason to disturb the trial courts finding of

petitioner banks employees negligence in their treatment of
respondent Pikes account. In the case on hand, the Court of
Appeals sustained, and rightly so, that an award of moral damages
is warranted. For, as found by said appellate court, citing the case
of Prudential Bank v. Court of Appeals,[41] the banks negligence
is a result of lack of due care and caution required of managers
and employees of a firm engaged in so sensitive and demanding
business, as banking, hence, the award of P20,000.00 as moral
damages, is proper.

The award of exemplary damages is also proper as a warning

to petitioner PNB and all concerned not to recklessly disregard
their obligation to exercise the highest and strictest diligence in
serving their depositors.

Finally, the aforestated grant of exemplary damages entitles

respondent Pike the award of attorney's fees in the amount of
P20,000.00 and the award of P10,000.00 for litigation
expenses.[42]

WHEREFORE, the instant petition is DENIED. The assailed

Decision dated 19 December 2002, and the Resolution dated 02
April 2003, both of the Court of Appeals, in CA-G.R. CV No.
59389, which affirmed with modification the Decision rendered by
the Regional Trial Court (RTC), Branch 07 of Manila, dated 10
January 1997, in Civil Case No. 94-68821, are hereby AFFIRMED
with the MODIFICATION that petitioner PNB is directed to pay
respondent Pike additional 1) P20,000.00 representing attorneys
fees; and 2) P10,000.00 representing expenses of litigation. Costs
against petitioner PNB.

SO ORDERED.

Cadiz vs. Court of Appeals, 474 SCRA 232 (2005)

SECOND DIVISION

ROMEO C. CADIZ, CARLITO ' G.R. No. 153784

BONGKINGKI and PRISCO
GLORIA IV,
Petitioners, Present:

PUNO, J.,
- versus- Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.
COURT OF APPEALS, and TINGA, and
PHILIPPINE COMMERCIAL CHICO-NAZARIO, JJ.
INTERNATIONAL BANK
(Now EQUITABLE PCIBANK),
Respondents. Promulgated:
October 25, 2005
x -------------------------------------------------------------x

DECISION

TINGA, J.:
Employees who abuse their position for fiduciary gain cannot be shielded
from the consequences of their wrongdoing even on account of the bank's

operational laxities that may have provided the gateway for their
shenanigans. Their misconduct provides the bank with cause for the
termination of their employment.
The facts follow.
Petitioners Romeo Cadiz (Cadiz'), Carlito Bongkingki (Bongkingki') and
Prisco Gloria IV (Gloria') were employed as signature verifier, bookkeeper,
and foreign currency denomination clerk/bookkeeper-reliever, respectively,
in the main office branch (MOB) of Philippine Commercial International
Bank (respondent bank).

The anomalies in question arose when Rosalina B. Alqueza (Alqueza) filed

a complaint with PCIB for the alleged non-receipt of a Six Hundred Dollar
($600.00) demand draft drawn against it which was purchased by her
husband from Hongkong and Shanghai Banking Corporation. Upon
verification, it was uncovered that the demand draft was deposited on 10
June 1988 with FCDU Savings Account (S/A) No. 1083-4, an account under
the name of Sonia Alfiscar (Alfiscar). Further investigation revealed that the
demand draft, together with four (4) other checks, was made to appear as
only one deposit covered by HSBC Check No. 979120 for One Thousand
Two Hundred Thirty-two Dollars (US$1,232.00).

The Branch Manager, Ismael R. Sandig, then presided over a series of

meetings, wherein Cadiz, Bongkingki and Gloria allegedly verbally admitted
their participation in a scheme to divert funds intended for other accounts
using the Savings Account of Alfiscar. Subsequently, Cadiz allegedly paid
Alqueza P12,690.00, the peso equivalent of US$600, but insisted that the
corresponding receipt be issued in Alfiscar's name instead.

On account of these allegations, a special audit examination was conducted

by the bank. On 31 January 1989, the internal auditors of the bank, headed
by Lizza G. Baylon, submitted their findings in an official report. The auditors
determined that as early as July 1987, petitioner Cadiz had reserved the
savings account in the name of Sonia Alfiscar. The account was opened on

27 November 1987 and closed on 23 June 1988. Twenty-five (25) deposit

slips involving the account were posted by Bongkingki while sixteen (16)
deposit slips were posted by Gloria. A verification of the deposit slips
yielded findings of miscoded checks, forged signatures, non-validation of
deposit slips by the tellers, wrongful deposit of second-endorsed checks into
foreign currency deposit accounts, the deposit slips which do not bear the
required approval of bank officers, and withdrawals made either on the day
of deposit or the following banking day.[1]

In view of such findings, show-cause memoranda[2] were served on

petitioners, requiring them to explain within seventy-two (72) hours why no
disciplinary action should be taken against them in connection with the
results of the special audit examination. On 22 March 1989, petitioners
submitted their written explanations.[3] Not satisfied with their explanations,
respondent bank in memoranda[4] all dated 22 June 1989 dismissed
petitioners from employment for violation of Article III Section 1 B-2 and
Article III Section 1-C of the Code of Discipline.

Petitioners lodged a complaint before the labor arbiter for illegal dismissal
on 18 September 1989. Labor Arbiter Ernesto S. Dinopol adjudged that
petitioners were illegally dismissed and ordered their reinstatement and
payment of backwages. This conclusion was based on the notices of
dismissal, which, to the mind of the labor arbiter, was couched in general
terms and without explaining how the rules were violated. The labor arbiter
also attributed petitioners' acts in fraudulently coding several deposit slips
as '1511 (immediately withdrawable) as mere procedural inadequacies, with
the fault attributable to respondent bank for its laxity.[5]

The labor arbiter's Decision was reversed on appeal before the Second
Division of the National Labor Relations Commission (NLRC), which, in a
Decision[6] dated 30 June 1994, ordered the dismissal of the petition. In
doing so, the NLRC departed from the labor arbiter's finding of facts and
concluded that petitioners were dismissed for just cause. Dismissing
petitioners' appeal, the Court of Appeals Ninth Division similarly determined

on the basis of substantial evidence that petitioners were validly terminated

in its own Decision[7] dated 13 July 2001.
After the appellate court denied petitioner's motion for reconsideration, the
matter was brought before this Court in a Petition for Review on
Certiorari.[8]

The issues to be resolved are whether the Court of Appeals erred in not
sustaining the findings of the labor arbiter and upholding those of the NLRC
and whether the Court of Appeals erred in dismissing the petition by
ignoring petitioners' claims that they were dismissed without just cause and
due process.[9]

In its Comment,[10] respondent bank seeks to have the petition dismissed

inasmuch as all the issues raised herein involve questions of fact. We note
that as a general rule, only questions of law may be brought upon this Court
in a petition for review on certiorari under Rule 45 of the Rules of Court. This
Court is not a trier of facts, and as such is tasked to calibrate and assess
the probative weight of evidence adduced by the parties during trial all over
again.[11]

However, if there are competing factual findings by the different triers of

fact, such as those made in this case by the labor arbiter on one hand, and
those of the NLRC and Court of Appeals on the other hand, this Court is
compelled to go over the records of the case, as well as the submissions of
the parties, and resolve the factual issues.[12] With this in mind, we shall
now proceed to examine the decisions under review.

The general thesis as laid down by the NLRC and Court of Appeals is that
petitioners had surreptitiously diverted funds deposited by depositors to S/A
No. 1083-4 which was under their control and disposition. On the other
hand, a perusal of the labor arbiter's Decision reveals a different perspective
from which the case was approached. While the labor arbiter conceded that
petitioners Bongkingki and Gloria had miscoded several deposit slips,
rendering them immediately withdrawable, he characterized the errors as
'mere procedural inadequacies' which were preventable had management
exercised greater control over its employees.[13]

Far from petitioners' thrust, the miscoding of deposit slips cannot be

downplayed as 'mere procedural inadequacies. After all, it is such
miscoding that precipitated the fraudulent withdrawals in the first place. The
act operated as the first indispensable step towards the commission of fraud
on the bank.

More disturbing though is the labor arbiter's willingness to acquit petitioners

of culpability on account of the purported negligence of the bank. It is similar
to concluding that the bank guards, and not the burglars, bear primary
culpability for a bank robbery. Whatever liability or responsibility was
expected of the bank stands as an issue separate from the liability of the
recreant bank employees. Even assuming that the bank observed less-thanideal controls over the security of its operations, such laxity does not serve
as the carte blanche signal for the bank employees to take advantage of
safeguard control lapses and perpetrate chicanery on their employer.

The labor arbiter also evaluated the bank's claim that Cadiz had reimbursed
the amount of $600 to the aggrieved depositor Alqueza while making it
appear that it was Alfiscar who had actually made the refund. In disbelieving
this claim, the Labor Arbiter concluded that 'it is unthinkable for a lowly bank
employee to impose his will upon his high and mighty employer.[14]

This pronouncement is revelatory of absurd logic. The notion that a lowly

employee will never countermand the will or interests of the employer is
sufficiently rebutted by any labor law casebook, any omnibus of our labor
jurisprudence, and the evolution of the human experience that disquiets
persons from unhesitatingly acceding to the presumptive good faith of
others. It is an accepted premise of life and jurisprudence that persons are
capable, upon impure motivations, of taking advantage of others, whether
their social lessers, equals, or betters. The necessity of punishment arises
from this flaw of human nature. This philosophic stance of the labor arbiter
actually obviates the nature of sin.

Obviously, we are hard-pressed to accord high regard to the labor arbiter's

discernment as a trier of facts. Nonetheless, his claim that there were
procedural flaws attending the dismissal of petitioners warrants some
deliberation.

The labor arbiter ruled that the notices of dismissal served on petitioners
was insufficient as it failed to specifically delineate how petitioners had
violated the internal rules of the bank. However, the notices do cite the rules
which petitioners had violated and refer to the fact that such violations
occurred relating to S/A No. 1083-4 account of Sonia Alfiscar and/or
Rosalinda Alqueza.

There is no demand that the notices of dismissal themselves be couched in

the form and language of judicial or quasi-judicial decisions. What is
required is that the employer conduct a formal investigation process, with
notices duly served on the employees informing them of the fact of
investigation, and subsequently, if warranted, a separate notice of
dismissal.[15] Through the formal investigatory process, the employee must
be accorded the right to present his/her side, which must be considered and
weighed by the employer. The employee must be sufficiently apprised of the

nature of the charge against him/her, so as to be able to intelligently defend

against the charges. '

In the instant case, records show that respondent bank complied with the
two-notice rule prescribed in Article 277(b) of the Labor Code.[16]
Petitioners were given all avenues to present their side and disprove the
allegations of respondent bank. An informal meeting was held between the
branch manager of MOB, the three petitioners and Mr. Gener, the VicePresident of the PCIB Employees Union. As per report, petitioners admitted
having used Alfiscar's account to divert funds intended for other accounts. A
special audit investigation was conducted to determine the extent of the
fraudulent transactions. Based on the results of the investigation,
respondent bank sent show-cause memoranda to petitioners, asking them
to explain their lapses, under pain of disciplinary action. The memoranda,
which constitute the first notice, specified the various questionable acts
committed by petitioners.

Afterwards, petitioners submitted their respective replies to the memoranda.

This very well complies with the requirement for hearing, by which
petitioners were afforded the opportunity to defend themselves. The second
notice came in the form of the termination memoranda, informing petitioners
of their dismissal from service. From the foregoing, it is clear that the
required procedural due process for their termination was strictly complied
with.

All told, we hold that the factual appreciation and conclusions rendered by
the labor arbiter are not worthy of adoption by this Court. In contrast, from
the factual determinations made by the NLRC and the Court of Appeals, we
accept the following facts as proven:

1.

Petitioner Cadiz reserved S/A No. 1083-4 in July 1987 as

reflected on respondent bank's 'new account register.

2.

Foreign denominated checks payable to other payees were

diverted into the said account.

3.

The various deposit slips, covering the said checks, did not
bear the machine validation of any of the tellers-in-charge.

4.

The signatures of the MOB officers appearing on the said

deposit slips were in fact forged.

5.

The posting of said bank transactions bore the initials of

petitioners Bongkingki or Gloria.

6.

The deposit slips were coded as '1511 or 'on-us check.

7.

Petitioner Cadiz agreed to pay Alqueza the equivalent amount

of $600.00 but it was made to appear that Alfiscar paid the said
amount.

8.

In view of these findings, petitioners were served with showcause memoranda asking them to explain the lapses.

9.

Finding their explanations unsatisfactory, petitioners were

terminated from employment.

It is from these established facts that we consider the arguments now

presented by petitioners. In light of these facts, petitioners' arguments
hardly detract from the conclusion that their behavior in the course of the
discharge of their duties is clearly malfeasant, and constitutes ground for
their termination on account of just cause.

First, petitioners insist that the show-cause memoranda served on

them did not impute any fraudulent behavior, but merely lapses. We
disagree.

The show-cause memoranda were occasioned by the confidential report

prepared by Sandig, as well as the findings of the special audit examination.

The confidential report prepared by Sandig addressed to the Vice-President

of respondent bank pertains to the discovery of fraudulent transactions on
S/A No.1083-4 involving three employees of respondent bank. The report
detailed how the events transpired, including the admissions of petitioners.
From there, a special audit examination was conducted to make a thorough
investigation of the questioned account. The examination yielded
conspicuous findings that anomalous transactions had taken place involving
petitioners.

Moreover, the show-cause memoranda respectively served on petitioners

clearly indicate that they were being made to answer questions pertaining to
possible anomalous behavior on their part. For example, petitioners were
asked to explain why they had posted the questioned deposits on the
ledger, although there were no teller validations or teller stamps, and also
on what basis they considered such transactions to be valid.[17] On the
other hand, the show-cause memorandum to Cadiz directly asks him to
provide the personal details of Sonia Alfiscar, why he went out of his way to
make a special arrangement for the mysterious Alfiscar, and other questions
pertaining to the Alfiscar accounts.

We thus cannot give credence to the averments of petitioners that the

memoranda pertain to 'lapses' , and not fraudulent transactions. The bank
could not have been expected to conclude outright that petitioners were
guilty of fraud, despite all the indicia that they indeed were. Certainly, the
purpose of the show-cause memoranda was to afford petitioners the
opportunity to acquit themselves of culpable responsibility. It would have
been quite irresponsible for the bank to have premised the queries therein
on irretractable conclusions' that petitioners had been guilty of anomalous
transactions.

Second, petitioners contend that they should be relieved of any liability

considering that respondent bank did not suffer a pecuniary loss. This claim
must obviously fail.

There is jurisprudential support, as noted by the Court of Appeals in citing

University of the East v. NLRC[18] that lack of material or pecuniary
damages would not in any way mitigate a person's liability nor obliterate the
loss of trust and confidence. In the case of Etcuban v. Sulpicio Lines,[19]
this Court definitively ruled that:

. . . Whether or not the respondent bank was financially

prejudiced is immaterial. Also, what matters is not the amount
involved, be it paltry or gargantuan; rather the fraudulent scheme
in which the petitioner was involved, which constitutes a clear
betrayal of trust and confidence. . . .

Moreover, it cannot be discounted that as bank employees, the

responsibilities of petitioners are impressed with a high degree of public
interest. Private persons entrust their fortunes to banks, and it would cause
a breakdown of the financial order if the judicial system were to leave
unsanctioned bank employees who treat depositor's accounts as their own
private kitty.
Still, petitioners insist that respondent bank never lost trust and confidence
in them as it did not place them under preventive suspension, and more
tellingly, it even promoted them after the labor arbiter had ordered their
reinstatement. Preventive suspension, which is never obligatory on the part
of the employer, may be resorted to only when the continued employment of
the employee poses 'a serious and imminent threat to the life or property of
the employer or of his co-workers.[20] The bank points out that the Alfiscar
account, through which the anomalous transactions were coursed, was no
longer active at the time the fraud was discovered.[21] Clearly, the bank had
reason to conclude that the imminence of the threat posed by the
employees was not as vital as it would have been had the dubious account
still been open.
As to the alleged promotions, the original employer, PCIB, admits that
petitioners had been reinstated by reason of the Decision, but such act was

by no means voluntary. PCIB however does not rebut the allegations that
Bongkingki and Cadiz were assigned to sensitive positions within the bank
after their compulsory reinstatement. This may be so, but the fact that PCIB
lost no time in removing the employees from the plantilla after the NLRC
reversed the labor arbiter's Decision hardly evinces any continuing trust and
confidence on the part of the bank, as maintained by petitioners. Moreover,
considering that these reinstated employees were, for the meantime, regular
employees of the bank, it is within the discretion of PCIB to reassign them
as it sees fit, taking into account the circumstances.
Moreover, it would simply be temerarious for the Court to sanction the
reinstatement of bank employees who have clearly engaged in anomalous
banking practices. The particular fiduciary responsibilities reposed on banks
and its employees cannot be emphasized enough. The fiduciary nature of
banking[22] is enshrined in Republic Act No. 8791 or the General Banking
Law of 2000. Section 2 of the law specifically says that the State recognizes
the 'fiduciary nature of banking that requires high standards of integrity and
performance.[23] The bank must not only exercise 'high standards of
integrity and performance, it must also ensure that its employees do
likewise because this is the only way to ensure that the bank will comply
with its fiduciary duty.[24]

All given, we affirm the conclusion that petitioners were dismissed for just
cause. Loss of trust and confidence is one of the just causes for termination
by employer under Article 282 of the Labor Code. The breach of trust must
be willful, meaning it must be done intentionally, knowingly, and purposely,
without justifiable excuse.[25] Ideally, loss of confidence applies only to
cases involving employees occupying positions of trust and confidence or to
those situations where the employee is routinely charged with the care and
custody of the employer's money or property.[26] Utmost trust and
confidence are deemed to have been reposed on petitioners by virtue of the
nature of their work.

The facts as established, as well as the need to assert the public interest in
safeguarding against bank fraud, militate against the present petition.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision of

the Court of Appeals AFFIRMED. Costs against petitioners.

SO ORDERED.

Far East Bank and Trust Company vs. Pacilan, Jr., 465 SCRA
372 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION

FAR EAST BANK AND TRUST G.R. No. 157314

COMPANY, NOW BANK OF
THE PHILIPPINE ISLANDS, Present:
Petitioner,
PUNO, J., Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
- versus -TINGA, and
CHICO-NAZARIO, JJ.
Promulgated:
THEMISTOCLES PACILAN, JR.,
Respondent. July 29, 2005
x--------------------------------------------------x

DECISION

CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by Far East Bank
and Trust Company (now Bank of the Philippines Islands) seeking the
reversal of the Decision[1] dated August 30, 2002 of the Court of Appeals

(CA) in CA-G.R. CV No. 36627 which ordered it, together with its branch
accountant, Roger Villadelgado, to pay respondent Themistocles Pacilan,
Jr.[2] the total sum of P100,000.00 as moral and exemplary damages. The
assailed decision affirmed with modification that of the Regional Trial Court
(RTC) of Negros Occidental, Bacolod City, Branch 54, in Civil Case No.
4908. Likewise sought to be reversed and set aside is the Resolution dated
January 17, 2003 of the appellate court, denying petitioner bank's motion for
reconsideration.

The case stemmed from the following undisputed facts:

Respondent Pacilan opened a current account with petitioner bank's

Bacolod Branch on May 23, 1980. His account was denominated as Current
Account No. 53208 (0052-00407-4). The respondent had since then issued
several postdated checks to different payees drawn against the said
account. Sometime in March 1988, the respondent issued Check No.
2434886 in the amount of P680.00 and the same was presented for
payment to petitioner bank on April 4, 1988.

Upon its presentment on the said date, Check No. 2434886 was dishonored
by petitioner bank. The next day, or on April 5, 1988, the respondent
deposited to his current account the amount of P800.00. The said amount
was accepted by petitioner bank; hence, increasing the balance of the
respondent's deposit to P1,051.43.

Subsequently, when the respondent verified with petitioner bank about the
dishonor of Check No. 2434866, he discovered that his current account was
closed on the ground that it was 'improperly handled. The records of
petitioner bank disclosed that between the period of March 30, 1988 and
April 5, 1988, the respondent issued four checks, to wit: Check No. 2480416
for P6,000.00; Check No. 2480419 for P50.00; Check No. 2434880 for
P680.00 and; Check No. 2434886 for P680.00, or a total amount of
P7,410.00. At the time, however, the respondent's current account with

petitioner bank only had a deposit of P6,981.43. Thus, the total amount of
the checks presented for payment on April 4, 1988 exceeded the balance of
the respondent's deposit in his account. For this reason, petitioner bank,
through its branch accountant, Villadelgado, closed the respondent's current
account effective the evening of April 4, 1988 as it then had an overdraft of
P428.57. As a consequence of the overdraft, Check No. 2434886 was
dishonored.

On April 18, 1988, the respondent wrote to petitioner bank complaining that
the closure of his account was unjustified. When he did not receive a reply
from petitioner bank, the respondent filed with the RTC of Negros
Occidental, Bacolod City, Branch 54, a complaint for damages against
petitioner bank and Villadelgado. The case was docketed as Civil Case No.
4908. The respondent, as complainant therein, alleged that the closure of
his current account by petitioner bank was unjustified because on the first
banking hour of April 5, 1988, he already deposited an amount sufficient to
fund his checks. The respondent pointed out that Check No. 2434886, in
particular, was delivered to petitioner bank at the close of banking hours on
April 4, 1988 and, following normal banking procedure, it (petitioner bank)
had until the last clearing hour of the following day, or on April 5, 1988, to
honor the check or return it, if not funded. In disregard of this banking
procedure and practice, however, petitioner bank hastily closed the
respondent's current account and dishonored his Check No. 2434886.

The respondent further alleged that prior to the closure of his current
account, he had issued several other postdated checks. The petitioner
bank's act of closing his current account allegedly preempted the deposits
that he intended to make to fund those checks. Further, the petitioner bank's
act exposed him to criminal prosecution for violation of Batas Pambansa
Blg. 22.

According to the respondent, the indecent haste that attended the closure of
his account was patently malicious and intended to embarrass him. He
claimed that he is a Cashier of Prudential Bank and Trust Company, whose

branch office is located just across that of petitioner bank, and a prominent
and respected leader both in the civic and banking communities. The
alleged malicious acts of petitioner bank besmirched the respondent's
reputation and caused him 'social humiliation, wounded feelings,
insurmountable worries and sleepless nights' entitling him to an award of
damages.

In their answer, petitioner bank and Villadelgado maintained that the

respondent's current account was subject to petitioner bank's Rules and
Regulations Governing the Establishment and Operation of Regular
Demand Deposits which provide that 'the Bank reserves the right to close
an account if the depositor frequently draws checks against insufficient
funds and/or uncollected deposits' and that 'the Bank reserves the right at
any time to return checks of the depositor which are drawn against
insufficient funds or for any reason.[3]

They showed that the respondent had improperly and irregularly handled his
current account. For example, in 1986, the respondent's account was
overdrawn 156 times, in 1987, 117 times and in 1988, 26 times. In all these
instances, the account was overdrawn due to the issuance of checks
against insufficient funds. The respondent had also signed several checks
with a different signature from the specimen on file for dubious reasons.

When the respondent made the deposit on April 5, 1988, it was obviously to
cover for issuances made the previous day against an insufficiently funded
account. When his Check No. 2434886 was presented for payment on April
4, 1988, he had already incurred an overdraft; hence, petitioner bank
rightfully dishonored the same for insufficiency of funds.

After due proceedings, the court a quo rendered judgment in favor of the
respondent as it ordered the petitioner bank and Villadelgado, jointly and
severally, to pay the respondent the amounts of P100,000.00 as moral
damages and P50,000.00 as exemplary damages and costs of suit. In so

ruling, the court a quo also cited petitioner bank's rules and regulations
which state that 'a charge of P10.00 shall be levied against the depositor for
any check that is taken up as a returned item due to insufficiency of funds'
on the date of receipt from the clearing office even if said check is honored
and/or covered by sufficient deposit the following banking day. The same
rules and regulations also provide that 'a check returned for insufficiency of
funds for any reason of similar import may be subsequently recleared for
one more time only, subject to the same charges.

According to the court a quo, following these rules and regulations, the
respondent, as depositor, had the right to put up sufficient funds for a check
that was taken as a returned item for insufficient funds the day following the
receipt of said check from the clearing office. In fact, the said check could
still be recleared for one more time. In previous instances, petitioner bank
notified the respondent when he incurred an overdraft and he would then
deposit sufficient funds the following day to cover the overdraft. Petitioner
bank thus acted unjustifiably when it immediately closed the respondent's
account on April 4, 1988 and deprived him of the opportunity to reclear his
check or deposit sufficient funds therefor the following day.

As a result of the closure of his current account, several of the respondent's

checks were subsequently dishonored and because of this, the respondent
was humiliated, embarrassed and lost his credit standing in the business
community. The court a quo further ratiocinated that even granting
arguendo that petitioner bank had the right to close the respondent's
account, the manner which attended the closure constituted an abuse of the
said right. Citing Article 19 of the Civil Code of the Philippines which states
that '[e]very person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith and Article 20 thereof which states that
'[e]very person who, contrary to law, wilfully or negligently causes damage
to another, shall indemnify the latter for the same, the court a quo adjudged
petitioner bank of acting in bad faith. It held that, under the foregoing
circumstances, the respondent is entitled to an award of moral and
exemplary damages.

The decretal portion of the court a quo's decision reads:

WHEREFORE,
hereby rendered:

PREMISES

CONSIDERED,

judgment

is

1.

Ordering the defendants [petitioner bank and

Villadelgado], jointly and severally, to pay plaintiff [the
respondent] the sum of P100,000.00 as moral damages;

2.

Ordering the defendants, jointly and severally, to pay

plaintiff the sum of P50,000.00 as exemplary damages plus
costs and expenses of the suit; and

3.

Dismissing [the] defendants' counterclaim for lack of

merit.

SO ORDERED.[4]

On appeal, the CA rendered the Decision dated August 30, 2002, affirming
with modification the decision of the court a quo.

The appellate court substantially affirmed the factual findings of the court a
quo as it held that petitioner bank unjustifiably closed the respondents'
account notwithstanding that its' own rules' and regulations

allow that a check returned for insufficiency of funds or any reason of similar
import, may be subsequently recleared for one more time, subject to

standard charges. Like the court a quo, the appellate court observed that in
several instances in previous years, petitioner bank would inform the
respondent when he incurred an overdraft and allowed him to make a timely
deposit to fund the checks that were initially dishonored for insufficiency of
funds. However, on April 4, 1988, petitioner bank immediately closed the
respondent's account without even notifying him that he had incurred an
overdraft. Even when they had already closed his account on April 4, 1988,
petitioner bank still accepted the deposit that the respondent made on April
5, 1988, supposedly to cover his checks.

Echoing the reasoning of the court a quo, the CA declared that even as it
may be conceded that petitioner bank had reserved the right to close an
account for repeated overdrafts by the respondent, the exercise of that right
must never be despotic or arbitrary. That petitioner bank chose to close the
account outright and return the check, even after accepting a deposit
sufficient to cover the said check, is contrary to its duty to handle the
respondent's account with utmost fidelity. The exercise of the right is not
absolute and good faith, at least, is required. The manner by which
petitioner bank closed the account of the respondent runs afoul of Article 19
of the Civil Code which enjoins every person, in the exercise of his rights, 'to
give every one his due, and observe honesty and good faith.

The CA concluded that petitioner bank's precipitate and imprudent closure

of the respondent's account had caused him, a respected officer of several
civic and banking associations, serious anxiety and humiliation. It had,
likewise, tainted his credit standing. Consequently, the award of damages is
warranted. The CA, however, reduced the amount of damages awarded by
the court a quo as it found the same to be excessive:

We, however, find excessive the amount of damages awarded by

the RTC. In our view the reduced amount of P75,000.00 as moral
damages and P25,000.00 as exemplary damages are in order.
Awards for damages are not meant to enrich the plaintiff-appellee
[the respondent] at the expense of defendants-appellants [the
petitioners], but to obviate the moral suffering he has undergone.
The award is aimed at the restoration, within limits possible, of the
status quo ante, and should be proportionate to the suffering
inflicted.[5]

The dispositive portion of the assailed CA decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED,

subject to the MODIFICATION that the award of moral damages
is reduced to P75,000.00 and the award of exemplary damages
reduced to P25,000.00.
SO ORDERED.[6]

Petitioner bank sought the reconsideration of the said decision but in the
assailed Resolution dated January 17, 2003, the appellate court denied its
motion. Hence, the recourse to this Court.

Petitioner bank maintains that, in closing the account of the respondent in

the evening of April 4, 1988, it acted in good faith and in accordance with
the rules' and regulations' governing the operation of a

regular demand deposit which reserves to the bank 'the right to close an
account if the depositor frequently draws checks against insufficient funds
and/or uncollected deposits. The same rules and regulations also provide
that 'the depositor is not entitled, as a matter of right, to overdraw on this
deposit and the bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any reason.

It cites the numerous instances that the respondent had overdrawn his
account and those instances where he deliberately signed checks using a
signature different from the specimen on file. Based on these facts,
petitioner bank was constrained to close the respondent's account for
improper and irregular handling and returned his Check No. 2434886 which
was presented to the bank for payment on April 4, 1988.

'Petitioner bank further posits that there is no law or rule which gives the
respondent a legal right to make good his check or to deposit the
corresponding amount to cover said check within 24 hours after the same is
dishonored or returned by the bank for having been drawn against
insufficient funds. It vigorously denies having violated Article 19 of the Civil
Code as it insists that it acted in good faith and in accordance with the
pertinent banking rules and regulations.

The petition is impressed with merit.

A perusal of the respective decisions of the court a quo and the appellate
court show that the award of damages in the respondent's favor was
anchored mainly on Article 19 of the Civil Code which, quoted anew below,
reads:
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.

The elements of abuse of rights are the following: (a) the existence of a
legal right or duty; (b) which is exercised in bad faith; and (c) for the sole
intent of prejudicing or injuring another.[7] Malice or bad faith is at the core
of the said provision.[8] The law always presumes good faith and any
person who seeks to be awarded damages due to acts of another has the
burden of proving that the latter acted in bad faith or with ill-motive.[9] Good
faith refers to the state of the mind which is manifested by the acts of the
individual concerned. It consists of the intention to abstain from taking an
unconscionable and unscrupulous advantage of another.[10] Bad faith does
not simply connote bad judgment or simple negligence, dishonest purpose
or some moral obliquity and conscious doing of a wrong, a breach of known
duty due to some motives or interest or ill-will that partakes of the nature of
fraud.[11] Malice connotes ill-will or spite and speaks not in response to
duty. It implies an intention to do ulterior and unjustifiable harm. Malice is
bad faith or bad motive.[12]

Undoubtedly, petitioner bank has the right to close the account of the
respondent based on the following provisions of its Rules and Regulations
Governing the Establishment and Operation of Regular Demand Deposits:

10)

The Bank reserves the right to close an account if the

depositor frequently draws checks against insufficient funds
and/or uncollected deposits.

12) '
However, it is clearly understood that the depositor is not
entitled, as a matter of right, to overdraw on this deposit and
the bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any
other reason.
The facts, as found by the court a quo and the appellate court, do not
establish that, in the exercise of this right, petitioner bank committed an
abuse thereof. Specifically, the second and third elements for abuse of
rights are not attendant in the present case. The evidence presented by
petitioner bank negates the existence of bad faith or malice on its part in
closing the respondent's account on April 4, 1988 because on the said date
the same was already overdrawn. The respondent issued four checks, all
due on April 4, 1988, amounting to P7,410.00 when the balance of his
current account deposit was only P6,981.43. Thus, he incurred an overdraft
of P428.57 which resulted in the dishonor of his Check No. 2434886.
Further, petitioner bank showed that in 1986, the current account of the
respondent was overdrawn 156 times due to his issuance of checks against
insufficient funds.[13] In 1987, the said account was overdrawn 117 times
for the same
reason.[14] Again, in 1988, 26 times.[15] There were also several instances
when the respondent issued checks deliberately using a signature different
from his specimen signature on file with petitioner bank.[16] All these
circumstances taken together justified the petitioner bank's closure of the
respondent's account on April 4, 1988 for 'improper handling.

It is observed that nowhere under its rules and regulations is petitioner bank
required to notify the respondent, or any depositor for that matter, of the
closure of the account for frequently drawing checks against insufficient
funds. No malice or bad faith could be imputed on petitioner bank for so
acting since the records bear out that the respondent had indeed been
improperly and irregularly handling his account not just a few times but
hundreds of times. Under the circumstances, petitioner bank could not be
faulted for exercising its right in accordance with the express rules and
regulations governing the current accounts of its depositors. Upon the

opening of his account, the respondent had agreed to be bound by these

terms and conditions.

Neither the fact that petitioner bank accepted the deposit made by the
respondent the day following the closure of his account constitutes bad faith
or malice on the part of petitioner bank. The same could be characterized as
simple negligence by its personnel. Said act, by itself, is not constitutive of
bad faith.
The respondent had thus failed to discharge his burden of proving bad faith
on the part of petitioner bank or that it was motivated by ill-will or spite in
closing his account on April 4, 1988 and in inadvertently accepting his
deposit on April 5, 1988.

Further, it has not been shown that these acts were done by petitioner bank
with the sole intention of prejudicing and injuring the respondent. It is
conceded that the respondent may have suffered damages as a result of
the closure of his current account. However, there is a material distinction
between damages and injury. The Court had the occasion to explain the
distinction between damages and injury in this wise:
Injury is the illegal invasion of a legal right; damage is the loss,
hurt or harm which results from the injury; and damages are the
recompense or compensation awarded for the damage suffered.
Thus, there can be damage without injury in those instances in
which the loss or harm was not the result of a violation of a legal
duty. In such cases, the consequences must be borne by the
injured person alone, the law affords no remedy for damages
resulting from an act which does not amount to a legal injury or
wrong. These situations are often called damnum absque injuria.
In other words, in order that a plaintiff may maintain an action for
the injuries of which he complains, he must establish that such
injuries resulted from a breach of duty which the defendant owed
to the plaintiff ' a concurrence of injury to the plaintiff and legal

responsibility by the person causing it. The underlying basis for

the award of tort damages is the premise that the individual was
injured in contemplation of law. Thus, there must first be a breach
of some duty and the imposition of liability for that breach before
damages may be awarded; and the breach of such duty should
be the proximate cause of the injury.[17]

Whatever damages the respondent may have suffered as a consequence,

e.g., dishonor of his other insufficiently funded checks, would have to be
borne by him alone. It was the respondent's repeated improper

and irregular handling of his account which constrained petitioner bank to

close the same in accordance with the rules and regulations governing its
depositors' current accounts. The respondent's case is clearly one of
damnum absque injuria.

WHEREFORE, the petition is GRANTED. The Decision dated August 30,

2002 and Resolution dated January 17, 2003 of the Court of Appeals in CAG.R. CV No. 36627 are REVERSED AND SET ASIDE.

SO ORDERED.

Citibank, N.A. vs. Cabamongan, 488 SCRA 517 (2006)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 146918

May 2, 2006

CITIBANK,
N.A.,
Petitioner,
vs.
SPS. LUIS and CARMELITA CABAMONGAN and their sons
LUISCABAMONGAN, JR. and LITO CABAMONGAN, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated
January 26, 2001 and the Resolution2 dated July 30, 2001 of the Court of
Appeals (CA) in CA-G.R. CV No. 59033.
The factual background of the case is as follows:
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a
joint "and/or" foreign currency time deposit in trust for their sons Luis, Jr.
and Lito at the Citibank, N.A., Makati branch, with Reference No. 6022214372, in the amount of $55,216.69 for a term of 182 days or until
February 14, 1994, at 2.5625 per cent interest per annum.3 Prior to maturity,
or on November 10, 1993, a person claiming to be Carmelita went to the
Makati branch and pre-terminated the said foreign currency time deposit by
presenting a passport, a Bank of America Versatele Card, an ATM card and
a Mabuhay Credit Card.4 She filled up the necessary forms for pretermination of deposits with the assistance of Account Officer Yeye San
Pedro. While the transaction was being processed, she was casually
interviewed by San Pedro about her personal circumstances and investment
plans.5 Since the said person failed to surrender the original Certificate of
Deposit, she had to execute a notarized release and waiver document in
favor of Citibank, pursuant to Citibank's internal procedure, before the
money was released to her.6 The release and waiver document7 was not
notarized on that same day but the money was nonetheless given to the
person withdrawing.8 The transaction lasted for about 40 minutes.9
After said person left, San Pedro realized that she left behind an
identification card.10 Thus, San Pedro called up Carmelita's listed address at
No. 48 Ranger Street, Moonwalk Village, Las Pinas, Metro Manila on the

same day to have the card picked up.11 Marites, the wife of Lito, received
San Pedro's call and was stunned by the news that Carmelita preterminated
her foreign currency time deposit because Carmelita was in the United
States at that time.12 The Cabamongan spouses work and reside in
California. Marites made an overseas call to Carmelita to inform her about
what happened.13 The Cabamongan spouses were shocked at the news. It
seems that sometime between June 10 and 16, 1993, an unidentified
person broke in at the couple's residence at No. 3268 Baldwin Park
Boulevard, Baldwin Park, California. Initially, they reported that only
Carmelita's jewelry box was missing, but later on, they discovered that other
items, such as their passports, bank deposit certificates, including the
subject foreign currency deposit, and identification cards were also
missing.14 It was only then that the Cabamongan spouses realized that their
passports and bank deposit certificates were lost.15
Through various overseas calls, the Cabamongan spouses informed
Citibank, thru San Pedro, that Carmelita was in the United States and did
not preterminate their deposit and that the person who did so was an
impostor who could have also been involved in the break-in of their
California residence. San Pedro told the spouses to submit the necessary
documents to support their claim but Citibank concluded nonetheless that
Carmelita indeed preterminated her deposit. In a letter dated September 16,
1994, the Cabamongan spouses, through counsel, made a formal demand
upon Citibank for payment of their preterminated deposit in the amount of
$55,216.69 with legal interests.16 In a letter dated November 28, 1994,
Citibank, through counsel, refused the Cabamongan spouses' demand for
payment, asserting that the subject deposit was released to Carmelita upon
proper identification and verification.17
On January 27, 1995, the Cabamongan spouses filed a complaint against
Citibank before the Regional Trial Court of Makati for Specific Performance
with Damages, docketed as Civil Case No 95-163 and raffled to Branch 150
(RTC).18
In its Answer dated April 20, 1995, Citibank insists that it was not negligent
of its duties since the subject deposit was released to Carmelita only upon
proper identification and verification.19
At the pre-trial conference the parties failed to arrive at an amicable
settlement.20 Thus, trial on the merits ensued.

For the plaintiffs, the Cabamongan spouses themselves and Florenda G.

Negre, Documents Examiner II of the Philippine National Police (PNP)
Crime Laboratory in Camp Crame, Quezon City, testified. The Cabamongan
spouses, in essence, testified that Carmelita could not have preterminated
the deposit account since she was in California at the time of the incident.21
Negre testified that an examination of the questioned signature and the
samples of the standard signatures of Carmelita submitted in the RTC
showed a significant divergence. She concluded that they were not written
by one and the same person.22
For the respondent, Citibank presented San Pedro and Cris Cabalatungan,
Vice-President and In-Charge of Security and Management Division. Both
San Pedro and Cabalatungan testified that proper bank procedure was
followed and the deposit was released to Carmelita only upon proper
identification and verification.23
On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan
spouses and against Citibank, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, defendant Citibank, N.A., is hereby
ordered to pay the plaintiffs the following:
1) the principal amount of their Foreign Currency Deposit (Reference
No. 6022214372) amounting to $55,216.69 or its Phil. Currency
equivalent plus interests from August 16, 1993 until fully paid;
2) Moral damages of P50,000.00;
3) Attorney's fees of P50,000.00; and
4) Cost of suit.
SO ORDERED.24
The RTC reasoned that:
xxx Citibank, N.A., committed negligence resulting to the undue suffering of
the plaintiffs. The forgery of the signatures of plaintiff Carmelita
Cabamongan on the questioned documents has been categorically
established by the handwriting expert. xxx Defendant bank was clearly
remiss in its duty and obligations to treat plaintiff's account with the highest

degree of care, considering the nature of their relationship. Banks are under
the obligation to treat the accounts of their depositors with meticulous care.
This is the reason for their established procedure of requiring several
specimen signatures and recent picture from potential depositors. For every
transaction, the depositor's signature is passed upon by personnel to check
and countercheck possible irregularities and therefore must bear the blame
when they fail to detect the forgery or discrepancy.25
Despite the favorable decision, the Cabamongan spouses filed on October
1, 1997 a motion to partially reconsider the decision by praying for an
increase of the amount of the damages awarded.26 Citibank opposed the
motion.27 On November 19, 1997, the RTC granted the motion for partial
reconsideration and amended the dispositive portion of the decision as
follows:
From the foregoing, and considering all the evidence laid down by the
parties, the dispositive portion of the court's decision dated July 1, 1997 is
hereby amended and/or modified to read as follows:
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the
plaintiffs the following:
1) the principal amount of their foreign currency deposit (Reference
No. 6022214372) amounting to $55,216.69 or its Philippine currency
equivalent (at the time of its actual payment or execution) plus legal
interest from Aug. 16, 1993 until fully paid.
2) moral damages in the amount of P200,000.00;
3) exemplary damages in the amount of P100,000.00;
4) attorney's fees of P100,000.00;
5) litigation expenses of P200,000.00;
6) cost of suit.
SO ORDERED.28

Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV

No. 59033.29 On January 26, 2001, the CA rendered a decision sustaining
the finding of the RTC that Citibank was negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency
deposit was pre-terminated on 10 November 1993. But Carmelita
Cabamongan, who works as a nursing aid (sic) at the Sierra View Care
Center in Baldwin Park, California, had shown through her Certificate of
Employment and her Daily Time Record from the [sic] January to December
1993 that she was in the United States at the time of the incident.
Defendant Citibank, N.A., however, insists that Carmelita was the one who
pre-terminated the deposit despite claims to the contrary. Its basis for
saying so is the fact that the person who made the transaction on the
incident mentioned presented a valid passport and three (3) other
identification cards. The attending account officer examined these
documents and even interviewed said person. She was satisfied that the
person presenting the documents was indeed Carmelita Cabamongan.
However, such conclusion is belied by these following circumstances.
First, the said person did not present the certificate of deposit issued to
Carmelita Cabamongan. This would not have been an insurmountable
obstacle as the bank, in the absence of such certificate, allows the
termination of the deposit for as long as the depositor executes a notarized
release and waiver document in favor of the bank. However, this simple
procedure was not followed by the bank, as it terminated the deposit and
actually delivered the money to the impostor without having the said
document notarized on the flimsy excuse that another department of the
bank was in charge of notarization. The said procedure was obviously for
the protection of the bank but it deliberately ignored such precaution. At the
very least, the conduct of the bank amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro
regarding the incident, she reported that upon comparing the authentic
signatures of Carmelita Cabamongan on file with the bank with the
signatures made by the person claiming to be Cabamongan on the
documents required for the termination of the deposit, she noticed that one
letter in the latter [sic] signatures was different from that in the standard
signatures. She requested said person to sign again and scrutinized the
identification cards presented. Presumably, San Pedro was satisfied with

the second set of signatures made as she eventually authorized the

termination of the deposit. However, upon examination of the signatures
made during the incident by the Philippine National Police (PNP) Crime
Laboratory, the said signatures turned out to be forgeries. As the
qualifications of Document Examiner Florenda Negre were established and
she satisfactorily testified on her findings during the trial, we have no reason
to doubt the validity of her findings. Again, the bank's negligence is patent.
San Pedro was able to detect discrepancies in the signatures but she did
not exercise additional precautions to ascertain the identity of the person
she was dealing with. In fact, the entire transaction took only 40 minutes to
complete despite the anomalous situation. Undoubtedly, the bank could
have done a better job.
Third, as the bank had on file pictures of its depositors, it is inconceivable
how bank employees could have been duped by an impostor. San Pedro
admitted in her testimony that the woman she dealt with did not resemble
the pictures appearing on the identification cards presented but San Pedro
still went on with the sensitive transaction. She did not mind such disturbing
anomaly because she was convinced of the validity of the passport. She
also considered as decisive the fact that the impostor had a mole on her
face in the same way that the person in the pictures on the identification
cards had a mole. These explanations do not account for the disparity
between the pictures and the actual appearance of the impostor. That said
person was allowed to withdraw the money anyway is beyond belief.
The above circumstances point to the bank's clear negligence. Bank
transactions pass through a successive [sic] of bank personnel, whose duty
is to check and countercheck transactions for possible errors. While a bank
is not expected to be infallible, it must bear the blame for failing to discover
mistakes of its employees despite established bank procedure involving a
battery of personnel designed to minimize if not eliminate errors. In the
instant case, Yeye San Pedro, the employee who primarily dealt with the
impostor, did not follow bank procedure when she did not have the waiver
document notarized. She also openly courted disaster by ignoring
discrepancies between the actual appearance of the impostor and the
pictures she presented, as well as the disparities between the signatures
made during the transaction and those on file with the bank. But even if San
Pedro was negligent, why must the other employees in the hierarchy of the
bank's work flow allow such thing to pass unnoticed and unrectified?30

The CA, however, disagreed with the damages awarded by the RTC. It held
that, insofar as the date from which legal interest of 12% is to run, it should
be counted from September 16, 1994 when extrajudicial demand was
made. As to moral damages, the CA reduced it to P100,000.00 and deleted
the awards of exemplary damages and litigation expenses. Thus, the
dispositive portion of the CA decision reads:
WHEREFORE, the decision of the trial court dated 01 July 1997, and its
order dated 19 November 1997, are hereby AFFIRMED with the
MODIFICATION that the legal interest for actual damages awarded in the
amount of $55,216.69 shall run from 16 September 1994; exemplary
damages amounting to P100,000.00 and litigation expenses amounting to
P200,000.00 are deleted; and moral damages is reduced to P100,000.00.
Costs against defendant.
SO ORDERED.31
The Cabamongan spouses filed a motion for partial reconsideration on the
matter of the award of damages in the decision.32 On July 30, 2001, the
CA granted in part said motion and modified its decision as follows:
1. The actual damages in amount of $55,216.69, representing the
amount of appellees' foreign currency time deposit shall earn an
interest of 2.5625% for the period 16 August 1993 to 14 February
1994, as stipulated in the contract;
2. From 16 September 1994 until full payment, the amount of
$55,216.69 shall earn interest at the legal rate of 12% per annum, and;
3. The award of moral damages is reduced to P50,000.00.33
Dissatisfied, both parties filed separate petitions for review on certiorari with
this Court. The Cabamongan spouses' petition, docketed as G.R. No.
149234, was denied by the Court per its Resolution dated October 17,
2001.34 On the other hand, Citibank's petition was given due course by the
Court per Resolution dated December 10, 2001 and the parties were
required to submit their respective memoranda.35
Citibank poses the following errors for resolution:

1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND

GRAVELY ABUSED ITS DISCRETION IN UPHOLDING THE LOWER
COURT'S DECISION WHICH IS NOT BASED ON CLEAR EVIDENCE
BUT ON GRAVE MISAPPREHENSION OF FACTS.
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
UPHOLDING THE DECISION OF THE TRIAL COURT AWARDING
MORAL DAMAGES WHEN IN FACT THERE IS NO BASIS IN LAW
AND FACT FOR SAID AWARD.
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RULING THAT THE PRINCIPAL AMOUNT OF US$55,216.69
SHOULD EARN INTEREST AT THE RATE OF 12% PER ANNUM
FROM 16 SEPTEMBER 1994 UNTIL FULL PAYMENT.36
Anent the first ground, Citibank contends that the CA erred in affirming the
RTC's finding that it was negligent since the said courts failed to appreciate
the extra diligence of a good father of a family exercised by Citibank thru
San Pedro.
As to the second ground, Citibank argues that the Cabamongan spouses
are not entitled to moral damages since moral damages can be awarded
only in cases of breach of contract where the bank has acted willfully,
fraudulently or in bad faith. It submits that it has not been shown in this case
that Citibank acted willfully, fraudulently or in bad faith and mere negligence,
even if the Cabamongan spouses suffered mental anguish or serious
anxiety on account thereof, is not a ground for awarding moral damages.
On the third ground, Citibank avers that the interest rate should not be 12%
but the stipulated rate of 2.5625% per annum. It adds that there is no basis
to pay the interest rate of 12% per annum from September 16, 1994 until full
payment because as of said date there was no legal ground yet for the
Cabamongan spouses to demand payment of the principal and it is only
after a final judgment is issued declaring that Citibank is obliged to return
the principal amount of US$55,216.69 when the right to demand payment
starts and legal interest starts to run.
On the other hand, the Cabamongan spouses contend that Citibank's
negligence has been established by evidence. As to the interest rate, they
submit that the stipulated interest of 2.5635% should apply for the 182-day

contract period from August 16, 1993 to February 14, 1993; thereafter, 12%
should apply. They further contend that the RTC's award of exemplary
damages of P100,000.00 should be maintained. They submit that the CA
erred in treating the award of litigation expenses as lawyer's fees since they
have shown that they incurred actual expenses in litigating their claim
against Citibank. They also contend that the CA erred in reducing the award
of moral damages in view of the degree of mental anguish and emotional
fears, anxieties and nervousness suffered by them.37
Subsequently, Citibank, thru a new counsel, submitted a Supplemental
Memorandum,38 wherein it posits that, assuming that it was negligent, the
Cabamongan spouses were guilty of contributory negligence since they
failed to notify Citibank that they had migrated to the United States and were
residents thereat and after having been victims of a burglary, they should
have immediately assessed their loss and informed Citibank of the
disappearance of the bank certificate, their passports and other
identification cards, then the fraud would not have been perpetuated and the
losses avoided. It further argues that since the Cabamongan spouses are
guilty of contributory negligence, the doctrine of last clear chance is
inapplicable.
Citibank's assertion that the Cabamongan spouses are guilty of contributory
negligence and non-application of the doctrine of last clear chance cannot
pass muster since these contentions were raised for the first time only in
their Supplemental Memorandum. Indeed, the records show that said
contention were neither pleaded in the petition for review and the
memorandum nor in Citibank's Answer to the complaint or in its appellant's
brief filed with the CA. To consider the alleged facts and arguments raised
belatedly in a supplemental pleading to herein petition for review at this very
late stage in the proceedings would amount to trampling on the basic
principles of fair play, justice and due process.391avvphil.net
The Court has repeatedly emphasized that, since the banking business is
impressed with public interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently, the highest degree of
diligence40 is expected,41 and high standards of integrity and performance
are even required, of it.42 By the nature of its functions, a bank is "under
obligation to treat the accounts of its depositors with meticulous care,43
always having in mind the fiduciary nature of their relationship."44

In this case, it has been sufficiently shown that the signatures of Carmelita
in the forms for pretermination of deposits are forgeries. Citibank, with its
signature verification procedure, failed to detect the forgery. Its negligence
consisted in the omission of that degree of diligence required of banks. The
Court has held that a bank is "bound to know the signatures of its
customers; and if it pays a forged check, it must be considered as making
the payment out of its own funds, and cannot ordinarily charge the amount
so paid to the account of the depositor whose name was forged."45 Such
principle equally applies here.
Citibank cannot label its negligence as mere mistake or human error. Banks
handle daily transactions involving millions of pesos.46 By the very nature of
their works the degree of responsibility, care and trustworthiness expected
of their employees and officials is far greater than those of ordinary clerks
and employees.47 Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.48
The Court agrees with the observation of the CA that Citibank, thru Account
Officer San Pedro, openly courted disaster when despite noticing
discrepancies in the signature and photograph of the person claiming to be
Carmelita and the failure to surrender the original certificate of time deposit,
the pretermination of the account was allowed. Even the waiver document
was not notarized, a procedure meant to protect the bank. For not observing
the degree of diligence required of banking institutions, whose business is
impressed with public interest, Citibank is liable for damages.
As to the interest rate, Citibank avers that the claim of the Cabamongan
spouses does not constitute a loan or forbearance of money and therefore,
the interest rate of 6%, not 12%, applies.
The Court does not agree.
The time deposit subject matter of herein petition is a simple loan. The
provisions of the New Civil Code on simple loan govern the contract
between a bank and its depositor. Specifically, Article 1980 thereof
categorically provides that ". . . savings . . . deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loan." Thus, the relationship between a bank and its depositor is that of a
debtor-creditor, the depositor being the creditor as it lends the bank money,
and the bank is the debtor which agrees to pay the depositor on demand.

The applicable interest rate on the actual damages of $55,216.69, should be

in accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v.
Court of Appeals49 to wit:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest, in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.50
Thus, in a loan or forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum counted from the time of demand. Accordingly, the stipulated
interest rate of 2.562% per annum shall apply for the 182-day contract
period from August 16, 1993 to February 14, 1994. For the period from the
date of extra-judicial demand, September 16, 1994, until full payment, the
rate of 12% shall apply. As for the intervening period between February 15,
1994 to September 15, 1994, the rate of interest then prevailing granted by
Citibank shall apply since the time deposit provided for roll over upon
maturity of the principal and interest.51
As to moral damages, in culpa contractual or breach of contract, as in the
case before the Court, moral damages are recoverable only if the defendant
has acted fraudulently or in bad faith,52 or is found guilty of gross negligence
amounting to bad faith, or in wanton disregard of his contractual
obligations.53 The act of Citibank's employee in allowing the pretermination
of Cabamongan spouses' account despite the noted discrepancies in
Carmelita's signature and photograph, the absence of the original certificate
of time deposit and the lack of notarized waiver dormant, constitutes gross
negligence amounting to bad faith under Article 2220 of the Civil Code.
There is no hard-and-fast rule in the determination of what would be a fair
amount of moral damages since each case must be governed by its own
peculiar facts. The yardstick should be that it is not palpably and
scandalously excessive.54 The amount of P50,000.00 awarded by the CA is
reasonable and just. Moreover, said award is deemed final and executory
insofar as respondents are concerned considering that their petition for
review had been denied by the Court in its final and executory Resolution
dated October 17, 2001 in G.R. No. 149234.
Finally, Citibank contends that the award of attorney's fees should be
deleted since such award appears only in the dispositive portion of the

decision of the RTC and the latter failed to elaborate, explain and justify the
same.
Article 2208 of the New Civil Code enumerates the instances where such
may be awarded and, in all cases, it must be reasonable, just and equitable
if the same were to be granted. Attorney's fees as part of damages are not
meant to enrich the winning party at the expense of the losing litigant. They
are not awarded every time a party prevails in a suit because of the policy
that no premium should be placed on the right to litigate.55 The award of
attorney's fees is the exception rather than the general rule. As such, it is
necessary for the court to make findings of facts and law that would bring
the case within the exception and justify the grant of such award. The matter
of attorney's fees cannot be mentioned only in the dispositive portion of the
decision.56 They must be clearly explained and justified by the trial court in
the body of its decision. Consequently, the award of attorney's fees should
be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed
Decision and Resolution are AFFIRMED with MODIFICATIONS, as follows:
1. The interest shall be computed as follows:
a. The actual damages in principal amount of $55,216.69,
representing the amount of foreign currency time deposit shall
earn interest at the stipulated rate of 2.5625% for the period
August 16, 1993 to February 14, 1994;
b. From February 15, 1994 to September 15, 1994, the principal
amount of $55,216.69 and the interest earned as of February 14,
1994 shall earn interest at the rate then prevailing granted by
Citibank;
c. From September 16, 1994 until full payment, the principal
amount of $55,216.69 and the interest earned as of September
15, 1994, shall earn interest at the legal rate of 12% per annum;
2. The award of attorney's fees is DELETED.
No pronouncement as to costs.
SO ORDERED.

Citibank, N.A. vs. Sabeniano, 504 SCRA 378 (2006)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 156132

October 12, 2006

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS'

FINANCE CORPORATION, doing business under the name and style of
FNCB
Finance,
petitioners,
vs.
MODESTA R. SABENIANO, respondent.

DECISION

CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the
Revised Rules of Court, of the Decision2 of the Court of Appeals in CA-G.R.
CV No. 51930, dated 26 March 2002, and the Resolution,3 dated 20
November 2002, of the same court which, although modifying its earlier
Decision, still denied for the most part the Motion for Reconsideration of
herein petitioners.
Petitioner Citibank, N.A. (formerly known as the First National City Bank) is
a banking corporation duly authorized and existing under the laws of the
United States of America and licensed to do commercial banking activities
and perform trust functions in the Philippines.
Petitioner Investor's Finance Corporation, which did business under the
name and style of FNCB Finance, was an affiliate company of petitioner
Citibank, specifically handling money market placements for its clients. It is
now, by virtue of a merger, doing business as part of its successor-ininterest, BPI Card Finance Corporation. However, so as to consistently

establish its identity in the Petition at bar, the said petitioner shall still be
referred to herein as FNCB Finance.4
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank
and FNCB Finance. Regrettably, the business relations among the parties
subsequently went awry.
On 8 August 1985, respondent filed a Complaint5 against petitioners,
docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of
Makati City. Respondent claimed to have substantial deposits and money
market placements with the petitioners, as well as money market
placements with the Ayala Investment and Development Corporation
(AIDC), the proceeds of which were supposedly deposited automatically
and directly to respondent's accounts with petitioner Citibank. Respondent
alleged that petitioners refused to return her deposits and the proceeds of
her money market placements despite her repeated demands, thus,
compelling respondent to file Civil Case No. 11336 against petitioners for
"Accounting, Sum of Money and Damages." Respondent eventually filed an
Amended Complaint6 on 9 October 1985 to include additional claims to
deposits and money market placements inadvertently left out from her
original Complaint.
In their joint Answer7 and Answer to Amended Complaint,8 filed on 12
September 1985 and 6 November 1985, respectively, petitioners admitted
that respondent had deposits and money market placements with them,
including dollar accounts in the Citibank branch in Geneva, Switzerland
(Citibank-Geneva). Petitioners further alleged that the respondent later
obtained several loans from petitioner Citibank, for which she executed
Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her
dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of her
money market placements with petitioner FNCB Finance. When respondent
failed to pay her loans despite repeated demands by petitioner Citibank, the
latter exercised its right to off-set or compensate respondent's outstanding
loans with her deposits and money market placements, pursuant to the
Declaration of Pledge and the Deeds of Assignment executed by
respondent in its favor. Petitioner Citibank supposedly informed respondent
Sabeniano of the foregoing compensation through letters, dated 28
September 1979 and 31 October 1979. Petitioners were therefore surprised
when six years later, in 1985, respondent and her counsel made repeated

requests for the withdrawal of respondent's deposits and money market

placements with petitioner Citibank, including her dollar accounts with
Citibank-Geneva and her money market placements with petitioner FNCB
Finance. Thus, petitioners prayed for the dismissal of the Complaint and for
the award of actual, moral, and exemplary damages, and attorney's fees.
When the parties failed to reach a compromise during the pre-trial hearing,9
trial proper ensued and the parties proceeded with the presentation of their
respective evidence. Ten years after the filing of the Complaint on 8 August
1985, a Decision10 was finally rendered in Civil Case No. 11336 on 24
August 1995 by the fourth Judge11 who handled the said case, Judge
Manuel D. Victorio, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered
as follows:
(1) Declaring as illegal, null and void the setoff effected by the
defendant Bank [petitioner Citibank] of plaintiff's [respondent
Sabeniano] dollar deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering the said defendant [petitioner Citibank]
to refund the said amount to the plaintiff with legal interest at the rate of
twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of
payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the
defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as
of 5 September 1979 and ordering the plaintiff [respondent Sabeniano]
to pay said amount, however, there shall be no interest and penalty
charges from the time the illegal setoff was effected on 31 October
1979;
(3) Dismissing all other claims and counterclaims interposed by the
parties against each other.
Costs against the defendant Bank.
All the parties appealed the foregoing Decision of the RTC to the Court of
Appeals, docketed as CA-G.R. CV No. 51930. Respondent questioned the
findings of the RTC that she was still indebted to petitioner Citibank, as well

as the failure of the RTC to order petitioners to render an accounting of

respondent's deposits and money market placements with them. On the
other hand, petitioners argued that petitioner Citibank validly compensated
respondent's outstanding loans with her dollar accounts with CitibankGeneva, in accordance with the Declaration of Pledge she executed in its
favor. Petitioners also alleged that the RTC erred in not declaring
respondent liable for damages and interest.
On 26 March 2002, the Court of Appeals rendered its Decision12 affirming
with modification the RTC Decision in Civil Case No. 11336, dated 24
August 1995, and ruling entirely in favor of respondent in this wise
Wherefore, premises considered, the assailed 24 August 1995
Decision of the court a quo is hereby AFFIRMED with
MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the
defendant-appellant Bank of the plaintiff-appellant's dollar deposit with
Citibank, Switzerland, in the amount of US$149,632.99, and ordering
defendant-appellant Citibank to refund the said amount to the plaintiffappellant with legal interest at the rate of twelve percent (12%) per
annum, compounded yearly, from 31 October 1979 until fully paid, or
its peso equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by competent
evidence the alleged indebtedness of plaintiff-appellant, the set-off of
P1,069,847.40 in the account of Ms. Sabeniano is hereby declared as
without legal and factual basis;
3. As defendants-appellants failed to account the following plaintiffappellant's money market placements, savings account and current
accounts, the former is hereby ordered to return the same, in
accordance with the terms and conditions agreed upon by the
contending parties as evidenced by the certificates of investments, to
wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes
NNPN No. 22526) issued on 17 March 1977, P318,897.34 with
14.50% interest p.a.;

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes

NNPN No. 22528) issued on 17 March 1977, P203,150.00 with
14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes
NNPN No. 04952), issued on 02 June 1977, P500,000.00 with
17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes
NNPN No. 04962), issued on 02 June 1977, P500,000.00 with
17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of
Ms. Sabeniano with the Ayala Investment & Development
Corporation (AIDC) with legal interest at the rate of twelve percent
(12%) per annum compounded yearly, from 30 September 1976
until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the
plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) by way of moral damages, FIVE HUNDRED
THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE
HUNDRED THOUSAND PESOS (P100,000.00) as attorney's fees.
Apparently, the parties to the case, namely, the respondent, on one hand,
and the petitioners, on the other, made separate attempts to bring the
aforementioned Decision of the Court of Appeals, dated 26 March 2002,
before this Court for review.
G.R. No. 152985
Respondent no longer sought a reconsideration of the Decision of the Court
of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead,
filed immediately with this Court on 3 May 2002 a Motion for Extension of
Time to File a Petition for Review,13 which, after payment of the docket and
other lawful fees, was assigned the docket number G.R. No. 152985. In the
said Motion, respondent alleged that she received a copy of the assailed
Court of Appeals Decision on 18 April 2002 and, thus, had 15 days
therefrom or until 3 May 2002 within which to file her Petition for Review.
Since she informed her counsel of her desire to pursue an appeal of the

Court of Appeals Decision only on 29 April 2002, her counsel neither had
enough time to file a motion for reconsideration of the said Decision with the
Court of Appeals, nor a Petition for Certiorari with this Court. Yet, the Motion
failed to state the exact extension period respondent was requesting for.
Since this Court did not act upon respondent's Motion for Extension of Time
to file her Petition for Review, then the period for appeal continued to run
and still expired on 3 May 2002.14 Respondent failed to file any Petition for
Review within the prescribed period for appeal and, hence, this Court issued
a Resolution,15 dated 13 November 2002, in which it pronounced that
G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et al.).
It appearing that petitioner failed to file the intended petition for
review on certiorari within the period which expired on May 3, 2002,
the Court Resolves to DECLARE THIS CASE TERMINATED and
DIRECT the Division Clerk of Court to INFORM the parties that the
judgment sought to be reviewed has become final and executory.
The said Resolution was duly recorded in the Book of Entries of Judgments
on 3 January 2003.
G.R. No. 156132
Meanwhile, petitioners filed with the Court of Appeals a Motion for
Reconsideration of its Decision in CA-G.R. CV No. 51930, dated 26 March
2002. Acting upon the said Motion, the Court of Appeals issued the
Resolution,16 dated 20 November 2002, modifying its Decision of 26 March
2002, as follows
WHEREFORE, premises considered, the instant Motion for
Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V)
paragraph 3 of the assailed Decision's dispositive portion is hereby
ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED
with MODIFICATION.
Assailing the Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 51930, dated 26 March 2002 and 20 November 2002, respectively,
petitioners filed the present Petition, docketed as G.R. No. 156132. The
Petition was initially denied17 by this Court for failure of the petitioners to

attach thereto a Certification against Forum Shopping. However, upon

petitioners' Motion and compliance with the requirements, this Court
resolved18 to reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly
committed by the Court of Appeals in its Decision, dated 26 March 2002,
involving both questions of fact and questions of law which this Court, for
the sake of expediency, discusses jointly, whenever possible, in the
succeeding paragraphs.
I
The Resolution of this Court, dated 13 November 2002, in G.R. No. 152985,
declaring the Decision of the Court of Appeals, dated 26 March 2002, final
and executory, pertains to respondent Sabeniano alone.
Before proceeding to a discussion of the merits of the instant Petition, this
Court wishes to address first the argument, persistently advanced by
respondent in her pleadings on record, as well as her numerous personal
and unofficial letters to this Court which were no longer made part of the
record, that the Decision of the Court of Appeals in CA-G.R. CV No. 51930,
dated 26 March 2002, had already become final and executory by virtue of
the Resolution of this Court in G.R. No. 152985, dated 13 November 2002.
G.R. No. 152985 was the docket number assigned by this Court to
respondent's Motion for Extension of Time to File a Petition for Review.
Respondent, though, did not file her supposed Petition. Thus, after the lapse
of the prescribed period for the filing of the Petition, this Court issued the
Resolution, dated 13 November 2002, declaring the Decision of the Court of
Appeals, dated 26 March 2002, final and executory. It should be pointed
out, however, that the Resolution, dated 13 November 2002, referred only to
G.R. No. 152985, respondent's appeal, which she failed to perfect through
the filing of a Petition for Review within the prescribed period. The
declaration of this Court in the same Resolution would bind respondent
solely, and not petitioners which filed their own separate appeal before this
Court, docketed as G.R. No. 156132, the Petition at bar. This would mean
that respondent, on her part, should be bound by the findings of fact and law
of the Court of Appeals, including the monetary amounts consequently
awarded to her by the appellate court in its Decision, dated 26 March 2002;
and she can no longer refute or assail any part thereof. 19

This Court already explained the matter to respondent when it issued a

Resolution20 in G.R. No. 156132, dated 2 February 2004, which addressed
her Urgent Motion for the Release of the Decision with the Implementation
of the Entry of Judgment in the following manner
[A]cting on Citibank's and FNCB Finance's Motion for Reconsideration,
we resolved to grant the motion, reinstate the petition and require
Sabeniano to file a comment thereto in our Resolution of June 23,
2003. Sabeniano filed a Comment dated July 17, 2003 to which
Citibank and FNCB Finance filed a Reply dated August 20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge of, and in
fact participated in, the proceedings in G.R. No. 156132. She cannot
feign ignorance of the proceedings therein and claim that the Decision
of the Court of Appeals has become final and executory. More
precisely, the Decision became final and executory only with regard to
Sabeniano in view of her failure to file a petition for review within the
extended period granted by the Court, and not to Citibank and FNCB
Finance whose Petition for Review was duly reinstated and is now
submitted for decision.
Accordingly, the instant Urgent Motion is hereby DENIED. (Emphasis
supplied.)
To sustain the argument of respondent would result in an unjust and
incongruous situation wherein one party may frustrate the efforts of the
opposing party to appeal the case by merely filing with this Court a Motion
for Extension of Time to File a Petition for Review, ahead of the opposing
party, then not actually filing the intended Petition.21 The party who fails to
file its intended Petition within the reglementary or extended period should
solely bear the consequences of such failure.
Respondent Sabeniano did not commit forum shopping.
Another issue that does not directly involve the merits of the present
Petition, but raised by petitioners, is whether respondent should be held
liable for forum shopping.
Petitioners contend that respondent committed forum shopping on the basis
of the following facts:

While petitioners' Motion for Reconsideration of the Decision in CA-G.R. CV

No. 51930, dated 26 March 2002, was still pending before the Court of
Appeals, respondent already filed with this Court on 3 May 2002 her Motion
for Extension of Time to File a Petition for Review of the same Court of
Appeals Decision, docketed as G.R. No. 152985. Thereafter, respondent
continued to participate in the proceedings before the Court of Appeals in
CA-G.R. CV No. 51930 by filing her Comment, dated 17 July 2002, to
petitioners' Motion for Reconsideration; and a Rejoinder, dated 23
September 2002, to petitioners' Reply. Thus, petitioners argue that by
seeking relief concurrently from this Court and the Court of Appeals,
respondent is undeniably guilty of forum shopping, if not indirect contempt.
This Court, however, finds no sufficient basis to hold respondent liable for
forum shopping.
Forum shopping has been defined as the filing of two or more suits involving
the same parties for the same cause of action, either simultaneously or
successively, for the purpose of obtaining a favorable judgment.22 The test
for determining forum shopping is whether in the two (or more) cases
pending, there is an identity of parties, rights or causes of action, and relief
sought.23 To guard against this deplorable practice, Rule 7, Section 5 of the
revised Rules of Court imposes the following requirement
SEC. 5. Certification against forum shopping. The plaintiff or principal
party shall certify under oath in the complaint or other initiatory
pleading asserting a claim for relief, or in a sworn certification annexed
thereto and simultaneously filed therewith: (a) that he has not
theretofore commenced any action or filed any claim involving the
same issues in any court, tribunal or quasi-judicial agency and, to the
best of his knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete statement
of the present status thereof; and (c) if he should thereafter learn that
the same or similar action or claim has been filed or is pending, he
shall report that fact within five (5) days therefrom to the court wherein
his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable
by mere amendment of the complaint or other initiatory pleading but
shall be cause for the dismissal of the case without prejudice, unless
otherwise provided, upon motion and after hearing. The submission of

a false certification or non-compliance with any of the undertakings

therein shall constitute indirect contempt of court, without prejudice to
the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as cause for
administrative sanctions.
Although it may seem at first glance that respondent was simultaneously
seeking recourse from the Court of Appeals and this Court, a careful and
closer scrutiny of the details of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985
than to file with this Court a Motion for Extension of Time within which to file
her Petition for Review. For unexplained reasons, respondent failed to
submit to this Court her intended Petition within the reglementary period.
Consequently, this Court was prompted to issue a Resolution, dated 13
November 2002, declaring G.R. No. 152985 terminated, and the therein
assailed Court of Appeals Decision final and executory. G.R. No. 152985,
therefore, did not progress and respondent's appeal was unperfected.
The Petition for Review would constitute the initiatory pleading before this
Court, upon the timely filing of which, the case before this Court
commences; much in the same way a case is initiated by the filing of a
Complaint before the trial court. The Petition for Review establishes the
identity of parties, rights or causes of action, and relief sought from this
Court, and without such a Petition, there is technically no case before this
Court. The Motion filed by respondent seeking extension of time within
which to file her Petition for Review does not serve the same purpose as the
Petition for Review itself. Such a Motion merely presents the important
dates and the justification for the additional time requested for, but it does
not go into the details of the appealed case.
Without any particular idea as to the assignments of error or the relief
respondent intended to seek from this Court, in light of her failure to file her
Petition for Review, there is actually no second case involving the same
parties, rights or causes of action, and relief sought, as that in CA-G.R. CV
No. 51930.

It should also be noted that the Certification against Forum Shopping is

required to be attached to the initiatory pleading, which, in G.R. No. 152985,
should have been respondent's Petition for Review. It is in that Certification
wherein respondent certifies, under oath, that: (a) she has not commenced
any action or filed any claim involving the same issues in any court, tribunal
or quasi-judicial agency and, to the best of her knowledge, no such other
action or claim is pending therein; (b) if there is such other pending action or
claim, that she is presenting a complete statement of the present status
thereof; and (c) if she should thereafter learn that the same or similar action
or claim has been filed or is pending, she shall report that fact within five
days therefrom to this Court. Without her Petition for Review, respondent
had no obligation to execute and submit the foregoing Certification against
Forum Shopping. Thus, respondent did not violate Rule 7, Section 5 of the
Revised Rules of Court; neither did she mislead this Court as to the
pendency of another similar case.
Lastly, the fact alone that the Decision of the Court of Appeals, dated 26
March 2002, essentially ruled in favor of respondent, does not necessarily
preclude her from appealing the same. Granted that such a move is
ostensibly irrational, nonetheless, it does not amount to malice, bad faith or
abuse of the court processes in the absence of further proof. Again, it
should be noted that the respondent did not file her intended Petition for
Review. The Petition for Review would have presented before this Court the
grounds for respondent's appeal and her arguments in support thereof.
Without said Petition, any reason attributed to the respondent for appealing
the 26 March 2002 Decision would be grounded on mere speculations, to
which this Court cannot give credence.
II
As an exception to the general rule, this Court takes cognizance of
questions of fact raised in the Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases
brought before it from the Court of Appeals by virtue of Rule 45 of the
Revised Rules of Court is limited to reviewing errors of law. Findings of fact
of the Court of Appeals are conclusive upon this Court. There are, however,
recognized exceptions to the foregoing rule, namely: (1) when the findings
are grounded entirely on speculation, surmises, or conjectures; (2) when the
interference made is manifestly mistaken, absurd, or impossible; (3) when

there is grave abuse of discretion; (4) when the judgment is based on a

misapprehension of facts; (5) when the findings of fact are conflicting; (6)
when in making its findings, the Court of Appeals went beyond the issues of
the case, or its findings are contrary to the admissions of both the appellant
and the appellee; (7) when the findings are contrary to those of the trial
court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not disputed by the
respondent; and (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on
record.24
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual findings that are
contrary to those of the RTC,25 thus, resulting in its substantial modification
of the trial court's Decision, and a ruling entirely in favor of the respondent.
In addition, petitioners invoked in the instant Petition for Review several
exceptions that would justify this Court's review of the factual findings of the
Court of Appeals, i.e., the Court of Appeals made conflicting findings of fact;
findings of fact which went beyond the issues raised on appeal before it; as
well as findings of fact premised on the supposed absence of evidence and
contradicted by the evidence on record.
On the basis of the foregoing, this Court shall proceed to reviewing and reevaluating the evidence on record in order to settle questions of fact raised
in the Petition at bar.
The fact that the trial judge who rendered the RTC Decision in Civil Case
No. 11336, dated 24 August 1995, was not the same judge who heard and
tried the case, does not, by itself, render the said Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years
from the institution of the said case. In the course of its trial, the case was
presided over by four (4) different RTC judges.26 It was Judge Victorio, the
fourth judge assigned to the case, who wrote the RTC Decision, dated 24
August 1995. In his Decision,27 Judge Victorio made the following findings
After carefully evaluating the mass of evidence adduced by the parties,
this Court is not inclined to believe the plaintiff's assertion that the

promissory notes as well as the deeds of assignments of her FNCB

Finance money market placements were simulated. The evidence is
overwhelming that the plaintiff received the proceeds of the loans
evidenced by the various promissory notes she had signed. What is
more, there was not an iota of proof save the plaintiff's bare testimony
that she had indeed applied for loan with the Development Bank of the
Philippines.
More importantly, the two deeds of assignment were notarized, hence
they partake the nature of a public document. It makes more than
preponderant proof to overturn the effect of a notarial attestation.
Copies of the deeds of assignments were actually filed with the
Records Management and Archives Office.
Finally, there were sufficient evidence wherein the plaintiff had
admitted the existence of her loans with the defendant Bank in the total
amount of P1,920,000.00 exclusive of interests and penalty charges
(Exhibits "28", "31", "32", and "33").
In fine, this Court hereby finds that the defendants had established the
genuineness and due execution of the various promissory notes
heretofore identified as well as the two deeds of assignments of the
plaintiff's money market placements with defendant FNCB Finance, on
the strength of which the said money market placements were applied
to partially pay the plaintiff's past due obligation with the defendant
Bank. Thus, the total sum of P1,053,995.80 of the plaintiff's past due
obligation was partially offset by the said money market placement
leaving a balance of P1,069,847.40 as of 5 September 1979 (Exhibit
"34").
Disagreeing in the foregoing findings, the Court of Appeals stressed, in its
Decision in CA-G.R. CV No. 51930, dated 26 March 2002, "that the ponente
of the herein assailed Decision is not the Presiding Judge who heard and
tried the case."28 This brings us to the question of whether the fact alone
that the RTC Decision was rendered by a judge other than the judge who
actually heard and tried the case is sufficient justification for the appellate
court to disregard or set aside the findings in the Decision of the court a
quo?
This Court rules in the negative.

What deserves stressing is that, in this jurisdiction, there exists a disputable

presumption that the RTC Decision was rendered by the judge in the regular
performance of his official duties. While the said presumption is only
disputable, it is satisfactory unless contradicted or overcame by other
evidence.29 Encompassed in this presumption of regularity is the
presumption that the RTC judge, in resolving the case and drafting his
Decision, reviewed, evaluated, and weighed all the evidence on record.
That the said RTC judge is not the same judge who heard the case and
received the evidence is of little consequence when the records and
transcripts of stenographic notes (TSNs) are complete and available for
consideration by the former.
In People v. Gazmen,30 this Court already elucidated its position on such an
issue
Accused-appellant makes an issue of the fact that the judge who
penned the decision was not the judge who heard and tried the case
and concludes therefrom that the findings of the former are erroneous.
Accused-appellant's argument does not merit a lengthy discussion. It is
well-settled that the decision of a judge who did not try the case is not
by that reason alone erroneous.
It is true that the judge who ultimately decided the case had not heard
the controversy at all, the trial having been conducted by then Judge
Emilio L. Polig, who was indefinitely suspended by this Court.
Nonetheless, the transcripts of stenographic notes taken during the
trial were complete and were presumably examined and studied by
Judge Baguilat before he rendered his decision. It is not unusual for a
judge who did not try a case to decide it on the basis of the record. The
fact that he did not have the opportunity to observe the demeanor of
the witnesses during the trial but merely relied on the transcript of their
testimonies does not for that reason alone render the judgment
erroneous.
(People vs. Jaymalin, 214 SCRA 685, 692 [1992])
Although it is true that the judge who heard the witnesses testify is in a
better position to observe the witnesses on the stand and determine by
their demeanor whether they are telling the truth or mouthing
falsehood, it does not necessarily follow that a judge who was not

present during the trial cannot render a valid decision since he can rely
on the transcript of stenographic notes taken during the trial as basis of
his decision.
Accused-appellant's contention that the trial judge did not have the
opportunity to observe the conduct and demeanor of the witnesses
since he was not the same judge who conducted the hearing is also
untenable. While it is true that the trial judge who conducted the
hearing would be in a better position to ascertain the truth and falsity of
the testimonies of the witnesses, it does not necessarily follow that a
judge who was not present during the trial cannot render a valid and
just decision since the latter can also rely on the transcribed
stenographic notes taken during the trial as the basis of his decision.
(People vs. De Paz, 212 SCRA 56, 63 [1992])
At any rate, the test to determine the value of the testimony of the
witness is whether or not such is in conformity with knowledge and
consistent with the experience of mankind (People vs. Morre, 217
SCRA 219 [1993]). Further, the credibility of witnesses can also be
assessed on the basis of the substance of their testimony and the
surrounding circumstances (People v. Gonzales, 210 SCRA 44
[1992]). A critical evaluation of the testimony of the prosecution
witnesses reveals that their testimony accords with the aforementioned
tests, and carries with it the ring of truth end perforce, must be given
full weight and credit.
Irrefragably, by reason alone that the judge who penned the RTC Decision
was not the same judge who heard the case and received the evidence
therein would not render the findings in the said Decision erroneous and
unreliable. While the conduct and demeanor of witnesses may sway a trial
court judge in deciding a case, it is not, and should not be, his only
consideration. Even more vital for the trial court judge's decision are the
contents and substance of the witnesses' testimonies, as borne out by the
TSNs, as well as the object and documentary evidence submitted and made
part of the records of the case.
This Court proceeds to making its own findings of fact.

Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated
26 March 2002, has become final and executory as to the respondent, due
to her failure to interpose an appeal therefrom within the reglementary
period, she is already bound by the factual findings in the said Decision.
Likewise, respondent's failure to file, within the reglementary period, a
Motion for Reconsideration or an appeal of the Resolution of the Court of
Appeals in the same case, dated 20 November 2002, which modified its
earlier Decision by deleting paragraph 3(v) of its dispositive portion, ordering
petitioners to return to respondent the proceeds of her money market
placement with AIDC, shall already bar her from questioning such
modification before this Court. Thus, what is for review before this Court is
the Decision of the Court of Appeals, dated 26 March 2002, as modified by
the Resolution of the same court, dated 20 November 2002.
Respondent alleged that she had several deposits and money market
placements with petitioners. These deposits and money market placements,
as determined by the Court of Appeals in its Decision, dated 26 March
2002, and as modified by its Resolution, dated 20 November 2002, are as
follows
Deposit/Placement
Dollar deposit with Citibank-Geneva

Amount
$
149,632.99
Money market placement with Citibank, P
evidenced by Promissory Note (PN) No. 318,897.34
23356 (which cancels and supersedes PN
No. 22526), earning 14.5% interest per
annum (p.a.)
Money market placement with Citibank, P
evidenced by PN No. 23357 (which cancels 203,150.00
and supersedes PN No. 22528), earning
14.5% interest p.a.
Money market placement with FNCB P
Finance, evidenced by PN No. 5757 (which 500,000.00
cancels and supersedes PN No. 4952),
earning 17% interest p.a.
Money market placement with FNCB P
Finance, evidenced by PN No. 5758 (which 500,000.00

cancels and supersedes PN No. 2962),

earning 17% interest p.a.
This Court is tasked to determine whether petitioners are indeed liable to
return the foregoing amounts, together with the appropriate interests and
penalties, to respondent. It shall trace respondent's transactions with
petitioners, from her money market placements with petitioner Citibank and
petitioner FNCB Finance, to her savings and current accounts with
petitioner Citibank, and to her dollar accounts with Citibank-Geneva.
Money market placements with petitioner Citibank
The history of respondent's money market placements with petitioner
Citibank began on 6 December 1976, when she made a placement of
P500,000.00 as principal amount, which was supposed to earn an interest
of 16% p.a. and for which PN No. 20773 was issued. Respondent did not
yet claim the proceeds of her placement and, instead, rolled-over or reinvested the principal and proceeds several times in the succeeding years
for which new PNs were issued by petitioner Citibank to replace the ones
which matured. Petitioner Citibank accounted for respondent's original
placement and the subsequent roll-overs thereof, as follows
Date

Interest
Cancels Maturity Date Amount
PN No.
(mm/dd/yyyy)
(mm/dd/yyyy) (P)
(p.a.)
12/06/1976 20773 None 01/13/1977 500,000.00 16%
01/14/1977 21686 20773 02/08/1977 508,444.44 15%
02/09/1977 22526 21686 03/16/1977 313,952.59 153/4%
22528 21686 03/16/1977 200,000.00 153/4%
03/17/1977 23356 22526 04/20/1977 318,897.34 141/2%
23357 22528 04/20/1977 203,150.00 141/2%
PN
No.

Petitioner Citibank alleged that it had already paid to respondent the

principal amounts and proceeds of PNs No. 23356 and 23357, upon their

maturity. Petitioner Citibank further averred that respondent used the

P500,000.00 from the payment of PNs No. 23356 and 23357, plus
P600,000.00 sourced from her other funds, to open two time deposit (TD)
accounts with petitioner Citibank, namely, TD Accounts No. 17783 and
17784.
Petitioner Citibank did not deny the existence nor questioned the
authenticity of PNs No. 23356 and 23357 it issued in favor of respondent for
her money market placements. In fact, it admitted the genuineness and due
execution of the said PNs, but qualified that they were no longer
outstanding.31 In Hibberd v. Rohde and McMillian,32 this Court delineated
the consequences of such an admission
By the admission of the genuineness and due execution of an
instrument, as provided in this section, is meant that the party whose
signature it bears admits that he signed it or that it was signed by
another for him with his authority; that at the time it was signed it was
in words and figures exactly as set out in the pleading of the party
relying upon it; that the document was delivered; and that any formal
requisites required by law, such as a seal, an acknowledgment, or
revenue stamp, which it lacks, are waived by him. Hence, such
defenses as that the signature is a forgery (Puritan Mfg. Co. vs. Toti &
Gradi, 14 N. M., 425; Cox vs. Northwestern Stage Co., 1 Idaho, 376;
Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479;
Faelnar vs. Escao, 11 Phil. Rep., 92); or that it was unauthorized, as
in the case of an agent signing for his principal, or one signing in behalf
of a partnership (Country Bank vs. Greenberg, 127 Cal., 26; Henshaw
vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a
corporation (Merchant vs. International Banking Corporation, 6 Phil
Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer &
Barnes Co., 162 Mich., 509); or that, in the case of the latter, that the
corporation was authorized under its charter to sign the instrument
(Merchant vs. International Banking Corporation, supra); or that the
party charged signed the instrument in some other capacity than that
alleged in the pleading setting it out (Payne vs. National Bank, 16 Kan.,
147); or that it was never delivered (Hunt vs. Weir, 29 Ill., 83; Elbring
vs. Mullen, 4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y., 253;
Fire Association of Philadelphia vs. Ruby, 60 Neb., 216) are cut off by
the admission of its genuineness and due execution.

The effect of the admission is such that in the case of a promissory

note a prima facie case is made for the plaintiff which dispenses with
the necessity of evidence on his part and entitles him to a judgment on
the pleadings unless a special defense of new matter, such as
payment, is interposed by the defendant (Papa vs. Martinez, 12 Phil.
Rep., 613; Chinese Chamber of Commerce vs. Pua To Ching, 14 Phil.
Rep., 222; Banco Espaol-Filipino vs. McKay & Zoeller, 27 Phil. Rep.,
183). x x x
Since the genuineness and due execution of PNs No. 23356 and 23357 are
uncontested, respondent was able to establish prima facie that petitioner
Citibank is liable to her for the amounts stated therein. The assertion of
petitioner Citibank of payment of the said PNs is an affirmative allegation of
a new matter, the burden of proof as to such resting on petitioner Citibank.
Respondent having proved the existence of the obligation, the burden of
proof was upon petitioner Citibank to show that it had been discharged.33 It
has already been established by this Court that
As a general rule, one who pleads payment has the burden of proving
it. Even where the plaintiff must allege non-payment, the general rule is
that the burden rests on the defendant to prove payment, rather than
on the plaintiff to prove non-payment. The debtor has the burden of
showing with legal certainty that the obligation has been discharged by
payment.
When the existence of a debt is fully established by the evidence
contained in the record, the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such
defense to the claim of the creditor. Where the debtor introduces some
evidence of payment, the burden of going forward with the evidence
as distinct from the general burden of proof shifts to the creditor, who
is then under the duty of producing some evidence of non-payment.34
Reviewing the evidence on record, this Court finds that petitioner Citibank
failed to satisfactorily prove that PNs No. 23356 and 23357 had already
been paid, and that the amount so paid was actually used to open one of
respondent's TD accounts with petitioner Citibank.
Petitioner Citibank presented the testimonies of two witnesses to support its
contention of payment: (1) That of Mr. Herminio Pujeda,35 the officer-in-

charge of loans and placements at the time when the questioned

transactions took place; and (2) that of Mr. Francisco Tan,36 the former
Assistant Vice-President of Citibank, who directly dealt with respondent with
regard to her deposits and loans.
The relevant portion37 of Mr. Pujeda's testimony as to PNs No. 23356 and
23357 (referred to therein as Exhibits No. "47" and "48," respectively) is
reproduced below
Atty. Mabasa:
Okey [sic]. Now Mr. Witness, you were asked to testify in this
case and this case is [sic] consist [sic] of several documents
involving transactions between the plaintiff and the defendant.
Now, were you able to make your own memorandum regarding all
these transactions?
A Yes, based on my recollection of these facts, I did come up of [sic]
the outline of the chronological sequence of events.
Court:
Are you trying to say that you have personal knowledge or
participation to these transactions?
A Yes, your Honor, I was the officer-in charge of the unit that was
processing these transactions. Some of the documents bear my
signature.
Court:
And this resume or summary that you have prepared is based on
purely your recollection or documents?
A Based on documents, your Honor.
Court:
Are these documents still available now?
A Yes, your honor.

Court:
Better present the documents.
Atty. Mabasa:
Yes, your Honor, that is why your Honor.
Atty. Mabasa:
Q Now, basing on the notes that you prepared, Mr. Witness, and
according to you basing also on your personal recollection about all the
transactions involved between Modesta Sabeniano and defendant City
Bank [sic] in this case. Now, would you tell us what happened to the
money market placements of Modesta Sabeniano that you have earlier
identified in Exhs. "47" and "48"?
A The transactions which I said earlier were terminated and booked to
time deposits.
Q And you are saying time deposits with what bank?
A With First National Citibank.
Q Is it the same bank as Citibank, N.A.?
A Yes, sir.
Q And how much was the amount booked as time deposit with
defendant Citibank?
A In the amount of P500,000.00.
Q And outside this P500,000.00 which you said was booked out of the
proceeds of Exhs. "47" and "48", were there other time deposits
opened by Mrs. Modesta Sabeniano at that time.
A Yes, she also opened another time deposit for P600,000.00.
Q So all in all Mr. Witness, sometime in April of 1978 Mrs. Modesta
Sabeneano [sic] had time deposit placements with Citibank in the

amount of P500,000.00 which is the proceeds of Exh. "47" and "48"

and another P600,000.00, is it not?
A Yes, sir.
Q And would you know where did the other P600,000 placed by Mrs.
Sabeneano [sic] in a time deposit with Citibank, N.A. came [sic] from?
A She funded it directly.
Q What are you saying Mr. Witness is that the P600,000 is a [sic] fresh
money coming from Mrs. Modesta Sabeneano [sic]?
A That is right.
In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs
No. 23356 and 23357 (referred to therein as Exhibits "E" and "F,"
respectively), as follows
Atty. Mabasa : Now from the Exhibits that you have identified Mr. Tan
from Exhibits "A" to "F", which are Exhibits of the plaintiff. Now, do I
understand from you that the original amount is Five Hundred
Thousand and thereafter renewed in the succeeding exhibits?
Mr. Tan : Yes, Sir.
Atty. Mabasa : Alright, after these Exhibits "E" and "F" matured, what
happened thereafter?
Mr. Tan : Split into two time deposits.
Atty. Mabasa : Exhibits "E" and "F"?
Before anything else, it should be noted that when Mr. Pujeda's testimony
before the RTC was made on 12 March 1990 and Mr. Tan's deposition in
Hong Kong was conducted on 3 September 1990, more than a decade had
passed from the time the transactions they were testifying on took place.
This Court had previously recognized the frailty and unreliability of human
memory with regards to figures after the lapse of five years.38 Taking into
consideration the substantial length of time between the transactions and
the witnesses' testimonies, as well as the undeniable fact that bank officers
deal with multiple clients and process numerous transactions during their

tenure, this Court is reluctant to give much weight to the testimonies of Mr.
Pujeda and Mr. Tan regarding the payment of PNs No. 23356 and 23357
and the use by respondent of the proceeds thereof for opening TD
accounts. This Court finds it implausible that they should remember, after all
these years, this particular transaction with respondent involving her PNs
No. 23356 and 23357 and TD accounts. Both witnesses did not give any
reason as to why, from among all the clients they had dealt with and all the
transactions they had processed as officers of petitioner Citibank, they
specially remembered respondent and her PNs No. 23356 and 23357. Their
testimonies likewise lacked details on the circumstances surrounding the
payment of the two PNs and the opening of the time deposit accounts by
respondent, such as the date of payment of the two PNs, mode of payment,
and the manner and context by which respondent relayed her instructions to
the officers of petitioner Citibank to use the proceeds of her two PNs in
opening the TD accounts.
Moreover, while there are documentary evidences to support and trace
respondent's money market placements with petitioner Citibank, from the
original PN No. 20773, rolled-over several times to, finally, PNs No. 23356
and 23357, there is an evident absence of any documentary evidence on
the payment of these last two PNs and the use of the proceeds thereof by
respondent for opening TD accounts. The paper trail seems to have ended
with the copies of PNs No. 23356 and 23357. Although both Mr. Pujeda and
Mr. Tan said that they based their testimonies, not just on their memories
but also on the documents on file, the supposed documents on which they
based those portions of their testimony on the payment of PNs No. 23356
and 23357 and the opening of the TD accounts from the proceeds thereof,
were never presented before the courts nor made part of the records of the
case. Respondent's money market placements were of substantial amounts
consisting of the principal amount of P500,000.00, plus the interest it
should have earned during the years of placement and it is difficult for this
Court to believe that petitioner Citibank would not have had documented the
payment thereof.
When Mr. Pujeda testified before the RTC on 6 February 1990,39 petitioners'
counsel attempted to present in evidence a document that would
supposedly support the claim of petitioner Citibank that the proceeds of PNs
No. 23356 and 23357 were used by respondent to open one of her two TD
accounts in the amount of P500,000.00. Respondent's counsel objected to

the presentation of the document since it was a mere "xerox" copy, and was
blurred and hardly readable. Petitioners' counsel then asked for a
continuance of the hearing so that they can have time to produce a better
document, which was granted by the court. However, during the next
hearing and continuance of Mr. Pujeda's testimony on 12 March 1990,
petitioners' counsel no longer referred to the said document.
As respondent had established a prima facie case that petitioner Citibank is
obligated to her for the amounts stated in PNs No. 23356 and 23357, and
as petitioner Citibank failed to present sufficient proof of payment of the said
PNs and the use by the respondent of the proceeds thereof to open her TD
accounts, this Court finds that PNs No. 23356 and 23357 are still
outstanding and petitioner Citibank is still liable to respondent for the
amounts stated therein.
The significance of this Court's declaration that PNs No. 23356 and 23357
are still outstanding becomes apparent in the light of petitioners' next
contentions that respondent used the proceeds of PNs No. 23356 and
23357, together with additional money, to open TD Accounts No. 17783 and
17784 with petitioner Citibank; and, subsequently, respondent preterminated these TD accounts and transferred the proceeds thereof,
amounting to P1,100,000.00, to petitioner FNCB Finance for money market
placements. While respondent's money market placements with petitioner
FNCB Finance may be traced back with definiteness to TD Accounts No.
17783 and 17784, there is only flimsy and unsubstantiated connection
between the said TD accounts and the supposed proceeds paid from PNs
No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then
they represent an obligation of petitioner Citibank separate and distinct from
the obligation of petitioner FNCB Finance arising from respondent's money
market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondent's TD Accounts No. 17783 and 17784,
in the total amount of P1,100,000.00, were supposed to mature on 15
March 1978. However, respondent, through a letter dated 28 April 1977,40
pre-terminated the said TD accounts and transferred all the proceeds
thereof to petitioner FNCB Finance for money market placement. Pursuant
to her instructions, TD Accounts No. 17783 and 17784 were pre-terminated
and petitioner Citibank (then still named First National City Bank) issued

Manager's Checks (MC) No. 19925341 and 19925142 for the amounts of
P500,000.00 and P600,00.00, respectively. Both MCs were payable to
Citifinance (which, according to Mr. Pujeda,43 was one with and the same as
petitioner FNCB Finance), with the additional notation that "A/C MODESTA
R. SABENIANO." Typewritten on MC No. 199253 is the phrase "Ref.
Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref.
Proceeds of TD 17784." These phrases purportedly established that the
MCs were paid from the proceeds of respondent's pre-terminated TD
accounts with petitioner Citibank. Upon receipt of the MCs, petitioner FNCB
Finance deposited the same to its account with Feati Bank and Trust Co.,
as evidenced by the rubber stamp mark of the latter found at the back of
both MCs. In exchange, petitioner FNCB Finance booked the amounts
received as money market placements, and accordingly issued PNs No.
4952 and 4962, for the amounts of P500,000.00 and P600,000.00,
respectively, payable to respondent's savings account with petitioner
Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once
again, respondent rolled-over several times the principal amounts of her
money market placements with petitioner FNCB Finance, as follows
Date

Interest
PN Cancels Maturity Date Amount
No. PN No.
(mm/dd/yyyy)
(mm/dd/yyyy) (P)
(p.a.)
04/29/1977 4952 None 06/01/1977 500,000.00 17%
4962 None 06/01/1977 600,000.00 17%
06/02/1977 5757 4952
08/31/1977 500,000.00 17%
5758 4962
08/31/1977 500,000.00 17%
08/31/1977 8167 5757
08/25/1978 500,000.00 14%
8169 5752
08/25/1978 500,000.00 14%
As presented by the petitioner FNCB Finance, respondent rolled-over only
the principal amounts of her money market placements as she chose to
receive the interest income therefrom. Petitioner FNCB Finance also
pointed out that when PN No. 4962, with principal amount of P600,000.00,
matured on 1 June 1977, respondent received a partial payment of the
principal which, together with the interest, amounted to P102,633.33;44 thus,
only the amount of P500,000.00 from PN No. 4962 was rolled-over to PN
No. 5758.

Based on the foregoing records, the principal amounts of PNs No. 5757 and
5758, upon their maturity, were rolled over to PNs No. 8167 and 8169,
respectively. PN No. 816745 expressly canceled and superseded PN No.
5757, while PN No. 816946 also explicitly canceled and superseded PN No.
5758. Thus, it is patently erroneous for the Court of Appeals to still award to
respondent the principal amounts and interests covered by PNs No. 5757
and 5758 when these were already canceled and superseded. It is now
incumbent upon this Court to determine what subsequently happened to
PNs No. 8167 and 8169.
Petitioner FNCB Finance presented four checks as proof of payment of the
principal amounts and interests of PNs No. 8167 and 8169 upon their
maturity. All the checks were payable to respondent's savings account with
petitioner Citibank, with the following details
of Check Amount
Notation
No.
(P)
(mm/dd/yyyy)
09/01/1978 76962 12,833.34 Interest
payment
on
PN#08167
09/01/1978 76961 12,833.34 Interest
payment
on
PN#08169
09/05/1978 77035 500,000.00 Full payment of
principal
on
PN#08167
which
is
hereby
cancelled
09/05/ 1978 77034 500,000.00 Full payment of
principal
on
PN#08169
which
is
hereby
cancelled
Date
Issuance

Then again, Checks No. 77035 and 77034 were later returned to petitioner
FNCB Finance together with a memo,47 dated 6 September 1978, from Mr.
Tan of petitioner Citibank, to a Mr. Bobby Mendoza of petitioner FNCB
Finance. According to the memo, the two checks, in the total amount of
P1,000,000.00, were to be returned to respondent's account with
instructions to book the said amount in money market placements for one
more year. Pursuant to the said memo, Checks No. 77035 and 77034 were
invested by petitioner FNCB Finance, on behalf of respondent, in money
market placements for which it issued PNs No. 20138 and 20139. The PNs
each covered P500,000.00, to earn 11% interest per annum, and to mature
on 3 September 1979.
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168,
pay to the order of "Citibank N.A. A/C Modesta Sabeniano," in the amount
of P1,022,916.66, as full payment of the principal amounts and interests of
both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs.48
Respondent actually admitted the issuance and existence of Check No.
100168, but with the qualification that the proceeds thereof were turned over
to petitioner Citibank.49 Respondent did not clarify the circumstances
attending the supposed turn over, but on the basis of the allegations of
petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139,
amounting to P1,022,916.66, was used by it to liquidate respondent's
outstanding loans. Therefore, the determination of whether or not
respondent is still entitled to the return of the proceeds of PNs No. 20138
and 20139 shall be dependent on the resolution of the issues raised as to
the existence of the loans and the authority of petitioner Citibank to use the
proceeds of the said PNs, together with respondent's other deposits and
money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank
Respondent presented and submitted before the RTC deposit slips and
bank statements to prove deposits made to several of her accounts with
petitioner Citibank, particularly, Accounts No. 00484202, 59091, and 472751, which would have amounted to a total of P3,812,712.32, had there
been no withdrawals or debits from the said accounts from the time the said
deposits were made.
Although the RTC and the Court of Appeals did not make any definitive
findings as to the status of respondent's savings and current accounts with

petitioner Citibank, the Decisions of both the trial and appellate courts
effectively recognized only the P31,079.14 coming from respondent's
savings account which was used to off-set her alleged outstanding loans
with petitioner Citibank.50
Since both the RTC and the Court of Appeals had consistently recognized
only the P31,079.14 of respondent's savings account with petitioner
Citibank, and that respondent failed to move for reconsideration or to appeal
this particular finding of fact by the trial and appellate courts, it is already
binding upon this Court. Respondent is already precluded from claiming any
greater amount in her savings and current accounts with petitioner Citibank.
Thus, this Court shall limit itself to determining whether or not respondent is
entitled to the return of the amount of P31,079.14 should the off-set thereof
by petitioner Citibank against her supposed loans be found invalid.
Dollar accounts with Citibank-Geneva
Respondent made an effort of preparing and presenting before the RTC her
own computations of her money market placements and dollar accounts
with Citibank-Geneva, purportedly amounting to a total of United States
(US) $343,220.98, as of 23 June 1985.51 In her Memorandum filed with the
RTC, she claimed a much bigger amount of deposits and money market
placements with Citibank-Geneva, totaling US$1,336,638.65.52 However,
respondent herself also submitted as part of her formal offer of evidence the
computation of her money market placements and dollar accounts with
Citibank-Geneva as determined by the latter.53 Citibank-Geneva accounted
for respondent's money market placements and dollar accounts as follows
MODESTA
SABENIANO
==================

&/OR

US$

30'000.--

Principal Fid. Placement

+
US$

339.06

Interest at 3,875% p.a. from

12.07. 25.10.79

US$

95.--

Commission (minimum)

US$

30'244.06

Total

proceeds

on

25.10.1979
US$

114'000.--

Principal Fid. Placement

+
US$

1'358.50

Interest at 4,125% p.a. from

12.07. 25.10.79

US$

41.17

Commission

US$

115'317.33 Total
proceeds
25.10.1979

US$

145'561.39 Total proceeds of both

placements on 25.10.1979

+
US$

11'381.31

US$

156'942.70 Total funds available

US$

149'632.99 Transfer to Citibank Manila

on
26.10.1979
(counter value of Pesos
1'102'944.78)

US$

7'309.71

Balance in current accounts

US$

6'998.84

Transfer to Citibank Zuerich

ac no. 121359 on March
13, 1980

US$

310.87

various charges including

closing charges

total
of
accounts

both

on

current

According to the foregoing computation, by 25 October 1979, respondent

had a total of US$156,942.70, from which, US$149,632.99 was transferred
by Citibank-Geneva to petitioner Citibank in Manila, and was used by the
latter to off-set respondent's outstanding loans. The balance of respondent's
accounts with Citibank-Geneva, after the remittance to petitioner Citibank in
Manila, amounted to US$7,309.71, which was subsequently expended by a

transfer to another account with Citibank-Zuerich, in the amount of

US$6,998.84, and by payment of various bank charges, including closing
charges, in the amount of US$310.87. Rightly so, both the RTC and the
Court of Appeals gave more credence to the computation of CitibankGeneva as to the status of respondent's accounts with the said bank, rather
than the one prepared by respondent herself, which was evidently selfserving. Once again, this Court shall limit itself to determining whether or not
respondent is entitled to the return of the amount of US$149,632.99 should
the off-set thereof by petitioner Citibank against her alleged outstanding
loans be found invalid. Respondent cannot claim any greater amount since
she did not perfect an appeal of the Decision of the Court of Appeals, dated
26 March 2002, which found that she is entitled only to the return of the said
amount, as far as her accounts with Citibank-Geneva is concerned.
III
Petitioner Citibank was able to establish by preponderance of evidence the
existence of respondent's loans.
Petitioners' version of events
In sum, the following amounts were used by petitioner Citibank to liquidate
respondent's purported outstanding loans
Description
Amount
Principal and interests of PNs
No.
20138
and
20139
(money market placements with P
petitioner FNCB Finance)
1,022,916.66
Savings account with petitioner
Citibank
31,079.14
Dollar remittance from CitibankGeneva (peso equivalent of
US$149,632.99)
1,102,944.78
P
Total
2,156,940.58
According to petitioner Citibank, respondent incurred her loans under the
circumstances narrated below.

As early as 9 February 1978, respondent obtained her first loan from

petitioner Citibank in the principal amount of P200,000.00, for which she
executed PN No. 31504.54 Petitioner Citibank extended to her several other
loans in the succeeding months. Some of these loans were paid, while
others were rolled-over or renewed. Significant to the Petition at bar are the
loans which respondent obtained from July 1978 to January 1979,
appropriately covered by PNs (first set).55 The aggregate principal amount
of these loans was P1,920,000.00, which could be broken down as follows
PN
No.

Date
Issuance

of Date
Maturity

of Principal
Amount

Date
Release

of MC
No.

(mm/dd/yyyy) (mm/dd/yyyy)
(mm/dd/yyyy)
32935 07/20/1978 09/18/1978 P
07/20/1978 220701
400,000.00
33751 10/13/1978 12/12/1978 100,000.00 Unrecovered
33798 10/19/1978 11/03/1978 100,000.00 10/19/1978 226285
34025 11/15/1978 01/15/1979 150,000.00 11/16/1978 226439
34079 11/21/1978 01/19/1979 250,000.00 11/21/1978 226467
34192 12/04/1978 01/18/1979 100,000.00 12/05/1978 228057
34402 12/26/1978 02/23/1979 300,000.00 12/26/1978 228203
34534 01/09/1979 03/09/1979 150,000.00 01/09/1979 228270
34609 01/17/1979 03/19/1979 150,000.00 01/17/1979 228357
34740 01/30/1979 03/30/1979 220,000.00 01/30/1979 228400
Total
P
1,920,000.00
When respondent was unable to pay the first set of PNs upon their maturity,
these were rolled-over or renewed several times, necessitating the
execution by respondent of new PNs in favor of petitioner Citibank. As of 5
April 1979, respondent had the following outstanding PNs (second set),56
the principal amount of which remained at P1,920,000.00
PN No. Date
Issuance

of Date
Maturity

of Principal
Amount

(mm/dd/yyyy) (mm/dd/yyyy)

34510 01/01/1979

03/02/1979

34509 01/02/1979
34534 01/09/1979
34612 01/19/1979
34741 01/26/1979
35689 02/23/1979
35694 03/19/1979
35695 03/19/1979
356946 03/20/1979
35697 03/30/1979
Total

03/02/1979
03/09/1979
03/16/1979
03/12/1979
05/29/1979
05/29/1979
05/29/1979
05/29/1979
05/29/1979

P
400,000.00
100,000.00
150,000.00
150,000.00
100,000.00
300,000.00
150,000.00
100,000.00
250,000.00
220,000.00
P
1,920,000.00

All the PNs stated that the purpose of the loans covered thereby is "To
liquidate existing obligation," except for PN No. 34534, which stated for its
purpose "personal investment."
Respondent secured her foregoing loans with petitioner Citibank by
executing Deeds of Assignment of her money market placements with
petitioner FNCB Finance. On 2 March 1978, respondent executed in favor
of petitioner Citibank a Deed of Assignment57 of PN No. 8169, which was
issued by petitioner FNCB Finance, to secure payment of the credit and
banking facilities extended to her by petitioner Citibank, in the aggregate
principal amount of P500,000.00. On 9 March 1978, respondent executed in
favor of petitioner Citibank another Deed of Assignment,58 this time, of PN
No. 8167, also issued by petitioner FNCB Finance, to secure payment of the
credit and banking facilities extended to her by petitioner Citibank, in the
aggregate amount of P500,000.00. When PNs No. 8167 and 8169,
representing respondent's money market placements with petitioner FNCB
Finance, matured and were rolled-over to PNs No. 20138 and 20139,
respondent executed new Deeds of Assignment,59 in favor of petitioner
Citibank, on 25 August 1978. According to the more recent Deeds,
respondent assigned PNs No. 20138 and 20139, representing her rolledover money market placements with petitioner FNCB Finance, to petitioner
Citibank as security for the banking and credit facilities it extended to her, in
the aggregate principal amount of P500,000.00 per Deed.

In addition to the Deeds of Assignment of her money market placements

with petitioner FNCB Finance, respondent also executed a Declaration of
Pledge,60 in which she supposedly pledged "[a]ll present and future fiduciary
placements held in my personal and/or joint name with Citibank,
Switzerland," to secure all claims the petitioner Citibank may have or, in the
future, acquire against respondent. The petitioners' copy of the Declaration
of Pledge is undated, while that of the respondent, a copy certified by a
Citibank-Geneva officer, bore the date 24 September 1979.61
When respondent failed to pay the second set of PNs upon their maturity,
an exchange of letters ensued between respondent and/or her
representatives, on one hand, and the representatives of petitioners, on the
other.
The first letter62 was dated 5 April 1979, addressed to respondent and
signed by Mr. Tan, as the manager of petitioner Citibank, which stated, in
part, that
Despite our repeated requests and follow-up, we regret you have not
granted us with any response or payment.
We, therefore, have no alternative but to call your loan of
P1,920,000.00 plus interests and other charges due and demandable.
If you still fail to settle this obligation by 4/27/79, we shall have no other
alternative but to refer your account to our lawyers for legal action to
protect the interest of the bank.
Respondent sent a reply letter63 dated 26 April 1979, printed on paper
bearing the letterhead of respondent's company, MC Adore International
Palace, the body of which reads
This is in reply to your letter dated April 5, 1979 inviting my attention to
my loan which has become due. Pursuant to our representation with
you over the telephone through Mr. F. A. Tan, you allow us to pay the
interests due for the meantime.
Please accept our Comtrust Check in the amount of P62,683.33.
Please bear with us for a little while, at most ninety days. As you know,
we have a pending loan with the Development Bank of the Philippines
in the amount of P11-M. This loan has already been recommended for

approval and would be submitted to the Board of Governors. In fact, to

further facilitate the early release of this loan, we have presented and
furnished Gov. J. Tengco a xerox copy of your letter.
You will be doing our corporation a very viable service, should you
grant us our request for a little more time.
A week later or on 3 May 1979, a certain C. N. Pugeda, designated as
"Executive Secretary," sent a letter64 to petitioner Citibank, on behalf of
respondent. The letter was again printed on paper bearing the letterhead of
MC Adore International Palace. The pertinent paragraphs of the said letter
are reproduced below
Per instructions of Mrs. Modesta R. Sabeniano, we would like to
request for a re-computation of the interest and penalty charges on her
loan in the aggregate amount of P1,920,000.00 with maturity date of all
promissory notes at June 30, 1979. As she has personally discussed
with you yesterday, this date will more or less assure you of early
settlement.
In this regard, please entrust to bearer, our Comtrust check for
P62,683.33 to be replaced by another check with amount resulting
from the new computation. Also, to facilitate the processing of the
same, may we request for another set of promissory notes for the
signature of Mrs. Sabeniano and to cancel the previous ones she has
signed and forwarded to you.
This was followed by a telegram,65 dated 5 June 1979, and received by
petitioner Citibank the following day. The telegram was sent by a Dewey G.
Soriano, Legal Counsel. The telegram acknowledged receipt of the telegram
sent by petitioner Citibank regarding the "re-past due obligation" of McAdore
International Palace. However, it reported that respondent, the President
and Chairman of MC Adore International Palace, was presently abroad
negotiating for a big loan. Thus, he was requesting for an extension of the
due date of the obligation until respondent's arrival on or before 31 July
1979.
The next letter,66 dated 21 June 1979, was signed by respondent herself
and addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB
Finance. Respondent wrote therein

Re: PN No. 20138 for P500,000.00 & PN No. 20139 for

P500,000.00 totalling P1 Million, both PNs will mature on
9/3/1979.
This is to authorize you to release the accrued quarterly interests
payment from my captioned placements and forward directly to
Citibank, Manila Attention: Mr. F. A. Tan, Manager, to apply to my
interest payable on my outstanding loan with Citibank.
Please note that the captioned two placements are continuously
pledged/hypothecated to Citibank, Manila to support my personal
outstanding loan. Therefore, please do not release the captioned
placements upon maturity until you have received the instruction from
Citibank, Manila.
On even date, respondent sent another letter67 to Mr. Tan of petitioner
Citibank, stating that
Re:
S/A
and C/A No. 484-946

No.

25-225928

This letter serves as an authority to debit whatever the outstanding

balance from my captioned accounts and credit the amount to my loan
outstanding account with you.
Unlike respondent's earlier letters, both letters, dated 21 June 1979, are
printed on plain paper, without the letterhead of her company, MC Adore
International Palace.
By 5 September 1979, respondent's outstanding and past due obligations to
petitioner Citibank totaled P2,123,843.20, representing the principal
amounts plus interests. Relying on respondent's Deeds of Assignment,
petitioner Citibank applied the proceeds of respondent's money market
placements with petitioner FNCB Finance, as well as her deposit account
with petitioner Citibank, to partly liquidate respondent's outstanding loan
balance,68 as follows
Respondent's
outstanding P
obligation (principal and interest)
2,123,843.20
Less: Proceeds from respondent's

money market placements

with petitioner FNCB Finance (1,022,916.66)
(principal and interest)
Deposits in respondent's bank
accounts with petitioner
Citibank
(31,079.14)
Balance of respondent's obligation P
1,069,847.40
Mr. Tan of petitioner Citibank subsequently sent a letter,69 dated 28
September 1979, notifying respondent of the status of her loans and the
foregoing compensation which petitioner Citibank effected. In the letter, Mr.
Tan informed respondent that she still had a remaining past-due obligation
in the amount of P1,069,847.40, as of 5 September 1979, and should
respondent fail to pay the amount by 15 October 1979, then petitioner
Citibank shall proceed to off-set the unpaid amount with respondent's other
collateral, particularly, a money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on
paper bearing the letterhead of MC Adore International Palace, as regards
the P1,920,000.00 loan account supposedly of MC Adore Finance &
Investment, Inc., and requested for a statement of account covering the
principal and interest of the loan as of 31 October 1979. She stated therein
that the loan obligation shall be paid within 60 days from receipt of the
statement of account.
Almost three weeks later, or on 25 October 1979, a certain Atty. Moises
Tolentino dropped by the office of petitioner Citibank, with a letter, dated 9
October 1979, and printed on paper with the letterhead of MC Adore
International Palace, which authorized the bearer thereof to represent the
respondent in settling the overdue account, this time, purportedly, of MC
Adore International Palace Hotel. The letter was signed by respondent as
the President and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of
petitioner Citibank, sent a letter to respondent, dated 31 October 1979,
informing her that petitioner Citibank had effected an off-set using her
account with Citibank-Geneva, in the amount of US$149,632.99, against her

"outstanding, overdue, demandable and unpaid obligation" to petitioner

Citibank. Atty. Agcaoili claimed therein that the compensation or off-set was
made pursuant to and in accordance with the provisions of Articles 1278
through 1290 of the Civil Code. He further declared that respondent's
obligation to petitioner Citibank was now fully paid and liquidated.
Unfortunately, on 7 October 1987, a fire gutted the 7th floor of petitioner
Citibank's building at Paseo de Roxas St., Makati, Metro Manila. Petitioners
submitted a Certification70 to this effect, dated 17 January 1991, issued by
the Chief of the Arson Investigation Section, Fire District III, Makati Fire
Station, Metropolitan Police Force. The 7th floor of petitioner Citibank's
building housed its Control Division, which was in charge of keeping the
necessary documents for cases in which it was involved. After compiling the
documentary evidence for the present case, Atty. Renato J. Fernandez,
internal legal counsel of petitioner Citibank, forwarded them to the Control
Division. The original copies of the MCs, which supposedly represent the
proceeds of the first set of PNs, as well as that of other documentary
evidence related to the case, were among those burned in the said fire.71
Respondent's version of events
Respondent disputed petitioners' narration of the circumstances
surrounding her loans with petitioner Citibank and the alleged authority she
gave for the off-set or compensation of her money market placements and
deposit accounts with petitioners against her loan obligation.
Respondent denied outright executing the first set of PNs, except for one
(PN No. 34534 in particular). Although she admitted that she obtained
several loans from petitioner Citibank, these only amounted to
P1,150,000.00, and she had already paid them. She secured from petitioner
Citibank two loans of P500,000.00 each. She executed in favor of petitioner
Citibank the corresponding PNs for the loans and the Deeds of Assignment
of her money market placements with petitioner FNCB Finance as
security.72 To prove payment of these loans, respondent presented two
provisional receipts of petitioner Citibank No. 19471,73 dated 11 August
1978, and No. 12723,74 dated 10 November 1978 both signed by Mr. Tan,
and acknowledging receipt from respondent of several checks in the total
amount of P500,744.00 and P500,000.00, respectively, for "liquidation of
loan."

She borrowed another P150,000.00 from petitioner Citibank for personal

investment, and for which she executed PN No. 34534, on 9 January 1979.
Thus, she admitted to receiving the proceeds of this loan via MC No.
228270. She invested the loan amount in another money market placement
with petitioner FNCB Finance. In turn, she used the very same money
market placement with petitioner FNCB Finance as security for her
P150,000.00 loan from petitioner Citibank. When she failed to pay the loan
when it became due, petitioner Citibank allegedly forfeited her money
market placement with petitioner FNCB Finance and, thus, the loan was
already paid.75
Respondent likewise questioned the MCs presented by petitioners, except
for one (MC No. 228270 in particular), as proof that she received the
proceeds of the loans covered by the first set of PNs. As recounted in the
preceding paragraph, respondent admitted to obtaining a loan of
P150,000.00, covered by PN No. 34534, and receiving MC No. 228270
representing the proceeds thereof, but claimed that she already paid the
same. She denied ever receiving MCs No. 220701 (for the loan of
P400,000.00, covered by PN No. 33935) and No. 226467 (for the loan of
P250,000.00, covered by PN No. 34079), and pointed out that the checks
did not bear her indorsements. She did not deny receiving all other checks
but she interposed that she received these checks, not as proceeds of
loans, but as payment of the principal amounts and/or interests from her
money market placements with petitioner Citibank. She also raised doubts
as to the notation on each of the checks that reads "RE: Proceeds of
PN#[corresponding PN No.]," saying that such notation did not appear on
the MCs when she originally received them and that the notation appears to
have been written by a typewriter different from that used in writing all other
information on the checks (i.e., date, payee, and amount).76 She even
testified that MCs were not supposed to bear notations indicating the
purpose for which they were issued.
As to the second set of PNs, respondent acknowledged having signed them
all. However, she asserted that she only executed these PNs as part of the
simulated loans she and Mr. Tan of petitioner Citibank concocted.
Respondent explained that she had a pending loan application for a big
amount with the Development Bank of the Philippines (DBP), and when Mr.
Tan found out about this, he suggested that they could make it appear that
the respondent had outstanding loans with petitioner Citibank and the latter

was already demanding payment thereof; this might persuade DBP to

approve respondent's loan application. Mr. Tan made the respondent sign
the second set of PNs, so that he may have something to show the DBP
investigator who might inquire with petitioner Citibank as to respondent's
loans with the latter. On her own copies of the said PNs, respondent wrote
by hand the notation, "This isa (sic) simulated non-negotiable note, signed
copy given to Mr. Tan., (sic) per agreement to be shown to DBP
representative. itwill (sic) be returned to me if the P11=M (sic) loan for MC
Adore Palace Hotel is approved by DBP."77
Findings of this Court as to the existence of the loans
After going through the testimonial and documentary evidence presented by
both sides to this case, it is this Court's assessment that respondent did
indeed have outstanding loans with petitioner Citibank at the time it effected
the off-set or compensation on 25 July 1979 (using respondent's savings
deposit with petitioner Citibank), 5 September 1979 (using the proceeds of
respondent's money market placements with petitioner FNCB Finance) and
26 October 1979 (using respondent's dollar accounts remitted from
Citibank-Geneva). The totality of petitioners' evidence as to the existence of
the said loans preponderates over respondent's. Preponderant evidence
means that, as a whole, the evidence adduced by one side outweighs that
of the adverse party.78
Respondent's outstanding obligation for P1,920,000.00 had been sufficiently
documented by petitioner Citibank.
The second set of PNs is a mere renewal of the prior loans originally
covered by the first set of PNs, except for PN No. 34534. The first set of
PNs is supported, in turn, by the existence of the MCs that represent the
proceeds thereof received by the respondent.
It bears to emphasize that the proceeds of the loans were paid to
respondent in MCs, with the respondent specifically named as payee. MCs
checks are drawn by the bank's manager upon the bank itself and regarded
to be as good as the money it represents.79 Moreover, the MCs were
crossed checks, with the words "Payee's Account Only."
In general, a crossed check cannot be presented to the drawee bank for
payment in cash. Instead, the check can only be deposited with the payee's

bank which, in turn, must present it for payment against the drawee bank in
the course of normal banking hours. The crossed check cannot be
presented for payment, but it can only be deposited and the drawee bank
may only pay to another bank in the payee's or indorser's account.80 The
effect of crossing a check was described by this Court in Philippine
Commercial International Bank v. Court of Appeals81
[T]he crossing of a check with the phrase "Payee's Account Only" is a
warning that the check should be deposited in the account of the
payee. Thus, it is the duty of the collecting bank PCI Bank to ascertain
that the check be deposited in payee's account only. It is bound to
scrutinize the check and to know its depositors before it can make the
clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed."
The crossed MCs presented by petitioner Bank were indeed deposited in
several different bank accounts and cleared by the Clearing Office of the
Central Bank of the Philippines, as evidenced by the stamp marks and
notations on the said checks. The crossed MCs are already in the
possession of petitioner Citibank, the drawee bank, which was ultimately
responsible for the payment of the amount stated in the checks. Given that
a check is more than just an instrument of credit used in commercial
transactions for it also serves as a receipt or evidence for the drawee bank
of the cancellation of the said check due to payment,82 then, the possession
by petitioner Citibank of the said MCs, duly stamped "Paid" gives rise to the
presumption that the said MCs were already paid out to the intended payee,
who was in this case, the respondent.
This Court finds applicable herein the presumptions that private transactions
have been fair and regular,83 and that the ordinary course of business has
been followed.84 There is no question that the loan transaction between
petitioner Citibank and the respondent is a private transaction. The
transactions revolving around the crossed MCs from their issuance by
petitioner Citibank to respondent as payment of the proceeds of her loans;
to its deposit in respondent's accounts with several different banks; to the
clearing of the MCs by an independent clearing house; and finally, to the
payment of the MCs by petitioner Citibank as the drawee bank of the said
checks are all private transactions which shall be presumed to have been
fair and regular to all the parties concerned. In addition, the banks involved

in the foregoing transactions are also presumed to have followed the

ordinary course of business in the acceptance of the crossed MCs for
deposit in respondent's accounts, submitting them for clearing, and their
eventual payment and cancellation.
The afore-stated presumptions are disputable, meaning, they are
satisfactory if uncontradicted, but may be contradicted and overcome by
other evidence.85 Respondent, however, was unable to present sufficient
and credible evidence to dispute these presumptions.
It should be recalled that out of the nine MCs presented by petitioner
Citibank, respondent admitted to receiving one as proceeds of a loan (MC
No. 228270), denied receiving two (MCs No. 220701 and 226467), and
admitted to receiving all the rest, but not as proceeds of her loans, but as
return on the principal amounts and interests from her money market
placements.
Respondent admitted receiving MC No. 228270 representing the proceeds
of her loan covered by PN No. 34534. Although the principal amount of the
loan is P150,000.00, respondent only received P146,312.50, because the
interest and handling fee on the loan transaction were already deducted
therefrom.86 Stamps and notations at the back of MC No. 228270 reveal that
it was deposited at the Bank of the Philippine Islands (BPI), Cubao Branch,
in Account No. 0123-0572-28.87 The check also bore the signature of
respondent at the back.88 And, although respondent would later admit that
she did sign PN No. 34534 and received MC No. 228270 as proceeds of the
loan extended to her by petitioner Citibank, she contradicted herself when,
in an earlier testimony, she claimed that PN No. 34534 was among the PNs
she executed as simulated loans with petitioner Citibank.89
Respondent denied ever receiving MCs No. 220701 and 226467. However,
considering that the said checks were crossed for payee's account only, and
that they were actually deposited, cleared, and paid, then the presumption
would be that the said checks were properly deposited to the account of
respondent, who was clearly named the payee in the checks. Respondent's
bare allegations that she did not receive the two checks fail to convince this
Court, for to sustain her, would be for this Court to conclude that an
irregularity had occurred somewhere from the time of the issuance of the
said checks, to their deposit, clearance, and payment, and which would
have involved not only petitioner Citibank, but also BPI, which accepted the

checks for deposit, and the Central Bank of the Philippines, which cleared
the checks. It falls upon the respondent to overcome or dispute the
presumption that the crossed checks were issued, accepted for deposit,
cleared, and paid for by the banks involved following the ordinary course of
their business.
The mere fact that MCs No. 220701 and 226467 do not bear respondent's
signature at the back does not negate deposit thereof in her account. The
liability for the lack of indorsement on the MCs no longer fall on petitioner
Citibank, but on the bank who received the same for deposit, in this case,
BPI Cubao Branch. Once again, it must be noted that the MCs were
crossed, for payee's account only, and the payee named in both checks
was none other than respondent. The crossing of the MCs was already a
warning to BPI to receive said checks for deposit only in respondent's
account. It was up to BPI to verify whether it was receiving the crossed MCs
in accordance with the instructions on the face thereof. If, indeed, the MCs
were deposited in accounts other than respondent's, then the respondent
would have a cause of action against BPI.90
BPI further stamped its guarantee on the back of the checks to the effect
that, "All prior endorsement and/or Lack of endorsement guaranteed." Thus,
BPI became the indorser of the MCs, and assumed all the warranties of an
indorser,91 specifically, that the checks were genuine and in all respects
what they purported to be; that it had a good title to the checks; that all prior
parties had capacity to contract; and that the checks were, at the time of
their indorsement, valid and subsisting.92 So even if the MCs deposited by
BPI's client, whether it be by respondent herself or some other person,
lacked the necessary indorsement, BPI, as the collecting bank, is bound by
its warranties as an indorser and cannot set up the defense of lack of
indorsement as against petitioner Citibank, the drawee bank.93
Furthermore, respondent's bare and unsubstantiated denial of receipt of the
MCs in question and their deposit in her account is rendered suspect when
MC No. 220701 was actually deposited in Account No. 0123-0572-28 of BPI
Cubao Branch, the very same account in which MC No. 228270 (which
respondent admitted to receiving as proceeds of her loan from petitioner
Citibank), and MCs No. 228203, 228357, and 228400 (which respondent
admitted to receiving as proceeds from her money market placements) were
deposited. Likewise, MC No. 226467 was deposited in Account No. 0121-

002-43 of BPI Cubao Branch, to which MCs No. 226285 and 226439 (which
respondent admitted to receiving as proceeds from her money market
placements) were deposited. It is an apparent contradiction for respondent
to claim having received the proceeds of checks deposited in an account,
and then deny receiving the proceeds of another check deposited in the
very same account.
Another inconsistency in respondent's denial of receipt of MC No. 226467
and her deposit of the same in her account, is her presentation of Exhibit
"HHH," a provisional receipt which was supposed to prove that respondent
turned over P500,000.00 to Mr. Tan of petitioner Citibank, that the said
amount was split into three money market placements, and that MC No.
226467 represented the return on her investment from one of these
placements.94 Because of her Exhibit "HHH," respondent effectively
admitted receipt of MC No. 226467, although for reasons other than as
proceeds of a loan.
Neither can this Court give credence to respondent's contention that the
notations on the MCs, stating that they were the proceeds of particular PNs,
were not there when she received the checks and that the notations
appeared to be written by a typewriter different from that used to write the
other information on the checks. Once more, respondent's allegations were
uncorroborated by any other evidence. Her and her counsel's observation
that the notations on the MCs appear to be written by a typewriter different
from that used to write the other information on the checks hardly convinces
this Court considering that it constitutes a mere opinion on the appearance
of the notation by a witness who does not possess the necessary expertise
on the matter. In addition, the notations on the MCs were written using both
capital and small letters, while the other information on the checks were
written using capital letters only, such difference could easily confuse an
untrained eye and lead to a hasty conclusion that they were written by
different typewriters.
Respondent's testimony, that based on her experience transacting with
banks, the MCs were not supposed to include notations on the purpose for
which the checks were issued, also deserves scant consideration. While
respondent may have extensive experience dealing with banks, it still does
not qualify her as a competent witness on banking procedures and
practices. Her testimony on this matter is even belied by the fact that the

other MCs issued by petitioner Citibank (when it was still named First
National City Bank) and by petitioner FNCB Finance, the existence and
validity of which were not disputed by respondent, also bear similar
notations that state the reason for which they were issued.
Respondent presented several more pieces of evidence to substantiate her
claim that she received MCs No. 226285, 226439, 226467, 226057,
228357, and 228400, not as proceeds of her loans from petitioner Citibank,
but as the return of the principal amounts and payment of interests from her
money market placements with petitioners. Part of respondent's exhibits
were personal checks95 drawn by respondent on her account with Feati
Bank & Trust Co., which she allegedly invested in separate money market
placements with both petitioners, the returns from which were paid to her via
MCs No. 226285 and 228400. Yet, to this Court, the personal checks only
managed to establish respondent's issuance thereof, but there was nothing
on the face of the checks that would reveal the purpose for which they were
issued and that they were actually invested in money market placements as
respondent claimed.
Respondent further submitted handwritten notes that purportedly computed
and presented the returns on her money market placements, corresponding
to the amount stated in the MCs she received from petitioner Citibank.
Exhibit "HHH-1"96 was a handwritten note, which respondent attributed to
Mr. Tan of petitioner Citibank, showing the breakdown of her BPI Check for
P500,000.00 into three different money market placements with petitioner
Citibank. This Court, however, noticed several factors which render the note
highly suspect. One, it was written on the reversed side of Provisional
Receipt No. 12724 of petitioner Citibank which bore the initials of Mr. Tan
acknowledging receipt of respondent's BPI Check No. 120989 for
P500,000.00; but the initials on the handwritten note appeared to be that of
Mr. Bobby Mendoza of petitioner FNCB Finance.97 Second, according to
Provisional Receipt No. 12724, BPI Check No. 120989 for P500,000.00 was
supposed to be invested in three money market placements with petitioner
Citibank for the period of 60 days. Since all these money market placements
were made through one check deposited on the same day, 10 November
1978, it made no sense that the handwritten note at the back of Provisional
Receipt No. 12724 provided for different dates of maturity for each of the
money market placements (i.e., 16 November 1978, 17 January 1979, and
21 November 1978), and such dates did not correspond to the 60 day

placement period stated on the face of the provisional receipt. And third, the
principal amounts of the money market placements as stated in the
handwritten note P145,000.00, P145,000.00 and P242,000.00 totaled
P532,000.00, and was obviously in excess of the P500,000.00
acknowledged on the face of Provisional Receipt No. 12724.
Exhibits "III" and "III-1," the front and bank pages of a handwritten note of
Mr. Bobby Mendoza of petitioner FNCB Finance,98 also did not deserve
much evidentiary weight, and this Court cannot rely on the truth and
accuracy of the computations presented therein. Mr. Mendoza was not
presented as a witness during the trial before the RTC, so that the
document was not properly authenticated nor its contents sufficiently
explained. No one was able to competently identify whether the initials as
appearing on the note were actually Mr. Mendoza's.
Also, going by the information on the front page of the note, this Court
observes that payment of respondent's alleged money market placements
with petitioner FNCB Finance were made using Citytrust Checks; the MCs
in question, including MC No. 228057, were issued by petitioner Citibank.
Although Citytrust (formerly Feati Bank & Trust Co.), petitioner FNCB
Finance, and petitioner Citibank may be affiliates of one another, they each
remained separate and distinct corporations, each having its own financial
system and records. Thus, this Court cannot simply assume that one
corporation, such as petitioner Citibank or Citytrust, can issue a check to
discharge an obligation of petitioner FNCB Finance. It should be recalled
that when petitioner FNCB Finance paid for respondent's money market
placements, covered by its PNs No. 8167 and 8169, as well as PNs No.
20138 and 20139, petitioner FNCB Finance issued its own checks.
As a last point on this matter, if respondent truly had money market
placements with petitioners, then these would have been evidenced by PNs
issued by either petitioner Citibank or petitioner FNCB Finance,
acknowledging the principal amounts of the investments, and stating the
applicable interest rates, as well as the dates of their of issuance and
maturity. After respondent had so meticulously reconstructed her other
money market placements with petitioners and consolidated the
documentary evidence thereon, she came surprisingly short of offering
similar details and substantiation for these particular money market
placements.

Since this Court is satisfied that respondent indeed received the proceeds of
the first set of PNs, then it proceeds to analyze her evidence of payment
thereof.
In support of respondent's assertion that she had already paid whatever
loans she may have had with petitioner Citibank, she presented as evidence
Provisional Receipts No. 19471, dated 11 August 1978, and No. 12723,
dated 10 November 1978, both of petitioner Citibank and signed by Mr. Tan,
for the amounts of P500,744.00 and P500,000.00, respectively. While these
provisional receipts did state that Mr. Tan, on behalf of petitioner Citibank,
received respondent's checks as payment for her loans, they failed to
specifically identify which loans were actually paid. Petitioner Citibank was
able to present evidence that respondent had executed several PNs in the
years 1978 and 1979 to cover the loans she secured from the said bank.
Petitioner Citibank did admit that respondent was able to pay for some of
these PNs, and what it identified as the first and second sets of PNs were
only those which remained unpaid. It thus became incumbent upon
respondent to prove that the checks received by Mr. Tan were actually
applied to the PNs in either the first or second set; a fact that, unfortunately,
cannot be determined from the provisional receipts submitted by respondent
since they only generally stated that the checks received by Mr. Tan were
payment for respondent's loans.
Mr. Tan, in his deposition, further explained that provisional receipts were
issued when payment to the bank was made using checks, since the checks
would still be subject to clearing. The purpose for the provisional receipts
was merely to acknowledge the delivery of the checks to the possession of
the bank, but not yet of payment.99 This bank practice finds legitimacy in the
pronouncement of this Court that a check, whether an MC or an ordinary
check, is not legal tender and, therefore, cannot constitute valid tender of
payment. In Philippine Airlines, Inc. v. Court of Appeals, 100 this Court
elucidated that:
Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself, operate
as payment (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code;
Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco, v.
Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's
check or ordinary check, is not legal tender, and an offer of a check in

payment of a debt is not a valid tender of payment and may be refused

receipt by the obligee or creditor. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3).
In the case at bar, the issuance of an official receipt by petitioner Citibank
would have been dependent on whether the checks delivered by
respondent were actually cleared and paid for by the drawee banks.
As for PN No. 34534, respondent asserted payment thereof at two separate
instances by two different means. In her formal offer of exhibits, respondent
submitted a deposit slip of petitioner Citibank, dated 11 August 1978,
evidencing the deposit of BPI Check No. 5785 for P150,000.00.101 In her
Formal Offer of Documentary Exhibits, dated 7 July 1989, respondent stated
that the purpose for the presentation of the said deposit slip was to prove
that she already paid her loan covered by PN No. 34534.102 In her testimony
before the RTC three years later, on 28 November 1991, she changed her
story. This time she narrated that the loan covered by PN No. 34534 was
secured by her money market placement with petitioner FNCB Finance, and
when she failed to pay the said PN when it became due, the security was
applied to the loan, therefore, the loan was considered paid.103 Given the
foregoing, respondent's assertion of payment of PN No. 34534 is extremely
dubious.
According to petitioner Citibank, the PNs in the second set, except for PN
No. 34534, were mere renewals of the unpaid PNs in the first set, which
was why the PNs stated that they were for the purpose of liquidating
existing obligations. PN No. 34534, however, which was part of the first set,
was still valid and subsisting and so it was included in the second set
without need for its renewal, and it still being the original PN for that
particular loan, its stated purpose was for personal investment.104
Respondent essentially admitted executing the second set of PNs, but they
were only meant to cover simulated loans. Mr. Tan supposedly convinced
her that her pending loan application with DBP would have a greater chance
of being approved if they made it appear that respondent urgently needed
the money because petitioner Citibank was already demanding payment for
her simulated loans.

Respondent's defense of simulated loans to escape liability for the second

set of PNs is truly a novel one. It is regrettable, however, that she was
unable to substantiate the same. Yet again, respondent's version of events
is totally based on her own uncorroborated testimony. The notations on the
second set of PNs, that they were non-negotiable simulated notes, were
admittedly made by respondent herself and were, thus, self-serving. Equally
self-serving was respondent's letter, written on 7 October 1985, or more
than six years after the execution of the second set of PNs, in which she
demanded return of the simulated or fictitious PNs, together with the letters
relating thereto, which Mr. Tan purportedly asked her to execute.
Respondent further failed to present any proof of her alleged loan
application with the DBP, and of any circumstance or correspondence
wherein the simulated or fictitious PNs were indeed used for their supposed
purpose.
In contrast, petitioner Citibank, as supported by the testimonies of its
officers and available documentation, consistently treated the said PNs as
regular loans accepted, approved, and paid in the ordinary course of its
business.
The PNs executed by the respondent in favor of petitioner Citibank to cover
her loans were duly-filled out and signed, including the disclosure statement
found at the back of the said PNs, in adherence to the Central Bank
requirement to disclose the full finance charges to a loan granted to
borrowers.
Mr. Tan, then an account officer with the Marketing Department of petitioner
Citibank, testified that he dealt directly with respondent; he facilitated the
loans; and the PNs, at least in the second set, were signed by respondent in
his presence.105
Mr. Pujeda, the officer who was previously in charge of loans and
placements, confirmed that the signatures on the PNs were verified against
respondent's specimen signature with the bank.106
Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan
processor, was responsible for booking respondent's loans. Booking the
loans means recording it in the General Ledger. She explained the
procedure for booking loans, as follows: The account officer, in the
Marketing Department, deals directly with the clients who wish to borrow

money from petitioner Citibank. The Marketing Department will forward a

loan booking checklist, together with the borrowing client's PNs and other
supporting documents, to the loan pre-processor, who will check whether
the details in the loan booking checklist are the same as those in the PNs.
The documents are then sent to Signature Control for verification of the
client's signature in the PNs, after which, they are returned to the loan preprocessor, to be forwarded finally to the loan processor. The loan processor
shall book the loan in the General Ledger, indicating therein the client name,
loan amount, interest rate, maturity date, and the corresponding PN
number. Since she booked respondent's loans personally, Ms. Dondoyano
testified that she saw the original PNs. In 1986, Atty. Fernandez of petitioner
Citibank requested her to prepare an accounting of respondent's loans,
which she did, and which was presented as Exhibit "120" for the petitioners.
The figures from the said exhibit were culled from the bookings in the
General Ledger, a fact which respondent's counsel was even willing to
stipulate.107
Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the
Control Department of petitioner Citibank. She was presented by petitioner
Citibank to expound on the microfilming procedure at the bank, since most
of the copies of the PNs were retrieved from microfilm. Microfilming of the
documents are actually done by people at the Operations Department. At
the end of the day or during the day, the original copies of all bank
documents, not just those pertaining to loans, are microfilmed. She refuted
the possibility that insertions could be made in the microfilm because the
microfilm is inserted in a cassette; the cassette is placed in the microfilm
machine for use; at the end of the day, the cassette is taken out of the
microfilm machine and put in a safe vault; and the cassette is returned to
the machine only the following day for use, until the spool is full. This is the
microfilming procedure followed everyday. When the microfilm spool is
already full, the microfilm is developed, then sent to the Control Department,
which double checks the contents of the microfilms against the entries in the
General Ledger. The Control Department also conducts a random
comparison of the contents of the microfilms with the original documents; a
random review of the contents is done on every role of microfilm.108
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from
the ranks, initially working as a secretary in the Personnel Group; then as a
secretary to the Personnel Group Head; a Service Assistant with the

Marketing Group, in 1972 to 1974, dealing directly with corporate and

individual clients who, among other things, secured loans from petitioner
Citibank; the Head of the Collection Group of the Foreign Department in
1974 to 1976; the Head of the Money Transfer Unit in 1976 to 1978; the
Head of the Loans and Placements Unit up to the early 1980s; and,
thereafter, she established operations training for petitioner Citibank in the
Asia-Pacific Region responsible for the training of the officers of the bank.
She testified on the standard loan application process at petitioner Citibank.
According to Ms. Rubio, the account officer or marketing person submits a
proposal to grant a loan to an individual or corporation. Petitioner Citibank
has a worldwide policy that requires a credit committee, composed of a
minimum of three people, which would approve the loan and amount
thereof. There can be no instance when only one officer has the power to
approve the loan application. When the loan is approved, the account officer
in charge will obtain the corresponding PNs from the client. The PNs are
sent to the signature verifier who would validate the signatures therein
against those appearing in the signature cards previously submitted by the
client to the bank. The Operations Unit will check and review the
documents, including the PNs, if it is a clean loan, and securities and
deposits, if it is collateralized. The loan is then recorded in the General
Ledger. The Loans and Placements Department will not book the loans
without the PNs. When the PNs are liquidated, whether they are paid or
rolled-over, they are returned to the client.109 Ms. Rubio further explained
that she was familiar with respondent's accounts since, while she was still
the Head of the Loan and Placements Unit, she was asked by Mr. Tan to
prepare a list of respondent's outstanding obligations.110 She thus
calculated respondent's outstanding loans, which was sent as an
attachment to Mr. Tan's letter to respondent, dated 28 September 1979, and
presented before the RTC as Exhibits "34-B" and "34-C."111
Lastly, the exchange of letters between petitioner Citibank and respondent,
as well as the letters sent by other people working for respondent, had
consistently recognized that respondent owed petitioner Citibank money.
In consideration of the foregoing discussion, this Court finds that the
preponderance of evidence supports the existence of the respondent's
loans, in the principal sum of P1,920,000.00, as of 5 September 1979. While
it is well-settled that the term "preponderance of evidence" should not be

wholly dependent on the number of witnesses, there are certain instances

when the number of witnesses become the determining factor
The preponderance of evidence may be determined, under certain
conditions, by the number of witnesses testifying to a particular fact or
state of facts. For instance, one or two witnesses may testify to a given
state of facts, and six or seven witnesses of equal candor, fairness,
intelligence, and truthfulness, and equally well corroborated by all the
remaining evidence, who have no greater interest in the result of the
suit, testify against such state of facts. Then the preponderance of
evidence is determined by the number of witnesses. (Wilcox vs. Hines,
100 Tenn. 524, 66 Am. St. Rep., 761.)112
Best evidence rule
This Court disagrees in the pronouncement made by the Court of Appeals
summarily dismissing the documentary evidence submitted by petitioners
based on its broad and indiscriminate application of the best evidence rule.
In general, the best evidence rule requires that the highest available degree
of proof must be produced. Accordingly, for documentary evidence, the
contents of a document are best proved by the production of the document
itself,113 to the exclusion of any secondary or substitutionary evidence.114
The best evidence rule has been made part of the revised Rules of Court,
Rule 130, Section 3, which reads
SEC. 3. Original document must be produced; exceptions. When the
subject of inquiry is the contents of a document, no evidence shall be
admissible other than the original document itself, except in the
following cases:
(a) When the original has been lost or destroyed, or cannot be
produced in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party
against whom the evidence is offered, and the latter fails to produce it
after reasonable notice;
(c) When the original consists of numerous accounts or other
documents which cannot be examined in court without great loss of

time and the fact sought to be established from them is only the
general result of the whole; and
(d) When the original is a public record in the custody of a public officer
or is recorded in a public office.
As the afore-quoted provision states, the best evidence rule applies only
when the subject of the inquiry is the contents of the document. The scope
of the rule is more extensively explained thus
But even with respect to documentary evidence, the best evidence rule
applies only when the content of such document is the subject of the
inquiry. Where the issue is only as to whether such document was
actually executed, or exists, or on the circumstances relevant to or
surrounding its execution, the best evidence rule does not apply and
testimonial evidence is admissible (5 Moran, op. cit., pp. 76-66; 4
Martin, op. cit., p. 78). Any other substitutionary evidence is likewise
admissible without need for accounting for the original.
Thus, when a document is presented to prove its existence or
condition it is offered not as documentary, but as real, evidence. Parol
evidence of the fact of execution of the documents is allowed
(Hernaez, et al. vs. McGrath, etc., et al., 91 Phil 565). x x x 115
In Estrada v. Desierto,116 this Court had occasion to rule that
It is true that the Court relied not upon the original but only copy of the
Angara Diary as published in the Philippine Daily Inquirer on February
4-6, 2001. In doing so, the Court, did not, however, violate the best
evidence rule. Wigmore, in his book on evidence, states that:
"Production of the original may be dispensed with, in the trial court's
discretion, whenever in the case in hand the opponent does not bona
fide dispute the contents of the document and no other useful purpose
will be served by requiring production.24
"x x x x
"In several Canadian provinces, the principle of unavailability has been
abandoned, for certain documents in which ordinarily no real dispute
arised. This measure is a sensible and progressive one and deserves

universal adoption (post, sec. 1233). Its essential feature is that a copy
may be used unconditionally, if the opponent has been given an
opportunity to inspect it." (Emphasis supplied.)
This Court did not violate the best evidence rule when it considered and
weighed in evidence the photocopies and microfilm copies of the PNs, MCs,
and letters submitted by the petitioners to establish the existence of
respondent's loans. The terms or contents of these documents were never
the point of contention in the Petition at bar. It was respondent's position
that the PNs in the first set (with the exception of PN No. 34534) never
existed, while the PNs in the second set (again, excluding PN No. 34534)
were merely executed to cover simulated loan transactions. As for the MCs
representing the proceeds of the loans, the respondent either denied receipt
of certain MCs or admitted receipt of the other MCs but for another purpose.
Respondent further admitted the letters she wrote personally or through her
representatives to Mr. Tan of petitioner Citibank acknowledging the loans,
except that she claimed that these letters were just meant to keep up the
ruse of the simulated loans. Thus, respondent questioned the documents as
to their existence or execution, or when the former is admitted, as to the
purpose for which the documents were executed, matters which are,
undoubtedly, external to the documents, and which had nothing to do with
the contents thereof.
Alternatively, even if it is granted that the best evidence rule should apply to
the evidence presented by petitioners regarding the existence of
respondent's loans, it should be borne in mind that the rule admits of the
following exceptions under Rule 130, Section 5 of the revised Rules of Court

SEC. 5. When the original document is unavailable. When the

original document has been lost or destroyed, or cannot be produced
in court, the offeror, upon proof of its execution or existence and the
cause of its unavailability without bad faith on his part, may prove its
contents by a copy, or by a recital of its contents in some authentic
document, or by the testimony of witnesses in the order stated.
The execution or existence of the original copies of the documents was
established through the testimonies of witnesses, such as Mr. Tan, before
whom most of the documents were personally executed by respondent. The
original PNs also went through the whole loan booking system of petitioner

Citibank from the account officer in its Marketing Department, to the preprocessor, to the signature verifier, back to the pre-processor, then to the
processor for booking.117 The original PNs were seen by Ms. Dondoyano,
the processor, who recorded them in the General Ledger. Mr. Pujeda
personally saw the original MCs, proving respondent's receipt of the
proceeds of her loans from petitioner Citibank, when he helped Attys. Cleofe
and Fernandez, the bank's legal counsels, to reconstruct the records of
respondent's loans. The original MCs were presented to Atty. Cleofe who
used the same during the preliminary investigation of the case, sometime in
years 1986-1987. The original MCs were subsequently turned over to the
Control and Investigation Division of petitioner Citibank.118
It was only petitioner FNCB Finance who claimed that they lost the original
copies of the PNs when it moved to a new office. Citibank did not make a
similar contention; instead, it explained that the original copies of the PNs
were returned to the borrower upon liquidation of the loan, either through
payment or roll-over. Petitioner Citibank proffered the excuse that they were
still looking for the documents in their storage or warehouse to explain the
delay and difficulty in the retrieval thereof, but not their absence or loss. The
original documents in this case, such as the MCs and letters, were
destroyed and, thus, unavailable for presentation before the RTC only on 7
October 1987, when a fire broke out on the 7th floor of the office building of
petitioner Citibank. There is no showing that the fire was intentionally set.
The fire destroyed relevant documents, not just of the present case, but also
of other cases, since the 7th floor housed the Control and Investigation
Division, in charge of keeping the necessary documents for cases in which
petitioner Citibank was involved.
The foregoing would have been sufficient to allow the presentation of
photocopies or microfilm copies of the PNs, MCs, and letters by the
petitioners as secondary evidence to establish the existence of respondent's
loans, as an exception to the best evidence rule.
The impact of the Decision of the Court of Appeals in the Dy case
In its assailed Decision, the Court of Appeals made the following
pronouncement
Besides, We find the declaration and conclusions of this Court in CAG.R. CV No. 15934 entitled Sps. Dr. Ricardo L. Dy and Rosalind O. Dy

vs. City Bank, N.A., et al, promulgated on 15 January 1990, as

disturbing taking into consideration the similarities of the fraud,
machinations, and deceits employed by the defendant-appellant
Citibank and its Account Manager Francisco Tan.
Worthy of note is the fact that Our declarations and conclusions
against Citibank and the person of Francisco Tan in CA-G.R. CV No.
15934 were affirmed in toto by the Highest Magistrate in a Minute
Resolution dated 22 August 1990 entitled Citibank, N.A., vs. Court of
Appeals, G.R. 93350.
As the factual milieu of the present appeal created reasonable doubts
as to whether the nine (9) Promissory Notes were indeed executed
with considerations, the doubts, coupled by the findings and
conclusions of this Court in CA-G.R. CV No. 15934 and the Supreme
Court in G.R. No. 93350. should be construed against herein
defendants-appellants Citibank and FNCB Finance.
What this Court truly finds disturbing is the significance given by the Court of
Appeals in its assailed Decision to the Decision119 of its Third Division in
CA-G.R. CV No. 15934 (or the Dy case), when there is an absolute lack of
legal basis for doing such.
Although petitioner Citibank and its officer, Mr. Tan, were also involved in
the Dy case, that is about the only connection between the Dy case and the
one at bar. Not only did the Dy case tackle transactions between parties
other than the parties presently before this Court, but the transactions are
absolutely independent and unrelated to those in the instant Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein
petitioner Citibank amounting to P7,000,000.00, secured to the extent of
P5,000,000.00 by a Third Party Real Estate Mortgage of the properties of
Caedo's aunt, Rosalind Dy. It turned out that Rosalind Dy and her husband
were unaware of the said loans and the mortgage of their properties. The
transactions were carried out exclusively between Caedo and Mr. Tan of
petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his
participation in the questionable transactions, essentially because he
allowed Caedo to take out the signature cards, when these should have
been signed by the Dy spouses personally before him. Although the Dy
spouses' signatures in the PNs and Third Party Real Estate Mortgage were

forged, they were approved by the signature verifier since the signature
cards against which they were compared to were also forged. Neither the
RTC nor the Court of Appeals, however, categorically declared Mr. Tan
personally responsible for the forgeries, which, in the narration of the facts,
were more likely committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no
third party involved who could have perpetrated any fraud or forgery in her
loan transactions. Although respondent attempted to raise suspicion as to
the authenticity of her signatures on certain documents, these were nothing
more than naked allegations with no corroborating evidence; worse, even
her own allegations were replete with inconsistencies. She could not even
establish in what manner or under what circumstances the fraud or forgery
was committed, or how Mr. Tan could have been directly responsible for the
same.
While the Court of Appeals can take judicial notice of the Decision of its
Third Division in the Dy case, it should not have given the said case much
weight when it rendered the assailed Decision, since the former does not
constitute a precedent. The Court of Appeals, in the challenged Decision,
did not apply any legal argument or principle established in the Dy case but,
rather, adopted the findings therein of wrongdoing or misconduct on the part
of herein petitioner Citibank and Mr. Tan. Any finding of wrongdoing or
misconduct as against herein petitioners should be made based on the
factual background and pieces of evidence submitted in this case, not those
in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case
not as a legal precedent for the present case, but rather as evidence of
similar acts committed by petitioner Citibank and Mr. Tan. A basic rule of
evidence, however, states that, "Evidence that one did or did not do a
certain thing at one time is not admissible to prove that he did or did not do
the same or similar thing at another time; but it may be received to prove a
specific intent or knowledge, identity, plan, system, scheme, habit, custom
or usage, and the like."120 The rationale for the rule is explained thus
The rule is founded upon reason, public policy, justice and judicial
convenience. The fact that a person has committed the same or similar
acts at some prior time affords, as a general rule, no logical guaranty
that he committed the act in question. This is so because, subjectively,

a man's mind and even his modes of life may change; and, objectively,
the conditions under which he may find himself at a given time may
likewise change and thus induce him to act in a different way. Besides,
if evidence of similar acts are to be invariably admitted, they will give
rise to a multiplicity of collateral issues and will subject the defendant
to surprise as well as confuse the court and prolong the trial.121
The factual backgrounds of the two cases are so different and unrelated that
the Dy case cannot be used to prove specific intent, knowledge, identity,
plan, system, scheme, habit, custom or usage on the part of petitioner
Citibank or its officer, Mr. Tan, to defraud respondent in the present case.
IV
The liquidation of respondent's outstanding loans were valid in so far as
petitioner Citibank used respondent's savings account with the bank and her
money market placements with petitioner FNCB Finance; but illegal and
void in so far as petitioner Citibank used respondent's dollar accounts with
Citibank-Geneva.
Savings Account with petitioner Citibank
Compensation is a recognized mode of extinguishing obligations. Relevant
provisions of the Civil Code provides
Art. 1278. Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor.
There is little controversy when it comes to the right of petitioner Citibank to
compensate respondent's outstanding loans with her deposit account. As
already found by this Court, petitioner Citibank was the creditor of
respondent for her outstanding loans. At the same time, respondent was the
creditor of petitioner Citibank, as far as her deposit account was concerned,
since bank deposits, whether fixed, savings, or current, should be
considered as simple loan or mutuum by the depositor to the banking
institution.122 Both debts consist in sums of money. By June 1979, all of
respondent's PNs in the second set had matured and became demandable,
while respondent's savings account was demandable anytime. Neither was
there any retention or controversy over the PNs and the deposit account
commenced by a third person and communicated in due time to the debtor
concerned. Compensation takes place by operation of law,123 therefore,
even in the absence of an expressed authority from respondent, petitioner
Citibank had the right to effect, on 25 June 1979, the partial compensation
or off-set of respondent's outstanding loans with her deposit account,
amounting to P31,079.14.
Money market placements with FNCB Finance
Things though are not as simple and as straightforward as regards to the
money market placements and bank account used by petitioner Citibank to
complete the compensation or off-set of respondent's outstanding loans,
which came from persons other than petitioner Citibank.
Respondent's money market placements were with petitioner FNCB
Finance, and after several roll-overs, they were ultimately covered by PNs
No. 20138 and 20139, which, by 3 September 1979, the date the check for
the proceeds of the said PNs were issued, amounted to P1,022,916.66,
inclusive of the principal amounts and interests. As to these money market
placements, respondent was the creditor and petitioner FNCB Finance the
debtor; while, as to the outstanding loans, petitioner Citibank was the
creditor and respondent the debtor. Consequently, legal compensation,
under Article 1278 of the Civil Code, would not apply since the first
requirement for a valid compensation, that each one of the obligors be

bound principally, and that he be at the same time a principal creditor of the
other, was not met.
What petitioner Citibank actually did was to exercise its rights to the
proceeds of respondent's money market placements with petitioner FNCB
Finance by virtue of the Deeds of Assignment executed by respondent in its
favor.
The Court of Appeals did not consider these Deeds of Assignment because
of petitioners' failure to produce the original copies thereof in violation of the
best evidence rule. This Court again finds itself in disagreement in the
application of the best evidence rule by the appellate court.
To recall, the best evidence rule, in so far as documentary evidence is
concerned, requires the presentation of the original copy of the document
only when the context thereof is the subject of inquiry in the case.
Respondent does not question the contents of the Deeds of Assignment.
While she admitted the existence and execution of the Deeds of
Assignment, dated 2 March 1978 and 9 March 1978, covering PNs No.
8169 and 8167 issued by petitioner FNCB Finance, she claimed, as
defense, that the loans for which the said Deeds were executed as security,
were already paid. She denied ever executing both Deeds of Assignment,
dated 25 August 1978, covering PNs No. 20138 and 20139. These are
again issues collateral to the contents of the documents involved, which
could be proven by evidence other than the original copies of the said
documents.
Moreover, the Deeds of Assignment of the money market placements with
petitioner FNCB Finance were notarized documents, thus, admissible in
evidence. Rule 132, Section 30 of the Rules of Court provides that
SEC. 30. Proof of notarial documents. Every instrument duly
acknowledged or proved and certified as provided by law, may be
presented in evidence without further proof, the certificate of
acknowledgement being prima facie evidence of the execution of the
instrument or document involved.
Significant herein is this Court's elucidation in De Jesus v. Court of
Appeals,124 which reads

On the evidentiary value of these documents, it should be recalled that

the notarization of a private document converts it into a public one and
renders it admissible in court without further proof of its authenticity
(Joson vs. Baltazar, 194 SCRA 114 [1991]). This is so because a
public document duly executed and entered in the proper registry is
presumed to be valid and genuine until the contrary is shown by clear
and convincing proof (Asido vs. Guzman, 57 Phil. 652 [1918]; U.S. vs.
Enriquez, 1 Phil 241 [1902]; Favor vs. Court of Appeals, 194 SCRA
308 [1991]). As such, the party challenging the recital of the document
must prove his claim with clear and convincing evidence (Diaz vs.
Court of Appeals, 145 SCRA 346 [1986]).
The rule on the evidentiary weight that must be accorded a notarized
document is clear and unambiguous. The certificate of acknowledgement in
the notarized Deeds of Assignment constituted prima facie evidence of the
execution thereof. Thus, the burden of refuting this presumption fell on
respondent. She could have presented evidence of any defect or irregularity
in the execution of the said documents125 or raised questions as to the verity
of the notary public's acknowledgment and certificate in the Deeds.126 But
again, respondent admitted executing the Deeds of Assignment, dated 2
March 1978 and 9 March 1978, although claiming that the loans for which
they were executed as security were already paid. And, she assailed the
Deeds of Assignment, dated 25 August 1978, with nothing more than her
bare denial of execution thereof, hardly the clear and convincing evidence
required to trounce the presumption of due execution of a notarized
document.
Petitioners not only presented the notarized Deeds of Assignment, but even
secured certified literal copies thereof from the National Archives.127 Mr.
Renato Medua, an archivist, working at the Records Management and
Archives Office of the National Library, testified that the copies of the Deeds
presented before the RTC were certified literal copies of those contained in
the Notarial Registries of the notary publics concerned, which were already
in the possession of the National Archives. He also explained that he could
not bring to the RTC the Notarial Registries containing the original copies of
the Deeds of Assignment, because the Department of Justice (DOJ)
Circular No. 97, dated 8 November 1968, prohibits the bringing of original
documents to the courts to prevent the loss of irreplaceable and priceless
documents.128

Accordingly, this Court gives the Deeds of Assignment grave importance in

establishing the authority given by the respondent to petitioner Citibank to
use as security for her loans her money her market placements with
petitioner FNCB Finance, represented by PNs No. 8167 and 8169, later to
be rolled-over as PNs No. 20138 and 20139. These Deeds of Assignment
constitute the law between the parties, and the obligations arising therefrom
shall have the force of law between the parties and should be complied with
in good faith.129 Standard clauses in all of the Deeds provide that
The ASSIGNOR and the ASSIGNEE hereby further agree as follows:
xxxx
2. In the event the OBLIGATIONS are not paid at maturity or upon
demand, as the case may be, the ASSIGNEE is fully authorized and
empowered to collect and receive the PLACEMENT (or so much
thereof as may be necessary) and apply the same in payment of the
OBLIGATIONS. Furthermore, the ASSIGNOR agrees that at any time,
and from time to time, upon request by the ASSIGNEE, the
ASSIGNOR will promptly execute and deliver any and all such further
instruments and documents as may be necessary to effectuate this
Assignment.
xxxx
5. This Assignment shall be considered as sufficient authority to FNCB
Finance to pay and deliver the PLACEMENT or so much thereof as
may be necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in
accordance with terms and provisions hereof.130
Petitioner Citibank was only acting upon the authority granted to it under the
foregoing Deeds when it finally used the proceeds of PNs No. 20138 and
20139, paid by petitioner FNCB Finance, to partly pay for respondent's
outstanding loans. Strictly speaking, it did not effect a legal compensation or
off-set under Article 1278 of the Civil Code, but rather, it partly extinguished
respondent's obligations through the application of the security given by the
respondent for her loans. Although the pertinent documents were entitled
Deeds of Assignment, they were, in reality, more of a pledge by respondent
to petitioner Citibank of her credit due from petitioner FNCB Finance by

virtue of her money market placements with the latter. According to Article
2118 of the Civil Code
ART. 2118. If a credit has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He
shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor.
PNs No. 20138 and 20139 matured on 3 September 1979, without them
being redeemed by respondent, so that petitioner Citibank collected from
petitioner FNCB Finance the proceeds thereof, which included the principal
amounts and interests earned by the money market placements, amounting
to P1,022,916.66, and applied the same against respondent's outstanding
loans, leaving no surplus to be delivered to respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondent's savings account and the
total application of the proceeds of PNs No. 20138 and 20139 to
respondent's outstanding loans, there still remained a balance of
P1,069,847.40. Petitioner Citibank then proceeded to applying respondent's
dollar accounts with Citibank-Geneva against her remaining loan balance,
pursuant to a Declaration of Pledge supposedly executed by respondent in
its favor.
Certain principles of private international law should be considered herein
because the property pledged was in the possession of an entity in a foreign
country, namely, Citibank-Geneva. In the absence of any allegation and
evidence presented by petitioners of the specific rules and laws governing
the constitution of a pledge in Geneva, Switzerland, they will be presumed
to be the same as Philippine local or domestic laws; this is known as
processual presumption.131
Upon closer scrutiny of the Declaration of Pledge, this Court finds the same
exceedingly suspicious and irregular.
First of all, it escapes this Court why petitioner Citibank took care to have
the Deeds of Assignment of the PNs notarized, yet left the Declaration of
Pledge unnotarized. This Court would think that petitioner Citibank would
take greater cautionary measures with the preparation and execution of the

Declaration of Pledge because it involved respondent's "all present and

future fiduciary placements" with a Citibank branch in another country,
specifically, in Geneva, Switzerland. While there is no express legal
requirement that the Declaration of Pledge had to be notarized to be
effective, even so, it could not enjoy the same prima facie presumption of
due execution that is extended to notarized documents, and petitioner
Citibank must discharge the burden of proving due execution and
authenticity of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the
Declaration of Pledge was actually executed. The photocopy of the
Declaration of Pledge submitted by petitioner Citibank before the RTC was
undated.132 It presented only a photocopy of the pledge because it already
forwarded the original copy thereof to Citibank-Geneva when it requested
for the remittance of respondent's dollar accounts pursuant thereto.
Respondent, on the other hand, was able to secure a copy of the
Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore
the date 24 September 1979.133 Respondent, however, presented her
passport and plane tickets to prove that she was out of the country on the
said date and could not have signed the pledge. Petitioner Citibank insisted
that the pledge was signed before 24 September 1979, but could not
provide an explanation as to how and why the said date was written on the
pledge. Although Mr. Tan testified that the Declaration of Pledge was signed
by respondent personally before him, he could not give the exact date when
the said signing took place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the RTC was certified
by an officer of Citibank-Geneva, which had possession of the original copy
of the pledge. It is dated 24 September 1979, and this Court shall abide by
the presumption that the written document is truly dated.134 Since it is
undeniable that respondent was out of the country on 24 September 1979,
then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in
a standard printed form. It was constituted in favor of Citibank, N.A.,
otherwise referred to therein as the Bank. It should be noted, however, that
in the space which should have named the pledgor, the name of petitioner
Citibank was typewritten, to wit

The pledge right herewith constituted shall secure all claims which the
Bank now has or in the future acquires against Citibank, N.A., Manila
(full name and address of the Debtor), regardless of the legal cause or
the transaction (for example current account, securities transactions,
collections, credits, payments, documentary credits and collections)
which gives rise thereto, and including principal, all contractual and
penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the
same entity. Was a mistake made by whoever filled-out the form? Yes, it
could be a possibility. Nonetheless, considering the value of such a
document, the mistake as to a significant detail in the pledge could only be
committed with gross carelessness on the part of petitioner Citibank, and
raised serious doubts as to the authenticity and due execution of the same.
The Declaration of Pledge had passed through the hands of several bank
officers in the country and abroad, yet, surprisingly and implausibly, no one
noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of
Pledge. She claimed that the signature was a forgery. When a document is
assailed on the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the
contents of a document, no evidence is admissible other than the
original document itself except in the instances mentioned in Section 3,
Rule 130 of the Revised Rules of Court. Mere photocopies of
documents are inadmissible pursuant to the best evidence rule. This is
especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear,
positive and convincing evidence and the burden of proof lies on the
party alleging forgery. The best evidence of a forged signature in an
instrument is the instrument itself reflecting the alleged forged
signature. The fact of forgery can only be established by a comparison
between the alleged forged signature and the authentic and genuine
signature of the person whose signature is theorized upon to have
been forged. Without the original document containing the alleged
forged signature, one cannot make a definitive comparison which
would establish forgery. A comparison based on a mere xerox copy or

reproduction of the document under controversy cannot produce

reliable results.135
Respondent made several attempts to have the original copy of the pledge
produced before the RTC so as to have it examined by experts. Yet, despite
several Orders by the RTC,136 petitioner Citibank failed to comply with the
production of the original Declaration of Pledge. It is admitted that CitibankGeneva had possession of the original copy of the pledge. While petitioner
Citibank in Manila and its branch in Geneva may be separate and distinct
entities, they are still incontestably related, and between petitioner Citibank
and respondent, the former had more influence and resources to convince
Citibank-Geneva to return, albeit temporarily, the original Declaration of
Pledge. Petitioner Citibank did not present any evidence to convince this
Court that it had exerted diligent efforts to secure the original copy of the
pledge, nor did it proffer the reason why Citibank-Geneva obstinately
refused to give it back, when such document would have been very vital to
the case of petitioner Citibank. There is thus no justification to allow the
presentation of a mere photocopy of the Declaration of Pledge in lieu of the
original, and the photocopy of the pledge presented by petitioner Citibank
has nil probative value.137 In addition, even if this Court cannot make a
categorical finding that respondent's signature on the original copy of the
pledge was forged, it is persuaded that petitioner Citibank willfully
suppressed the presentation of the original document, and takes into
consideration the presumption that the evidence willfully suppressed would
be adverse to petitioner Citibank if produced.138
Without the Declaration of Pledge, petitioner Citibank had no authority to
demand the remittance of respondent's dollar accounts with CitibankGeneva and to apply them to her outstanding loans. It cannot effect legal
compensation under Article 1278 of the Civil Code since, petitioner Citibank
itself admitted that Citibank-Geneva is a distinct and separate entity. As for
the dollar accounts, respondent was the creditor and Citibank-Geneva is the
debtor; and as for the outstanding loans, petitioner Citibank was the creditor
and respondent was the debtor. The parties in these transactions were
evidently not the principal creditor of each other.
Therefore, this Court declares that the remittance of respondent's dollar
accounts from Citibank-Geneva and the application thereof to her
outstanding loans with petitioner Citibank was illegal, and null and void.

Resultantly, petitioner Citibank is obligated to return to respondent the

amount of US$149,632,99 from her Citibank-Geneva accounts, or its
present equivalent value in Philippine currency; and, at the same time,
respondent continues to be obligated to petitioner Citibank for the balance
of her outstanding loans which, as of 5 September 1979, amounted to
P1,069,847.40.
V
The parties shall be liable for interests on their monetary obligations to each
other, as determined herein.
In summary, petitioner Citibank is ordered by this Court to pay respondent
the proceeds of her money market placements, represented by PNs No.
23356 and 23357, amounting to P318,897.34 and P203,150.00,
respectively, earning an interest of 14.5% per annum as stipulated in the
PNs,139 beginning 17 March 1977, the date of the placements.
Petitioner Citibank is also ordered to refund to respondent the amount of
US$149,632.99, or its equivalent in Philippine currency, which had been
remitted from her Citibank-Geneva accounts. These dollar accounts,
consisting of two fiduciary placements and current accounts with CitibankGeneva shall continue earning their respective stipulated interests from 26
October 1979, the date of their remittance by Citibank-Geneva to petitioner
Citibank in Manila and applied against respondent's outstanding loans.
As for respondent, she is ordered to pay petitioner Citibank the balance of
her outstanding loans, which amounted to P1,069,847.40 as of 5 September
1979. These loans continue to earn interest, as stipulated in the
corresponding PNs, from the time of their respective maturity dates, since
the supposed payment thereof using respondent's dollar accounts from
Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective.
VI
Petitioner Citibank shall be liable for damages to respondent.
Petitioners protest the award by the Court of Appeals of moral damages,
exemplary damages, and attorney's fees in favor of respondent. They
argued that the RTC did not award any damages, and respondent, in her

appeal before the Court of Appeals, did not raise in issue the absence of
such.
While it is true that the general rule is that only errors which have been
stated in the assignment of errors and properly argued in the brief shall be
considered, this Court has also recognized exceptions to the general rule,
wherein it authorized the review of matters, even those not assigned as
errors in the appeal, if the consideration thereof is necessary in arriving at a
just decision of the case, and there is a close inter-relation between the
omitted assignment of error and those actually assigned and discussed by
the appellant.140 Thus, the Court of Appeals did not err in awarding the
damages when it already made findings that would justify and support the
said award.
Although this Court appreciates the right of petitioner Citibank to effect legal
compensation of respondent's local deposits, as well as its right to the
proceeds of PNs No. 20138 and 20139 by virtue of the notarized Deeds of
Assignment, to partly extinguish respondent's outstanding loans, it finds that
petitioner Citibank did commit wrong when it failed to pay and properly
account for the proceeds of respondent's money market placements,
evidenced by PNs No. 23356 and 23357, and when it sought the remittance
of respondent's dollar accounts from Citibank-Geneva by virtue of a highlysuspect Declaration of Pledge to be applied to the remaining balance of
respondent's outstanding loans. It bears to emphasize that banking is
impressed with public interest and its fiduciary character requires high
standards of integrity and performance.141 A bank is under the obligation to
treat the accounts of its depositors with meticulous care whether such
accounts consist only of a few hundred pesos or of millions of pesos.142 The
bank must record every single transaction accurately, down to the last
centavo, and as promptly as possible.143 Petitioner Citibank evidently failed
to exercise the required degree of care and transparency in its transactions
with respondent, thus, resulting in the wrongful deprivation of her property.
Respondent had been deprived of substantial amounts of her investments
and deposits for more than two decades. During this span of years,
respondent had found herself in desperate need of the amounts wrongfully
withheld from her. In her testimony144 before the RTC, respondent narrated

Q By the way Mrs. Witness will you kindly tell us again, you said before
that you are a businesswoman, will you tell us again what are the
businesses you are engaged into [sic]?
A I am engaged in real estate. I am the owner of the Modesta Village 1
and 2 in San Mateo, Rizal. I am also the President and Chairman of
the Board of Macador [sic] Co. and Business Inc. which operates the
Macador [sic] International Palace Hotel. I am also the President of the
Macador [sic] International Palace Hotel, and also the Treasures Home
Industries, Inc. which I am the Chairman and president of the Board
and also operating affiliated company in the name of Treasures Motor
Sales engaged in car dealers [sic] like Delta Motors, we are the
dealers of the whole Northern Luzon and I am the president of the
Disto Company, Ltd., based in Hongkong licensed in Honkong [sic]
and now operating in Los Angeles, California.
Q What is the business of that Disto Company Ltd.?
A Disto Company, Ltd., is engaged in real estate and construction.
Q Aside from those businesses are you a member of any national or
community organization for social and civil activities?
A Yes sir.
Q What are those?
A I am the Vice-President of thes [sic] Subdivision Association of the
Philippines in 1976, I am also an officer of the Chamber of Real
Estate Business Association; I am also an officer of the Chatholic [sic]
Women's League and I am also a member of the CMLI, I forgot the
definition.
Q How about any political affiliation or government position held if any?
A I was also a candidate for Mayo last January 30, 1980.
Q Where?
A In Dagupan City, Pangasinan.
Q What else?

A I also ran as an Assemblywoman last May, 1984, Independent party

in Regional I, Pangasinan.
Q What happened to your businesses you mentioned as a result of
your failure to recover you [sic] investments and bank deposits from
the defendants?
A They are not all operating, in short, I was hampered to push through
the businesses that I have.
A [sic] Of all the businesses and enterprises that you mentioned what
are those that are paralyzed and what remain inactive?
A Of all the company [sic] that I have, only the Disto Company that is
now operating in California.
Q How about your candidacy as Mayor of Dagupan, [sic] City, and later
as Assemblywoman of Region I, what happened to this?
A I won by voting but when election comes on [sic] the counting I lost
and I protested this, it is still pending and because I don't have financial
resources I was not able to push through the case. I just have it
pending in the Comelec.
Q Now, do these things also affect your social and civic activities?
A Yes sir, definitely.
Q How?
A I was embarrassed because being a businesswoman I would like to
inform the Honorable Court that I was awarded as the most
outstanding businesswoman of the year in 1976 but when this money
was not given back to me I was not able to comply with the
commitments that I have promised to these associations that I am
engaged into [sic], sir.
For the mental anguish, serious anxiety, besmirched reputation, moral
shock and social humiliation suffered by the respondent, the award of moral
damages is but proper. However, this Court reduces the amount thereof to

P300,000.00, for the award of moral damages is meant to compensate for

the actual injury suffered by the respondent, not to enrich her.145
Having failed to exercise more care and prudence than a private individual
in its dealings with respondent, petitioner Citibank should be liable for
exemplary damages, in the amount of P250,000.00, in accordance with
Article 2229146 and 2234147 of the Civil Code.
With the award of exemplary damages, then respondent shall also be
entitled to an award of attorney's fees.148 Additionally, attorney's fees may
be awarded when a party is compelled to litigate or to incur expenses to
protect his interest by reason of an unjustified act of the other party.149 In
this case, an award of P200,000.00 attorney's fees shall be satisfactory.
In contrast, this Court finds no sufficient basis to award damages to
petitioners. Respondent was compelled to institute the present case in the
exercise of her rights and in the protection of her interests. In fact, although
her Complaint before the RTC was not sustained in its entirety, it did raise
meritorious points and on which this Court rules in her favor. Any injury
resulting from the exercise of one's rights is damnum absque injuria.150
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED.
The assailed Decision of the Court of Appeals in CA-G.R. No. 51930, dated
26 March 2002, as already modified by its Resolution, dated 20 November
2002, is hereby AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to return to respondent the principal
amounts of the said PNs, amounting to Three Hundred Eighteen Thousand
Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos
(P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos
(P203,150.00), respectively, plus the stipulated interest of Fourteen and a
half percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty
Two US Dollars and Ninety-Nine Cents (US$149,632.99) from respondent's
Citibank-Geneva accounts to petitioner Citibank in Manila, and the
application of the same against respondent's outstanding loans with the
latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED
to refund to respondent the said amount, or its equivalent in Philippine

currency using the exchange rate at the time of payment, plus the stipulated
interest for each of the fiduciary placements and current accounts involved,
beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the
amount of Three Hundred Thousand Pesos (P300,000.00); exemplary
damages in the amount of Two Hundred Fifty Thousand Pesos
(P250,000.00); and attorney's fees in the amount of Two Hundred
Thousand Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her
outstanding loans, which, from the respective dates of their maturity to 5
September 1979, was computed to be in the sum of One Million Sixty-Nine
Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos
(P1,069,847.40), inclusive of interest. These outstanding loans shall
continue to earn interest, at the rates stipulated in the corresponding PNs,
from 5 September 1979 until payment thereof.
SO ORDERED.

Demosthenes P. Agan, Jr., et al. vs. PIATCO, et al.,402 SCRA

612 (2003)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. 155001

May 5, 2003

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B.

REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL
E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA
R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR
WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and
PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL
AIRPORT
AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION AND COMMUNICATIONS and SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation
and
Communications,
respondents,
MIASCOR
GROUNDHANDLING
CORPORATION,
DNATA-WINGS
AVIATION
SYSTEMS
CORPORATION,
MACROASIA-EUREST
SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES
CORPORATION, MIASCOR CATERING SERVICES CORPORATION,
MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR
LOGISTICS CORPORATION, petitioners-in-intervention,
x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G.
JARAULA,
petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL
AIRPORT
AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF

PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M.

MENDOZA, in his capacity as Head of the Department of Transportation
and Communications, and SECRETARY SIMEON A. DATUMANONG, in
his capacity as Head of the Department of Public Works and Highways,
respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA,
WILLY BUYSON VILLARAMA, PROSPERO C. NOGRALES, PROSPERO
A. PICHAY, JR., HARLIN CAST ABAYON, and BENASING O.
MACARANBON, respondents-intervenors,
x---------------------------------------------------------x
G.R. No. 155661 May 5, 2003
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA.
TERESA V. GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON,
VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO SANTOS, MA.
LUISA M. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG
PILIPINAS
(SMPP),
petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL
AIRPORT
AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO
M. MENDOZA, in his capacity as Head of the Department of Transportation
and Communications, respondents.
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for
prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit
the Manila International Airport Authority (MIAA) and the Department of
Transportation and Communications (DOTC) and its Secretary from
implementing the following agreements executed by the Philippine
Government through the DOTC and the MIAA and the Philippine
International Air Terminals Co., Inc. (PIATCO): (1) the Concession
Agreement signed on July 12, 1997, (2) the Amended and Restated
Concession Agreement dated November 26, 1999, (3) the First Supplement
to the Amended and Restated Concession Agreement dated August 27,
1999, (4) the Second Supplement to the Amended and Restated
Concession Agreement dated September 4, 2000, and (5) the Third

Supplement to the Amended and Restated Concession Agreement dated

June 22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris
(ADP) to conduct a comprehensive study of the Ninoy Aquino
International Airport (NAIA) and determine whether the present airport
can cope with the traffic development up to the year 2010. The study
consisted of two parts: first, traffic forecasts, capacity of existing
facilities, NAIA future requirements, proposed master plans and
development plans; and second, presentation of the preliminary design
of the passenger terminal building. The ADP submitted a Draft Final
Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John
Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty
and Alfonso Yuchengco met with then President Fidel V. Ramos to
explore the possibility of investing in the construction and operation of
a new international airport terminal. To signify their commitment to
pursue the project, they formed the Asia's Emerging Dragon Corp.
(AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the
Government through the DOTC/MIAA for the development of NAIA
International Passenger Terminal III (NAIA IPT III) under a buildoperate-and-transfer arrangement pursuant to RA 6957 as amended
by RA 7718 (BOT Law).1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832
constituting the Prequalification Bids and Awards Committee (PBAC) for the
implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the
proposal of AEDC to the National Economic and Development Authority
(NEDA). A revised proposal, however, was forwarded by the DOTC to
NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment
Coordinating Council (NEDA ICC) Technical Board favorably endorsed
the project to the ICC Cabinet Committee which approved the same,

subject to certain conditions, on January 19, 1996. On February 13, 1996,

the NEDA passed Board Resolution No. 2 which approved the NAIA IPT III
project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two
daily newspapers of an invitation for competitive or comparative proposals
on AEDC's unsolicited proposal, in accordance with Sec. 4-A of RA 6957,
as amended. The alternative bidders were required to submit three (3)
sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first
envelope should contain the Prequalification Documents, the second
envelope the Technical Proposal, and the third envelope the Financial
Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the
availment of the Bid Documents and the submission of the comparative bid
proposals. Interested firms were permitted to obtain the Request for
Proposal Documents beginning June 28, 1996, upon submission of a written
application and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the
proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, operation,
and maintenance phases of the project. The proponent would be evaluated
based on its ability to provide a minimum amount of equity to the project,
and its capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders
to a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the
Bid Documents. The following amendments were made on the Bid
Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent
shall include in its financial proposal an additional percentage of gross
revenue share of the Government, as follows:
i. First 5 years
ii. Next 10 years
iii. Next 10 years

5.0%
7.5%
10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be

subject of the price challenge. Proponent may offer an Annual
Guaranteed Payment which need not be of equal amount, but payment
of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the
financing requirement for the detailed engineering, design,
construction, and/or operation and maintenance phases of the project
as the case may be. For purposes of pre-qualification, this capability
shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the
consortium to provide the minimum amount of equity for the
project; and
ii. a letter testimonial from reputable banks attesting that the
project proponent and/or the members of the consortium are
banking with them, that the project proponent and/or the members
are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponent's
compliance with the minimum technical and financial requirements
provided in the Bid Documents and the IRR of the BOT Law. The
minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued
from time to time. Said amendments shall only cover items that would
not materially affect the preparation of the proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where
certain clarifications were made. Upon the request of prospective bidder
People's Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC
warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and
Regulations of the BOT Law, only the proposed Annual Guaranteed
Payment submitted by the challengers would be revealed to AEDC, and that
the challengers' technical and financial proposals would remain confidential.
The PBAC also clarified that the list of revenue sources contained in Annex
4.2a of the Bid Documents was merely indicative and that other revenue
sources may be included by the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and

charges denominated as Public Utility Fees would be subject to regulation,

and those charges which would be actually deemed Public Utility Fees
could still be revised, depending on the outcome of PBAC's query on the
matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers
to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10,
1996." Paircargo's queries and the PBAC's responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required
minimum equity requirement as prescribed in Section 8.3.4 of the Bid
Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of their
current respective business undertaking/activities. In order to comply
with this equity requirement, Paircargo is requesting PBAC to just allow
each member of (sic) corporation of the Joint Venture to just execute
an agreement that embodies a commitment to infuse the required
capital in case the project is awarded to the Joint Venture instead of
increasing each corporation's current authorized capital stock just for
prequalification purposes.
In prequalification, the agency is interested in one's financial capability
at the time of prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough
to establish that "present" financial capability. However, total financial
capability of all member companies of the Consortium, to be
established by submitting the respective companies' audited financial
statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions
for the extension of a Performance Security to the joint venture in the
event that the Concessions Agreement (sic) is awarded to them.
However, Paircargo is being required to submit a copy of the draft
concession as one of the documentary requirements. Therefore,
Paircargo is requesting that they'd (sic) be furnished copy of the
approved negotiated agreement between the PBAC and the AEDC at
the soonest possible time.

A copy of the draft Concession Agreement is included in the Bid

Documents. Any material changes would be made known to
prospective challengers through bid bulletins. However, a final version
will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of
the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin
Project) and to submit the same with the required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo
and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc.
(PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium) submitted their competitive proposal to the PBAC. On
September 23, 1996, the PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium. On the following
day, September 24, 1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its
reservations as regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of
PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General
Banking Act) on the amount that Security Bank could legally invest in
the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the
Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents
submitted by Paircargo and the established prequalification criteria, the
PBAC had found that the challenger, Paircargo, had prequalified to
undertake the project. The Secretary of the DOTC approved the finding of
the PBAC.

The PBAC then proceeded with the opening of the second envelope of the
Paircargo Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect
to Paircargo's financial capability, in view of the restrictions imposed by
Section 21-B of the General Banking Act and Sections 1380 and 1381 of the
Manual Regulations for Banks and Other Financial Intermediaries. On
October 7, 1996, AEDC again manifested its objections and requested that
it be furnished with excerpts of the PBAC meeting and the accompanying
technical evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by
AEDC and the Paircargo Consortium containing their respective financial
proposals. Both proponents offered to build the NAIA Passenger Terminal III
for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation,
7.5% share in gross revenues for the next ten years of operation, and 10%
share in gross revenues for the last ten years of operation, in accordance
with the Bid Documents. However, in addition to the foregoing, AEDC
offered to pay the government a total of P135 million as guaranteed
payment for 27 years while Paircargo Consortium offered to pay the
government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price
proposal submitted by the Paircargo Consortium, and gave AEDC 30
working days or until November 28, 1996 within which to match the said bid,
otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC
Secretary Amado Lagdameo, on December 11, 1996, issued a notice to
Paircargo Consortium regarding AEDC's failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine
International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to
PIATCO and reiterated its objections as regards the prequalification of
PIATCO.

On April 11, 1997, the DOTC submitted the concession agreement for the
second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a
Petition for Declaration of Nullity of the Proceedings, Mandamus and
Injunction against the Secretary of the DOTC, the Chairman of the PBAC,
the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity
as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate
the approval, on a no-objection basis, of the BOT agreement between the
DOTC and PIATCO. As the ad referendum gathered only four (4) of the
required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to
PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T.
Enrile, and PIATCO, through its President, Henry T. Go, signed the
"Concession Agreement for the Build-Operate-and-Transfer Arrangement of
the Ninoy Aquino International Airport Passenger Terminal III" (1997
Concession Agreement). The Government granted PIATCO the franchise to
operate and maintain the said terminal during the concession period and to
collect the fees, rentals and other charges in accordance with the rates or
schedules stipulated in the 1997 Concession Agreement. The Agreement
provided that the concession period shall be for twenty-five (25) years
commencing from the in-service date, and may be renewed at the option of
the Government for a period not exceeding twenty-five (25) years. At the
end of the concession period, PIATCO shall transfer the development
facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended
and Restated Concession Agreement (ARCA). Among the provisions of the
1997 Concession Agreement that were amended by the ARCA were: Sec.
1.11 pertaining to the definition of "certificate of completion"; Sec. 2.05
pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the
exclusivity of the franchise given to the Concessionaire; Sec. 4.04
concerning the assignment by Concessionaire of its interest in the
Development Facility; Sec. 5.08 (c) dealing with the proceeds of
Concessionaire's insurance; Sec. 5.10 with respect to the temporary take-

over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and
other imposts that may be levied on the Concessionaire; Sec. 6.03 as
regards the periodic adjustment of public utility fees and charges; the entire
Article VIII concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in case a
dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to
the ARCA. The First Supplement was signed on August 27, 1999; the
Second Supplement on September 4, 2000; and the Third Supplement on
June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA
defining "Revenues" or "Gross Revenues"; Sec. 2.05 (d) of the ARCA
referring to the obligation of MIAA to provide sufficient funds for the upkeep,
maintenance, repair and/or replacement of all airport facilities and
equipment which are owned or operated by MIAA; and further providing
additional special obligations on the part of GRP aside from those already
enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided
a stipulation as regards the construction of a surface road to connect NAIA
Terminal II and Terminal III in lieu of the proposed access tunnel crossing
Runway 13/31; the swapping of obligations between GRP and PIATCO
regarding the improvement of Sales Road; and the changes in the
timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to the
Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an
introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the
Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the
clearing, removal, demolition or disposal of subterranean structures
uncovered or discovered at the site of the construction of the terminal by the
Concessionaire. It defined the scope of works; it provided for the procedure
for the demolition of the said structures and the consideration for the same
which the GRP shall pay PIATCO; it provided for time extensions,
incremental and consequential costs and losses consequent to the
existence of such structures; and it provided for some additional obligations
on the part of PIATCO as regards the said structures.

Finally, the Third Supplement provided for the obligations of the

Concessionaire as regards the construction of the surface road connecting
Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation
of the NAIA Terminals I and II, had existing concession contracts with
various service providers to offer international airline airport services, such
as in-flight catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing, and other
services, to several international airlines at the NAIA. Some of these service
providers are the Miascor Group, DNATA-Wings Aviation Systems Corp.,
and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with
Philippine Airlines (PAL), are the dominant players in the industry with an
aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service
providers, claiming that they stand to lose their employment upon the
implementation of the questioned agreements, filed before this Court a
petition for prohibition to enjoin the enforcement of said agreements.2
On October 15, 2002, the service providers, joining the cause of the
petitioning workers, filed a motion for intervention and a petition-inintervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and
Constantino Jaraula filed a similar petition with this Court.3
On November 6, 2002, several employees of the MIAA likewise filed a
petition assailing the legality of the various agreements.4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V.
Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero
C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O.
Macaranbon, moved to intervene in the case as Respondents-Intervenors.
They filed their Comment-In-Intervention defending the validity of the
assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria
Macapagal Arroyo, on November 29, 2002, in her speech at the 2002
Golden Shell Export Awards at Malacaang Palace, stated that she will not

"honor (PIATCO) contracts which the Executive Branch's legal offices have
concluded (as) null and void."5
Respondent PIATCO filed its Comments to the present petitions on
November 7 and 27, 2002. The Office of the Solicitor General and the Office
of the Government Corporate Counsel filed their respective Comments in
behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After
the oral argument, the Court then resolved in open court to require the
parties to file simultaneously their respective Memoranda in amplification of
the issues heard in the oral arguments within 30 days and to explore the
possibility of arbitration or mediation as provided in the challenged
contracts.
In their consolidated Memorandum, the Office of the Solicitor General and
the Office of the Government Corporate Counsel prayed that the present
petitions be given due course and that judgment be rendered declaring the
1997 Concession Agreement, the ARCA and the Supplements thereto void
for being contrary to the Constitution, the BOT Law and its Implementing
Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4,
2003 PIATCO commenced arbitration proceedings before the International
Chamber of Commerce, International Court of Arbitration (ICC) by filing a
Request for Arbitration with the Secretariat of the ICC against the
Government of the Republic of the Philippines acting through the DOTC and
MIAA.
In the present cases, the Court is again faced with the task of resolving
complicated issues made difficult by their intersecting legal and economic
implications. The Court is aware of the far reaching fall out effects of the
ruling which it makes today. For more than a century and whenever the
exigencies of the times demand it, this Court has never shirked from its
solemn duty to dispense justice and resolve "actual controversies involving
rights which are legally demandable and enforceable, and to determine
whether or not there has been grave abuse of discretion amounting to lack
or excess of jurisdiction."6 To be sure, this Court will not begin to do
otherwise today.

We shall first dispose of the procedural issues raised by respondent

PIATCO which they allege will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service
providers7 having separate concession contracts with MIAA and continuing
service agreements with various international airlines to provide in-flight
catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing and other
services. Also included as petitioners are labor unions MIASCOR Workers
Union-National Labor Union and Philippine Airlines Employees Association.
These petitioners filed the instant action for prohibition as taxpayers and as
parties whose rights and interests stand to be violated by the
implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and
existing under Philippine laws engaged in the business of providing in-flight
catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing and other
services to several international airlines at the Ninoy Aquino International
Airport. Petitioners-Intervenors allege that as tax-paying international airline
and airport-related service operators, each one of them stands to be
irreparably injured by the implementation of the PIATCO Contracts. Each of
the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they
allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and
Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union
and accredited as the sole and exclusive bargaining agent of all the
employees in MIAA. Petitioners anchor their petition for prohibition on the
nullity of the contracts entered into by the Government and PIATCO
regarding the build-operate-and-transfer of the NAIA IPT III. They filed the
petition as taxpayers and persons who have a legitimate interest to protect
in the implementation of the PIATCO Contracts.

Petitioners in both cases raise the argument that the PIATCO Contracts
contain stipulations which directly contravene numerous provisions of the
Constitution, specific provisions of the BOT Law and its Implementing Rules
and Regulations, and public policy. Petitioners contend that the DOTC and
the MIAA, by entering into said contracts, have committed grave abuse of
discretion amounting to lack or excess of jurisdiction which can be remedied
only by a writ of prohibition, there being no plain, speedy or adequate
remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession
Agreement and the ARCA which grant PIATCO the exclusive right to
operate a commercial international passenger terminal within the Island of
Luzon, except those international airports already existing at the time of the
execution of the agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government shall
cause the closure of Ninoy Aquino International Airport Passenger
Terminals I and II as international passenger terminals. With respect to
existing concession agreements between MIAA and international airport
service providers regarding certain services or operations, the 1997
Concession Agreement and the ARCA uniformly provide that such services
or operations will not be carried over to the NAIA IPT III and PIATCO is
under no obligation to permit such carry over except through a separate
agreement duly entered into with PIATCO.8
With respect to the petitioning service providers and their employees, upon
the commencement of operations of the NAIA IPT III, they allege that they
will be effectively barred from providing international airline airport services
at the NAIA Terminals I and II as all international airlines and passengers
will be diverted to the NAIA IPT III. The petitioning service providers will thus
be compelled to contract with PIATCO alone for such services, with no
assurance that subsisting contracts with MIAA and other international
airlines will be respected. Petitioning service providers stress that despite
the very competitive market, the substantial capital investments required
and the high rate of fees, they entered into their respective contracts with
the MIAA with the understanding that the said contracts will be in force for
the stipulated period, and thereafter, renewed so as to allow each of the
petitioning service providers to recoup their investments and obtain a
reasonable return thereon.

Petitioning employees of various service providers at the NAIA Terminals I

and II and of MIAA on the other hand allege that with the closure of the
NAIA Terminals I and II as international passenger terminals under the
PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have "alleged such a
personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the
court so largely depends for illumination of difficult constitutional
questions."9 Accordingly, it has been held that the interest of a person
assailing the constitutionality of a statute must be direct and personal. He
must be able to show, not only that the law or any government act is invalid,
but also that he sustained or is in imminent danger of sustaining some direct
injury as a result of its enforcement, and not merely that he suffers thereby
in some indefinite way. It must appear that the person complaining has been
or is about to be denied some right or privilege to which he is lawfully
entitled or that he is about to be subjected to some burdens or penalties by
reason of the statute or act complained of.10
We hold that petitioners have the requisite standing. In the abovementioned cases, petitioners have a direct and substantial interest to protect
by reason of the implementation of the PIATCO Contracts. They stand to
lose their source of livelihood, a property right which is zealously protected
by the Constitution. Moreover, subsisting concession agreements between
MIAA and petitioners-intervenors and service contracts between
international airlines and petitioners-intervenors stand to be nullified or
terminated by the operation of the NAIA IPT III under the PIATCO
Contracts. The financial prejudice brought about by the PIATCO Contracts
on petitioners and petitioners-intervenors in these cases are legitimate
interests sufficient to confer on them the requisite standing to file the instant
petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members
of the House of Representatives, citizens and taxpayers. They allege that as
members of the House of Representatives, they are especially interested in
the PIATCO Contracts, because the contracts compel the Government
and/or the House of Representatives to appropriate funds necessary to
comply with the provisions therein.11 They cite provisions of the PIATCO

Contracts which require disbursement of unappropriated amounts in

compliance with the contractual obligations of the Government. They allege
that the Government obligations in the PIATCO Contracts which compel
government expenditure without appropriation is a curtailment of their
prerogatives as legislators, contrary to the mandate of the Constitution that
"[n]o money shall be paid out of the treasury except in pursuance of an
appropriation made by law."12
Standing is a peculiar concept in constitutional law because in some cases,
suits are not brought by parties who have been personally injured by the
operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Although we are
not unmindful of the cases of Imus Electric Co. v. Municipality of Imus13 and
Gonzales v. Raquiza14 wherein this Court held that appropriation must be
made only on amounts immediately demandable, public interest demands
that we take a more liberal view in determining whether the petitioners suing
as legislators, taxpayers and citizens have locus standi to file the instant
petition. In Kilosbayan, Inc. v. Guingona,15 this Court held "[i]n line with the
liberal policy of this Court on locus standi, ordinary taxpayers, members of
Congress, and even association of planters, and non-profit civic
organizations were allowed to initiate and prosecute actions before this
Court to question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or instrumentalities."16
Further, "insofar as taxpayers' suits are concerned . . . (this Court) is not
devoid of discretion as to whether or not it should be entertained."17 As such
". . . even if, strictly speaking, they [the petitioners] are not covered by the
definition, it is still within the wide discretion of the Court to waive the
requirement and so remove the impediment to its addressing and resolving
the serious constitutional questions raised."18 In view of the serious legal
questions involved and their impact on public interest, we resolve to grant
standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to
review the instant cases as factual issues are involved which this Court is illequipped to resolve. Moreover, PIATCO alleges that submission of this
controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent

jurisdiction with this Court with respect to a special civil action for prohibition
and hence, following the rule on hierarchy of courts, resort must first be had
before the trial courts.
After a thorough study and careful evaluation of the issues involved, this
Court is of the view that the crux of the instant controversy involves
significant legal questions. The facts necessary to resolve these legal
questions are well established and, hence, need not be determined by a trial
court.
The rule on hierarchy of courts will not also prevent this Court from
assuming jurisdiction over the cases at bar. The said rule may be relaxed
when the redress desired cannot be obtained in the appropriate courts or
where exceptional and compelling circumstances justify availment of a
remedy within and calling for the exercise of this Court's primary
jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar
that call for the relaxation of the rule. Both petitioners and respondents
agree that these cases are of transcendental importance as they involve the
construction and operation of the country's premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression
and they entail the proper legal interpretation of key provisions of the
Constitution, the BOT Law and its Implementing Rules and Regulations.
Thus, considering the nature of the controversy before the Court, procedural
bars may be lowered to give way for the speedy disposition of the instant
cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court
is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA
have been filed at the instance of respondent PIATCO. Again, we hold that
the arbitration step taken by PIATCO will not oust this Court of its
jurisdiction over the cases at bar.

In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that

the arbitration clause in the Distributorship Agreement in question is valid
and the dispute between the parties is arbitrable, this Court affirmed the trial
court's decision denying petitioner's Motion to Suspend Proceedings
pursuant to the arbitration clause under the contract. In so ruling, this Court
held that as contracts produce legal effect between the parties, their assigns
and heirs, only the parties to the Distributorship Agreement are bound by its
terms, including the arbitration clause stipulated therein. This Court ruled
that arbitration proceedings could be called for but only with respect to the
parties to the contract in question. Considering that there are parties to the
case who are neither parties to the Distributorship Agreement nor heirs or
assigns of the parties thereto, this Court, citing its previous ruling in Salas,
Jr. v. Laperal Realty Corporation,21 held that to tolerate the splitting of
proceedings by allowing arbitration as to some of the parties on the one
hand and trial for the others on the other hand would, in effect, result in
multiplicity of suits, duplicitous procedure and unnecessary delay.22 Thus,
we ruled that the interest of justice would best be served if the trial court
hears and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented
legitimate interests in the resolution of the controversy are not parties to the
PIATCO Contracts. Accordingly, they cannot be bound by the arbitration
clause provided for in the ARCA and hence, cannot be compelled to submit
to arbitration proceedings. A speedy and decisive resolution of all the critical
issues in the present controversy, including those raised by petitioners,
cannot be made before an arbitral tribunal. The object of arbitration is
precisely to allow an expeditious determination of a dispute. This objective
would not be met if this Court were to allow the parties to settle the cases by
arbitration as there are certain issues involving non-parties to the PIATCO
Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's
predecessor, was not a duly pre-qualified bidder on the unsolicited proposal
submitted by AEDC as the Paircargo Consortium failed to meet the financial

capability required under the BOT Law and the Bid Documents. They allege
that in computing the ability of the Paircargo Consortium to meet the
minimum equity requirements for the project, the entire net worth of Security
Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum
dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C.
Cal stating that the Paircargo Consortium is found to have a combined net
worth of P3,900,000,000.00, sufficient to meet the equity requirements of
the project. The said Memorandum was in response to a letter from Mr.
Antonio Henson of AEDC to President Fidel V. Ramos questioning the
financial capability of the Paircargo Consortium on the ground that it does
not have the financial resources to put up the required minimum equity of
P2,700,000,000.00. This contention is based on the restriction under R.A.
No. 337, as amended or the General Banking Act that a commercial bank
cannot invest in any single enterprise in an amount more than 15% of its net
worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5,
require that financial capability will be evaluated based on total
financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a
combined net worth of P3,926,421,242.00 that could support a project
costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted." To
impose that as a requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in
establishing financial capability. As stated in Bid Bulletin No. 3,
financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this
requirement.
To recap, net worth reflected in the Financial Statement should not be
taken as the amount of the money to be used to answer the required
thirty percent (30%) equity of the challenger but rather to be used in
establishing if there is enough basis to believe that the challenger can
comply with the required 30% equity. In fact, proof of sufficient equity is
required as one of the conditions for award of contract (Section 12.1

IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the
same document).23
Under the BOT Law, in case of a build-operate-and-transfer
arrangement, the contract shall be awarded to the bidder "who, having
satisfied the minimum financial, technical, organizational and legal
standards" required by the law, has submitted the lowest bid and most
favorable terms of the project.24 Further, the 1994 Implementing Rules
and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
xxx

xxx

xxx

c. Financial Capability: The project proponent must have adequate

capability to sustain the financing requirements for the detailed
engineering design, construction and/or operation and maintenance
phases of the project, as the case may be. For purposes of prequalification, this capability shall be measured in terms of (i) proof of
the ability of the project proponent and/or the consortium to provide a
minimum amount of equity to the project, and (ii) a letter testimonial
from reputable banks attesting that the project proponent and/or
members of the consortium are banking with them, that they are in
good financial standing, and that they have adequate resources. The
government agency/LGU concerned shall determine on a project-toproject basis and before pre-qualification, the minimum amount of
equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated
August 16, 1996 amending the financial capability requirements for prequalification of the project proponent as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the
proponent to the minimum technical and financial requirements
provided in the Bid Documents and in the IRR of the BOT Law, R.A.
No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponent's financial
capability will be based shall be thirty percent (30%) of the project cost

instead of the twenty percent (20%) specified in Section 3.6.4 of the

Bid Documents. This is to correlate with the required debt-to-equity
ratio of 70:30 in Section 2.01a of the draft concession agreement. The
debt portion of the project financing should not exceed 70% of the
actual project cost.
Accordingly, based on the above provisions of law, the Paircargo
Consortium or any challenger to the unsolicited proposal of AEDC has to
show that it possesses the requisite financial capability to undertake the
project in the minimum amount of 30% of the project cost through (i) proof of
the ability to provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project proponent
or members of the consortium are banking with them, that they are in good
financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00,25 the Paircargo Consortium had to show to the
satisfaction of the PBAC that it had the ability to provide the minimum equity
for the project in the amount of at least P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated
that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively.26
PAGS' Audited Financial Statements as of 1995 indicate that it has
approximately P26,735,700.00 to invest as its equity for the project.27
Security Bank's Audited Financial Statements as of 1995 show that it has a
net worth equivalent to its capital funds in the amount of
P3,523,504,377.00.28
We agree with public respondents that with respect to Security Bank, the
entire amount of its net worth could not be invested in a single undertaking
or enterprise, whether allied or non-allied in accordance with the provisions
of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem
appropriate and necessary to further national development objectives
or support national priority projects, may authorize a commercial bank,
a bank authorized to provide commercial banking services, as well as
a government-owned and controlled bank, to operate under an
expanded commercial banking authority and by virtue thereof exercise,

in addition to powers authorized for commercial banks, the powers of

an Investment House as provided in Presidential Decree No. 129,
invest in the equity of a non-allied undertaking, or own a majority or all
of the equity in a financial intermediary other than a commercial bank
or a bank authorized to provide commercial banking services:
Provided, That (a) the total investment in equities shall not exceed fifty
percent (50%) of the net worth of the bank; (b) the equity investment in
any one enterprise whether allied or non-allied shall not exceed fifteen
percent (15%) of the net worth of the bank; (c) the equity investment of
the bank, or of its wholly or majority-owned subsidiary, in a single nonallied undertaking shall not exceed thirty-five percent (35%) of the total
equity in the enterprise nor shall it exceed thirty-five percent (35%) of
the voting stock in that enterprise; and (d) the equity investment in
other banks shall be deducted from the investing bank's net worth for
purposes of computing the prescribed ratio of net worth to risk assets.
xxx

xxx

xxx

Further, the 1993 Manual of Regulations for Banks provides:

SECTION X383. Other Limitations and Restrictions. The following
limitations and restrictions shall also apply regarding equity
investments of banks.
a. In any single enterprise. The equity investments of banks in any
single enterprise shall not exceed at any time fifteen percent (15%) of
the net worth of the investing bank as defined in Sec. X106 and
Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the
Paircargo Consortium is only P528,525,656.55, representing 15% of its
entire net worth. The total net worth therefore of the Paircargo Consortium,
after considering the maximum amounts that may be validly invested by
each of its members is P558,384,871.55 or only 6.08% of the project cost,29
an amount substantially less than the prescribed minimum equity
investment required for the project in the amount of P2,755,095,000.00 or
30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the
earliest opportunity, the ability of the bidder to undertake the project. Thus,

with respect to the bidder's financial capacity at the pre-qualification stage,

the law requires the government agency to examine and determine the
ability of the bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the project at the time of
pre-qualification.
The PBAC has determined that any prospective bidder for the construction,
operation and maintenance of the NAIA IPT III project should prove that it
has the ability to provide equity in the minimum amount of 30% of the
project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in
the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC
should determine the maximum amounts that each member of the
consortium may commit for the construction, operation and maintenance of
the NAIA IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amount which may be invested by it would
only be 15% of its net worth in view of the restrictions imposed by the
General Banking Act. Disregarding the investment ceilings provided by
applicable law would not result in a proper evaluation of whether or not a
bidder is pre-qualified to undertake the project as for all intents and
purposes, such ceiling or legal restriction determines the true maximum
amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to
undertake the project requires an evaluation of the financial capacity of the
said bidder at the time the bid is submitted based on the required
documents presented by the bidder. The PBAC should not be allowed to
speculate on the future financial ability of the bidder to undertake the project
on the basis of documents submitted. This would open doors to abuse and
defeat the very purpose of a public bidding. This is especially true in the
case at bar which involves the investment of billions of pesos by the project
proponent. The relevant government authority is duty-bound to ensure that
the awardee of the contract possesses the minimum required financial
capability to complete the project. To allow the PBAC to estimate the
bidder's future financial capability would not secure the viability and integrity
of the project. A restrictive and conservative application of the rules and
procedures of public bidding is necessary not only to protect the impartiality
and regularity of the proceedings but also to ensure the financial and
technical reliability of the project. It has been held that:

The basic rule in public bidding is that bids should be evaluated based
on the required documents submitted before and not after the opening
of bids. Otherwise, the foundation of a fair and competitive public
bidding would be defeated. Strict observance of the rules, regulations,
and guidelines of the bidding process is the only safeguard to a fair,
honest and competitive public bidding.30
Thus, if the maximum amount of equity that a bidder may invest in the
project at the time the bids are submitted falls short of the minimum
amounts required to be put up by the bidder, said bidder should be properly
disqualified. Considering that at the pre-qualification stage, the maximum
amounts which the Paircargo Consortium may invest in the project fell short
of the minimum amounts prescribed by the PBAC, we hold that Paircargo
Consortium was not a qualified bidder. Thus the award of the contract by
the PBAC to the Paircargo Consortium, a disqualified bidder, is null and
void.
While it would be proper at this juncture to end the resolution of the instant
controversy, as the legal effects of the disqualification of respondent
PIATCO's predecessor would come into play and necessarily result in the
nullity of all the subsequent contracts entered by it in pursuance of the
project, the Court feels that it is necessary to discuss in full the pressing
issues of the present controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession
Agreement is invalid as it contains provisions that substantially depart from
the draft Concession Agreement included in the Bid Documents. They
maintain that a substantial departure from the draft Concession Agreement
is a violation of public policy and renders the 1997 Concession Agreement
null and void.
PIATCO maintains, however, that the Concession Agreement attached to
the Bid Documents is intended to be a draft, i.e., subject to change,
alteration or modification, and that this intention was clear to all participants,
including AEDC, and DOTC/MIAA. It argued further that said intention is

expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which
states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from
time to time. Said amendments shall only cover items that would not
materially affect the preparation of the proponent's proposal.
By its very nature, public bidding aims to protect the public interest by giving
the public the best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of
government contract law, competition requires, not only `bidding upon
a common standard, a common basis, upon the same thing, the same
subject matter, the same undertaking,' but also that it be legitimate, fair
and honest; and not designed to injure or defraud the government.31
An essential element of a publicly bidded contract is that all bidders must be
on equal footing. Not simply in terms of application of the procedural rules
and regulations imposed by the relevant government agency, but more
importantly, on the contract bidded upon. Each bidder must be able to bid
on the same thing. The rationale is obvious. If the winning bidder is allowed
to later include or modify certain provisions in the contract awarded such
that the contract is altered in any material respect, then the essence of fair
competition in the public bidding is destroyed. A public bidding would indeed
be a farce if after the contract is awarded, the winning bidder may modify
the contract and include provisions which are favorable to it that were not
previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition
among the bidders. The specifications in such biddings provide the
common ground or basis for the bidders. The specifications should,
accordingly, operate equally or indiscriminately upon all bidders.32
The same rule was restated by Chief Justice Stuart of the Supreme Court of
Minnesota:
The law is well settled that where, as in this case, municipal authorities
can only let a contract for public work to the lowest responsible bidder,
the proposals and specifications therefore must be so framed as to

permit free and full competition. Nor can they enter into a contract with
the best bidder containing substantial provisions beneficial to him, not
included or contemplated in the terms and specifications upon which
the bids were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its
argument that the draft concession agreement is subject to amendment, the
pertinent portion of which was quoted above, the PBAC also clarified that
"[s]aid amendments shall only cover items that would not materially affect
the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon, such changes
must not constitute substantial or material amendments that would alter the
basic parameters of the contract and would constitute a denial to the other
bidders of the opportunity to bid on the same terms. Hence, the
determination of whether or not a modification or amendment of a contract
bidded out constitutes a substantial amendment rests on whether the
contract, when taken as a whole, would contain substantially different terms
and conditions that would have the effect of altering the technical and/or
financial proposals previously submitted by other bidders. The alterations
and modifications in the contract executed between the government and the
winning bidder must be such as to render such executed contract to be an
entirely different contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this
Court quoted with approval the ruling of the trial court that an amendment to
a contract awarded through public bidding, when such subsequent
amendment was made without a new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs that
the due execution of a contract after public bidding is a limitation upon
the right of the contracting parties to alter or amend it without another
public bidding, for otherwise what would a public bidding be good for if
after the execution of a contract after public bidding, the contracting
parties may alter or amend the contract, or even cancel it, at their will?
Public biddings are held for the protection of the public, and to give the
public the best possible advantages by means of open competition
between the bidders. He who bids or offers the best terms is awarded
the contract subject of the bid, and it is obvious that such protection

and best possible advantages to the public will disappear if the parties
to a contract executed after public bidding may alter or amend it
without another previous public bidding.35
Hence, the question that comes to fore is this: is the 1997 Concession
Agreement the same agreement that was offered for public bidding, i.e., the
draft Concession Agreement attached to the Bid Documents? A close
comparison of the draft Concession Agreement attached to the Bid
Documents and the 1997 Concession Agreement reveals that the
documents differ in at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft
Concession Agreement and the 1997 Concession Agreement may be
classified into three distinct categories: (1) fees which are subject to periodic
adjustment of once every two years in accordance with a prescribed
parametric formula and adjustments are made effective only upon written
approval by MIAA; (2) fees other than those included in the first category
which maybe adjusted by PIATCO whenever it deems necessary without
need for consent of DOTC/MIAA; and (3) new fees and charges that may be
imposed by PIATCO which have not been previously imposed or collected
at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to
Administrative Order No. 1, Series of 1993, as amended. The glaring
distinctions between the draft Concession Agreement and the 1997
Concession Agreement lie in the types of fees included in each category
and the extent of the supervision and regulation which MIAA is allowed to
exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic
adjustment in accordance with a prescribed parametric formula and
effective only upon written approval by MIAA, the draft Concession
Agreement includes the following:36
(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to
adjustment and effective upon MIAA approval are classified as "Public Utility
Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA
approval is best appreciated in relation to fees included in the second
category identified above. Under the 1997 Concession Agreement, fees
which PIATCO may adjust whenever it deems necessary without need for
consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as
"all other income not classified as Public Utility Revenues derived from
operations of the Terminal and the Terminal Complex."38 Thus, under the
1997 Concession Agreement, ground handling fees, rentals from airline
offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA
reserves the right to regulate (1) lobby and vehicular parking fees and (2)
other new fees and charges that may be imposed by PIATCO. Such
regulation may be made by periodic adjustment and is effective only upon
written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments
in the aircraft parking fees, aircraft tacking fees, groundhandling fees,
rentals and airline offices, check-in-counter rentals and porterage fees
shall be allowed only once every two years and in accordance with the

Parametric Formula attached hereto as Annex F. Provided that

adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the
MIAA, shall be contingent only on the conformity of the adjustments
with the above said parametric formula. The first adjustment shall be
made prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and
conditions the lobby and vehicular parking fees and other new fees
and charges as contemplated in paragraph 2 of Section 6.01 if in its
judgment the users of the airport shall be deprived of a free option for
the services they cover.39
On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
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xxx

(c) Concessionaire shall at all times be judicious in fixing fees and

charges constituting Non-Public Utility Revenues in order to ensure
that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee
constitute Non-Public Utility Revenues of Concessionaire, GRP may
intervene and require Concessionaire to explain and justify the fee it
may set from time to time, if in the reasonable opinion of GRP the said
fees have become exorbitant resulting in the unreasonable deprivation
of End Users of such services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular
parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA
can do is to require PIATCO to explain and justify the fees set by PIATCO.
In the draft Concession Agreement, vehicular parking fee is subject to MIAA
regulation and approval under the second paragraph of Section 6.03 thereof
while porterage fee is covered by the first paragraph of the same provision.
There is an obvious relaxation of the extent of control and regulation by
MIAA with respect to the particular fees that may be charged by PIATCO.

Moreover, with respect to the third category of fees that may be imposed
and collected by PIATCO, i.e., new fees and charges that may be imposed
by PIATCO which have not been previously imposed or collected at the
Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03
of the draft Concession Agreement MIAA has reserved the right to regulate
the same under the same conditions that MIAA may regulate fees under the
first category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only upon
written approval by MIAA. However, under the 1997 Concession
Agreement, adjustment of fees under the third category is not subject to
MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,41 as shown
earlier, this was included within the category of "Public Utility Revenues"
under the 1997 Concession Agreement. This classification is significant
because under the 1997 Concession Agreement, "Public Utility Revenues"
are subject to an "Interim Adjustment" of fees upon the occurrence of
certain extraordinary events specified in the agreement.42 However, under
the draft Concession Agreement, terminal fees are not included in the types
of fees that may be subject to "Interim Adjustment."43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues,"
except terminal fees, are denominated in US Dollars44 while payments to
the Government are in Philippine Pesos. In the draft Concession
Agreement, no such stipulation was included. By stipulating that "Public
Utility Revenues" will be paid to PIATCO in US Dollars while payments by
PIATCO to the Government are in Philippine currency under the 1997
Concession Agreement, PIATCO is able to enjoy the benefits of
depreciations of the Philippine Peso, while being effectively insulated from
the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession
Agreement with respect to reduction in the types of fees that are subject to
MIAA regulation and the relaxation of such regulation with respect to other
fees are significant amendments that substantially distinguish the draft
Concession Agreement from the 1997 Concession Agreement. The 1997
Concession Agreement, in this respect, clearly gives PIATCO more
favorable terms than what was available to other bidders at the time the
contract was bidded out. It is not very difficult to see that the changes in the

1997 Concession Agreement translate to direct and concrete financial

advantages for PIATCO which were not available at the time the contract
was offered for bidding. It cannot be denied that under the 1997 Concession
Agreement only "Public Utility Revenues" are subject to MIAA regulation.
Adjustments of all other fees imposed and collected by PIATCO are entirely
within its control. Moreover, with respect to terminal fees, under the 1997
Concession Agreement, the same is further subject to "Interim Adjustments"
not previously stipulated in the draft Concession Agreement. Finally, the
change in the currency stipulated for "Public Utility Revenues" under the
1997 Concession Agreement, except terminal fees, gives PIATCO an added
benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its
obligations to creditors who have provided, loaned or advanced funds for
the NAIA IPT III project does not result in the assumption by the
Government of these liabilities. In fact, nowhere in the said contract does
default of PIATCO's loans figure in the agreement. Such default does not
directly result in any concomitant right or obligation in favor of the
Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
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xxx

xxx

(b) In the event Concessionaire should default in the payment of an

Attendant Liability, and the default has resulted in the acceleration of
the payment due date of the Attendant Liability prior to its stated date
of maturity, the Unpaid Creditors and Concessionaire shall immediately
inform GRP in writing of such default. GRP shall, within one hundred
eighty (180) Days from receipt of the joint written notice of the Unpaid
Creditors and Concessionaire, either (i) take over the Development

Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid
Creditors, if qualified, to be substituted as concessionaire and operator
of the Development Facility in accordance with the terms and
conditions hereof, or designate a qualified operator acceptable to GRP
to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided that if at the end of the 180-day
period GRP shall not have served the Unpaid Creditors and
Concessionaire written notice of its choice, GRP shall be deemed to
have elected to take over the Development Facility with the
concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator
acceptable to GRP within one hundred eighty (180) days from receipt
of GRP's written notice. If the concession company, acting in good faith
and with due diligence, is unable to designate a qualified operator
within the aforesaid period, then GRP shall at the end of the 180-day
period take over the Development Facility and assume Attendant
Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is
defined as:
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid
Creditors who have provided, loaned or advanced funds actually used
for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related
expenses, and further including amounts owed by Concessionaire to
its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition
of "Attendant Liabilities," default by PIATCO of its loans used to finance the
NAIA IPT III project triggers the occurrence of certain events that leads to
the assumption by the Government of the liability for the loans. Only in one
instance may the Government escape the assumption of PIATCO's

liabilities, i.e., when the Government so elects and allows a qualified

operator to take over as Concessionaire. However, this circumstance is
dependent on the existence and availability of a qualified operator who is
willing to take over the rights and obligations of PIATCO under the contract,
a circumstance that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to
state that Section 4.04 of the 1997 Concession Agreement may be
considered a form of security for the loans PIATCO has obtained to finance
the project, an option that was not made available in the draft Concession
Agreement. Section 4.04 is an important amendment to the 1997
Concession Agreement because it grants PIATCO a financial advantage or
benefit which was not previously made available during the bidding process.
This financial advantage is a significant modification that translates to better
terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure
acknowledge that the draft Concession Agreement is subject to amendment
because the Bid Documents permit financing or borrowing. They claim that
it was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the
BOT Law to allow the project proponent or the winning bidder to obtain
financing for the project, especially in this case which involves the
construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would
involve a substantial amount of investment. It is therefore inevitable for the
awardee of the contract to seek alternate sources of funds to support the
project. Be that as it may, this Court maintains that amendments to the
contract bidded upon should always conform to the general policy on public
bidding if such procedure is to be faithful to its real nature and purpose. By
its very nature and characteristic, competitive public bidding aims to protect
the public interest by giving the public the best possible advantages through
open competition.45 It has been held that the three principles in public
bidding are (1) the offer to the public; (2) opportunity for competition; and (3)
a basis for the exact comparison of bids. A regulation of the matter which
excludes any of these factors destroys the distinctive character of the
system and thwarts the purpose of its adoption.46 These are the basic

parameters which every awardee of a contract bidded out must conform to,
requirements of financing and borrowing notwithstanding. Thus, upon a
concrete showing that, as in this case, the contract signed by the
government and the contract-awardee is an entirely different contract from
the contract bidded, courts should not hesitate to strike down said contract
in its entirety for violation of public policy on public bidding. A strict
adherence on the principles, rules and regulations on public bidding must be
sustained if only to preserve the integrity and the faith of the general public
on the procedure.
Public bidding is a standard practice for procuring government contracts for
public service and for furnishing supplies and other materials. It aims to
secure for the government the lowest possible price under the most
favorable terms and conditions, to curtail favoritism in the award of
government contracts and avoid suspicion of anomalies and it places all
bidders in equal footing.47 Any government action which permits any
substantial variance between the conditions under which the bids are invited
and the contract executed after the award thereof is a grave abuse of
discretion amounting to lack or excess of jurisdiction which warrants proper
judicial action.
In view of the above discussion, the fact that the foregoing substantial
amendments were made on the 1997 Concession Agreement renders the
same null and void for being contrary to public policy. These amendments
convert the 1997 Concession Agreement to an entirely different agreement
from the contract bidded out or the draft Concession Agreement. It is not
difficult to see that the amendments on (1) the types of fees or charges that
are subject to MIAA regulation or control and the extent thereof and (2) the
assumption by the Government, under certain conditions, of the liabilities of
PIATCO directly translates concrete financial advantages to PIATCO that
were previously not available during the bidding process. These
amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions which
provide financial benefit to PIATCO which may have altered the technical
and financial parameters of other bidders had they known that such terms
were available.
III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997
Concession Agreement provides:
Section 4.04 Assignment
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xxx

(b) In the event Concessionaire should default in the payment of an

Attendant Liability, and the default resulted in the acceleration of the
payment due date of the Attendant Liability prior to its stated date of
maturity, the Unpaid Creditors and Concessionaire shall immediately
inform GRP in writing of such default. GRP shall within one hundred
eighty (180) days from receipt of the joint written notice of the Unpaid
Creditors and Concessionaire, either (i) take over the Development
Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid
Creditors, if qualified to be substituted as concessionaire and operator
of the Development facility in accordance with the terms and conditions
hereof, or designate a qualified operator acceptable to GRP to operate
the Development Facility, likewise under the terms and conditions of
this Agreement; Provided, that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written
notice of its choice, GRP shall be deemed to have elected to take over
the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator
acceptable to GRP within one hundred eighty (180) days from receipt
of GRP's written notice. If the concession company, acting in good faith
and with due diligence, is unable to designate a qualified operator
within the aforesaid period, then GRP shall at the end of the 180-day
period take over the Development Facility and assume Attendant
Liabilities.

.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid
Creditors who have provided, loaned or advanced funds actually used
for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related
expenses, and further including amounts owed by Concessionaire to
its suppliers, contractors and sub-contractors.48
It is clear from the above-quoted provisions that Government, in the event
that PIATCO defaults in its loan obligations, is obligated to pay "all amounts
recorded and from time to time outstanding from the books" of PIATCO
which the latter owes to its creditors.49 These amounts include "all interests,
penalties,
associated
fees,
charges,
surcharges,
indemnities,
50
reimbursements and other related expenses." This obligation of the
Government to pay PIATCO's creditors upon PIATCO's default would arise
if the Government opts to take over NAIA IPT III. It should be noted,
however, that even if the Government chooses the second option, which is
to allow PIATCO's unpaid creditors operate NAIA IPT III, the Government is
still at a risk of being liable to PIATCO's creditors should the latter be unable
to designate a qualified operator within the prescribed period.51 In effect,
whatever option the Government chooses to take in the event of PIATCO's
failure to fulfill its loan obligations, the Government is still at a risk of
assuming PIATCO's outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCO's debts if the
unpaid creditors would be able to designate a qualified operator within the
period provided for in the contract. Thus, the Government's assumption of
liability is virtually out of its control. The Government under the
circumstances provided for in the 1997 Concession Agreement is at the
mercy of the existence, availability and willingness of a qualified operator.
The above contractual provisions constitute a direct government guarantee
which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of
government funds to construct the infrastructure and development projects
necessary for economic growth and development. This is why private sector
resources are being tapped in order to finance these projects. The BOT law

allows the private sector to participate, and is in fact encouraged to do so by

way of incentives, such as minimizing the unstable flow of returns,52
provided that the government would not have to unnecessarily expend
scarcely available funds for the project itself. As such, direct guarantee,
subsidy and equity by the government in these projects are strictly
prohibited.53 This is but logical for if the government would in the end still be
at a risk of paying the debts incurred by the private entity in the BOT
projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the
government or any of its agencies or local government units assume
responsibility for the repayment of debt directly incurred by the project
proponent in implementing the project in case of a loan default.
Clearly by providing that the Government "assumes" the attendant liabilities,
which consists of PIATCO's unpaid debts, the 1997 Concession Agreement
provided for a direct government guarantee for the debts incurred by
PIATCO in the implementation of the NAIA IPT III project. It is of no moment
that the relevant sections are subsumed under the title of "assignment". The
provisions providing for direct government guarantee which is prohibited by
law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did
not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I,
Section 1.06, of the ARCA provides:
Section 4.04 Security
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(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in

good faith and enter into direct agreement with the Senior Lenders, or
with an agent of such Senior Lenders (which agreement shall be
subject to the approval of the Bangko Sentral ng Pilipinas), in such
form as may be reasonably acceptable to both GRP and Senior
Lenders, with regard, inter alia, to the following parameters:
xxx

xxx

xxx

(iv) If the Concessionaire [PIATCO] is in default under a payment

obligation owed to the Senior Lenders, and as a result thereof the
Senior Lenders have become entitled to accelerate the Senior
Loans, the Senior Lenders shall have the right to notify GRP of
the same, and without prejudice to any other rights of the Senior
Lenders or any Senior Lenders' agent may have (including
without limitation under security interests granted in favor of the
Senior Lenders), to either in good faith identify and designate a
nominee which is qualified under sub-clause (viii)(y) below to
operate the Development Facility [NAIA Terminal 3] or transfer
the Concessionaire's [PIATCO] rights and obligations under this
Agreement to a transferee which is qualified under sub-clause
(viii) below;
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xxx

xxx

(vi) if the Senior Lenders, acting in good faith and using

reasonable efforts, are unable to designate a nominee or effect a
transfer in terms and conditions satisfactory to the Senior Lenders
within one hundred eighty (180) days after giving GRP notice as
referred to respectively in (iv) or (v) above, then GRP and the
Senior Lenders shall endeavor in good faith to enter into any
other arrangement relating to the Development Facility [NAIA
Terminal 3] (other than a turnover of the Development Facility
[NAIA Terminal 3] to GRP) within the following one hundred
eighty (180) days. If no agreement relating to the Development
Facility [NAIA Terminal 3] is arrived at by GRP and the Senior
Lenders within the said 180-day period, then at the end thereof
the Development Facility [NAIA Terminal 3] shall be transferred
by the Concessionaire [PIATCO] to GRP or its designee and GRP
shall make a termination payment to Concessionaire [PIATCO]
equal to the Appraised Value (as hereinafter defined) of the
Development Facility [NAIA Terminal 3] or the sum of the
Attendant Liabilities, if greater. Notwithstanding Section 8.01(c)
hereof, this Agreement shall be deemed terminated upon the
transfer of the Development Facility [NAIA Terminal 3] to GRP
pursuant hereto;
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Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by
verifiable evidence from time to time owed or which may become
owing by Concessionaire [PIATCO] to Senior Lenders or any other
persons or entities who have provided, loaned, or advanced funds or
provided financial facilities to Concessionaire [PIATCO] for the Project
[NAIA Terminal 3], including, without limitation, all principal, interest,
associated fees, charges, reimbursements, and other related expenses
(including the fees, charges and expenses of any agents or trustees of
such persons or entities), whether payable at maturity, by acceleration
or otherwise, and further including amounts owed by Concessionaire
[PIATCO] to its professional consultants and advisers, suppliers,
contractors and sub-contractors.54
It is clear from the foregoing contractual provisions that in the event that
PIATCO fails to fulfill its loan obligations to its Senior Lenders, the
Government is obligated to directly negotiate and enter into an agreement
relating to NAIA IPT III with the Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who will take the place of
PIATCO. If the Senior Lenders and the Government are unable to enter into
an agreement after the prescribed period, the Government must then pay
PIATCO, upon transfer of NAIA IPT III to the Government, termination
payment equal to the appraised value of the project or the value of the
attendant liabilities whichever is greater. Attendant liabilities as defined in
the ARCA includes all amounts owed or thereafter may be owed by PIATCO
not only to the Senior Lenders with whom PIATCO has defaulted in its loan
obligations but to all other persons who may have loaned, advanced funds
or provided any other type of financial facilities to PIATCO for NAIA IPT III.
The amount of PIATCO's debt that the Government would have to pay as a
result of PIATCO's default in its loan obligations -- in case no qualified
nominee or transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the
Government and the Senior Lenders -- includes, but is not limited to, "all
principal, interest, associated fees, charges, reimbursements, and other
related expenses . . . whether payable at maturity, by acceleration or
otherwise."55

It is clear from the foregoing that the ARCA provides for a direct guarantee
by the government to pay PIATCO's loans not only to its Senior Lenders but
all other entities who provided PIATCO funds or services upon PIATCO's
default in its loan obligation with its Senior Lenders. The fact that the
Government's obligation to pay PIATCO's lenders for the latter's obligation
would only arise after the Senior Lenders fail to appoint a qualified nominee
or transferee does not detract from the fact that, should the conditions as
stated in the contract occur, the ARCA still obligates the Government to pay
any and all amounts owed by PIATCO to its lenders in connection with NAIA
IPT III. Worse, the conditions that would make the Government liable for
PIATCO's debts is triggered by PIATCO's own default of its loan obligations
to its Senior Lenders to which loan contracts the Government was never a
party to. The Government was not even given an option as to what course
of action it should take in case PIATCO defaulted in the payment of its
senior loans. The Government, upon PIATCO's default, would be merely
notified by the Senior Lenders of the same and it is the Senior Lenders who
are authorized to appoint a qualified nominee or transferee. Should the
Senior Lenders fail to make such an appointment, the Government is then
automatically obligated to "directly deal and negotiate" with the Senior
Lenders regarding NAIA IPT III. The only way the Government would not be
liable for PIATCO's debt is for a qualified nominee or transferee to be
appointed in place of PIATCO to continue the construction, operation and
maintenance of NAIA IPT III. This "pre-condition", however, will not take the
contract out of the ambit of a direct guarantee by the government as the
existence, availability and willingness of a qualified nominee or transferee is
totally out of the government's control. As such the Government is virtually
at the mercy of PIATCO (that it would not default on its loan obligations to
its Senior Lenders), the Senior Lenders (that they would appoint a qualified
nominee or transferee or agree to some other arrangement with the
Government) and the existence of a qualified nominee or transferee who is
able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the
policy considerations behind the BOT Law. Clearly, in the present case, the
ARCA obligates the Government to pay for all loans, advances and
obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan
obligations to its Senior Lenders and the latter fails to appoint a qualified
nominee or transferee. This in effect would make the Government liable for

PIATCO's loans should the conditions as set forth in the ARCA arise. This is
a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an
unsolicited proposal for a BOT project may be accepted, the following
conditions must first be met: (1) the project involves a new concept in
technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by publication other
interested parties to a public bidding and conducted the same.56 The failure
to meet any of the above conditions will result in the denial of the proposal.
It is further provided that the presence of direct government guarantee,
subsidy or equity will "necessarily disqualify a proposal from being treated
and accepted as an unsolicited proposal."57 The BOT Law clearly and
strictly prohibits direct government guarantee, subsidy and equity in
unsolicited proposals that the mere inclusion of a provision to that effect is
fatal and is sufficient to deny the proposal. It stands to reason therefore that
if a proposal can be denied by reason of the existence of direct government
guarantee, then its inclusion in the contract executed after the said proposal
has been accepted is likewise sufficient to invalidate the contract itself. A
prohibited provision, the inclusion of which would result in the denial of a
proposal cannot, and should not, be allowed to later on be inserted in the
contract resulting from the said proposal. The basic rules of justice and fair
play alone militate against such an occurrence and must not, therefore, be
countenanced particularly in this instance where the government is exposed
to the risk of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those
that cannot be done directly cannot be done indirectly.58 To declare the
PIATCO contracts valid despite the clear statutory prohibition against a
direct government guarantee would not only make a mockery of what the
BOT Law seeks to prevent -- which is to expose the government to the risk
of incurring a monetary obligation resulting from a contract of loan between
the project proponent and its lenders and to which the Government is not a
party to -- but would also render the BOT Law useless for what it seeks to
achieve - to make use of the resources of the private sector in the
"financing, operation and maintenance of infrastructure and development
projects"59 which are necessary for national growth and development but

which the government, unfortunately, could ill-afford to finance at this point

in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so
requires, the State may, during the emergency and under reasonable
terms prescribed by it, temporarily take over or direct the operation of
any privately owned public utility or business affected with public
interest.
The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over
the operation of any business affected with public interest. In the 1986
Constitutional Commission, the term "national emergency" was defined to
include threat from external aggression, calamities or national disasters, but
not strikes "unless it is of such proportion that would paralyze government
service."60 The duration of the emergency itself is the determining factor as
to how long the temporary takeover by the government would last.61 The
temporary takeover by the government extends only to the operation of the
business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as
there is no transfer of ownership, whether permanent or temporary. The
private entity-owner affected by the temporary takeover cannot, likewise,
claim just compensation for the use of the said business and its properties
as the temporary takeover by the government is in exercise of its police
power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the
operations of Concessionaire or any part thereof, become the subject
matter of or be included in any notice, notification, or declaration

concerning or relating to acquisition, seizure or appropriation by GRP

in times of war or national emergency, GRP shall, by written notice to
Concessionaire, immediately take over the operations of the Terminal
and/or the Terminal Complex. During such take over by GRP, the
Concession Period shall be suspended; provided, that upon
termination of war, hostilities or national emergency, the operations
shall be returned to Concessionaire, at which time, the Concession
period shall commence to run again. Concessionaire shall be entitled
to reasonable compensation for the duration of the temporary take
over by GRP, which compensation shall take into account the
reasonable cost for the use of the Terminal and/or Terminal Complex,
(which is in the amount at least equal to the debt service requirements
of Concessionaire, if the temporary take over should occur at the time
when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other
consequential damages. If the parties cannot agree on the reasonable
compensation of Concessionaire, or on the liability of GRP as
aforesaid, the matter shall be resolved in accordance with Section
10.01 [Arbitration]. Any amount determined to be payable by GRP to
Concessionaire shall be offset from the amount next payable by
Concessionaire to GRP.62
PIATCO cannot, by mere contractual stipulation, contravene the
Constitutional provision on temporary government takeover and obligate the
government to pay "reasonable cost for the use of the Terminal and/or
Terminal Complex."63 Article XII, section 17 of the 1987 Constitution
envisions a situation wherein the exigencies of the times necessitate the
government to "temporarily take over or direct the operation of any privately
owned public utility or business affected with public interest." It is the
welfare and interest of the public which is the paramount consideration in
determining whether or not to temporarily take over a particular business.
Clearly, the State in effecting the temporary takeover is exercising its police
power. Police power is the "most essential, insistent, and illimitable of
powers."64 Its exercise therefore must not be unreasonably hampered nor
its exercise be a source of obligation by the government in the absence of
damage due to arbitrariness of its exercise.65 Thus, requiring the
government to pay reasonable compensation for the reasonable use of the
property pursuant to the operation of the business contravenes the
Constitution.

V
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more
persons or companies, consisting in the exclusive right (or power) to carry
on a particular business or trade, manufacture a particular article, or control
the sale of a particular commodity."66 The 1987 Constitution strictly
regulates monopolies, whether private or public, and even provides for their
prohibition if public interest so requires. Article XII, Section 19 of the 1987
Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be
permitted to exist to aid the government in carrying on an enterprise or to
aid in the performance of various services and functions in the interest of
the public.67 Nonetheless, a determination must first be made as to whether
public interest requires a monopoly. As monopolies are subject to abuses
that can inflict severe prejudice to the public, they are subject to a higher
level of State regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and
the ARCA, is granted the "exclusive right to operate a commercial
international passenger terminal within the Island of Luzon" at the NAIA IPT
III.68 This is with the exception of already existing international airports in
Luzon such as those located in the Subic Bay Freeport Special Economic
Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag
City.69 As such, upon commencement of PIATCO's operation of NAIA IPT
III, Terminals 1 and 2 of NAIA would cease to function as international
passenger terminals. This, however, does not prevent MIAA to use
Terminals 1 and 2 as domestic passenger terminals or in any other manner
as it may deem appropriate except those activities that would compete with
NAIA IPT III in the latter's operation as an international passenger
terminal.70 The right granted to PIATCO to exclusively operate NAIA IPT III
would be for a period of twenty-five (25) years from the In-Service Date71
and renewable for another twenty-five (25) years at the option of the
government.72 Both the 1997 Concession Agreement and the ARCA further

provide that, in view of the exclusive right granted to PIATCO, the

concession contracts of the service providers currently servicing Terminals
1 and 2 would no longer be renewed and those concession contracts whose
expiration are subsequent to the In-Service Date would cease to be
effective on the said date.73
The operation of an international passenger airport terminal is no doubt an
undertaking imbued with public interest. In entering into a BuildOperateand-Transfer contract for the construction, operation and maintenance of
NAIA IPT III, the government has determined that public interest would be
served better if private sector resources were used in its construction and
an exclusive right to operate be granted to the private entity undertaking the
said project, in this case PIATCO. Nonetheless, the privilege given to
PIATCO is subject to reasonable regulation and supervision by the
Government through the MIAA, which is the government agency authorized
to operate the NAIA complex, as well as DOTC, the department to which
MIAA is attached.74
This is in accord with the Constitutional mandate that a monopoly which is
not prohibited must be regulated.75 While it is the declared policy of the BOT
Law to encourage private sector participation by "providing a climate of
minimum government regulations,"76 the same does not mean that
Government must completely surrender its sovereign power to protect
public interest in the operation of a public utility as a monopoly. The
operation of said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to the
public utility may be exclusive but the exercise of the right cannot run riot.
Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III
as an international passenger terminal, the Government, through the MIAA,
has the right and the duty to ensure that it is done in accord with public
interest. PIATCO's right to operate NAIA IPT III cannot also violate the
rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
xxx

xxx

xxx

(e) GRP confirms that certain concession agreements relative to

certain services and operations currently being undertaken at the
Ninoy Aquino International Airport passenger Terminal I have a validity
period extending beyond the In-Service Date. GRP through
DOTC/MIAA, confirms that these services and operations shall not be
carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate
agreement duly entered into with Concessionaire. In the event
Concessionaire becomes involved in any litigation initiated by any such
concessionaire or operator, GRP undertakes and hereby holds
Concessionaire free and harmless on full indemnity basis from and
against any loss and/or any liability resulting from any such litigation,
including the cost of litigation and the reasonable fees paid or payable
to Concessionaire's counsel of choice, all such amounts shall be fully
deductible by way of an offset from any amount which the
Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the
petitioners-in-intervention for G.R. No. 155001 stated that there are
two service providers whose contracts are still existing and whose
validity extends beyond the In-Service Date. One contract remains
valid until 2008 and the other until 2010.77
We hold that while the service providers presently operating at NAIA
Terminal 1 do not have an absolute right for the renewal or the extension of
their respective contracts, those contracts whose duration extends beyond
NAIA IPT III's In-Service-Date should not be unduly prejudiced. These
contracts must be respected not just by the parties thereto but also by third
parties. PIATCO cannot, by law and certainly not by contract, render a valid
and binding contract nugatory. PIATCO, by the mere expedient of claiming
an exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre
and stevedoring service providers in the case of Anglo-Fil Trading
Corporation v. Lazaro78 whose contracts consist of temporary hold-over
permits, the affected service providers in the cases at bar, have a valid and
binding contract with the Government, through MIAA, whose period of
effectivity, as well as the other terms and conditions thereof, cannot be
violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest.
The provisions of the 1997 Concession Agreement and the ARCA did not
strip government, thru the MIAA, of its right to supervise the operation of the
whole NAIA complex, including NAIA IPT III. As the primary government
agency tasked with the job,79 it is MIAA's responsibility to ensure that
whoever by contract is given the right to operate NAIA IPT III will do so
within the bounds of the law and with due regard to the rights of third parties
and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial
capacity of the Paircargo Consortium, predecessor of respondent PIATCO,
the award by the PBAC of the contract for the construction, operation and
maintenance of the NAIA IPT III is null and void. Further, considering that
the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997
Concession Agreement into an entirely different agreement from the
contract bidded upon, the 1997 Concession Agreement is similarly null and
void for being contrary to public policy. The provisions under Sections
4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession
Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA,
which constitute a direct government guarantee expressly prohibited by,
among others, the BOT Law and its Implementing Rules and Regulations
are also null and void. The Supplements, being accessory contracts to the
ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and
Restated Concession Agreement and the Supplements thereto are set
aside for being null and void.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez,
Martinez,
Corona,
and
Carpio-Morales,
JJ.,
Vitug,
J.,
see
separate
(dissenting)
Panganiban,
J.,
please
see
separate
Quisumbing, J., no jurisdiction, please see separate opinion of J.

Austriaconcur.
opinion.
opinion.
Vitug in

which
he
concurs.
Carpio,
J.,
no
part.
Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

SEPARATE OPINIONS
VITUG, J.:
This Court is bereft of jurisdiction to hear the petitions at bar. The
Constitution provides that the Supreme Court shall exercise original
jurisdiction over, among other actual controversies, petitions for certiorari,
prohibition, mandamus, quo warranto, and habeas corpus.1 The cases in
question, although denominated to be petitions for prohibition, actually pray
for the nullification of the PIATCO contracts and to restrain respondents
from implementing said agreements for being illegal and unconstitutional.
Section 2, Rule 65 of the Rules of Court states:
"When the proceedings of any tribunal, corporation, board, officer or
person, whether exercising judicial, quasi-judicial or ministerial
functions, are without or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction, and
there is no appeal or any other plain, speedy and adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered commanding the respondent to
desist from further proceedings in the action or matter specified
therein, or otherwise granting such incidental reliefs as law and justice
may require."
The rule is explicit. A petition for prohibition may be filed against a tribunal,
corporation, board, officer or person, exercising judicial, quasi-judicial or
ministerial functions. What the petitions seek from respondents do not
involve judicial, quasi-judicial or ministerial functions. In prohibition, only
legal issues affecting the jurisdiction of the tribunal, board or officer involved
may be resolved on the basis of undisputed facts.2 The parties allege,
respectively, contentious evidentiary facts. It would be difficult, if not

anomalous, to decide the jurisdictional issue on the basis of the

contradictory factual submissions made by the parties.3 As the Court has so
often exhorted, it is not a trier of facts.
The petitions, in effect, are in the nature of actions for declaratory relief
under Rule 63 of the Rules of Court. The Rules provide that any person
interested under a contract may, before breach or violation thereof, bring an
action in the appropriate Regional Trial Court to determine any question of
construction or validity arising, and for a declaration of his rights or duties
thereunder.4 The Supreme Court assumes no jurisdiction over petitions for
declaratory relief which are cognizable by regional trial courts.5
As I have so expressed in Tolentino vs. Secretary of Finance,6 reiterated in
Santiago vs. Guingona, Jr.7 , the Supreme Court should not be thought of
as having been tasked with the awesome responsibility of overseeing the
entire bureaucracy. Pervasive and limitless, such as it may seem to be
under the 1987 Constitution, judicial power still succumbs to the paramount
doctrine of separation of powers. The Court may not at good liberty intrude,
in the guise of sovereign imprimatur, into every affair of government. What
significance can still then remain of the time-honored and widely acclaimed
principle of separation of powers if, at every turn, the Court allows itself to
pass upon at will the disposition of a co-equal, independent and coordinate
branch in our system of government. I dread to think of the so varied
uncertainties that such an undue interference can lead to.
Accordingly, I vote for the dismissal of the petition.
Quisumbing, and Azcuna, JJ., concur.

PANGANIBAN, J.:
The five contracts for the construction and the operation of Ninoy Aquino
International Airport (NAIA) Terminal III, the subject of the consolidated
Petitions before the Court, are replete with outright violations of law, public
policy and the Constitution. The only proper thing to do is declare them all
null and void ab initio and let the chips fall where they may. Fiat iustitia ruat
coelum.

The facts leading to this controversy are already well presented in the
ponencia. I shall not burden the readers with a retelling thereof. Instead, I
will cut to the chase and directly address the two sets of gut issues:
1. The first issue is procedural: Does the Supreme Court have original
jurisdiction to hear and decide the Petitions? Corollarily, do petitioners have
locus standi and should this Court decide the cases without any mandatory
referral to arbitration?
2. The second one is substantive in character: Did the subject contracts
violate the Constitution, the laws, and public policy to such an extent as to
render all of them void and inexistent?
My answer to all the above questions is a firm "Yes."
The
Procedural
Jurisdiction, Standing and Arbitration

Issue:

Definitely and surely, the issues involved in these Petitions are clearly of
transcendental importance and of national interest. The subject contracts
pertain to the construction and the operation of the country's premiere
international airport terminal - an ultramodern world-class public utility that
will play a major role in the country's economic development and serve to
project a positive image of our country abroad. The five build-operate-&transfer (BOT) contracts, while entailing the investment of billions of pesos
in capital and the availment of several hundred millions of dollars in loans,
contain provisions that tend to establish a monopoly, require the
disbursements of public funds sans appropriations, and provide government
guarantees in violation of statutory prohibitions, as well as other provisions
equally offensive to law, public policy and the Constitution. Public interest
will inevitably be affected thereby.
Thus, objections to these Petitions, grounded upon (a) the hierarchy of
courts, (b) the need for arbitration prior to court action, and (c) the alleged
lack of sufficient personality, standing or interest, being in the main
procedural matters, must now be set aside, as they have been in past
cases. This Court must be permitted to perform its constitutional duty of
determining whether the other agencies of government have acted within
the limits of the Constitution and the laws, or if they have gravely abused the
discretion entrusted to them.1

Hierarchy of Courts
The Court has, in the past, held that questions relating to gargantuan
government contracts ought to be settled without delay.2 This holding
applies with greater force to the instant cases. Respondent Piatco is partly
correct in averring that petitioners can obtain relief from the regional trial
courts via an action to annul the contracts.
Nevertheless, the unavoidable consequence of having to await the rendition
and the finality of any such judgment would be a prolonged state of
uncertainty that would be prejudicial to the nation, the parties and the
general public. And, in light of the feared loss of jobs of the petitioning
workers, consequent to the inevitable pretermination of contracts of the
petitioning service providers that will follow upon the heels of the impending
opening of NAIA Terminal III, the need for relief is patently urgent, and
therefore, direct resort to this Court through the special civil action of
prohibition is thus justified.3
Contrary to Piatco's argument that the resolution of the issues raised in the
Petitions will require delving into factual questions,4 I submit that their
disposition ultimately turns on questions of law.5 Further, many of the
significant and relevant factual questions can be easily addressed by an
examination of the documents submitted by the parties. In any event, the
Petitions raise some novel questions involving the application of the
amended BOT Law, which this Court has seen fit to tackle.
Arbitration
Should the dispute be referred to arbitration prior to judicial recourse?
Respondent Piatco claims that Section 10.02 of the Amended and Restated
Concession Agreement (ARCA) provides for arbitration under the auspices
of the International Chamber of Commerce to settle any dispute or
controversy or claim arising in connection with the Concession Agreement,
its amendments and supplements. The government disagrees, however,
insisting that there can be no arbitration based on Section 10.02 of the
ARCA, since all the Piatco contracts are void ab initio. Therefore, all
contractual provisions, including Section 10.02 of the ARCA, are likewise
void, inexistent and inoperative. To support its stand, the government cites
Chavez v. Presidential Commission on Good Government:6 "The void
agreement will not be rendered operative by the parties' alleged

performance (partial or full) of their respective prestations. A contract that

violates the Constitution and the law is null and void ab initio and vests no
rights and creates no obligations. It produces no legal effect at all."
As will be discussed at length later, the Piatco contracts are indeed void in
their entirety; thus, a resort to the aforesaid provision on arbitration is
unavailing. Besides, petitioners and petitioners-in-intervention have pointed
out that, even granting arguendo that the arbitration clause remained a valid
provision, it still cannot bind them inasmuch as they are not parties to the
Piatco contracts. And in the final analysis, it is unarguable that the
arbitration process provided for under Section 10.02 of the ARCA, to be
undertaken by a panel of three (3) arbitrators appointed in accordance with
the Rules of Arbitration of the International Chamber of Commerce, will not
be able to address, determine and definitively resolve the constitutional and
legal questions that have been raised in the Petitions before us.
Locus Standi
Given this Court's previous decisions in cases of similar import, no one will
seriously doubt that, being taxpayers and members of the House of
Representatives, Petitioners Baterina et al. have locus standi to bring the
Petition in GR No. 155547. In Albano v. Reyes,7 this Court held that the
petitioner therein, suing as a citizen, taxpayer and member of the House of
Representatives, was sufficiently clothed with standing to bring the suit
questioning the validity of the assailed contract. The Court cited the fact that
public interest was involved, in view of the important role of the Manila
International Container Terminal (MICT) in the country's economic
development and the magnitude of the financial consideration. This,
notwithstanding the fact that expenditure of public funds was not required
under the assailed contract.
In the cases presently under consideration, petitioners' personal and
substantial interest in the controversy is shown by the fact that certain
provisions in the Piatco contracts create obligations on the part of
government (through the DOTC and the MIAA) to disburse public funds
without prior congressional appropriations.
Petitioners thus correctly assert that the injury to them has a twofold aspect:
(1) they are adversely affected as taxpayers on account of the illegal
disbursement of public funds; and (2) they are prejudiced qua legislators,

since the contractual provisions requiring the government to incur

expenditures without appropriations also operate as limitations upon the
exclusive power and prerogative of Congress over the public purse. As
members of the House of Representatives, they are actually deprived of
discretion insofar as the inclusion of those items of expenditure in the
budget is concerned. To prevent such encroachment upon the legislative
privilege and obviate injury to the institution of which they are members,
petitioners-legislators have locus standi to bring suit.
Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus
possessed of standing to challenge the illegal disbursement of public funds.
Messrs. Agan et al., in particular, are employees (or representatives of
employees) of various service providers that have (1) existing concession
agreements with the MIAA to provide airport services necessary to the
operation of the NAIA and (2) service agreements to furnish essential
support services to the international airlines operating at the NAIA.
On the other hand, Messrs. Lopez et al. are employees of the MIAA. These
petitioners (Messrs. Agan et al. and Messrs. Lopez et al.) are confronted
with the prospect of being laid off from their jobs and losing their means of
livelihood when their employer-companies are forced to shut down or
otherwise retrench and cut back on manpower. Such development would
result from the imminent implementation of certain provisions in the
contracts that tend toward the creation of a monopoly in favor of Piatco, its
subsidiaries and related companies.
Petitioners-in-intervention are service providers in the business of furnishing
airport-related services to international airlines and passengers in the NAIA
and are therefore competitors of Piatco as far as that line of business is
concerned. On account of provisions in the Piatco contracts, petitioners-inintervention have to enter into a written contract with Piatco so as not to be
shut out of NAIA Terminal III and barred from doing business there. Since
there is no provision to ensure or safeguard free and fair competition, they
are literally at its mercy. They claim injury on account of their deprivation of
property (business) and of the liberty to contract, without due process of
law.
And even if petitioners and petitioners-in-intervention were not sufficiently
clothed with legal standing, I have at the outset already established that,
given its impact on the public and on national interest, this controversy is

laden with transcendental importance and constitutional significance.

Hence, I do not hesitate to adopt the same position as was enunciated in
Kilosbayan v. Guingona Jr.8 that "in cases of transcendental importance, the
Court may relax the standing requirements and allow a suit to prosper even
when there is no direct injury to the party claiming the right of judicial
review."9
The
Substantive
Violations of the Constitution and the Laws

Issue:

From the Outset, the Bidding Process Was Flawed and Tainted
After studying the documents submitted and arguments advanced by the
parties, I have no doubt that, right at the outset, Piatco was not qualified to
participate in the bidding process for the Terminal III project, but was
nevertheless permitted to do so. It even won the bidding and was helped
along by what appears to be a series of collusive and corrosive acts.
The build-operate-and-transfer (BOT) project for the NAIA Passenger
Terminal III comes under the category of an "unsolicited proposal," which is
the subject of Section 4-A of the BOT Law.10 The unsolicited proposal was
originally submitted by the Asia's Emerging Dragon Corporation (AEDC) to
the Department of Transportation and Communications (DOTC) and the
Manila International Airport Authority (MIAA), which reviewed and approved
the proposal.
The draft of the concession agreement as negotiated between AEDC and
DOTC/MIAA was endorsed to the National Economic Development
Authority (NEDA-ICC), which in turn reviewed it on the basis of its scope,
economic viability, financial indicators and risks; and thereafter approved it
for bidding.
The DOTC/MIAA then prepared the Bid Documents, incorporating therein
the negotiated Draft Concession Agreement, and published invitations for
public bidding, i.e., for the submission of comparative or competitive
proposals. Piatco's predecessor-in-interest, the Paircargo Consortium, was
the only company that submitted a competitive bid or price challenge.
At this point, I must emphasize that the law requires the award of a BOT
project to the bidder that has satisfied the minimum requirements; and met

the technical, financial, organizational and legal standards provided in the

BOT Law. Section 5 of this statute states:
"Sec. 5. Public bidding of projects. - . . .
"In the case of a build-operate-and-transfer arrangement, the contract
shall be awarded to the bidder who, having satisfied the minimum
financial, technical, organizational and legal standards required by this
Act, has submitted the lowest bid and most favorable terms for the
project, based on the present value of its proposed tolls, fees, rentals
and charges over a fixed term for the facility to be constructed,
rehabilitated, operated and maintained according to the prescribed
minimum design and performance standards, plans and specifications.
. . ." (Emphasis supplied.)
The same provision requires that the price challenge via public bidding
"must be conducted under a two-envelope/two-stage system: the first
envelope to contain the technical proposal and the second envelope to
contain the financial proposal." Moreover, the 1994 Implementing Rules and
Regulations (IRR) provide that only those bidders that have passed the
prequalification stage are permitted to have their two envelopes reviewed.
In other words, prospective bidders must prequalify by submitting their
prequalification documents for evaluation; and only the pre-qualified bidders
would be entitled to have their bids opened, evaluated and appreciated. On
the other hand, disqualified bidders are to be informed of the reason for their
disqualification. This procedure was confirmed and reiterated in the Bid
Documents, which I quote thus: "Prequalified proponents will be considered
eligible to move to second stage technical proposal evaluation. The second
and third envelopes of pre-disqualified proponents will be returned."11
Aside from complying with the legal and technical requirements (track
record or experience of the firm and its key personnel), a project proponent
desiring to prequalify must also demonstrate its financial capacity to
undertake the project. To establish such capability, a proponent must prove
that it is able to raise the minimum amount of equity required for the project
and to procure the loans or financing needed for it. Section 5.4(c) of the
1994 IRR provides:

"Sec. 5.4. Prequalification Requirements. - To pre-qualify, a project

proponent must comply with the following requirements:
xxx

xxx

xxx

"c. Financial Capability. The project proponent must have adequate

capability to sustain the financing requirements for the detailed
engineering design, construction, and/or operation and maintenance
phases of the project, as the case may be. For purposes of
prequalification, this capability shall be measured in terms of: (i) proof
of the ability of the project proponent and/or the consortium to provide
a minimum amount of equity to the project, and (ii) a letter testimonial
from reputable banks attesting that the project proponent and/or
members of the consortium are banking with them, that they are in
good financial standing, and that they have adequate resources. The
government Agency/LGU concerned shall determine on a project-toproject basis, and before prequalification, the minimum amount of
equity needed. . . . ." (Italics supplied)
Since the minimum amount of equity for the project was set at 30 percent12
of the minimum project cost of US$350 million, the minimum amount of
equity required of any proponent stood at US$105 million. Converted to
pesos at the exchange rate then of P26.239 to US$1.00 (as quoted by the
Bangko Sentral ng Pilipinas), the peso equivalent of the minimum equity
was P2,755,095,000.
However, the combined equity or net worth of the Paircargo consortium
stood at only P558,384,871.55.13 This amount was only slightly over 6
percent of the minimum project cost and very much short of the required
minimum equity, which was equivalent to 30 percent of the project cost.
Such deficiency should have immediately caused the disqualification of the
Paircargo consortium. This matter was brought to the attention of the
Prequalification and Bidding Committee (PBAC).
Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C.
Cal, concurrent chair of the PBAC, declared in a Memorandum dated 14
October 1996 that "the Challenger (Paircargo consortium) was found to
have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 billion." To justify his conclusion, he

asserted: "It is not a requirement that the networth must be `unrestricted'. To

impose this as a requirement now will be nothing less than unfair."
He further opined, "(T)he networth reflected in the Financial Statement
should not be taken as the amount of money to be used to answer the
required thirty (30%) percent equity of the challenger but rather to be used
in establishing if there is enough basis to believe that the challenger can
comply with the required 30% equity. In fact, proof of sufficient equity is
required as one of the conditions for award of contract (Sec. 12.1 of IRR of
the BOT Law) but not for prequalification (Sec. 5.4 of same document)."
On the basis of the foregoing dubious declaration, the Paircargo consortium
was deemed prequalified and thus permitted to proceed to the other stages
of the bidding process.
By virtue of the prequalified status conferred upon the Paircargo,
Undersecretary Cal's findings in effect relieved the consortium of the need
to comply with the financial capability requirement imposed by the BOT Law
and IRR. This position is unmistakably and squarely at odds with the
Supreme Court's consistent doctrine emphasizing the strict application of
pertinent rules, regulations and guidelines for the public bidding process, in
order to place each bidder - actual or potential - on the same footing. Thus,
it is unarguably irregular and contrary to the very concept of public bidding
to permit a variance between the conditions under which bids are invited
and those under which proposals are submitted and approved.
Republic v. Capulong,14 teaches that if one bidder is relieved from having to
conform to the conditions that impose some duty upon it, that bidder is not
contracting in fair competition with those bidders that propose to be bound
by all conditions. The essence of public bidding is, after all, an opportunity
for fair competition and a basis for the precise comparison of bids.15 Thus,
each bidder must bid under the same conditions; and be subject to the
same guidelines, requirements and limitations. The desired result is to be
able to determine the best offer or lowest bid, all things being equal.
Inasmuch as the Paircargo consortium did not possess the minimum equity
equivalent to 30 percent of the minimum project cost, it should not have
been prequalified or allowed to participate further in the bidding. The
Prequalification and Bidding Committee (PBAC) should therefore not have
opened the two envelopes of the consortium containing its technical and

financial proposals; required AEDC to match the consortium's bid; 16 or

awarded the Concession Agreement to the consortium's successor-ininterest, Piatco.
As there was effectively no public bidding to speak of, the entire bidding
process having been flawed and tainted from the very outset, therefore, the
award of the concession to Paircargo's successor Piatco was void, and the
Concession Agreement executed with the latter was likewise void ab initio.
For this reason, Piatco cannot and should not be allowed to benefit from
that Agreement.17
AEDC Was Deprived of the Right to Match PIATCO's Price Challenge
In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared
that, for purposes of matching the price challenge of Piatco, AEDC as
originator of the unsolicited proposal would be permitted access only to the
schedule of proposed Annual Guaranteed Payments submitted by Piatco,
and not to the latter's financial and technical proposals that constituted the
basis for the price challenge in the first place. This was supposedly in
keeping with Section 11.6 of the 1994 IRR, which provides that proprietary
information is to be respected, protected and treated with utmost
confidentiality, and is therefore not to form part of the bidding/tender and
related documents.
This pronouncement, I believe, was a grievous misapplication of the
mentioned provision. The "proprietary information" referred to in Section
11.6 of the IRR pertains only to the proprietary information of the originator
of an unsolicited proposal, and not to those belonging to a challenger. The
reason for the protection accorded proprietary information at all is the fact
that, according to Section 4-A of the BOT Law as amended, a proposal
qualifies as an "unsolicited proposal" when it pertains to a project that
involves "a new concept or technology", and/or a project that is not on the
government's list of priority projects.
To be considered as utilizing a new concept or technology, a project must
involve the possession of exclusive rights (worldwide or regional) over a
process; or possession of intellectual property rights over a design,
methodology or engineering concept.18 Patently, the intent of the BOT Law
is to encourage individuals and groups to come up with creative innovations,
fresh ideas and new technology. Hence, the significance and necessity of

protecting proprietary information in connection with unsolicited proposals.

And to make the encouragement real, the law also extends to such
individuals and groups what amounts to a "right of first refusal" to undertake
the project they conceptualized, involving the use of new technology or
concepts, through the mechanism of matching a price challenge.
A competing bid is never just any figure conjured from out of the blue; it is
arrived at after studying economic, financial, technical and other, factors; it
is likewise based on certain assumptions as to the nature of the business,
the market potentials, the probable demand for the product or service, the
future behavior of cost items, political and other risks, and so on. It is thus
self-evident that in order to be able to intelligently match a bid or price
challenge, a bidder must be given access to the assumptions and the
calculations that went into crafting the competing bid.
In this instance, the financial and technical proposals of Piatco would have
provided AEDC with the necessary information to enable it to make a
reasonably informed matching bid. To put it more simply, a bidder unable to
access the competitor's assumptions will never figure out how the
competing bid came about; requiring him to "counter-propose" is like having
him shoot at a target in the dark while blindfolded.
By withholding from AEDC the challenger's financial and technical
proposals containing the critical information it needed, Undersecretary Cal
actually and effectively deprived AEDC of the ability to match the price
challenge. One could say that AEDC did not have the benefit of a "level
playing field." It seems to me, though, that AEDC was actually shut out of
the game altogether.
At the end of the day, the bottom line is that the validity and the propriety of
the award to Piatco had been irreparably impaired.
Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR
Section 9.5 of the IRR requires that the Notice of Award must indicate the
time frame within which the winner of the bidding (and therefore the
prospective awardee) shall submit the prescribed performance security,
proof of commitment of equity contributions, and indications of sources of
financing (loans); and, in the case of joint ventures, an agreement showing

that the members are jointly and severally responsible for the obligations of
the project proponent under the contract.
The purpose of having a definite and firm timetable for the submission of the
aforementioned requirements is not only to prevent delays in the project
implementation, but also to expose and weed out unqualified proponents,
who might have unceremoniously slipped through the earlier prequalification
process, by compelling them to put their money where their mouths are, so
to speak.
Nevertheless, this provision can be easily circumvented by merely
postponing the actual issuance of the Notice of Award, in order to give the
favored proponent sufficient time to comply with the requirements. Hence, to
avert or minimize the manipulation of the post-bidding process, the IRR not
only set out the precise sequence of events occurring between the
completion of the evaluation of the technical bids and the issuance of the
Notice of Award, but also specified the timetables for each such event.
Definite allowable extensions of time were provided for, as were the
consequences of a failure to meet a particular deadline.
In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar
days from the time the second-stage evaluation shall have been completed,
the Committee must come to a decision whether or not to award the
contract and, within 7 days therefrom, the Notice of Award must be
approved by the head of agency or local government unit (LGU) concerned,
and its issuance must follow within another 7 days thereafter.
Section 9.2 of the IRR set the procedure applicable to projects involving
substantial government undertakings as follows: Within 7 days after the
decision to award is made, the draft contract shall be submitted to the ICC
for clearance on a no-objection basis. If the draft contract includes
government undertakings already previously approved, then the submission
shall be for information only.
However, should there be additional or new provisions different from the
original government undertakings, the draft shall have to be reviewed and
approved. The ICC has 15 working days to act thereon, and unless
otherwise specified, its failure to act on the contract within the specified time
frame signifies that the agency or LGU may proceed with the award. The
head of agency or LGU shall approve the Notice of Award within seven days

of the clearance by the ICC on a no-objection basis, and the Notice itself
has to be issued within seven days thereafter.
The highly regulated time-frames within which the agents of government
were to act evinced the intent to impose upon them the duty to act
expeditiously throughout the process, to the end that the project be
prosecuted and implemented without delay. This regulated scenario was
likewise intended to discourage collusion and substantially reduce the
opportunity for agents of government to abuse their discretion in the course
of the award process.
Despite the clear timetables set out in the IRR, several lengthy and stillunexplained delays occurred in the award process, as can be observed
from the presentation made by the counsel for public respondents,19 quoted
hereinbelow:
"11 Dec. 1996 - The Paircargo Joint Venture was informed by the
PBAC that AEDC failed to match and that negotiations preparatory to
Notice of Award should be commenced. This was the decision to
award that should have commenced the running of the 7-day period to
approve the Notice of Award, as per Section 9.1 of the IRR, or to
submit the draft contract to the ICC for approval conformably with
Section 9.2.
"01 April 1997 - The PBAC resolved that a copy of the final draft of the
Concession Agreement be submitted to the NEDA for clearance on a
no-objection basis. This resolution came more than 3 months too late
as it should have been made on the 20th of December 1996 at the
latest.
"16 April 1997 - The PBAC resolved that the period of signing the
Concession Agreement be extended by 15 days.
"18 April 1997 - NEDA approved the Concession Agreement. Again
this is more than 3 months too late as the NEDA's decision should
have been released on the 16th of January 1997 or fifteen days after it
should have been submitted to it for review.
"09 July 1997 - The Notice of Award was issued to PIATCO. Following
the provisions of the IRR, the Notice of Award should have been

issued fourteen days after NEDA's approval, or the 28th of January

1997. In any case, even if it were to be assumed that the release of
NEDA's approval on the 18th of April was timely, the Notice of Award
should have been issued on the 9th of May 1997. In both cases,
therefore, the release of the Notice of Award occurred in a decidedly
less than timely fashion."
This chronology of events bespeaks an unmistakable disregard, if not
disdain, by the persons in charge of the award process for the time
limitations prescribed by the IRR. Their attitude flies in the face of this
Court's solemn pronouncement in Republic v. Capulong,20 that "strict
observance of the rules, regulations and guidelines of the bidding process is
the only safeguard to a fair, honest and competitive public bidding."
From the foregoing, the only conclusion that can possibly be drawn is that
the BOT law and its IRR were repeatedly violated with unmitigated impunity
- and by agents of government, no less! On account of such violation, the
award of the contract to Piatco, which undoubtedly gained time and
benefited from the delays, must be deemed null and void from the
beginning.
Further Amendments Resulted in a Substantially Different Contract,
Awarded Without Public Bidding
But the violations and desecrations did not stop there. After the PBAC made
its decision on December 11, 1996 to award the contract to Piatco, the latter
negotiated changes to the Contract bidded out and ended up with what
amounts to a substantially new contract without any public bidding. This
Contract was subsequently further amended four more times through
negotiation and without any bidding. Thus, the contract actually executed
between Piatco and DOTC/MIAA on July 12, 1997 (the Concession
Agreement or "CA") differed from the contract bidded out (the draft
concession agreement or "DCA") in the following very significant respects:
1. The CA inserted stipulations creating a monopoly in favor of Piatco
in the business of providing airport-related services for international
airlines and passengers.21

2. The CA provided that government is to answer for Piatco's unpaid

loans and debts (lumped under the term Attendant Liabilities) in the
event Piatco fails to pay its senior lenders.22
3. The CA provided that in case of termination of the contract due to
the fault of government, government shall pay all expenses that Piatco
incurred for the project plus the appraised value of the Terminal.23
4. The CA imposed new and special obligations on government,
including delivery of clean possession of the site for the terminal;
acquisition of additional land at the government's expense for
construction of road networks required by Piatco's approved plans and
specifications; and assistance to Piatco in securing site utilities, as well
as all necessary permits, licenses and authorizations.24
5. Where Section 3.02 of the DCA requires government to refrain from
competing with the contractor with respect to the operation of NAIA
Terminal III, Section 3.02(b) of the CA excludes and prohibits
everyone, including government, from directly or indirectly competing
with Piatco, with respect to the operation of, as well as operations in,
NAIA Terminal III. Operations in is sufficiently broad to encompass all
retail and other commercial business enterprises operating within
Terminal III, inclusive of the businesses of providing various airportrelated services to international airlines, within the scope of the
prohibition.
6. Under Section 6.01 of the DCA, the following fees are subject to the
written approval of MIAA: lease/rental charges, concession privilege
fees for passenger services, food services, transportation utility
concessions, groundhandling, catering and miscellaneous concession
fees, porterage fees, greeter/well-wisher fees, carpark fees, advertising
fees, VIP facilities fees and others. Moreover, adjustments to the
groundhandling fees, rentals and porterage fees are permitted only
once every two years and in accordance with a parametric formula, per
DCA Section 6.03. However, the CA as executed with Piatco provides
in Section 6.06 that all the aforesaid fees, rentals and charges may be
adjusted without MIAA's approval or intervention. Neither are the
adjustments to these fees and charges subject to or limited by any
parametric formula.25

7. Section 1.29 of the DCA provides that the terminal fees, aircraft
tacking fees, aircraft parking fees, check-in counter fees and other fees
are to be quoted and paid in Philippine pesos. But per Section 1.33 of
the CA, all the aforesaid fees save the terminal fee are denominated in
US Dollars.
8. Under Section 8.07 of the DCA, the term attendant liabilities refers
to liabilities pertinent to NAIA Terminal III, such as payment of lease
rentals and performance of other obligations under the Land Lease
Agreement; the obligations under the Tenant Agreements; and
payment of all taxes, fees, charges and assessments of whatever kind
that may be imposed on NAIA Terminal III or parts thereof. But in
Section 1.06 of the CA, Attendant Liabilities refers to unpaid debts of
Piatco: "All amounts recorded and from time to time outstanding in the
books of (Piatco) as owing to Unpaid Creditors who have provided,
loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including
amounts owed by [Piatco] to its suppliers, contractors and
subcontractors."
9. Per Sections 8.04 and 8.06 of the DCA, government may, on
account of the contractors breach, rescind the contract and select one
of four options: (a) take over the terminal and assume all its attendant
liabilities; (b) allow the contractor's creditors to assign the Project to
another entity acceptable to DOTC/MIAA; (c) pay the contractor rent
for the facilities and equipment the DOTC may utilize; or (d) purchase
the terminal at a price established by independent appraisers.
Depending on the option selected, government may take immediate
possession and control of the terminal and its operations. Government
will be obligated to compensate the contractor for the "equivalent or
proportionate contract costs actually disbursed," but only where
government is the one in breach of the contract. But under Section
8.06(a) of the CA, whether on account of Piatco's breach of contract or
its inability to pay its creditors, government is obliged to either (a) take
over Terminal III and assume all of Piatco's debts or (b) permit the
qualified unpaid creditors to be substituted in place of Piatco or to
designate a new operator. And in the event of government's breach of

contract, Piatco may compel it to purchase the terminal at fair market

value, per Section 8.06(b) of the CA.
10. Under the DCA, any delay by Piatco in the payment of the amounts
due the government constitutes breach of contract. However, under
the CA, such delay does not necessarily constitute breach of contract,
since Piatco is permitted to suspend payments to the government in
order to first satisfy the claims of its secured creditors, per Section
8.04(d) of the CA.
It goes without saying that the amendment of the Contract bidded out (the
DCA or draft concession agreement) - in such substantial manner, without
any public bidding, and after the bidding process had been concluded on
December 11, 1996 - is violative of public policy on public biddings, as well
as the spirit and intent of the BOT Law. The whole point of going through
the public bidding exercise was completely lost. Its very rationale was totally
subverted by permitting Piatco to amend the contract for which public
bidding had already been concluded. Competitive bidding aims to obtain the
best deal possible by fostering transparency and preventing favoritism,
collusion and fraud in the awarding of contracts. That is the reason why
procedural rules pertaining to public bidding demand strict observance.26
In a relatively early case, Caltex v. Delgado Brothers,27 this Court made it
clear that substantive amendments to a contract for which a public bidding
has already been finished should only be awarded after another public
bidding:
"The due execution of a contract after public bidding is a limitation
upon the right of the contracting parties to alter or amend it without
another public bidding, for otherwise what would a public bidding be
good for if after the execution of a contract after public bidding, the
contracting parties may alter or amend the contract, or even cancel it,
at their will? Public biddings are held for the protection of the public,
and to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the best terms
is awarded the contract subject of the bid, and it is obvious that such
protection and best possible advantages to the public will disappear if
the parties to a contract executed after public bidding may alter or
amend it without another previous public bidding."28

The aforementioned case dealt with the unauthorized amendment of a

contract executed after public bidding; in the situation before us, the
amendments were made also after the bidding, but prior to execution. Be
that as it may, the same rationale underlying Caltex applies to the present
situation with equal force. Allowing the winning bidder to renegotiate the
contract for which the bidding process has ended is tantamount to
permitting it to put in anything it wants. Here, the winning bidder (Piatco) did
not even bother to wait until after actual execution of the contract before
rushing to amend it. Perhaps it believed that if the changes were made to a
contract already won through bidding (DCA) instead of waiting until it is
executed, the amendments would not be noticed or discovered by the
public.
In a later case, Mata v. San Diego,29 this Court reiterated its ruling as
follows:
"It is true that modification of government contracts, after the same had
been awarded after a public bidding, is not allowed because such
modification serves to nullify the effects of the bidding and whatever
advantages the Government had secured thereby and may also result
in manifest injustice to the other bidders. This prohibition, however,
refers to a change in vital and essential particulars of the agreement
which results in a substantially new contract."
Piatco's counter-argument may be summed up thus: There was nothing in
the 1994 IRR that prohibited further negotiations and eventual amendments
to the DCA even after the bidding had been concluded. In fact, PBAC Bid
Bulletin No. 3 states: "[A]mendments to the Draft Concession Agreement
shall be issued from time to time. Said amendments will only cover items
that would not materially affect the preparation of the proponent's proposal."
I submit that accepting such warped argument will result in perverting the
policy underlying public bidding. The BOT Law cannot be said to allow the
negotiation of contractual stipulations resulting in a substantially new
contract after the bidding process and price challenge had been concluded.
In fact, the BOT Law, in recognition of the time, money and effort invested in
an unsolicited proposal, accords its originator the privilege of matching the
challenger's bid.

Section 4-A of the BOT Law specifically refers to a "lower price proposal" by
a competing bidder; and to the right of the original proponent "to match the
price" of the challenger. Thus, only the price proposals are in play. The
terms, conditions and stipulations in the contract for which public bidding
has been concluded are understood to remain intact and not be subject to
further negotiation. Otherwise, the very essence of public bidding will be
destroyed - there will be no basis for an exact comparison between bids.
Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No.
3. The phrase amendments . . . from time to time refers only to those
amendments to the draft concession agreement issued by the PBAC prior to
the submission of the price challenge; it certainly does not include or permit
amendments negotiated for and introduced after the bidding process, has
been terminated.
Piatco's Concession Agreement Was Further Amended, (ARCA) Again
Without Public Bidding
Not satisfied with the Concession Agreement, Piatco - once more without
bothering with public bidding - negotiated with government for still more
substantial changes. The result was the Amended and Restated
Concession Agreement (ARCA) executed on November 26, 1998. The
following changes were introduced:
1. The definition of Attendant Liabilities was further amended with the
result that the unpaid loans of Piatco, for which government may be
required to answer, are no longer limited to only those loans recorded
in Piatco's books or loans whose proceeds were actually used in the
Terminal III project.30
2. Although the contract may be terminated due to breach by Piatco, it
will not be liable to pay the government any Liquidated Damages if a
new operator is designated to take over the operation of the terminal.31
3. The Liquidated Damages which government becomes liable for in
case of its breach of contract were substantially increased.32
4. Government's right to appoint a comptroller for Piatco in case the
latter encounters liquidity problems was deleted.33

5. Government is made liable for Incremental and Consequential Costs

and Losses in case it fails to comply or cause any third party under its
direct or indirect control to comply with the special obligations imposed
on government.34
6. The insurance policies obtained by Piatco covering the terminal are
now required to be assigned to the Senior Lenders as security for the
loans; previously, their proceeds were to be used to repair and
rehabilitate the facility in case of damage.35
7. Government bound itself to set the initial rate of the terminal fee, to
be charged when Terminal III begins operations, at an amount higher
than US$20.36
8. Government waived its defense of the illegality of the contract and
even agreed to be liable to pay damages to Piatco in the event the
contract was declared illegal.37
9. Even though government may be entitled to terminate the ARCA on
account of breach by Piatco, government is still liable to pay Piatco the
appraised value of Terminal III or the Attendant Liabilities, if the
termination occurs before the In-Service Date.38 This condition
contravenes the BOT Law provision on termination compensation.
10. Government is obligated to take the administrative action required
for Piatco's imposition, collection and application of all Public Utility
Revenues.39 No such obligation existed previously.
11. Government is now also obligated to perform and cause other
persons and entities under its direct or indirect control to perform all
acts necessary to perfect the security interests to be created in favor of
Piatco's Senior Lenders.40 No such obligation existed previously.
12. DOTC/MIAA's right of intervention in instances where Piatco's NonPublic Utility Revenues become exorbitant or excessive has been
removed.41
13. The illegality and unenforceability of the ARCA or any of its
material provisions was made an event of default on the part of
government only, thus constituting a ground for Piatco to terminate the
ARCA.42

14. Amounts due from and payable by government under the contract
were made payable on demand - net of taxes, levies, imposts, duties,
charges or fees of any kind except as required by law.43
15. The Parametric Formula in the contract, which is utilized to
compute for adjustments/increases to the public utility revenues (i.e.,
aircraft parking and tacking fees, check-in counter fee and terminal
fee), was revised to permit Piatco to input its more costly short-term
borrowing rates instead of the longer-terms rates in the computations
for adjustments, with the end result that the changes will redound to its
greater financial benefit.
16. The Certificate of Completion simply deleted the successful
performance-testing of the terminal facility in accordance with defined
performance standards as a pre-condition for government's
acceptance of the terminal facility.44
In sum, the foregoing revisions and amendments as embodied in the ARCA
constitute very material alterations of the terms and conditions of the CA,
and give further manifestly undue advantage to Piatco at the expense of
government. Piatco claims that the changes to the CA were necessitated by
the demands of its foreign lenders. However, no proof whatsoever has been
adduced to buttress this claim.
In any event, it is quite patent that the sum total of the aforementioned
changes resulted in drastically weakening the position of government to a
degree that seems quite excessive, even from the standpoint of a
businessperson who regularly transacts with banks and foreign lenders, is
familiar with their mind-set, and understands what motivates them. On the
other hand, whatever it was that impelled government officials concerned to
accede to those grossly disadvantageous changes, I can only hazard a
guess.
There is no question in my mind that the ARCA was unauthorized and illegal
for lack of public bidding and for being patently disadvantageous to
government.
The Three Supplements Imposed New Obligations on Government, Also
Without Prior Public Bidding

After Piatco had managed to breach the protective rampart of public

bidding, it recklessly went on a rampage of further assaults on the ARCA.
The First Supplement Is as Void as the ARCA
In the First Supplement ("FS") executed on August 27, 1999, the following
changes were made to the ARCA:
1. The amounts payable by Piatco to government were reduced by
allowing additional exceptions to the Gross Revenues in which
government is supposed to participate.45
2. Made part of the properties which government is obliged to construct
and/or maintain and keep in good repair are (a) the access road
connecting Terminals II and III - the construction of this access road is
the obligation of Piatco, in lieu of its obligation to construct an Access
Tunnel connecting Terminals II and III; and (b) the taxilane and taxiway
- these are likewise part of Piatco's obligations, since they are part and
parcel of the project as described in Clause 1.3 of the Bid Documents
.46
3. The MIAA is obligated to provide funding for the maintenance and
repair of the airports and facilities owned or operated by it and by third
persons under its control. It will also be liable to Piatco for the latter's
losses, expenses and damages as well as liability to third persons, in
case MIAA fails to perform such obligations. In addition, MIAA will also
be liable for the incremental and consequential costs of the remedial
work done by Piatco on account of the former's default.47
4. The FS also imposed on government ten (10) "Additional Special
Obligations," including the following:
(a) Working for the removal of the general aviation traffic from the
NAIA airport complex48
(b) Providing through MIAA the land required by Piatco for the
taxilane and one taxiway at no cost to Piatco49
(c) Implementing the government's existing storm drainage
master plan50

(d) Coordinating with DPWH the financing, the implementation

and the completion of the following works before the In-Service
Date: three left-turning overpasses (EDSA to Tramo St., Tramo to
Andrews Ave., and Manlunas Road to Sales Ave.);51 and a road
upgrade and improvement program involving widening, repair and
resurfacing of Sales Road, Andrews Avenue and Manlunas Road;
improvement of Nichols Interchange; and removal of squatters
along Andrews Avenue.52
(e) Dealing directly with BCDA and the Phil. Air Force in acquiring
additional land or right of way for the road upgrade and
improvement program.53
5. Government is required to work for the immediate reversion to MIAA
of the Nayong Pilipino National Park.54
6. Government's share in the terminal fees collected was revised from
a flat rate of P180 to 36 percent thereof; together with government's
percentage share in the gross revenues of Piatco, the amount will be
remitted to government in pesos instead of US dollars.55 This
amendment enables Piatco to benefit from the further erosion of the
peso-dollar exchange rate, while preventing government from building
up its foreign exchange reserves.
7. All payments from Piatco to government are now to be invoiced to
MIAA, and payments are to accrue to the latter's exclusive benefit.56
This move appears to be in support of the funds MIAA advanced to
DPWH.
I must emphasize that the First Supplement is void in two respects. First, it
is merely an amendment to the ARCA, upon which it is wholly dependent;
therefore, since the ARCA is void, inexistent and not capable of being
ratified or amended, it follows that the FS too is void, inexistent and
inoperative. Second, even assuming arguendo that the ARCA is somehow
remotely valid, nonetheless the FS, in imposing significant new obligations
upon government, altered the fundamental terms and stipulations of the
ARCA, thus necessitating a public bidding all over again. That the FS was
entered into sans public bidding renders it utterly void and inoperative.
The Second Supplement Is Similarly Void and Inexistent

The Second Supplement ("SS") was executed between the government and
Piatco on September 4, 2000. It calls for Piatco, acting not as
concessionaire of NAIA Terminal III but as a public works contractor, to
undertake - in the government's stead - the clearing, removal, demolition
and disposal of improvements, subterranean obstructions and waste
materials at the project site.57
The scope of the works, the procedures involved, and the obligations of the
contractor are provided for in Parts II and III of the SS. Section 4.1 sets out
the compensation to be paid, listing specific rates per cubic meter of
materials for each phase of the work - excavation, leveling, removal and
disposal, backfilling and dewatering. The amounts collectible by Piatco are
to be offset against the Annual Guaranteed Payments it must pay
government.
Though denominated as Second Supplement, it was nothing less than an
entirely new public works contract. Yet it, too, did not undergo any public
bidding, for which reason it is also void and inoperative.
Not surprisingly, Piatco had to subcontract the works to a certain Wintrack
Builders, a firm reputedly owned by a former high-ranking DOTC official. But
that is another story altogether.
The Third Supplement Is Likewise Void and Inexistent
The Third Supplement ("TS"), executed between the government and Piatco
on June 22, 2001, passed on to the government certain obligations of Piatco
as Terminal III concessionaire, with respect to the surface road connecting
Terminals II and III.
By way of background, at the inception of and forming part of the NAIA
Terminal III project was the proposed construction of an access tunnel
crossing Runway 13/31, which. would connect Terminal III to Terminal II.
The Bid Documents in Section 4.1.2.3[B][i] declared that the said access
tunnel was subject to further negotiation; but for purposes of the bidding, the
proponent should submit a bid for it as well. Therefore, the tunnel was
supposed to be part and parcel of the Terminal III project.
However, in Section 5 of the First Supplement, the parties declared that the
access tunnel was not economically viable at that time. In lieu thereof, the

parties agreed that a surface access road (now called the T2-T3 Road) was
to be constructed by Piatco to connect the two terminals. Since it was
plainly in substitution of the tunnel, the surface road construction should
likewise be considered part and parcel of the same project, and therefore
part of Piatco's obligation as well. While the access tunnel was estimated to
cost about P800 million, the surface road would have a price tag in the
vicinity of about P100 million, thus producing significant savings for Piatco.
Yet, the Third Supplement, while confirming that Piatco would construct the
T2-T3 Road, nevertheless shifted to government some of the obligations
pertaining to the former, as follows:
1. Government is now obliged to remove at its own expense all
tenants, squatters, improvements and/or waste materials on the site
where the T2-T3 road is to be constructed.58 There was no similar
obligation on the part of government insofar as the access tunnel was
concerned.
2. Should government fail to carry out its obligation as above
described, Piatco may undertake it on government's behalf, subject to
the terms and conditions (including compensation payments)
contained in the Second Supplement.59
3. MIAA will answer for the operation, maintenance and repair of the
T2-T3 Road.60
The TS depends upon and is intended to supplement the ARCA as well as
the First Supplement, both of which are void and inexistent and not capable
of being ratified or amended. It follows that the TS is likewise void, inexistent
and inoperative. And even if, hypothetically speaking, both ARCA and FS
are valid, still, the Third Supplement - imposing as it does significant new
obligations upon government - would in effect alter the terms and
stipulations of the ARCA in material respects, thus necessitating another
public bidding. Since the TS was not subjected to public bidding, it is
consequently utterly void as well. At any rate, the TS created new monetary
obligations on the part of government, for which there were no prior
appropriations. Hence it follows that the same is void ab initio.
In patiently tracing the progress of the Piatco contracts from their inception
up to the present, I noted that the whole process was riddled with significant

lapses, if not outright irregularity and wholesale violations of law and public
policy. The rationale of beginning at the beginning, so to speak, will become
evident when the question of what to do with the five Piatco contracts is
discussed later on.
In the meantime, I shall take up specific, provisions or changes in the
contracts and highlight the more prominent objectionable features.
Government Directly Guarantees Piatco Debts
Certainly the most discussed provision in the parties' arguments is the one
creating an unauthorized, direct government guarantee of Piatco's
obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited proposals,
such as the NAIA Terminal III Project, may be accepted by government
provided inter alia that no direct government guarantee, subsidy or equity is
required. In short, such guarantee is prohibited in unsolicited proposals.
Section 2(n) of the same legislation defines direct government guarantee as
"an agreement whereby the government or any of its agencies or local
government units (will) assume responsibility for the repayment of debt
directly incurred by the project proponent in implementing the project in
case of a loan default."
Both the CA and the ARCA have provisions that undeniably create such
prohibited government guarantee. Section 4.04 (c)(iv) to (vi) of the ARCA,
which is similar to Section 4.04 of the CA, provides thus:
"(iv) that if Concessionaire is in default under a payment obligation
owed to the Senior Lenders, and as a result thereof the Senior Lenders
have become entitled to accelerate the Senior Loans, the Senior
Lenders shall have the right to notify GRP of the same . . .;
(v) . . . the Senior Lenders may after written notification to GRP,
transfer the Concessionaire's rights and obligations to a transferee . . .;
(vi) if the Senior Lenders . . . are unable to . . . effect a transfer . . .,
then GRP and the Senior Lenders shall endeavor . . . to enter into any
other arrangement relating to the Development Facility . . . If no
agreement relating to the Development Facility is arrived at by GRP
and the Senior Lenders within the said 180-day period, then at the end

thereof the Development Facility shall be transferred by the

Concessionaire to GRP or its designee and GRP shall make a
termination payment to Concessionaire equal to the Appraised Value
(as hereinafter defined) of the Development Facility or the sum of the
Attendant Liabilities, if greater. . . ."
In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA
as follows:
"Attendant Liabilities refer to all amounts in each case supported by
verifiable evidence from time to time owed or which may become,
owing by Concessionaire to Senior Lenders or any other persons or
entities who have provided, loaned or advanced funds or provided
financial facilities to Concessionaire for the Project, including, without
limitation, all principal, interest, associated fees, charges,
reimbursements, and other related expenses (including the fees,
charges and expenses of any agents or trustees of such persons or
entities), whether payable at maturity, by acceleration or otherwise,
and further including amounts owed by Concessionaire to its
professional consultants and advisers, suppliers, contractors and subcontractors."
Government's agreement to pay becomes effective in the event of a default
by Piatco on any of its loan obligations to the Senior Lenders, and the
amount to be paid by government is the greater of either the Appraised
Value of Terminal III or the aggregate amount of the moneys owed by
Piatco - whether to the Senior Lenders or to other entities, including its
suppliers, contractors and subcontractors. In effect, therefore, this
agreement already constitutes the prohibited assumption by government of
responsibility for repayment of Piatco's debts in case of a loan default. In
fine, a direct government guarantee.
It matters not that there is a roundabout procedure prescribed by Section
4.04(c)(iv), (v) and (vi) that would require, first, an attempt (albeit
unsuccessful) by the Senior Lenders to transfer Piatco's rights to a
transferee of their choice; and, second, an effort (equally unsuccessful) to
"enter into any other arrangement" with the government regarding the
Terminal III facility, before government is required to make good on its
guarantee. What is abundantly clear is the fact that, in the devious
labyrinthine process detailed in the aforesaid section, it is entirely within the

Senior Lenders' power, prerogative and control - exercisable via a mere

refusal or inability to agree upon "a transferee" or "any other arrangement"
regarding the terminal facility - to push the process forward to the ultimate
contractual cul-de-sac, wherein government will be compelled to abjectly
surrender and make good on its guarantee of payment.
Piatco also argues that there is no proviso requiring government to pay the
Senior Lenders in the event of Piatco's default. This is literally true, in the
sense that Section 4.04(c)(vi) of ARCA speaks of government making the
termination payment to Piatco, not to the lenders. However, it is almost a
certainty that the Senior Lenders will already have made Piatco sign over to
them, ahead of time, its right to receive such payments from government;
and/or they may already have had themselves appointed its attorneys-infact for the purpose of collecting and receiving such payments.
Nevertheless, as petitioners-in-intervention pointed out in their
Memorandum,61 the termination payment is to be made to Piatco, not to the
lenders; and there is no provision anywhere in the contract documents to
prevent it from diverting the proceeds to its own benefit and/or to ensure
that it will necessarily use the same to pay off the Senior Lenders and other
creditors, in order to avert the foreclosure of the mortgage and other liens
on the terminal facility. Such deficiency puts the interests of government at
great risk. Indeed, if the unthinkable were to happen, government would be
paying several hundreds of millions of dollars, but the mortgage liens on the
facility may still be foreclosed by the Senior Lenders just the same.
Consequently, the Piatco contracts are also objectionable for grievously
failing to adequately protect government's interests. More accurately, the
contracts would consistently weaken and do away with protection of
government interests. As such, they are therefore grossly lopsided in favor
of Piatco and/or its Senior Lenders.
While on this subject, it is well to recall the earlier discussion regarding a
particularly noticeable alteration of the concept of "Attendant Liabilities." In
Section 1.06 of the CA defining the term, the Piatco debts to be
assumed/paid by government were qualified by the phrases recorded and
from time to time outstanding in the books of the Concessionaire and
actually used for the project. These phrases were eliminated from the
ARCA's definition of Attendant Liabilities.

Since no explanation has been forthcoming from Piatco as to the possible

justification for such a drastic change, the only conclusion, possible is that it
intends to have all of its debts covered by the guarantee, regardless of
whether or not they are disclosed in its books. This has particular reference
to those borrowings which were obtained in violation of the loan covenants
requiring Piatco to maintain a minimum 70:30 debt-to-equity ratio, and even
if the loan proceeds were not actually used for the project itself.
This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of
ARCA, the amount which government has guaranteed to pay as termination
payment is the greater of either (i) the Appraised Value of the terminal
facility or (ii) the aggregate of the Attendant Liabilities. Given that the
Attendant Liabilities may include practically any Piatco debt under the sun, it
is highly conceivable that their sum may greatly exceed the appraised value
of the facility, and government may end up paying very much more than the
real worth of Terminal III. (So why did government have to bother with public
bidding anyway?)
In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at
odds with the spirit and the intent of the BOT Law. The law meant to
mobilize private resources (the private sector) to take on the burden and the
risks of financing the construction, operation and maintenance of relevant
infrastructure and development projects for the simple reason that
government is not in a position to do so. By the same token, government
guarantee was prohibited, since it would merely defeat the purpose and
raison d'tre of a build-operate-and-transfer project to be undertaken by the
private sector.
To the extent that the project proponent is able to obtain loans to fund the
project, those risks are shared between the project proponent on the one
hand, and its banks and other lenders on the other. But where the
proponent or its lenders manage to cajol or coerce the government into
extending a guarantee of payment of the loan obligations, the risks
assumed by the lenders are passed right back to government. I cannot
understand why, in the instant case, government cheerfully assented to reassuming the risks of the project when it gave the prohibited guarantee and
thus simply negated the very purpose of the BOT Law and the protection it
gives the government.
Contract Termination Provisions in the Piatco Contracts Are Void

The BOT Law as amended provides for contract termination as follows:

"Sec. 7. Contract Termination. - In the event that a project is revoked,
cancelled or terminated by the government through no fault of the
project proponent or by mutual agreement, the Government shall
compensate the said project proponent for its actual expenses incurred
in the project plus a reasonable rate of return thereon not exceeding
that stated in the contract as of the date of such revocation,
cancellation or termination: Provided, That the interest of the
Government in this instances [sic] shall be duly insured with the
Government Service Insurance System or any other insurance entity
duly accredited by the Office of the Insurance Commissioner:
Provided, finally, That the cost of the insurance coverage shall be
included in the terms and conditions of the bidding referred to above.
"In the event that the government defaults on certain major obligations
in the contract and such failure is not remediable or if remediable shall
remain unremedied for an unreasonable length of time, the project
proponent/contractor may, by prior notice to the concerned national
government agency or local government unit specifying the turn-over
date, terminate the contract. The project proponent/contractor shall be
reasonably compensated by the Government for equivalent or
proportionate contract cost as defined in the contract."
The foregoing statutory provision in effect provides for the following limited
instances when termination compensation may be allowed:
1. Termination by the government through no fault of the project
proponent
2. Termination upon the parties' mutual agreement
3. Termination by the proponent due to government's default on certain
major contractual obligations
To emphasize, the law does not permit compensation for the project
proponent when contract termination is due to the proponent's own fault or
breach of contract.

This principle was clearly violated in the Piatco Contracts. The ARCA
stipulates that government is to pay termination compensation to Piatco
even when termination is initiated by government for the following causes:
"(i) Failure of Concessionaire to finish the Works in all material
respects in accordance with the Tender Design and the Timetable;
(ii) Commission by Concessionaire of a material breach of this
Agreement . . .;
(iii) . . . a change in control of Concessionaire arising from the sale,
assignment, transfer or other disposition of capital stock which results
in an ownership structure violative of statutory or constitutional
limitations;
(iv) A pattern of continuing or repeated non-compliance, willful
violation, or non-performance of other terms and conditions hereof
which is hereby deemed a material breach of this Agreement . . ."62
As if that were not bad enough, the ARCA also inserted into Section 8.01
the phrase "Subject to Section 4.04." The effect of this insertion is that in
those instances where government may terminate the contract on account
of Piatco's breach, and it is nevertheless required under the ARCA to make
termination compensation to Piatco even though unauthorized by law, such
compensation is to be equivalent to the payment amount guaranteed by
government - either a) the Appraised Value of the terminal facility or (b) the
aggregate of the Attendant Liabilities, whichever amount is greater!
Clearly, this condition is not in line with Section 7 of the BOT Law. That
provision permits a project proponent to recover the actual expenses it
incurred in the prosecution of the project plus a reasonable rate of return not
in excess of that provided in the contract; or to be compensated for the
equivalent or proportionate contract cost as defined in the contract, in case
the government is in default on certain major contractual obligations.
Furthermore, in those instances where such termination compensation is
authorized by the BOT Law, it is indispensable that the interest of
government be duly insured. Section 5.08 the ARCA mandates insurance
coverage for the terminal facility; but all insurance policies are to be
assigned, and all proceeds are payable, to the Senior Lenders. In brief, the

interest being secured by such coverage is that of the Senior Lenders, not
that of government. This can hardly be considered compliance with law.
In essence, the ARCA provisions on termination compensation result in
another unauthorized government guarantee, this time in favor of Piatco.
A Prohibited Direct Government Subsidy, Which at the Same Time Is an
Assault on the National Honor
Still another contractual provision offensive to law and public policy is
Section 8.01(d) of the ARCA, which is a "bolder and badder" version of
Section 8.04(d) of the CA.
It will be recalled that Section 4-A of the BOT Law as amended prohibits not
only direct government guarantees, but likewise a direct government
subsidy for unsolicited proposals. Section 13.2. b. iii. of the 1999 IRR
defines a direct government subsidy as encompassing "an agreement
whereby the Government . . . will . . . postpone any payments due from the
proponent."
Despite the statutory ban, Section 8.01 (d) of the ARCA provides thus:
"(d) The provisions of Section 8.01(a) notwithstanding, and for the
purpose of preventing a disruption of the operations in the Terminal
and/or Terminal Complex, in the event that at any time Concessionaire
is of the reasonable opinion that it shall be unable to meet a payment
obligation owed to the Senior Lenders, Concessionaire shall give
prompt notice to GRP, through DOTC/MIAA and to the Senior Lenders.
In such circumstances, the Senior Lenders (or the Senior Lenders'
Representative) may ensure that after making provision for
administrative expenses and depreciation, the cash resources of
Concessionaire shall first be used and applied to meet all payment
obligations owed to the Senior Lenders. Any excess cash, after
meeting such payment obligations, shall be earmarked for the payment
of all sums payable by Concessionaire to GRP under this Agreement.
If by reason of the foregoing GRP should be unable to collect in full all
payments due to GRP under this Agreement, then the unpaid balance
shall be payable within a 90-day grace period counted from the
relevant due date, with interest per annum at the rate equal to the
average 91-day Treasury Bill Rate as of the auction date immediately

preceding the relevant due date. If payment is not effected by

Concessionaire within the grace period, then a spread of five (5%)
percent over the applicable 91-day Treasury Bill Rate shall be added
on the unpaid amount commencing on the expiry of the grace period
up to the day of full payment. When the temporary illiquidity of
Concessionaire shall have been corrected and the cash position of
Concessionaire should indicate its ability to meet its maturing
obligations, then the provisions set forth under this Section 8.01(d)
shall cease to apply. The foregoing remedial measures shall be
applicable only while there remains unpaid and outstanding amounts
owed to the Senior Lenders." (Emphasis supplied)
By any manner of interpretation or application, Section 8.01(d) of the ARCA
clearly mandates the indefinite postponement of payment of all of Piatco's
obligations to the government, in order to ensure that Piatco's obligations to
the Senior Lenders are paid in full first. That is nothing more or less than the
direct government subsidy prohibited by the BOT Law and the IRR. The fact
that Piatco will pay interest on the unpaid amounts owed to government
does not change the situation or render the prohibited subsidy any less
unacceptable.
But beyond the clear violations of law, there are larger issues involved in the
ARCA. Earlier, I mentioned that Section 8.01(d) of the ARCA completely
eliminated the proviso in Section 8.04(d) of the CA which gave government
the right to appoint a financial controller to manage the cash position of
Piatco during situations of financial distress. Not only has government been
deprived of any means of monitoring and managing the situation; worse, as
can be seen from Section 8.01(d) above-quoted, the Senior Lenders have
effectively locked in on the right to exercise financial controllership over
Piatco and to allocate its cash resources to the payment of all amounts
owed to the Senior Lenders before allowing any payment to be made to
government.
In brief, this particular provision of the ARCA has placed in the hands of
foreign lenders the power and the authority to determine how much (if at all)
and when the Philippine government (as grantor of the franchise) may be
allowed to receive from Piatco. In that situation, government will be at the
mercy of the foreign lenders. This is a situation completely contrary to the
rationale of the BOT Law and to public policy.

The aforesaid provision rouses mixed emotions - shame and disgust at the
parties' (especially the government officials') docile submission and abject
servitude and surrender to the imperious and excessive demands of the
foreign lenders, on the one hand; and vehement outrage at the affront to the
sovereignty of the Republic and to the national honor, on the other. It is
indeed time to put an end to such an unbearable, dishonorable situation.
The Piatco Contracts Unarguably Violate Constitutional Injunctions
I will now discuss the manner in which the Piatco Contracts offended the
Constitution.
The Exclusive Right Granted to Piatco to Operate a Public Utility Is
Prohibited by the Constitution
While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to
operate and maintain the Terminal Complex," Section 3.02(a) of the same
ARCA granted to Piatco, for the entire term of the concession agreement,
"the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon" with the exception of those three
terminals already existing63 at the time of execution of the ARCA.
Section 11 of Article XII of the Constitution prohibits the grant of a
"franchise, certificate, or any other form of authorization for the operation of
a public utility" that is "exclusive in character."
In its Opinion No. 078, Series of 1995, the Department of justice held that
"the NAIA Terminal III which . . . is a 'terminal for public use' is a public
utility." Consequently, the constitutional prohibition against the exclusivity of
a franchise applies to the franchise for the operation of NAIA Terminal III as
well.
What was granted to Piatco was not merely a franchise, but an "exclusive
right" to operate an international passenger terminal within the "Island of
Luzon." What this grant effectively means is that the government is now
estopped from exercising its inherent power to award any other person
another franchise or a right to operate such a public utility, in the event
public interest in Luzon requires it. This restriction is highly detrimental to
government and to the public interest. Former Secretary of Justice

Hernando B. Perez expressed this point well in his Memorandum for the
President dated 21 May 2002:
"Section 3.02 on 'Exclusivity'
"This provision gives to PIATCO (the Concessionaire) the exclusive
right to operate a commercial international airport within the Island of
Luzon with the exception of those already existing at the time of the
execution of the Agreement, such as the airports at Subic, Clark and
Laoag City. In the case of the Clark International Airport, however, the
provision restricts its operation beyond its design capacity of 850,000
passengers per annum and the operation of new terminal facilities
therein until after the new NAIA Terminal III shall have consistently
reached or exceeded its design capacity of ten (10) million passenger
capacity per year for three (3) consecutive years during the concession
period.
"This is an onerous and disadvantageous provision. It effectively grants
PIATCO a monopoly in Luzon and ties the hands of government in the
matter of developing new airports which may be found expedient and
necessary in carrying out any future plan for an inter-modal
transportation system in Luzon.
"Additionally, it imposes an unreasonable restriction on the operation of
the Clark International Airport which could adversely affect the
operation and development of the Clark Special Economic Zone to the
economic prejudice of the local constituencies that are being benefited
by its operation." (Emphasis supplied)
While it cannot be gainsaid that an enterprise that is a public utility may
happen to constitute a monopoly on account of the very nature of its
business and the absence of competition, such a situation does not
however constitute justification to violate the constitutional prohibition and
grant an exclusive franchise or exclusive right to operate a public utility.
Piatco's contention that the Constitution does not actually prohibit
monopolies is beside the point. As correctly argued,64 the existence of a
monopoly by a public utility is a situation created by circumstances that do
not encourage competition. This situation is different from the grant of a
franchise to operate a public utility, a privilege granted by government. Of

course, the grant of a franchise may result in a monopoly. But making such
franchise exclusive is what is expressly proscribed by the Constitution.
Actually, the aforementioned Section 3.02 of the ARCA more than just
guaranteed exclusivity; it also guaranteed that the government will not
improve or expand the facilities at Clark - and in fact is required to put a cap
on the latter's operations - until after Terminal III shall have been operated
at or beyond its peak capacity for three consecutive years.65 As counsel for
public respondents pointed out, in the real world where the rate of influx of
international passengers can fluctuate substantially from year to year, it may
take many years before Terminal III sees three consecutive years'
operations at peak capacity. The Diosdado Macapagal International Airport
may thus end up stagnating for a long time. Indeed, in order to ensure
greater profits for Piatco, the economic progress of a region has had to be
sacrificed.
The Piatco Contracts Violate the Time Limitation on Franchises
Section 11 of Article XII of the Constitution also provides that "no franchise,
certificate or any other form of authorization for the operation of a public
utility shall be . . . for a longer period than fifty years." After all, a franchise
held for an unreasonably long time would likely give rise to the same evils
as a monopoly.
The Piatco Contracts have come up with an innovative way to circumvent
the prohibition and obtain an extension. This fact can be gleaned from
Section 8.03(b) of the ARCA, which I quote thus:
"Sec. 8.03. Termination Procedure and Consequences of Termination.
a) x x x

xxx

xxx

b) In the event the Agreement is terminated pursuant to Section

8.01 (b) hereof, Concessionaire shall be entitled to collect the
Liquidated Damages specified in Annex 'G'. The full payment by
GRP to Concessionaire of the Liquidated Damages shall be a
condition precedent to the transfer by Concessionaire to GRP of
the Development Facility. Prior to the full payment of the
Liquidated Damages, Concessionaire shall to the extent

practicable continue to operate the Terminal and the Terminal

Complex and shall be entitled to retain and withhold all payments
to GRP for the purpose of offsetting the same against the
Liquidated Damages. Upon full payment of the Liquidated
Damages, Concessionaire shall immediately transfer the
Development Facility to GRP on 'as-is-where-is' basis."
The aforesaid easy payment scheme is less beneficial than it first appears.
Although it enables government to avoid having to make outright payment of
an obligation that will likely run into billions of pesos, this easy payment plan
will nevertheless cost government considerable loss of income, which it
would earn if it were to operate Terminal III by itself. Inasmuch as payments
to the concessionaire (Piatco) will be on "installment basis," interest charges
on the remaining unpaid balance would undoubtedly cause the total
outstanding balance to swell. Piatco would thus be entitled to remain in the
driver's seat and keep operating the terminal for an indefinite length of time.
The Contracts Create Two Monopolies for Piatco
By way of background, two monopolies were actually created by the Piatco
contracts. The first and more obvious one refers to the business of
operating an international passenger terminal in Luzon, the business end of
which involves providing international airlines with parking space for their
aircraft, and airline passengers with the use of departure and arrival areas,
check-in counters, information systems, conveyor systems, security
equipment and paraphernalia, immigrations and customs processing areas;
and amenities such as comfort rooms, restaurants and shops.
In furtherance of the first monopoly, the Piatco Contracts stipulate that the
NAIA Terminal III will be the only facility to be operated as an international
passenger terminal;66 that NAIA Terminals I and II will no longer be
operated as such;67 and that no one (including the government) will be
allowed to compete with Piatco in the operation of an international
passenger terminal in the NAIA Complex.68 Given that, at this time, the
government and Piatco are the only ones engaged in the business of
operating an international passenger terminal, I am not acutely concerned
with this particular monopolistic situation.
There was however another monopoly within the NAIA created by the
subject contracts for Piatco - in the business of providing international

airlines with the following: groundhandling, in-flight catering, cargo handling,

and aircraft repair and maintenance services. These are lines of business
activity in which are engaged many service providers (including the
petitioners-in-intervention), who will be adversely affected upon full
implementation of the Piatco Contracts, particularly Sections 3.01(d)69 and
(e)70 of both the ARCA and the CA.
On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only
international passenger terminal at the NAIA, and therefore the only place
within the NAIA Complex where the business of providing airport-related
services to international airlines may be conducted. On the other hand,
Section 3.01(d) of the ARCA requires government, through the MIAA, not to
allow service providers with expired MIAA contracts to renew or extend their
contracts to render airport-related services to airlines. Meanwhile, Section
3.01(e) of the ARCA requires government, through the DOTC and MIAA,
not to allow service providers - those with subsisting concession
agreements for services and operations being conducted at Terminal I - to
carry over their concession agreements, services and operations to
Terminal III, unless they first enter into a separate agreement with Piatco.
The aforementioned provisions vest in Piatco effective and exclusive control
over which service provider may and may not operate at Terminal III and
render the airport-related services needed by international airlines. It
thereby possesses the power to exclude competition. By necessary
implication, it also has effective control over the fees and charges that will
be imposed and collected by these service providers.
This intention is exceedingly clear in the declaration by Piatco that it is
"completely within its rights to exclude any party that it has not contracted
with from NAIA Terminal III."71
Worse, there is nothing whatsoever in the Piatco Contracts that can serve to
restrict, control or regulate the concessionaire's discretion and power to
reject any service provider and/or impose any term or condition it may see
fit in any contract it enters into with a service provider. In brief, there is no
safeguard whatsoever to ensure free and fair competition in the serviceprovider sector.
In the meantime, and not surprisingly, Piatco is first in line, ready to exploit
the unique business opportunity. It announced72 that it has accredited three

groundhandlers for Terminal III. Aside from the Philippine Airlines, the other
accredited entities are the Philippine Airport and Ground Services
Globeground, Inc. ("PAGSGlobeground") and the Orbit Air Systems, Inc.
("Orbit"). PAGSGlobeground is a wholly-owned subsidiary of the Philippine
Airport and Ground Services, Inc. or PAGS,73 while Orbit is a wholly-owned
subsidiary of Friendship Holdings, Inc.,74 which is in turn owned 80 percent
by PAGS.75 PAGS is a service provider owned 60 percent by the Cheng
Family;76 it is a stockholder of 35 percent of Piatco77 and is the latter's
designated contractor-operator for NAIA Terminal III.78
Such entry into and domination of the airport-related services sector appear
to be very much in line with the following provisions contained in the First
Addendum to the Piatco Shareholders Agreement,79 executed on July 6,
1999, which appear to constitute a sort of master plan to create a monopoly
and combinations in restraint of trade:
"11. The Shareholders shall ensure:
a. x x x

xxx

x x x.;

b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its
designated Affiliates shall, at all times during the Concession Period,
be exclusively authorized by (PIATCO) to engage in the provision of
ground-handling, catering and fueling services within the Terminal
Complex.
c. That PAIRCARGO and/or its designated Affiliate shall, during the
Concession Period, be the only entities authorized to construct and
operate a warehouse for all cargo handling and related services within
the Site."
Precisely, proscribed by our Constitution are the monopoly and the restraint
of trade being fostered by the Piatco Contracts through the erection of
barriers to the entry of other service providers into Terminal III. In Tatad v.
Secretary of the Department of Energy,80 the Court ruled:
". . . [S]ection 19 of Article XII of the Constitution . . . mandates: 'The
State shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition
shall be allowed.'

"A monopoly is a privilege or peculiar advantage vested in one or more

persons or companies, consisting in the exclusive right or power to
carry on a particular business or trade, manufacture a particular article,
or control the sale or the whole supply of a particular commodity. It is a
form of market structure in which one or only a few firms dominate the
total sales of a product or service. On the other hand, a combination in
restraint of trade is an agreement or understanding between two or
more persons, in the form of a contract, trust, pool, holding company,
or other form of association, for the purpose of unduly restricting
competition, monopolizing trade and commerce in a certain
commodity, controlling its production, distribution and price, or
otherwise interfering with freedom of trade without statutory authority.
Combination in restraint of trade refers to the means while monopoly
refers to the end.
"x x x

xxx

xxx

"Section 19, Article XII of our Constitution is anti-trust in history and in

spirit. It espouses competition. The desirability of competition is the
reason for the prohibition against restraint of trade, the reason for the
interdiction of unfair competition, and the reason for regulation of
unmitigated monopolies. Competition is thus the underlying principle of
[S]ection 19, Article XII of our Constitution, . . ."81
Gokongwei Jr. v. Securities and Exchange Commission82 elucidates the
criteria to be employed: "A 'monopoly' embraces any combination the
tendency of which is to prevent competition in the broad and general sense,
or to control prices to the detriment of the public. In short, it is the
concentration of business in the hands of a few. The material consideration
in determining its existence is not that prices are raised and competition
actually excluded, but that power exists to raise prices or exclude
competition when desired."83 (Emphasis supplied)
The Contracts Encourage Monopolistic Pricing, Too
Aside from creating a monopoly, the Piatco contracts also give the
concessionaire virtually limitless power over the charging of fees, rentals
and so forth. What little "oversight function" the government might be able
and minded to exercise is less than sufficient to protect the public interest,
as can be gleaned from the following provisions:

"Sec. 6.06. Adjustment of Non-Public Utility Fees and Charges

"For fees, rentals and charges constituting Non-Public Utility
Revenues, Concessionaire may make any adjustments it deems
appropriate without need for the consent of GRP or any government
agency subject to Sec. 6.03(c)."
Section 6.03(c) in turn provides:
"(c) Concessionaire shall at all times be judicious in fixing fees and
charges constituting Non-Public Utility Revenues in order to ensure
that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/wellwisher fee
constitute Non-Public Utility Revenues of Concessionaire, GRP may
require Concessionaire to explain and justify the fee it may set from
time to time, if in the reasonable opinion of GRP the said fees have
become exorbitant resulting in the unreasonable deprivation of End
Users of such services."
It will be noted that the above-quoted provision has no teeth, so the
concessionaire can defy the government without fear of any sanction.
Moreover, Section 6.06 - taken together with Section 6.03(c) of the ARCA falls short of the standard set by the BOT Law as amended, which expressly
requires in Section 2(b) that the project proponent is "allowed to charge
facility users appropriate tolls, fees, rentals and charges not exceeding
those proposed in its bid or as negotiated and incorporated in the contract x
x x."
The Piatco Contracts Violate Constitutional Prohibitions Against
Impairment of Contracts and Deprivation of Property Without Due Process
Earlier, I discussed how Section 3.01(e)84 of both the CA and the ARCA
requires government, through DOTC/MIAA, not to permit the carry-over to
Terminal III of the services and operations of certain service providers
currently operating at Terminal I with subsisting contracts.
By the In-Service Date, Terminal III shall be the only facility to be operated
as an international passenger terminal at the NAIA;85 thus, Terminals I and
II shall no longer operate as such,86 and no one shall be allowed to compete
with Piatco in the operation of an international passenger terminal in the

NAIA.87 The bottom line is that, as of the In-Service Date, Terminal III will be
the only terminal where the business of providing airport-related services to
international airlines and passengers may be conducted at all.
Consequently, government through the DOTC/MIAA will be compelled to
cease honoring existing contracts with service providers after the In-Service
Date, as they cannot be allowed to operate in Terminal III.
In short, the CA and the ARCA obligate and constrain government to break
its existing contracts with these service providers.
Notably, government is not in a position to require Piatco to accommodate
the displaced service providers, and it would be unrealistic to think that
these service providers can perform their service contracts in some other
international airport outside Luzon. Obviously, then, these displaced service
providers are - to borrow a quaint expression - up the river without a paddle.
In plainer terms, they will have lost their businesses entirely, in the blink of
an eye.
What we have here is a set of contractual provisions that impair the
obligation of contracts and contravene the constitutional prohibition against
deprivation of property without due process of law.88
Moreover, since the displaced service providers, being unable to operate,
will be forced to close shop, their respective employees - among them
Messrs. Agan and Lopez et al. - have very grave cause for concern, as they
will find themselves out of employment and bereft of their means of
livelihood. This situation comprises still another violation of the constitution
prohibition against deprivation of property without due process.
True, doing business at the NAIA may be viewed more as a privilege than
as a right. Nonetheless, where that privilege has been availed of by the
petitioners-in-intervention service providers for years on end, a situation
arises, similar to that in American Inter-fashion v. GTEB.89 We held therein
that a privilege enjoyed for seven years "evolved into some form of property
right which should not be removed x x x arbitrarily and without due process."
Said pronouncement is particularly relevant and applicable to the situation
at bar because the livelihood of the employees of petitioners-intervenors are
at stake.

The
Piatco
Contracts
Violate
Constitutional
Against Deprivation of Liberty Without Due Process

Prohibition

The Piatco Contracts by locking out existing service providers from entry
into Terminal III and restricting entry of future service providers, thereby
infringed upon the freedom - guaranteed to and heretofore enjoyed by
international airlines - to contract with local service providers of their choice,
and vice versa.
Both the service providers and their client airlines will be deprived of the
right to liberty, which includes the right to enter into all contracts,90 and/or
the right to make a contract in relation to one's business.91
By
Creating
New
Financial
Obligations
for
Government,
Supplements
to
the
ARCA
Violate
the
Constitutional
Ban on Disbursement of Public Funds Without Valid Appropriation
Clearly prohibited by the Constitution is the disbursement of public funds out
of the treasury, except in pursuance of an appropriation made by law.92 The
immediate effect of this constitutional ban is that all the various agencies of
government are constrained to limit their expenditures to the amounts
appropriated by law for each fiscal year; and to carefully count their cash
before taking on contractual commitments. Giving flesh and form to the
injunction of the fundamental law, Sections 46 and 47 of Executive Order
292, otherwise known as the Administrative Code of 1987, provide as
follows:
"Sec. 46. Appropriation Before Entering into Contract. - (1) No contract
involving the expenditure of public funds shall be entered into unless
there is an appropriation therefor, the unexpended balance of which,
free of other obligations, is sufficient to cover the proposed
expenditure; and . .
"Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except
in the case of a contract for personal service, for supplies for current
consumption or to be carried in stock not exceeding the estimated
consumption for three (3) months, or banking transactions of
government-owned or controlled banks, no contract involving the
expenditure of public funds by any government agency shall be
entered into or authorized unless the proper accounting official of the

agency concerned shall have certified to the officer entering into the
obligation that funds have been duly appropriated for the purpose and
that the amount necessary to cover the proposed contract for the
current calendar year is available for expenditure on account thereof,
subject to verification by the auditor concerned. The certificate signed
by the proper accounting official and the auditor who verified it, shall be
attached to and become an integral part of the proposed contract, and
the sum so certified shall not thereafter be available for expenditure for
any other purpose until the obligation of the government agency
concerned under the contract is fully extinguished."
Referring to the aforequoted provisions, this Court has held that "(I)t is quite
evident from the tenor of the language of the law that the existence of
appropriations and the availability of funds are indispensable pre-requisites
to or conditions sine qua non for the execution of government contracts. The
obvious intent is to impose such conditions as a priori requisites to the
validity of the proposed contract."93
Notwithstanding the constitutional ban, statutory mandates and
Jurisprudential precedents, the three Supplements to the ARCA, which were
not approved by NEDA, imposed on government the additional burden of
spending public moneys without prior appropriation.
In the First Supplement ("FS") dated August 27, 1999, the following
requirements were imposed on the government:
To construct, maintain and keep in good repair and operating
condition all airport support services, facilities, equipment and
infrastructure owned and/or operated by MIAA, which are not part of
the Project or which are located outside the Site, even though
constructed by Concessionaire - including the access road connecting
Terminals II and III and the taxilane, taxiways and runways
To obligate the MIAA to provide funding for the upkeep, maintenance
and repair of the airports and facilities owned or operated by it and by
third persons under its control in order to ensure compliance with
international standards; and holding MIAA liable to Piatco for the
latter's losses, expenses and damages as well as for the latter's liability
to third persons, in case MIAA fails to perform such obligations; in
addition, MIAA will also be liable for the incremental and consequential

costs of the remedial work done by Piatco on account of the former's

default.
Section 4 of the FS imposed on government ten (10) "Additional
Special Obligations," including the following:
o

Providing thru MIAA the land required by Piatco for the taxilane
and one taxiway, at no cost to Piatco
Implementing the government's existing storm drainage master
plan
Coordinating with DPWH the financing, implementation and
completion of the following works before the In-Service Date:
three left-turning overpasses (Edsa to Tramo St., Tramo to
Andrews Ave., and Manlunas Road to Sales Ave.) and a road
upgrade and improvement program involving widening, repair and
resurfacing of Sales Road, Andrews Avenue and Manlunas Road;
improvement of Nichols Interchange; and removal of squatters
along Andrews Avenue
Dealing directly with BCDA and the Philippine Air Force in
acquiring additional land or right of way for the road upgrade and
improvement program
Requiring government to work for the immediate reversion to
MIAA of the Nayong Pilipino National Park, in order to permit the
building of the second west parallel taxiway

Section 5 of the FS also provides that in lieu of the access tunnel, a

surface access road (T2-T3) will be constructed. This provision
requires government to expend funds to purchase additional land from
Nayong Pilipino and to clear the same in order to be able to deliver
clean possession of the site to Piatco, as required in Section 5(c) of the
FS.
On the other hand, the Third Supplement ("TS") obligates the government to
deliver, within 120 days from date thereof, clean possession of the land on
which the T2-T3 Road is to be constructed.
The foregoing contractual stipulations undeniably impose on government
the expenditures of public funds not included in any congressional
appropriation or authorized by any other statute. Piatco however attempts to
take these stipulations out of the ambit of Sections 46 and 47 of the

Administrative Code by characterizing them as stipulations for compliance

on a "best-efforts basis" only.
To determine whether the additional obligations under the Supplements
may really be undertaken on a best-efforts basis only, the nature of each of
these obligations must be examined in the context of its relevance and
significance to the Terminal III Project, as well as of any adverse impact that
may result if such obligation is not performed or undertaken on time. In
short, the criteria for determining whether the best-efforts basis will apply is
whether the obligations are critical to the success of the Project and,
accordingly, whether failure to perform them (or to perform them on time)
could result in a material breach of the contract.
Viewed in this light, the "Additional Special Obligations" set out in Section 4
of the FS take on a different aspect. In particular, each of the following may
all be deemed to play a major role in the successful and timely prosecution
of the Terminal III Project: the obtention of land required by PIATCO for the
taxilane and taxiway; the implementation of government's existing storm
drainage master plan; and coordination with DPWH for the completion of the
three left-turning overpasses before the In-Service Date, as well as
acquisition and delivery of additional land for the construction of the T2-T3
access road.
Conversely, failure to deliver on any of these obligations may conceivably
result in substantial prejudice to the concessionaire, to such an extent as to
constitute a material breach of the Piatco Contracts. Whereupon, the
concessionaire may outrightly terminate the Contracts pursuant to Section
8.01(b)(i) and (ii) of the ARCA and seek payment of Liquidated Damages in
accordance with Section 8.02(a) of the ARCA; or the concessionaire may
instead require government to pay the Incremental and Consequential
Losses under Section 1.23 of the ARCA.94 The logical conclusion then is
that the obligations in the Supplements are not to be performed on a bestefforts basis only, but are unarguably mandatory in character.
Regarding MIAA's obligation to coordinate with the DPWH for the complete
implementation of the road upgrading and improvement program for Sales,
Andrews and Manlunas Roads (which provide access to the Terminal III
site) prior to the In-Service Date, it is essential to take note of the fact that
there was a pressing need to complete the program before the opening of
Terminal III.95 For that reason, the MIAA was compelled to enter into a

memorandum of agreement with the DPWH in order to ensure the timely

completion of the road widening and improvement program. MIAA agreed to
advance the total amount of P410.11 million to DPWH for the works, while
the latter was committed to do the following:
"2.2.8. Reimburse all advance payments to MIAA including but not
limited to interest, fees, plus other costs of money within the periods
CY2004 and CY2006 with payment of no less than One Hundred
Million Pesos (PhP100M) every year.
"2.2.9. Perform all acts necessary to include in its CY2004 to CY2006
budget allocation the repayments for the advances made by MIAA, to
ensure that the advances are fully repaid by CY2006. For this purpose,
DPWH shall include the amounts to be appropriated for reimbursement
to MIAA in the "Not Needing Clearance" column of their Agency
Budget Matrix (ABM) submitted to the Department of Budget and
Management."
It can be easily inferred, then, that DPWH did not set aside enough funds to
be able to complete the upgrading program for the crucially situated access
roads prior to the targeted opening date of Terminal III; and that, had MIAA
not agreed to lend the P410 Million, DPWH would not have been able to
complete the program on time. As a consequence, government would have
been in breach of a material obligation. Hence, this particular undertaking of
government may likewise not be construed as being for best-efforts
compliance only.
They also Infringe on the Legislative Prerogative and Power Over the Public
Purse
But the particularly sad thing about this transaction between MIAA and
DPWH is the fact that both agencies were maneuvered into (or allowed
themselves to be maneuvered into) an agreement that would ensure
delivery of upgraded roads for Piatco's benefit, using funds not allocated for
that purpose. The agreement would then be presented to Congress as a
done deal. Congress would thus be obliged to uphold the agreement and
support it with the necessary allocations and appropriations for three years,
in order to enable DPWH to deliver on its committed repayments to MIAA.
The net result is an infringement on the legislative power over the public
purse and a diminution of Congress' control over expenditures of public

funds - a development that would not have come about, were it not for the
Supplements. Very clever but very illegal!
EPILOGUE
What Do We Do Now?
In the final analysis, there remains but one ultimate question, which I raised
during the Oral Argument on December 10, 2002: What do we do with the
Piatco Contracts and Terminal III?96 (Feeding directly into the resolution of
the decisive question is the other nagging issue: Why should we bother with
determining the legality and validity of these contracts, when the Terminal
itself has already been built and is practically complete?)
Prescinding from all the foregoing disquisition, I find that all the Piatco
contracts, without exception, are void ab initio, and therefore inoperative.
Even the very process by which the contracts came into being - the bidding
and the award - has been riddled with irregularities galore and blatant
violations of law and public policy, far too many to ignore. There is thus no
conceivable way, as proposed by some, of saving one (the original
Concession Agreement) while junking all the rest.
Neither is it possible to argue for the retention of the Draft Concession
Agreement (referred to in the various pleadings as the Contract Bidded Out)
as the contract that should be kept in force and effect to govern the
situation, inasmuch as it was never executed by the parties. What Piatco
and the government executed was the Concession Agreement which is
entirely different from the Draft Concession Agreement.
Ultimately, though, it would be tantamount to an outrageous, grievous and
unforgivable mutilation of public policy and an insult to ourselves if we opt to
keep in place a contract - any contract - for to do so would assume that we
agree to having Piatco continue as the concessionaire for Terminal III.
Despite all the insidious contraventions of the Constitution, law and public
policy Piatco perpetrated, keeping Piatco on as concessionaire and even
rewarding it by allowing it to operate and profit from Terminal III - instead of
imposing upon it the stiffest sanctions permissible under the laws - is
unconscionable.

It is no exaggeration to say that Piatco may not really mind which contract
we decide to keep in place. For all it may care, we can do just as well
without one, if we only let it continue and operate the facility. After all, the
real money will come not from building the Terminal, but from actually
operating it for fifty or more years and charging whatever it feels like, without
any competition at all. This scenario must not be allowed to happen.
If the Piatco contracts are junked altogether as I think they should be,
should not AEDC automatically be considered the winning bidder and
therefore allowed to operate the facility? My answer is a stone-cold 'No'.
AEDC never won the bidding, never signed any contract, and never built
any facility. Why should it be allowed to automatically step in and benefit
from the greed of another?
Should government pay at all for reasonable expenses incurred in the
construction of the Terminal? Indeed it should, otherwise it will be unjustly
enriching itself at the expense of Piatco and, in particular, its funders,
contractors and investors - both local and foreign. After all, there is no
question that the State needs and will make use of Terminal III, it being part
and parcel of the critical infrastructure and transportation-related programs
of government.
In Melchor v. Commission on Audit,97 this Court held that even if the
contract therein was void, the principle of payment by quantum meruit was
found applicable, and the contractor was allowed to recover the reasonable
value of the thing or services rendered (regardless of any agreement as to
the supposed value), in order to avoid unjust enrichment on the part of
government. The principle of quantum meruit was likewise applied in Eslao
v. Commission on Audit,98 because to deny payment for a building almost
completed and already occupied would be to permit government to unjustly
enrich itself at the expense of the contractor. The same principle was
applied in Republic v. Court of Appeals.99
One possible practical solution would be for government - in view of the
nullity of the Piatco contracts and of the fact that Terminal III has already
been built and is almost finished - to bid out the operation of the facility
under the same or analogous principles as build-operate-and-transfer
projects. To be imposed, however, is the condition that the winning bidder
must pay the builder of the facility a price fixed by government based on

quantum meruit; on the real, reasonable - not inflated - value of the built
facility.
How the payment or series of payments to the builder, funders, investors
and contractors will be staggered and scheduled, will have to be built into
the bids, along with the annual guaranteed payments to government. In this
manner, this whole sordid mess could result in something truly beneficial for
all, especially for the Filipino people.
WHEREFORE, I vote to grant the Petitions and to declare the subject
contracts NULL and VOID.

Dio vs. Japor, 463 SCRA 170 (2005)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
[G.R. No. 154129. July 8, 2005]
TERESITA DIO, Petitioner, vs.SPOUSES VIRGILIO and LUZ ROCES
JAPOR and MARTA[1] JAPOR, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision,[2] dated February 22, 2002, of the
Court of Appeals, in the consolidated cases CA-G.R. CV No. 51521 and
CA-G.R. SP No. 40457. The decretal portion read:
WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the
decision of the trial court is AFFIRMED with MODIFICATION. Judgment is
rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty
charge per month such that plaintiffs-appellants' contractual obligation
under the deed of real estate mortgage would amount to P1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of P2,247,326.00 to
plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously
issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and
academic.

SO ORDERED.[3]
Equally assailed in this petition is the Resolution,[4] dated July 2, 2002, of
the appellate court, denying Teresita Dio's Motion for Partial
Reconsideration of March 19, 2002 and the Spouses Japor and Marta
Japor's Motion for Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the
owners of an 845.5 square-meter residential lot including its improvements,
situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer
Certificate of Title (TCT) No. T-39514. Adjacent to the Japor's lot is another
lot owned by respondent Marta Japor, which consisted of 325.5 square
meters and titled under TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of P90,000 from the
Quezon Development Bank (QDB), and as security therefor, they
mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB, as
evidenced by a Deed of Real Estate Mortgage duly executed by and
between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real
Estate Mortgage increasing respondents' loan to P128,000.
The respondents failed to pay their aforesaid loans. However, before the
bank could foreclose on the mortgage, respondents, thru their broker, one
Lucia G. Orian, offered to mortgage their properties to petitioner Teresita
Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby
respondents mortgaged anew the two properties already mortgaged with
QDB to secure the timely payment of a P350,000 loan that respondents had
from petitioner Dio. The Deed of Real Estate Mortgage, though dated
January 1989, was actually executed on February 13, 1989 and notarized
on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner
interest at the rate of five percent (5%) a month, within a period of two
months or until April 14, 1989. In the event of default, an additional interest
equivalent to five percent (5%) of the amount then due, for every month of
delay, would be charged on them.

The respondents failed to settle their obligation to petitioner on April 14,

1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the
respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner
applied for extrajudicial foreclosure of the mortgage. The auction of the
unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing of
Contractual Obligation with Prayer for Preliminary Mandatory
Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the
Regional Trial Court (RTC) of Lucena City. Respondents prayed that
'judgment be rendered fixing the contractual obligations of plaintiffs with the
defendant Dio plus legal or allowable interests thereon.[5]
The trial court issued an Order enjoining the auction sale of the
aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint
with an attached copy of their Amended Complaint praying that the Deed of
Real Estate Mortgage dated February 13, 1989 be declared null and void,
but reiterating the plea that the trial court fix the contractual obligations of
the Japors with Dio. The trial court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a
petition for certiorari, docketed as CA-G.R. SP No. 35315, praying that the
Court of Appeals direct the trial court to admit their Amended Complaint.
The appellate court denied said petition.[6]
On December 11, 1995, the trial court handed down the following judgment:
WHEREFORE, in view of the foregoing considerations, judgment is
rendered:
1. Dismissing the complaint for failure of the plaintiffs to substantiate their
affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. 'A to 'A-13/Exhs. 3 to '3-D') to
be valid and binding as between the parties, more particularly the plaintiffs

Virgilio Japor, Luz Japor and Marta Japor or the latter's substituted heir or
heirs, as the case may be;
3. Dissolving the writ of preliminary injunction previously issued by this
Court; and
4. To pay the cost of this suit.
SO ORDERED.[7]
On January 17, 1996, respondents filed their notice of appeal. On April 26,
1996, they also filed a Petition for Temporary Restraining Order And/Or
Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of
Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased
the properties for P3,500,000.
On May 9, 1996, the Court of Appeals denied respondents' application for a
temporary restraining order.[8]
On October 9, 1996, the appellate court consolidated CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial
court with respect to the validity of the Deed of Real Estate Mortgage, but
modified the interest and penalty rates for being unconscionable and
exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the
appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND
PENALTY WAS NOT RAISED BEFORE THE TRIAL COURT NOR
ASSIGNED AS AN ERROR IN RESPONDENTS' APPEAL.
II

THE STIPULATED INTEREST AND PENALTY ARE NOT 'EXCESSIVE,

INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO
MORAL[S].
III
PAYMENT OF THE 'SURPLUS' OF P2,247,326.00 TO RESPONDENTS
WOULD RESULT IN THEIR UNJUST ENRICHMENT.
IV
RESPONDENTS' APPEAL SHOULD HAVE BEEN DISMISSED DUE TO
FORUM SHOPPING.[9]
Simply stated, the issue is: Did the Court of Appeals err when it held that the
stipulations on interest and penalty in the Deed of Real Estate Mortgage is
contrary to morals, if not illegal? Corollarily, were respondents entitled to
any 'surplus' on the auction sale price?
On the main issue, petitioner contends that The Usury Law[10] has been
rendered ineffective by Central Bank Circular No. 905, series of 1982 and
accordingly, usury has become legally non-existent in this jurisdiction, thus,
interest rates may accordingly be pegged at such levels or rates as the
lender and the borrower may agree upon. Petitioner avers she has not
violated any law considering she is not engaged in the business of moneylending. Moreover, she claims she has suffered inconveniences and
incurred expenses for some 13 years now as a result of respondents' failure
to pay her. Petitioner further points out that the 5% interest rate was
proposed by the respondents and have only themselves to blame if the
interests and penalties ballooned to its present amount due to their willful
delay and default in payment. The appellate court thus erred, petitioner now
insists, in applying Sps. Almeda v. Court of Appeals[11] and Medel v. Court
of Appeals[12] to reduce the interest rate to 12% per annum and the penalty
to 1% per month.
Respondents admit they owe petitioner P350,000 and do not question any
lawful interest on their loan but they maintain that the Deed of Real Estate
Mortgage is null and void since it did not state the true intent of the parties,
which limited the 5% interest rate to only two (2) months from the date of the
loan and which did not provide for penalties and other charges in the event

of default or delay. Respondents vehemently contend that they never

consented to the said stipulations and hence, should not be bound by them.
On the first issue, we are constrained to rule against the petitioner's
contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity. However, nothing in said Circular
grants lenders carte blanche authority to impose interest rates which would
result in the enslavement of their borrowers or to the hemorrhaging of their
assets.[13] While a stipulated rate of interest may not technically and
necessarily be usurious under Circular No. 905, usury now being legally
non-existent in our jurisdiction,[14] nonetheless, said rate may be equitably
reduced should the same be found to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra bonos mores), if not
against the law.[15] What is iniquitous, unconscionable, and exorbitant shall
depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per
month and 5% penalty rate per month for every month of default or delay is
in reality interest rate at 120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or 66% per annum is void for
being iniquitous or unconscionable.[16] We have likewise ruled that an
interest rate of 6% per month or 72% per annum is outrageous and
inordinate.[17] Conformably to these precedent cases, a combined interest
and penalty rate at 10% per month or 120% per annum, should be deemed
iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate
court when it found the interest and penalty rates in the Deed of Real Estate
Mortgage in the present case excessive, hence legally impermissible.
Reduction is legally called for now in rates of interest and penalty stated in
the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the
5% interest rate per month for two (2) months. Having agreed to said rate,
the parties are now estopped from claiming otherwise. For the succeeding
period after the two months, however, the Court of Appeals correctly

reduced the interest rate to 12% per annum and the penalty rate to 1% per
month, in accordance with Article 2227[18] of the Civil Code.
But were respondents entitled to the 'surplus' of P2,247,326[19] as a result
of the overpricing in the auction?
We note that the 'surplus' was the result of the computation by the Court of
Appeals of respondents' outstanding liability based on a reduced interest
rate of 12% per annum and the reduced penalty rate of 1% per month. The
court a quo then proceeded to apply our ruling in Sulit v. Court of
Appeals,[20] to the effect that in case of surplus in the purchase price, the
mortgagee is liable for such surplus as actually comes into his hands, but
where he sells on credit instead of cash, he must still account for the
proceeds as if the price were paid in cash, for such surplus stands in the
place of the land itself with respect to liens thereon or vested rights therein
particularly those of the mortgagor or his assigns.
In the instant case, however, there is no 'surplus' to speak of. In adjusting
the interest and penalty rates to equitable and conscionable levels, what the
Court did was merely to reflect the true price of the land in the foreclosure
sale. The amount of the petitioner's bid merely represented the true amount
of the mortgage debt. No surplus in the purchase price was thus created to
which the respondents as the mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of
Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP
No. 40457 is hereby AFFIRMED with MODIFICATION. The interest rate for
the subject loan owing to QDB, or whoever is now the party mortgagee, is
hereby fixed at five percent (5%) for the first two (2) months following the
date of execution of the Deed of Real Estate Mortgage, and twelve percent
(12%) for the succeeding period. The penalty rate thereafter shall be fixed at
one percent (1%) per month. Petitioner Teresita Dio is declared free of any
obligation to return to the respondents, the Spouses Virgilio Japor and Luz
Roces Japor and Marta Japor, any surplus in the foreclosure sale price.
There being no surplus, after the court below had applied our ruling in
Sulit,[21] respondents could not legally claim any overprice from the
petitioner, much less the amount of P2,247,326.00.
SO ORDERED.

Consolidated Bank and Trust Corporation vs. Court of

Appeals, 365 SCRA 671 (2001)
Republic
SUPREME
Baguio City

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 114286

April 19, 2001

THE COSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK),

petitioner
vs.
THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION,
GREGORY T. LIM and SPOUSE, respondents.
YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993
Decision1 of respondent Court of Appeals in CA-GR. CV No. 29950, insofar
as it orders petitioner to reimburse respondent Continental Cement
Corporation the amount of P490, 228.90 with interest thereon at the legal
rate from July 26, 1988 until fully paid. The petition also seeks to set aside
the March 8, 1994 Resolution2 of respondent Court of Appeals denying its
Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement Corporation
(hereinafter, respondent Corporation) and Gregory T. Lim (hereinafter,
respondent Lim) obtained from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-23277 in the amount of P
1,068,150.00 On the same date, respondent Corporation paid a marginal
deposit of P320,445.00 to petitioner. The letter of credit was used to
purchase around five hundred thousand liters of bunker fuel oil from
Petrophil Corporation, which the latter delivered directly to respondent
Corporation in its Bulacan plant. In relation to the same transaction, a trust
receipt for the amount of P 1,001,520.93 was executed by respondent
Corporation, with respondent Lim as signatory.

Claiming that respondents failed to turn over the goods covered by the trust
receipt or the proceeds thereof, petitioner filed a complaint for sum of
money with application for preliminary attachment3 before the Regional Trial
Court of Manila. In answer to the complaint, respondents averred that the
transaction between them was a simple loan and not a trust receipt
transaction, and that the amount claimed by petitioner did not take into
account payments already made by them. Respondent Lim also denied any
personal liability in the subject transactions. In a Supplemental Answer,
respondents prayed for reimbursement of alleged overpayment to petitioner
of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a
trust receipt transaction;
2) Whether or not the interest rates charged against the defendants by
the plaintiff are proper under the letter of credit, trust receipt and under
existing rules or regulations of the Central Bank;
3) Whether or not the plaintiff properly applied the previous payment of
P300,456.27 by the defendant corporation on July 13, 1982 as
payment for the latters account; and
4) Whether or not the defendants are personally liable under the
transaction sued for in this case.4
On September 17, 1990, the trial court rendered its Decision,5 dismissing
the Complaint and ordering petitioner to pay respondents the following
amounts under their counterclaim: P490,228.90 representing overpayment
of respondent Corporation, with interest thereon at the legal rate from July
26, 1988 until fully paid; P10,000.00 as attorney's fees; and costs.
Both parties appealed to the Court of Appeals, which partially modified the
Decision by deleting the award of attorney's fees in favor of respondents
and, instead, ordering respondent Corporation to pay petitioner P37,469.22
as and for attorney's fees and litigation expenses.
Hence, the instant petition raising the following issues:

1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT

ACTED INCORRECTLY OR COMMITTED REVERSIBLE ERROR IN
HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE
RESPONDENTS TO THE PETITIONER IN THE AMOUNT OF
P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION
MADE IN THE DECISION AND THE ERRONEOUS APPLICATION
OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE
MARGINAL DEPOSIT BY THE RESPONDENT APPELLATE COURT
IS IN ACCORDANCE WITH BANKING PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES
AS TO THE FLOATING OF INTEREST RATE IS VALID UNDER
APPLICABLE JURISPRUDENCE AND THE RULES AND
REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NO THE RESPONDENT APPELLATE COUR
GRIEVOUSLY ERRED IN NOT CONSIDERING THE TRANSACTION
AT BAR AS A TRUST RECEIPT TRANSACTION ON THE BASIS OF
THE JUDICIAL ADMISSIONS OF THE PRIVATE RESPONDENTS
AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE RESPONDENT
SPOUSES LIABLE UNDER THE TRUST RECEIPT TRANSACTION.6
The petition must be denied.
On the first issue respecting the fact of overpayment found by both the
lower court and respondent Court of Appeals, we stress the time-honored
rule that findings of fact by the Court of Appeals especially if they affirm
factual findings of the trial court will not be disturbed by this Court, unless
these findings are not supported by evidence.7
Petitioner decries the lack of computation by the lower court as basis for its
ruling that there was an overpayment made. While such a computation may
not have appeared in the Decision itself, we note that the trial court's finding
of overpayment is supported by evidence presented before it. At any rate,

we painstakingly reviewed and computed the payments together with the

interest and penalty charges due thereon and found that the amount of
overpayment made by respondent Bank to petitioner, i.e., P263,070.13, was
more than what was ordered reimbursed by the lower court. However, since
respondents did not file an appeal in this case, the amount ordered
reimbursed by the lower court should stand.
Moreover, petitioner's contention that the marginal deposit made by
respondent Corporation should not be deducted outright from the amount of
the letter of credit is untenable. Petitioner argues that the marginal deposit
should be considered only after computing the principal plus accrued
interest and other charges. However, to sustain petitioner on this score
would be to countenance a clear case of unjust enrichment, for while a
marginal deposit earns no interest in favour of the debtor-depositor, the
bank is not only able to use the same for its own purposes, interest-free, but
is also able to earn interest on the money loaned to respondent Corporation.
Indeed, it would be onerous to compute interest and other charges on the
face value of the letter of credit which the petitioner issued, without first
crediting or setting off the marginal deposit which the respondent
Corporation paid to it. Compensation is proper and should take effect by
operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount.8
Hence, the interests and other charges on the subject letter of credit should
be computed only on the balance of P681,075.93, which was the portion
actually loaned by the bank to respondent Corporation.
Neither do we find error when the lower court and the Court of Appeals set
aside as invalid the floating rate of interest exhorted by petitioner to be
applicable. The pertinent provision in the trust receipt agreement of the
parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in the
interest rate which may occur after July 1, 1981, when the Central
Bank floated the interest rate, and to pay additionally the penalty of 1%
per month until the amount/s or instalments/s due and unpaid under
the trust receipt on the reverse side hereof is/are fully paid.9
We agree with respondent Court of Appeals that the foregoing stipulation is
invalid, there being no reference rate set either by it or by the Central Bank,

leaving the determination thereof at the sole will and control of petitioner.
1wphi1.nt
While it may be acceptable, for practical reasons given the fluctuating
economic conditions, for banks to stipulate that interest rates on a loan not
be fixed and instead be made dependent upon prevailing market conditions,
there should always be a reference rate upon which to peg such variable
interest rates. An example of such a valid variable interest rate was found in
Polotan, Sr. v. Court of Appeals. 10 In that case, the contractual provision
stating that "if there occurs any change in the prevailing market rates, the
new interest rate shall be the guiding rate in computing the interest due on
the outstanding obligation without need of serving notice to the Cardholder
other than the required posting on the monthly statement served to the
Cardholder"11 was considered valid. The aforequoted provision was upheld
notwithstanding that it may partake of the nature of an escalation clause,
because at the same time it provides for the decrease in the interest rate in
case the prevailing market rates dictate its reduction. In other words, unlike
the stipulation subject of the instant case, the interest rate involved in the
Polotan case is designed to be based on the prevailing market rate. On the
other hand, a stipulation ostensibly signifying an agreement to "any increase
or decrease in the interest rate," without more, cannot be accepted by this
Court as valid for it leaves solely to the creditor the determination of what
interest rate to charge against an outstanding loan.
Petitioner has also failed to convince us that its transaction with respondent
Corporation is really a trust receipt transaction instead of merely a simple
loan, as found by the lower court and the Court of Appeals.
The recent case of Colinares v. Court of Appeals 12 appears to be
foursquare with the facts obtaining in the case at bar. There, we found that
inasmuch as the debtor received the goods subject of the trust receipt
before the trust receipt itself was entered into, the transaction in question
was a simple loan and not a trust receipt agreement. Prior to the date of
execution of the trust receipt, ownership over the goods was already
transferred to the debtor. This situation is inconsistent with what normally
obtains in a pure trust receipt transaction, wherein the goods belong in
ownership to the bank and are only released to the importer in trust after the
loan is granted.

In the case at bar, as in Colinares, the delivery to respondent Corporation of

the goods subject of the trust receipt occurred long before the trust receipt
itself was executed. More specifically, delivery of the bunker fuel oil to
respondent Corporation's Bulacan plant commenced on July 7, 1982 and
was completed by July 19, 1982.13 Further, the oil was used up by
respondent Corporation in its normal operations by August, 1982.14 On the
other hand, the subject trust receipt was only executed nearly two months
after full delivery of the oil was made to respondent Corporation, or on
September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was
explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. Here, it is crystal clear that on the part
of Petitioners there was neither dishonesty nor abuse of confidence in
the handling of money to the prejudice of PBC. Petitioners continually
endeavored to meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The mala prohibita
nature of the alleged offense notwithstanding, intent as a state of mind
was not proved to be present in Petitioners' situation. Petitioners
employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners
sought favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring
the goods for re-sale, contrary to the express provision embodied in
the trust receipt. They are contractors who obtained the fungible goods
for their construction project. At no time did title over the construction
materials pass to the bank, but directly to the Petitioners from CM
Builders Centre. This impresses upon the trust receipt in question
vagueness and ambiguity, which should not be the basis for criminal
prosecution in the event of violation of its provisions.

The practice of banks of making borrowers sign trust receipts to

facilitate collection of loans and place them under the threats of
criminal prosecution should they be unable to pay it may be unjust and
inequitable if not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation, as
had happened in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as manifested
by its Affidavit of Desistance.
Similarly, respondent Corporation cannot be said to have been dishonest in
its dealings with petitioner. Neither has it been shown that it has evaded
payment of its obligations. Indeed, it continually endeavored to meet the
same, as shown by the various receipts issued by petitioner acknowledging
payment on the loan. Certainly, the payment of the sum of P1,832,158.38
on a loan with a principal amount of only P681,075.93 negates any badge of
dishonesty , abuse of confidence or mishandling of funds on the part of
respondent Corporation, which are the gravamen of a trust receipt violation.
Furthermore, Respondent Corporation is not an importer, which acquired
the bunker fuel oil for re-sale; it needed the oil for its own operations. More
importantly, at no time did title over the oil pass to petitioner, but directly to
respondent Corporation to which the oil was directly delivered long before
the trust receipt was executed. The fact that ownership of the oil belonged
to respondent Corporation, through its President, Gregory Lim, was
acknowledged by petitioner's own account officer on the witness stand, to
wit:
Q -After the bank opened a letter of credit in favor of Petrophil Corp. for
the account of the defendants thereby paying the value of the bunker
fuel oil what transpired next after that?
A -Upon purchase of the bunker fuel oil and upon the requests of the
defendant possession of the bunker fuel oil were transferred to them.
Q -You mentioned them to whom are you referring to?
A -To the Continental Cement Corp. upon the execution of the trust
receipt acknowledging the ownership of the bunker fuel oil this should
be acceptable for whatever disposition he may make.

Q - You mentioned about acknowledging ownership of the bunker fuel

oil to whom by whom?
A - By the Continental Cement Corp.
Q So by your statement who really owns the bunker fuel oil?
A TTY. RACHON:
Objection already answered,
COURT:
Give time to the other counsel to object.
A TTY. RACHON :
He has testified that ownership was acknowledged in favor of
Continental Cement Corp. so that question has already been
answered.
A TTY. BANAGA:
That is why I made a follow up question asking ownership of the
bunker fuel oil.
COURT:
Proceed.
A TTY .BANAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp. ?
A - Gregory Lim.15
By all indications, then, it is apparent that there was really no trust receipt
transaction that took place. Evidently, respondent Corporation was required
to sign the trust receipt simply to facilitate collection by petitioner of the loan
it had extended to the former.
Finally, we are not convinced that respondent Gregory T. Lim and his
spouse should be personally liable under the subject trust receipt.

Petitioner's argument that respondent Corporation and respondent Lim and

his spouse are one and the same cannot be sustained. The transactions
sued upon were clearly entered into by respondent Lim in his capacity as
Executive Vice President of respondent Corporation. We stress the
hornbook law that corporate personality is a shield against personal liability
of its officers. Thus, we agree that respondents Gregory T. Lim and his
spouse cannot be made personally liable since respondent Lim entered into
and signed the contract clearly in his official capacity as Executive Vice
President. The personality of the corporation is separate and distinct from
the persons composing it.16
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
DENIED. The Decision of the Court of Appeals dated July 26, 1993 in CAG.R. CY No.29950 is AFFIRMED.
SO ORDERED.

Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490,

September 17, 2009
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 175490

September 17, 2009

ILEANA
DR.
MACALINAO,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

Petitioner,

DECISION
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court seeking to reverse and set aside the June 30, 2006 Decision1 of
the Court of Appeals (CA) and its November 21, 2006 Resolution2 denying
petitioners motion for reconsideration.
The Facts
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard,
one of the credit card facilities of respondent Bank of the Philippine Islands
(BPI).3 Petitioner Macalinao made some purchases through the use of the
said credit card and defaulted in paying for said purchases. She
subsequently received a letter dated January 5, 2004 from respondent BPI,
demanding payment of the amount of one hundred forty-one thousand five
hundred eighteen pesos and thirty-four centavos (PhP 141,518.34), as
follows:
Statement
Date

Previous
Balance

10/27/2002 94,843.70

Purchases Penalty
(Payments) Interest
559.72

Finance Balance
Charges Due
3,061.99 98,456.41

11/27/2002 98,465.41

(15,000)

2,885.61 86,351.02

12/31/2002 86,351.02

30,308.80

259.05

2,806.41 119,752.28

1/27/2003

119,752.28

618.23

3,891.07 124,234.58

2/27/2003

124,234.58

990.93

4,037.62 129,263.13

3/27/2003

129,263.13 (18,000.00) 298.72

3,616.05 115,177.90

4/27/2003

115,177.90

644.26

3,743.28 119,565.44

5/27/2003

119,565.44 (10,000.00) 402.95

3,571.71 113,540.10

6/29/2003

113,540.10

7/27/2003

8,362.50
(7,000.00)

323.57

3,607.32 118,833.49

118,833.49

608.07

3,862.09 123,375.65

8/27/2003

123,375.65

1,050.20 4,009.71 128,435.56

9/28/2003

128,435.56

1,435.51 4,174.16 134,045.23

141,518.34

8,491.10 4,599.34 154,608.78

10/28/2003
11/28/2003
12/28/2003
1/27/2004

Under the Terms and Conditions Governing the Issuance and Use of the
BPI Credit and BPI Mastercard, the charges or balance thereof remaining
unpaid after the payment due date indicated on the monthly Statement of
Accounts shall bear interest at the rate of 3% per month and an additional
penalty fee equivalent to another 3% per month. Particularly:
8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly
Statement of Account (SOA) and the Cardholder agrees that all charges
made through the use of the CARD shall be paid by the Cardholder as
stated in the SOA on or before the last day for payment, which is twenty
(20) days from the date of the said SOA, and such payment due date may
be changed to an earlier date if the Cardholders account is considered
overdue and/or with balances in excess of the approved credit limit, or to
such other date as may be deemed proper by the CARD issuer with notice
to the Cardholder on the same monthly SOA. If the last day fall on a

Saturday, Sunday or a holiday, the last day for the payment automatically
becomes the last working day prior to said payment date. However,
notwithstanding the absence or lack of proof of service of the SOA of the
Cardholder, the latter shall pay any and all charges made through the use of
the CARD within thirty (30) days from date or dates thereof. Failure of the
Cardholder to pay the charges made through the CARD within the payment
period as stated in the SOA or within thirty (30) days from actual date or
dates of purchase whichever occur earlier, shall render him in default
without the necessity of demand from BCC, which the Cardholder expressly
waives. The charges or balance thereof remaining unpaid after the payment
due date indicated on the monthly Statement of Accounts shall bear interest
at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard
and an additional penalty fee equivalent to another 3% of the amount due
for every month or a fraction of a months delay. PROVIDED that if there
occurs any change on the prevailing market rates, BCC shall have the
option to adjust the rate of interest and/or penalty fee due on the
outstanding obligation with prior notice to the cardholder. The Cardholder
hereby authorizes BCC to correspondingly increase the rate of such interest
[in] the event of changes in the prevailing market rates, and to charge
additional service fees as may be deemed necessary in order to maintain its
service to the Cardholder. A CARD with outstanding balance unpaid after
thirty (30) days from original billing statement date shall automatically be
suspended, and those with accounts unpaid after ninety (90) days from said
original billing/statement date shall automatically be cancel (sic), without
prejudice to BCCs right to suspend or cancel any card anytime and for
whatever reason. In case of default in his obligation as provided herein,
Cardholder shall surrender his/her card to BCC and in addition to the
interest and penalty charges aforementioned , pay the following liquidated
damages and/or fees (a) a collection fee of 25% of the amount due if the
account is referred to a collection agency or attorney; (b) service fee for
every dishonored check issued by the cardholder in payment of his account
without prejudice, however, to BCCs right of considering Cardholders
account, and (c) a final fee equivalent to 25% of the unpaid balance,
exclusive of litigation expenses and judicial cost, if the payment of the
account is enforced though court action. Venue of all civil suits to enforce
this Agreement or any other suit directly or indirectly arising from the
relationship between the parties as established herein, whether arising from
crimes, negligence or breach thereof, shall be in the process of courts of the

City of Makati or in other courts at the option of BCC.4 (Emphasis

supplied.)1avvphi1
For failure of petitioner Macalinao to settle her obligations, respondent BPI
filed with the Metropolitan Trial Court (MeTC) of Makati City a complaint for
a sum of money against her and her husband, Danilo SJ. Macalinao. This
was raffled to Branch 66 of the MeTC and was docketed as Civil Case No.
84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr.
Macalinao and Danilo SJ. Macalinao.5
In said complaint, respondent BPI prayed for the payment of the amount of
one hundred fifty-four thousand six hundred eight pesos and seventy-eight
centavos (PhP 154,608.78) plus 3.25% finance charges and late payment
charges equivalent to 6% of the amount due from February 29, 2004 and an
amount equivalent to 25% of the total amount due as attorneys fees, and of
the cost of suit.6
After the summons and a copy of the complaint were served upon petitioner
Macalinao and her husband, they failed to file their Answer.7 Thus,
respondent BPI moved that judgment be rendered in accordance with
Section 6 of the Rule on Summary Procedure.8 This was granted in an
Order dated June 16, 2004.9 Thereafter, respondent BPI submitted its
documentary evidence.101avvphi1
In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent
BPI and ordered petitioner Macalinao and her husband to pay the amount of
PhP 141,518.34 plus interest and penalty charges of 2% per month, to wit:
WHEREFORE, finding merit in the allegations of the complaint supported by
documentary evidence, judgment is hereby rendered in favor of the plaintiff,
Bank of the Philippine Islands and against defendant-spouses Ileana DR
Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former
jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND
FIVE HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest
and penalty charges of 2% per month from January 05, 2004 until fully
paid;
2. P10,000.00 as and by way of attorneys fees; and

3. Cost of suit.
SO ORDERED.11
Only petitioner Macalinao and her husband appealed to the Regional Trial
Court (RTC) of Makati City, their recourse docketed as Civil Case No. 041153. In its Decision dated October 14, 2004, the RTC affirmed in toto the
decision of the MeTC and held:
In any event, the sum of P141,518.34 adjudged by the trial court appeared
to be the result of a recomputation at the reduced rate of 2% per month.
Note that the total amount sought by the plaintiff-appellee was P154,608.75
exclusive of finance charge of 3.25% per month and late payment charge of
6% per month.
WHEREFORE, the appealed decision is hereby affirmed in toto.
No pronouncement as to costs.
SO ORDERED.12
Unconvinced, petitioner Macalinao filed a petition for review with the CA,
which was docketed as CA-G.R. SP No. 92031. The CA affirmed with
modification the Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with
respect to the total amount due and interest rate. Accordingly, petitioners
are jointly and severally ordered to pay respondent Bank of the Philippine
Islands the following:
1. The amount of One Hundred Twenty Six Thousand Seven Hundred
Six Pesos and Seventy Centavos plus interest and penalty charges of
3% per month from January 5, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of Suit.
SO ORDERED.13

Although sued jointly with her husband, petitioner Macalinao was the only
one who filed the petition before the CA since her husband already passed
away on October 18, 2005.14
In its assailed decision, the CA held that the amount of PhP 141,518.34 (the
amount sought to be satisfied in the demand letter of respondent BPI) is
clearly not the result of the re-computation at the reduced interest rate as
previous higher interest rates were already incorporated in the said amount.
Thus, the said amount should not be made as basis in computing the total
obligation of petitioner Macalinao. Further, the CA also emphasized that
respondent BPI should not compound the interest in the instant case absent
a stipulation to that effect. The CA also held, however, that the MeTC erred
in modifying the amount of interest rate from 3% monthly to only 2%
considering that petitioner Macalinao freely availed herself of the credit card
facility offered by respondent BPI to the general public. It explained that
contracts of adhesion are not invalid per se and are not entirely prohibited.
Petitioner Macalinaos motion for reconsideration was denied by the CA in
its Resolution dated November 21, 2006. Hence, petitioner Macalinao is
now before this Court with the following assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD
BE UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS
UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.
II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED
RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF
ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A
RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR
FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT
OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT
BPI TO PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.

Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum
Should Be Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest and penalty
charges at the rate of 9.25% per month or 111% per annum. This was
declared as unconscionable by the lower courts for being clearly excessive,
and was thus reduced to 2% per month or 24% per annum. On appeal, the
CA modified the rate of interest and penalty charge and increased them to
3% per month or 36% per annum based on the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, which governs the
transaction between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate and penalty
charge of 3% per month imposed by the CA is iniquitous as the same
translates to 36% per annum or thrice the legal rate of interest.15 On the
other hand, respondent BPI asserts that said interest rate and penalty
charge are reasonable as the same are based on the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card.16
We find for petitioner. We are of the opinion that the interest rate and
penalty charge of 3% per month should be equitably reduced to 2% per
month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the
BPI Credit Card, there was a stipulation on the 3% interest rate.
Nevertheless, it should be noted that this is not the first time that this Court
has considered the interest rate of 36% per annum as excessive and
unconscionable. We held in Chua vs. Timan:17
The stipulated interest rates of 7% and 5% per month imposed on
respondents loans must be equitably reduced to 1% per month or 12% per
annum. We need not unsettle the principle we had affirmed in a plethora of
cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law. While C.B. Circular
No. 905-82, which took effect on January 1, 1983, effectively removed the

ceiling on interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would
either enslave their borrowers or lead to a hemorrhaging of their assets.
(Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was no
express contract thereon. Hence, courts may reduce the interest rate as
reason and equity demand.18
The same is true with respect to the penalty charge. Notably, under the
Terms and Conditions Governing the Issuance and Use of the BPI Credit
Card, it was also stated therein that respondent BPI shall impose an
additional penalty charge of 3% per month. Pertinently, Article 1229 of the
Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and unconscionable,
courts must consider the circumstances of each case since what may be
iniquitous and unconscionable in one may be totally just and equitable in
another.19
In the instant case, the records would reveal that petitioner Macalinao made
partial payments to respondent BPI, as indicated in her Billing Statements.20
Further, the stipulated penalty charge of 3% per month or 36% per annum,
in addition to regular interests, is indeed iniquitous and unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the
interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty
charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per
month or 24% per annum in line with the prevailing jurisprudence and in
accordance with Art. 1229 of the Civil Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA,
that is, the amount of PhP 94,843.70 stated on the October 27, 2002
Statement of Account, was not the amount of the principal obligation. Thus,
this allegedly necessitates a re-examination of the evidence presented by
the parties. For this reason, petitioner Macalinao further contends that the
dismissal of the case or its remand to the lower court would be a more
appropriate disposition of the case.
Such contention is untenable. Based on the records, the summons and a
copy of the complaint were served upon petitioner Macalinao and her
husband on May 4, 2004. Nevertheless, they failed to file their Answer
despite such service. Thus, respondent BPI moved that judgment be
rendered accordingly.21 Consequently, a decision was rendered by the
MeTC on the basis of the evidence submitted by respondent BPI. This is in
consonance with Sec. 6 of the Revised Rule on Summary Procedure, which
states:
Sec. 6. Effect of failure to answer. Should the defendant fail to answer
the complaint within the period above provided, the court, motu proprio, or
on motion of the plaintiff, shall render judgment as may be warranted by the
facts alleged in the complaint and limited to what is prayed for therein:
Provided, however, that the court may in its discretion reduce the amount of
damages and attorneys fees claimed for being excessive or otherwise
unconscionable. This is without prejudice to the applicability of Section 3(c),
Rule 10 of the Rules of Court, if there are two or more defendants. (As
amended by the 1997 Rules of Civil Procedure; emphasis supplied.)
Considering the foregoing rule, respondent BPI should not be made to
suffer for petitioner Macalinaos failure to file an answer and concomitantly,
to allow the latter to submit additional evidence by dismissing or remanding
the case for further reception of evidence. Significantly, petitioner Macalinao
herself admitted the existence of her obligation to respondent BPI, albeit
with reservation as to the principal amount. Thus, a dismissal of the case
would cause great injustice to respondent BPI. Similarly, a remand of the
case for further reception of evidence would unduly prolong the proceedings
of the instant case and render inutile the proceedings conducted before the
lower courts.
Significantly, the CA correctly used the beginning balance of PhP 94,843.70
as basis for the re-computation of the interest considering that this was the

first amount which appeared on the Statement of Account of petitioner

Macalinao. There is no other amount on which the re-computation could be
based, as can be gathered from the evidence on record. Furthermore,
barring a showing that the factual findings complained of are totally devoid
of support in the record or that they are so glaringly erroneous as to
constitute serious abuse of discretion, such findings must stand, for this
Court is not expected or required to examine or contrast the evidence
submitted by the parties.22
In view of the ruling that only 1% monthly interest and 1% penalty charge
can be applied to the beginning balance of PhP 94,843.70, this Court finds
the following computation more appropriate:
Purchase
Stateme Previous s
Balance
nt Date Balance (Paymen
ts)

Total
Penalty Amount
Interest
Charge Due for
(1%)
(1%)
the
Month

10/27/20 94,843.7
02
0

94,843.7
948.44
0

948.44

96,740.5
8

11/27/20 94,843.7
(15,000)
02
0

79,843.7
798.44
0

798.44

81,440.5
8

12/31/20 79,843.7 30,308.8 110,152. 1,101.5 1,101.5 112,355.

02
0
0
50
3
3
56
1/27/200 110,152.
3
50

110,152. 1,101.5 1,101.5 112,355.

50
3
3
56

2/27/200 110,152.
3
50

110,152. 1,101.5 1,101.5 112,355.

50
3
3
56

3/27/200 110,152. (18,000.

3
50
00)

92,152.5
921.53
0

921.53

93,995.5
6

4/27/200 92,152.5
3
0

92,152.5
921.53
0

921.53

93,995.5
6

5/27/200 92,152.5 (10,000.

3
0
00)

82,152.5
821.53
0

821.53

83,795.5
6

8,362.50
6/29/200 82,152.5
83,515.0
(7,000.0
835.15
3
0
0
0)

835.15

85,185.3
0

7/27/200 83,515.0
3
0

83,515.0
835.15
0

835.15

85,185.3
0

8/27/200 83,515.0
3
0

83,515.0
835.15
0

835.15

85,185.3
0

9/28/200 83,515.0
3
0

83,515.0
835.15
0

835.15

85,185.3
0

10/28/20 83,515.0
03
0

83,515.0
835.15
0

835.15

85,185.3
0

11/28/20 83,515.0
03
0

83,515.0
835.15
0

835.15

85,185.3
0

12/28/20 83,515.0
03
0

83,515.0
835.15
0

835.15

85,185.3
0

1/27/200 83,515.0
4
0

83,515.0
835.15
0

835.15

85,185.3
0

TOTAL

83,515.0 14,397. 14,397. 112,309.

0
26
26
52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated

June 30, 2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect
to the total amount due, interest rate, and penalty charge. Accordingly,
petitioner Macalinao is ordered to pay respondent BPI the following:
(1) The amount of one hundred twelve thousand three hundred nine
pesos and fifty-two centavos (PhP 112,309.52) plus interest and
penalty charges of 2% per month from January 5, 2004 until fully paid;
(2) PhP 10,000 as and by way of attorneys fees; and
(3) Cost of suit.
SO ORDERED.

China Banking Corporation vs. Court of Appeals, 461 SCRA

162 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 153267

June 23, 2005

CHINA
BANKING
CORPORATION,
petitioner,
vs.
HON. COURT OF APPEALS and ARMED FORCES AND POLICE
SAVINGS & LOAN ASSOCIATION, INC. (AFPSLAI), respondents.
DECISION
QUISUMBING, J.:
For review is the D E C I S I O N1 dated November 23, 2001 of the Court of
Appeals in CA-G.R. SP No. 65740, affirming the Orders2 dated August 25,
2000 and April 17, 2001, of the Regional Trial Court of Quezon City, Branch
216, which denied petitioners motion to dismiss the civil action for a sum of
money filed by private respondent. Likewise impugned is the Resolution3
dated April 24, 2002 of the Court of Appeals denying petitioners motion for
reconsideration of said decision.
The antecedent facts, as summarized by the appellate court, are as follows:
On September 24, 1996, private respondent Armed Forces and Police
Savings and Loan Association, Inc. (AFPSLAI) filed a complaint for a sum of
money against petitioner China Banking Corporation (CBC) with the
Regional Trial Court of Quezon City, Branch 216.
In its Answer,4 the petitioner admitted being the registered owner of the
Home Notes, the subject matter of the complaint. These are instruments of
indebtedness issued in favor of a corporation named Fund Centrum
Finance, Inc. (FCFI) and were sold, transferred and assigned to private
respondent. Thus, the petitioner filed a Motion to Dismiss alleging that the

real party in interest was FCFI, which was not joined in the complaint, and
that petitioner was a mere trustee of FCFI.
The trial court denied the motion to dismiss. Petitioner filed a motion for
reconsideration, which the court a quo again denied. Petitioner elevated the
case to the Court of Appeals through a Petition for Certiorari and
Prohibition. The appellate court denied the petition for lack of merit. The
petitioner then brought the matter to this Court via a Petition for Certiorari,
under Rule 65. We dismissed the petition for being an improper remedy.
Petitioner filed another Motion to Dismiss, this time invoking prescription.
The lower court denied said motion to dismiss for lack of merit. It held that it
was not apparent in the complaint whether or not prescription had set in.
Thus, the trial judge directed petitioner to present its evidence. However,
petitioner instead filed a motion for reconsideration, which the trial court
denied, ratiocinating thus:
This Court finds that there are conflicting claims on the issue of whether or
not the action has already prescribed. A full blown trial is in order to
determine fully the rights of the contending parties.5
Undeterred, petitioner impugned, through a petition under Rule 65, the two
orders of the trial court claiming before the appellate court that:
RESPONDENT COURT GROSSLY ERRED OR GRAVELY ABUSED ITS
DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DENYING
THE MOTION TO DISMISS AND DECLARING THAT PRESCRIPTION
HAS NOT SET IN AGAINST PRIVATE RESPONDENT.6
In its assailed Decision, the Court of Appeals dismissed the petition, ruling
that:
Since the defense of prescription under the facts obtaining did not rest on
solid ground, the trial court took a more judicious move to direct the
defendant therein, herein petitioner, to present its evidence. It is self-evident
that with the evidence of both parties adduced, the trial court could proceed
to decide on the merits of the case including prescription, and thus avoid
collateral proceedings such as the one at bar that unduly prolong the final
determination of the controversy. After all, prescription subsists as a valid
issue in the decision process. The trial court wanted precisely a definite and

definitive-factual premise to determine whether or not the action has

prescribed. Surely, such exercise of judgment is not grave abuse of
discretion correctible by writ of certiorari. If ever he erred, it was error in
judgment. Errors of judgment may be reviewed only by appeal.7
Undaunted, petitioner now comes to this Court raising a simple issue:
WHETHER [OR] NOT THE DATE OF MATURITY OF THE INSTRUMENTS
IS THE DATE OF ACCRUAL OF CAUSE OF ACTION.8
Petitioner insists that upon the face of the complaint, prescription has set in.
It claims that the Home Notes annexed to the pleading bearing a uniform
maturity date of December 2, 1983 indicate the date of accrual of the cause
of action. Hence, argues petitioner, private respondents filing of the
complaint for sum of money on September 24, 1996, is way beyond the
prescriptive period of ten years under Article 11449 of the Civil Code. Citing
Soriano v. Ubat,10 petitioner maintains the prescription period starts from the
time when the creditor may file an action, not from the time he wishes to do
so.
However, private respondent counters that prescription is not apparent in
the complaint because the maturity date of the Home Notes attached
thereto is not the time of accrual of petitioners action. Relying on Elido, Sr.
v. Court of Appeals,11 private respondent insists that the action accrued only
on July 20, 1995, when demand to pay was made on petitioner. Private
respondent also points out that since both the trial court and the appellate
court found that prescription is not apparent on the face of the complaint,
such factual finding should therefore be binding on this Court.
We find the petition without merit. The Court of Appeals validly dismissed
the petition, there being no grave abuse of discretion committed by the trial
court in denying petitioners motion to dismiss the complaint on the ground
of prescription.
Well-settled is the rule that since a cause of action requires, as essential
elements, not only a legal right of the plaintiff and a correlative duty of the
defendant but also "an act or omission of the defendant in violation of said
legal right," the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty.12

Otherwise stated, a cause of action has three elements, to wit, (1) a right in
favor of the plaintiff by whatever means and under whatever law it arises or
is created; (2) an obligation on the part of the named defendant to respect
or not to violate such right; and (3) an act or omission on the part of such
defendant violative of the right of the plaintiff or constituting a breach of the
obligation of the defendant to the plaintiff.13
It bears stressing that it is only when the last element occurs that a cause of
action arises. Accordingly, a cause of action on a written contract accrues
only when an actual breach or violation thereof occurs.14
Applying the foregoing principle to the instant case, we rule that private
respondents cause of action accrued only on July 20, 1995, when its
demand for payment of the Home Notes was refused by petitioner. It was
only at that time, and not before that, when the written contract was
breached and private respondent could properly file an action in court.
The cause of action cannot be said to accrue on the uniform maturity date of
the Home Notes as petitioner posits because at that point, the third
essential element of a cause of action, namely, an act or omission on the
part of petitioner violative of the right of private respondent or constituting a
breach of the obligation of petitioner to private respondent, had not yet
occurred.
The subject Home Notes, in fact, specifically states that payment of the
principal and interest due on the notes shall be made only upon
presentation for notation and/or surrender for cancellation of the notes, thus:
Payment of the principal amount and interest due on this Note shall be
made by the Company at the principal office of the Trustee herein referred
to or at such other office or agency that the Company may designate for the
purpose, in such coin or currency of the Republic of the Philippines as at the
time of payment shall be legal tender for payment of public and private
debts, upon presentation for notation and/or surrender for cancellation of
this Note. . . .15 (Emphasis supplied.)
Thus, the maturity date of the Home Notes is not controlling as far as
accrual of cause of action is concerned. What said date indicates is the time
when the obligation matures, when payment on the Notes would
commence, subject to presentation, notation and/or cancellation of those

Notes. The date for computing when prescription of the action for collection
begins to set in is properly a function related to the date of actual demand
by the holder of the Notes for payment by the obligor, herein petitioner bank.
Since the demand was made only on July 20, 1995, while the civil action for
collection of a sum of money was filed on September 24, 1996, within a
period of not more than ten years, such action was not yet barred by
prescription.
WHEREFORE, the petition is DENIED for lack of merit. The assailed
Decision dated November 23, 2001, and the Resolution dated April 24,
2002, of the Court of Appeals are AFFIRMED. Costs against petitioner.
SO ORDERED.

Development Bank of the Philippines vs. Arcilla, Jr., 462 SCRA

599 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 161397

June 30, 2005

DEVELOPMENT
BANK
OF
THE
vs.
FELIPE P. ARCILLA, JR., Respondent.

PHILIPPINES,

Petitioner,

FELIPE
P.
ARCILLA,
JR.,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

Petitioner,

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 161426

June 30, 2005

DECISION
CALLEJO, SR., J.:
Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the
Philippines (DBP) in October 1981. About five or six months thereafter, he
was assigned to the legal department, and thereafter, decided to avail of a
loan under the Individual Housing Project (IHP) of the bank.1 On September
12, 1983, DBP and Arcilla executed a Deed of Conditional Sale2 over a
parcel of land, as well as the house to be constructed thereon, for the price
of P160,000.00. Arcilla borrowed the said amount from DBP for the
purchase of the lot and the construction of a residential building thereon. He
obliged himself to pay the loan in 25 years, with a monthly amortization of
P1,417.91, with 9% interest per annum, to be deducted from his monthly
salary.3
DBP obliged itself to transfer the title of the property upon the payment of
the loan, including any increments thereof. It was also agreed therein that if

Arcilla availed of optional retirement, he could elect to continue paying the

loan, provided that the loan/amount would be converted into a regular real
estate loan account with the prevailing interest assigned on real estate
loans, payable within the remaining term of the loan account.4
Arcilla was notified of the periodic release of his loan.5 During the period of
July 1984 to December 31, 1986, the monthly amortizations for the said
account were deducted from his monthly salary, for which he was issued
receipts.6
The monthly amortization was increased to P1,468.92 in November 1984,
and to P1,691.51 beginning January 1985. However, Arcilla opted to resign
from the bank in December 1986. Conformably with the Deed of Conditional
Sale, the bank informed him, on June 11, 1987, that the balance of his loan
account with the bank had been converted to a regular housing loan, thus:
Amount
Remaining
converted to PH Interest Rate
Term
Loan

Monthly
Amortization

P 155,218.79 9%
1

22 yrs.
mos<

&

6,802.45 - 2

9%

21 yrs. & 10
59.41
mos.

24,342.91 - 3

9%

22 yrs.

P1,342.72

212.07

Plus: MRI at PC. 41/thousand P1,614.20

76.41
P186,364.15 Total

P1,690.617
=========

On July 24, 1987, Arcilla signed three Promissory Notes8 for the total
amount of P186,364.15. He was also obliged to pay service charge and
interests, as follows:
a.1 On the amount advanced or balance thereof that remains unpaid
for 30 days* or less:

i.

Interest on advances at 7% p.a. over DBP's borrowing cost:

ii.

No 2% service charge

iii. No 8% penalty charge

a.2 On the amount advanced or balance thereof that remains unpaid
for more than 30 days:
i.

Interest on the advance at 7% p.a. ]

over DBP's borrowing cost;
]

ii.

One time 2% service charge

iii. Interest on the service charge

] -- To be computed from
] the start of the 30-day

iv. 8% penalty charge on the balances ]

of the advances and service
charge.9

period

Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date of
advances
Other Advances - 30-day period to be computed from date of notification
b.

Taxes

b.1 One time service charge

b.2 Interest
charge
i.

and

2% of the amount advanced

penalty Interest - 7% p.a. over borrowing cost

Penalty charge 8% p.a. if unpaid
after 30 days from date of advance

Interest of the advance at ]

7% p.a. over DBP's

borrowing costs;

]-- To be computed from start of 30day period

ii.

One time 2% service

]
charge

iii.

Interest on the service ]

charge
iv. 8% penalty charge on ]
the
]
balances of the advance ]
and
service charge.
*Insurance Premiums - 30-day period to be computed from date of
advances.
Other Advances - 30-day period to be computed from date of notification.
b.

Taxes

b.1 One time service charge

2% of the amount advanced

b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
Penalty charge 8% p.a. if unpaid
after 30 days from date of advance
However, Arcilla also agreed to the reservation by the DBP of its right to
increase (with notice to him) the "rate of interest on the loan, as well as all
other fees and charges on loans and advances pursuant to such policy as it
may adopt from time to time during the period of the loan; Provided, that the
rate of interest on the loan shall be reduced by law or by the Monetary
Board; Provided, further, that the adjustment in the rate of interest shall take
effect on or after the effectivity of the increase or decrease in the maximum
rate of interest."10
Upon his request, DBP agreed to grant Arcilla an additional cash advance of
P32,000.00. Thereafter, on May 23, 1984, a Supplement to the Conditional
Sale Agreement was executed in which DBP and Arcilla agreed on the
following terms of the loan:
Amount

Interest Rate
Terms
Per Annum

P32,000.00 Nine (9%) per 24

cent MRI for years

Amortization
P271.57

P32,000.00 at
P0.40/1,000.00

12.80

P32,000.00 same to be (Est.

consolidated
Amort.) P
284.37
with
the
=========
original
advance
in
accordance
with Condition
No. 8 hereof.11
The additional advance was, thus, consolidated to the outstanding balance
of Arcilla's original advance, payable within the remaining term thereof at
9% per annum. However, he failed to pay his loan account, advances,
penalty charges and interests which, as of October 31, 1990, amounted to
P241,940.93.12 DBP rescinded the Deed of Conditional Sale by notarial act
on November 27, 1990.13 Nevertheless, it wrote Arcilla, on January 3, 1992,
giving him until October 24, 1992, within which to repurchase the property
upon full payment of the current appraisal or updated total, whichever is
lesser; in case of failure to do so, the property would be advertised for
bidding.14 DBP reiterated the said offer on October 7, 1992.15 Arcilla failed
to respond. Consequently, the property was advertised for sale at public
bidding on February 14, 1994.16
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of
Antipolo, Rizal, on February 21, 1994. He alleged that DBP failed to furnish
him with the disclosure statement required by Republic Act (R.A.) No. 3765
and Central Bank (CB) Circular No. 158 prior to the execution of the deed of
conditional sale and the conversion of his loan account with the bank into a
regular housing loan account. Despite this, DBP immediately deducted the
account from his salary as early as 1984. Moreover, the bank applied its
own formula and imposed its usurious interests, penalties and charges on
his loan account and advances. He further alleged, thus:
13. That when plaintiff could no longer cope-up with defendant's illegal and
usurious impositions, the DBP unilaterally increased further the rate of
interest, without notice to the latter, and heaped-up usurious interests,
penalties and charges;

--14. That to further bend the back of the plaintiff, defendant rescinded the
subject deed of conditional sale on 4 December 1990 without giving due
notice to plaintiff;
15. That much later, on 10 October 1993, plaintiff received a letter from
defendant dated 19 September 1993, informing plaintiff that the subject
deed of conditional sale was already rescinded on 4 December 1990 (xerox
copy of the same is hereto attached and made an integral part hereof as
Annex "C";17
In its answer to the complaint, the DBP alleged that it substantially complied
with R.A. No. 3765 and CB Circular No. 158 because the details required in
said statements were particularly disclosed in the promissory notes, deed of
conditional sale and the required notices sent to Arcilla. In any event, its
failure to comply strictly with R.A. No. 3765 did not affect the validity and
enforceability of the subject contracts or transactions. DBP interposed a
counterclaim for the possession of the property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and
nullified the notarial rescission of the deeds executed by the parties. The
fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiff and against the defendant.1avvphil.zw+ Defendant is hereby
directed to furnish the disclosure statement to the plaintiff within five (5)
days upon receipt hereof in the manner and form provided by R.A. No. 3765
and submit to this Court for approval the total obligation of the plaintiff as of
this date, within ten (10) days from receipt of this order. The Notarial
Rescission (Exh. "16") dated November 27, 1990 is hereby declared null
and void. Costs against the defendant.
SO ORDERED.18
DBP appealed the decision to the Court of Appeals (CA) wherein it made
the following assignment of errors:
4.1. The trial court erred in ruling that the provision of the details of the
loan without the issuance of a "Disclosure Statement" is not
compliance with the "Truth in Lending Act;"

4.2. The trial court erred in declaring the Notarial Rescission null and
void; and
4.3. The trial court erred in denying DBP's counterclaims for recovery
of possession, back rentals and litigation expenses.19
On May 29, 2003, the CA rendered judgment setting aside and reversing
the decision of the RTC. In ordering the dismissal of the complaint, the
appellate court ruled that DBP substantially complied with R.A. No. 3765
and CB Circular No. 158. Arcilla filed a motion for reconsideration of the
decision. For its part, DBP filed a motion for partial reconsideration of the
decision, praying that Arcilla be ordered to vacate the property. However,
the appellate court denied both motions.
The parties filed separate petitions for review on certiorari with this Court.
The first petition, entitled Development Bank of the Philippines v. Court of
Appeals, was docketed as G.R. No. 161397; the second petition, entitled
Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R. No. 161426.
The Court resolved to consolidate the two cases.
The issues raised in the two petitions are the following: a) whether or not
petitioner DBP complied with the disclosure requirement of R.A. No. 3765
and CB Circular No. 158, Series of 1978, in the execution of the deed of
conditional sale, the supplemental deed of conditional sale, as well as the
promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is
mandated to vacate the property and pay rentals for his occupation thereof
after the notarial rescission of the deed of conditional sale was rescinded by
notarial act, as well as the supplement executed by DBP.
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular
No. 158, the DBP, as the creditor bank, was mandated to furnish him with
the requisite information in such form prescribed by the Central Bank before
the commutation of the loan transaction. He avers that the disclosure of the
details of the loan contained in the deed of conditional sale and the
supplement thereto, the promissory notes and release sheet, do not
constitute substantial compliance with the law and the CB Circular. He avers
that the required disclosure did not include the following:
[T]he percentage of Finance Charges to Total Amount Financed
(Computed in accordance with Sec. 2(i) of CB Circular 158; the Additional

Charges in case certain stipulations in the contract are not met by the
debtor; Total Non-Finance Charges; Total Finance Charges, Effective
Interest Rate, etc. 20
Arcilla further posits that the failure of DBP to comply with its obligation
under R.A. No. 3765 and CB Circular No. 158 forecloses its right to rescind
the transaction between them, and to demand compliance of his obligation
arising from said transaction. Moreover, the bank had no right to deduct the
monthly amortizations from his salary without first complying with the
mandate of R.A. No. 3765.
DBP, on the other hand, avers that all the information required by R.A. No.
3765 was already contained in the loan transaction documents. It posits that
even if it failed to comply strictly with the disclosure requirement of R.A. No.
3765, nevertheless, under Section 6(b) of the law, the validity and
enforceability of any action or transaction is not affected. It asserts that
Arcilla was estopped from invoking R.A. No. 3765 because he failed to
demand compliance with R.A. No. 3765 from the bank before the
consummation of the loan transaction, until the time his complaint was filed
with the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not
rendering judgment on its counterclaim for the possession of the subject
property, and the liability of Arcilla for rentals while in the possession of the
property after the notarial rescission of the deeds of conditional sale. For his
part, Arcilla (in G.R. No. 161426) insists that the respondent failed to comply
with its obligation under R.A. No. 3765; hence, the notarial rescission of the
deed of conditional sale and the supplement thereof was null and void. Until
DBP complies with its obligation, he is not obliged to comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a
loan transaction, the bank, as creditor, is obliged to furnish a client with a
clear statement, in writing, setting forth, to the extent applicable and in
accordance with the rules and regulations prescribed by the Monetary
Board of the Central Bank of the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be
acquired;

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

(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 charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to
be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A.
No. 3765 shall be included in the contract covering the credit transaction or
any other document to be acknowledged and signed by the debtor, thus:
The contract covering the credit transaction, or any other document to be
acknowledged and signed by the debtor, shall indicate the above seven
items of information. In addition, the contract or document shall specify
additional charges, if any, which will be collected in case certain stipulations
in the contract are not met by the debtor.
Furthermore, the contract or document shall specify additional charges, if
any, which will be collected in case certain stipulations in the contract are
not met by the debtor.21
If the borrower is not duly informed of the data required by the law prior to
the consummation of the availment or drawdown, the lender will have no
right to collect such charge or increases thereof, even if stipulated in the
promissory note.22 However, such failure shall not affect the validity or
enforceability of any contract or transaction.23
In the present case, DBP failed to disclose the requisite information in the
disclosure statement form authorized by the Central Bank, but did so in the
loan transaction documents between it and Arcilla. There is no evidence on

record that DBP sought to collect or collected any interest, penalty or other
charges, from Arcilla other than those disclosed in the said
deeds/documents.
The Court is convinced that Arcilla's claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was
but an afterthought. Despite the notarial rescission of the conditional sale in
1990, and DBP's subsequent repeated offers to repurchase the property,
the latter maintained his silence. Arcilla filed his complaint only on February
21, 1994, or four years after the said notarial rescission. The Court finds and
so holds that the following findings and ratiocinations of the CA are correct:
After a careful perusal of the records, We find that the appellee had been
sufficiently informed of the terms and the requisite charges necessarily
included in the subject loan. It must be stressed that the Truth in Lending
Act (R.A. No. 3765), was enacted primarily "to protect its citizens from a
lack of awareness of the true cost of credit to the user by using a full
disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy" (Emata vs. Intermediate
Appellate Court, 174, SCRA 464 [1989]; Sec. 2, R.A. No. 3765). Contrary to
appellee's claim that he was not sufficiently informed of the details of the
loan, the records disclose that the required informations were readily
available in the three (3) promissory notes he executed. Precisely, the said
promissory notes were executed to apprise appellee of the remaining
balance on his loan when the same was converted into a regular housing
loan. And on its face, the promissory notes signed by no less than the
appellee readily shows all the data required by the Truth in Lending Act
(R.A. No. 3765).
Apropos, We agree with the appellant that appellee, a lawyer, would not be
so gullible or negligent as to sign documents without knowing fully well the
legal implications and consequences of his actions, and that appellee was a
former employee of appellant. As such employee, he is as well presumed
knowledgeable with matters relating to appellant's business and fully
cognizant of the terms of the loan he applied for, including the charges that
had to be paid.
It might have been different if the borrower was, say, an ordinary employee
eager to buy his first house and is easily lured into accepting onerous terms
so long as the same is payable on installments. In such cases, the Court

would be disposed to be stricter in the application of the Truth in Lending

Act, insisting that the borrower be fully informed of what he is entering into.
But in the case at bar, considering appellee's education and training, We
must hold, in the light of the evidence at hand, that he was duly informed of
the necessary charges and fully understood their implications and effects.
Consequently, the trial court's annulment of the rescission anchored on this
ground was unjustified.24
Anent the prayer of DBP to order Arcilla to vacate the property and pay
rentals therefor from 1990, a review of the records has shown that it failed to
adduce evidence on the reasonable amount of rentals for Arcilla's
occupancy of the property. Hence, the Court orders a remand of the case to
the court of origin, for the parties to adduce their respective evidence on the
bank's counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is
DENIED for lack of merit. The petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional
Trial Court of Antipolo, Rizal, Branch 73, for it to resolve the counterclaim of
the Development Bank of the Philippines for possession of the property, and
for the reasonable rentals for Felipe P. Arcilla, Jr.'s occupancy thereof after
the notarial rescission of the Deed of Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.
SO ORDERED.

Ejercito vs. Sandiganbayan (Special Division), 509

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. Nos. 157294-95 November 30, 2006
Joseph
Victor
vs.
Sandiganbayan (Special
Respondents.

G.
Division)

Ejercito,
and

People

of

Petitioner,
the

Philippines,

DECISION
CARPIO MORALES, J.:
The present petition for certiorari under Rule 65 assails the Sandiganbayan
Resolutions dated February 7 and 12, 2003 denying petitioner Joseph Victor
G. Ejercitos Motions to Quash Subpoenas Duces Tecum/Ad Testificandum,
and Resolution dated March 11, 2003 denying his Motion for
Reconsideration of the first two resolutions.
The three resolutions were issued in Criminal Case No. 26558, "People of
the Philippines v. Joseph Ejercito Estrada, et al.," for plunder, defined and
penalized in R.A. 7080, "AN ACT DEFINING AND PENALIZING THE
CRIME OF PLUNDER."
In above-stated case of People v. Estrada, et al., the Special Prosecution
Panel 1 filed on January 20, 2003 before the Sandiganbayan a Request for
Issuance of Subpoena Duces Tecum for the issuance of a subpoena
directing the President of Export and Industry Bank (EIB, formerly Urban
Bank) or his/her authorized representative to produce the following
documents during the hearings scheduled on January 22 and 27, 2003:
I. For Trust Account No. 858;
1. Account Opening Documents;

2. Trading Order No. 020385 dated January 29, 1999;

3. Confirmation Advice TA 858;
4. Original/Microfilm copies, including the dorsal side, of the following:
a. Bank of Commerce MC # 0256254 in the amount of P2,000,000.00;
b. Urban bank Corp. MC # 34181 dated November 8, 1999 in the amount of
P10,875,749.43;
c. Urban Bank MC # 34182 dated November 8, 1999 in the amount of
P42,716,554.22;
d. Urban Bank Corp. MC # 37661 dated November 23, 1999 in the amount
of P54,161,496.52;
5. Trust Agreement dated January 1999:
Trustee: Joseph Victor C. Ejercito
Nominee: URBAN BANK-TRUST DEPARTMENT
Special Private Account No. (SPAN) 858; and
6. Ledger of the SPAN # 858.
II. For Savings Account No. 0116-17345-9
SPAN No. 858
1. Signature Cards; and
2. Statement of Account/Ledger
III. Urban Bank Managers Check and their corresponding Urban Bank
Managers Check Application Forms, as follows:
1. MC # 039975 dated January 18, 2000 in the amount of P70,000,000.00;
2. MC # 039976 dated January 18, 2000 in the amount of P2,000,000.00;
3. MC # 039977 dated January 18, 2000 in the amount of P2,000,000.00;

4. MC # 039978 dated January 18, 2000 in the amount of P1,000,000.00;

The Special Prosecution Panel also filed on January 20, 2003, a Request
for Issuance of Subpoena Duces Tecum/Ad Testificandum directed to the
authorized representative of Equitable-PCI Bank to produce statements of
account pertaining to certain accounts in the name of "Jose Velarde" and to
testify thereon.
The Sandiganbayan granted both requests by Resolution of January 21,
2003 and subpoenas were accordingly issued.
The Special Prosecution Panel filed still another Request for Issuance of
Subpoena Duces Tecum/Ad Testificandum dated January 23, 2003 for the
President of EIB or his/her authorized representative to produce the same
documents subject of the Subpoena Duces Tecum dated January 21, 2003
and to testify thereon on the hearings scheduled on January 27 and 29,
2003 and subsequent dates until completion of the testimony. The request
was likewise granted by the Sandiganbayan. A Subpoena Duces Tecum/Ad
Testificandum was accordingly issued on January 24, 2003.
Petitioner, claiming to have learned from the media that the Special
Prosecution Panel had requested for the issuance of subpoenas for the
examination of bank accounts belonging to him, attended the hearing of the
case on January 27, 2003 and filed before the Sandiganbayan a letter of
even date expressing his concerns as follows, quoted verbatim:
Your Honors:
It is with much respect that I write this court relative to the concern of
subpoenaing the undersigneds bank account which I have learned
through the media.
I am sure the prosecution is aware of our banking secrecy laws
everyone supposed to observe. But, instead of prosecuting those who
may have breached such laws, it seems it is even going to use
supposed evidence which I have reason to believe could only have
been illegally obtained.
The prosecution was not content with a general request. It even lists
and identifies specific documents meaning someone else in the bank
illegally released confidential information.

If this can be done to me, it can happen to anyone. Not that anything
can still shock our family. Nor that I have anything to hide. Your
Honors.
But, I am not a lawyer and need time to consult one on a situation that
affects every bank depositor in the country and should interest the
bank itself, the Bangko Sentral ng Pilipinas, and maybe the
Ombudsman himself, who may want to investigate, not exploit, the
serious breach that can only harm the economy, a consequence that
may have been overlooked. There appears to have been deplorable
connivance.
xxxx
I hope and pray, Your Honors, that I will be given time to retain the
services of a lawyer to help me protect my rights and those of every
banking depositor. But the one I have in mind is out of the country right
now.
May I, therefore, ask your Honors, that in the meantime, the issuance
of the subpoena be held in abeyance for at least ten (10) days to
enable me to take appropriate legal steps in connection with the
prosecutions request for the issuance of subpoena concerning my
accounts. (Emphasis supplied)
From the present petition, it is gathered that the "accounts" referred to by
petitioner in his above-quoted letter are Trust Account No. 858 and Savings
Account No. 0116-17345-9. 2
In open court, the Special Division of the Sandiganbayan, through Associate
Justice Edilberto Sandoval, advised petitioner that his remedy was to file a
motion to quash, for which he was given up to 12:00 noon the following day,
January 28, 2003.
Petitioner, unassisted by counsel, thus filed on January 28, 2003 a Motion
to Quash Subpoena Duces Tecum/Ad Testificandum praying that the
subpoenas previously issued to the President of the EIB dated January 21
and January 24, 2003 be quashed. 3
In his Motion to Quash, petitioner claimed that his bank accounts are
covered by R.A. No. 1405 (The Secrecy of Bank Deposits Law) and do not

fall under any of the exceptions stated therein. He further claimed that the
specific identification of documents in the questioned subpoenas, including
details on dates and amounts, could only have been made possible by an
earlier illegal disclosure thereof by the EIB and the Philippine Deposit
Insurance Corporation (PDIC) in its capacity as receiver of the then Urban
Bank.
The disclosure being illegal, petitioner concluded, the prosecution in the
case may not be allowed to make use of the information.
Before the Motion to Quash was resolved by the Sandiganbayan, the
prosecution filed another Request for the Issuance of Subpoena Duces
Tecum/Ad Testificandum dated January 31, 2003, again to direct the
President of the EIB to produce, on the hearings scheduled on February 3
and 5, 2003, the same documents subject of the January 21 and 24, 2003
subpoenas with the exception of the Bank of Commerce MC #0256254 in
the amount of P2,000,000 as Bank of Commerce MC #0256256 in the
amount of P200,000,000 was instead requested. Moreover, the request
covered the following additional documents:
IV. For Savings Account No. 1701-00646-1:
1. Account Opening Forms;
2. Specimen Signature Card/s; and
3. Statements of Account.
The prosecution also filed a Request for the Issuance of Subpoena Duces
Tecum/Ad Testificandum bearing the same date, January 31, 2003, directed
to Aurora C. Baldoz, Vice President-CR-II of the PDIC for her to produce the
following documents on the scheduled hearings on February 3 and 5, 2003:
1. Letter of authority dated November 23, 1999 re: SPAN [Special Private
Account Number] 858;
2. Letter of authority dated January 29, 2000 re: SPAN 858;
3. Letter of authority dated April 24, 2000 re: SPAN 858;

4. Urban Bank check no. 052092 dated April 24, 2000 for the amount of
P36, 572, 315.43;
5. Urban Bank check no. 052093 dated April 24, 2000 for the amount of
P107,191,780.85; and
6. Signature Card Savings Account No. 0116-17345-9. (Underscoring
supplied)
The subpoenas prayed for in both requests were issued by the
Sandiganbayan on January 31, 2003.
On February 7, 2003, petitioner, this time assisted by counsel, filed an
Urgent Motion to Quash Subpoenae Duces Tecum/Ad Testificandum
praying that the subpoena dated January 31, 2003 directed to Aurora
Baldoz be quashed for the same reasons which he cited in the Motion to
Quash 4 he had earlier filed.
On the same day, February 7, 2003, the Sandiganbayan issued a
Resolution denying petitioners Motion to Quash Subpoenae Duces
Tecum/Ad Testificandum dated January 28, 2003.
Subsequently or on February 12, 2003, the Sandiganbayan issued a
Resolution denying petitioners Urgent Motion to Quash Subpoena Duces
Tecum/Ad Testificandum dated February 7, 2003.
Petitioners Motion for Reconsideration dated February 24, 2003 seeking a
reconsideration of the Resolutions of February 7 and 12, 2003 having been
denied by Resolution of March 11, 2003, petitioner filed the present petition.
Raised as issues are:
1. Whether petitioners Trust Account No. 858 is covered by the term
"deposit" as used in R.A. 1405;
2. Whether petitioners Trust Account No. 858 and Savings Account No.
0116-17345-9 are excepted from the protection of R.A. 1405; and
3. Whether the "extremely-detailed" information contained in the Special
Prosecution Panels requests for subpoena was obtained through a prior

illegal disclosure of petitioners bank accounts, in violation of the "fruit of the

poisonous tree" doctrine.
Respondent People posits that Trust Account No. 858 5 may be inquired
into, not merely because it falls under the exceptions to the coverage of
R.A. 1405, but because it is not even contemplated therein. For, to
respondent People, the law applies only to "deposits" which strictly means
the money delivered to the bank by which a creditor-debtor relationship is
created between the depositor and the bank.
The contention that trust accounts are not covered by the term "deposits,"
as used in R.A. 1405, by the mere fact that they do not entail a creditordebtor relationship between the trustor and the bank, does not lie. An
examination of the law shows that the term "deposits" used therein is to be
understood broadly and not limited only to accounts which give rise to a
creditor-debtor relationship between the depositor and the bank.
The policy behind the law is laid down in Section 1:
SECTION 1. It is hereby declared to be the policy of the Government to give
encouragement to the people to deposit their money in banking institutions
and to discourage private hoarding so that the same may be properly
utilized by banks in authorized loans to assist in the economic development
of the country. (Underscoring supplied)
If the money deposited under an account may be used by banks for
authorized loans to third persons, then such account, regardless of whether
it creates a creditor-debtor relationship between the depositor and the bank,
falls under the category of accounts which the law precisely seeks to protect
for the purpose of boosting the economic development of the country.
Trust Account No. 858 is, without doubt, one such account. The Trust
Agreement between petitioner and Urban Bank provides that the trust
account covers "deposit, placement or investment of funds" by Urban Bank
for and in behalf of petitioner. 6 The money deposited under Trust Account
No. 858, was, therefore, intended not merely to remain with the bank but to
be invested by it elsewhere. To hold that this type of account is not
protected by R.A. 1405 would encourage private hoarding of funds that
could otherwise be invested by banks in other ventures, contrary to the
policy behind the law.

Section 2 of the same law in fact even more clearly shows that the term
"deposits" was intended to be understood broadly:
SECTION 2. All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued by the
Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a competent court
in cases of bribery or dereliction of duty of public officials, or in cases where
the money deposited or invested is the subject matter of the litigation.
(Emphasis and underscoring supplied)
The phrase "of whatever nature" proscribes any restrictive interpretation of
"deposits." Moreover, it is clear from the immediately quoted provision that,
generally, the law applies not only to money which is deposited but also to
those which are invested. This further shows that the law was not intended
to apply only to "deposits" in the strict sense of the word. Otherwise, there
would have been no need to add the phrase "or invested."
Clearly, therefore, R.A. 1405 is broad enough to cover Trust Account No.
858.
The protection afforded by the law is, however, not absolute, there being
recognized exceptions thereto, as above-quoted Section 2 provides. In the
present case, two exceptions apply, to wit: (1) the examination of bank
accounts is upon order of a competent court in cases of bribery or
dereliction of duty of public officials, and (2) the money deposited or
invested is the subject matter of the litigation.
Petitioner contends that since plunder is neither bribery nor dereliction of
duty, his accounts are not excepted from the protection of R.A. 1405.
Philippine National Bank v. Gancayco 7 holds otherwise:
Cases of unexplained wealth are similar to cases of bribery or dereliction of
duty and no reason is seen why these two classes of cases cannot be
excepted from the rule making bank deposits confidential. The policy as to
one cannot be different from the policy as to the other. This policy
expresses the notion that a public office is a public trust and any person

who enters upon its discharge does so with the full knowledge that his life,
so far as relevant to his duty, is open to public scrutiny.
Undoubtedly, cases for plunder involve unexplained wealth. Section 2 of
R.A. No. 7080 states so.
SECTION 2. Definition of the Crime of Plunder; Penalties. Any public
officer who, by himself or in connivance with members of his family,
relatives by affinity or consanguinity, business associates, subordinates or
other persons, amasses, accumulates or acquires ill-gotten wealth through
a combination or series of overt or criminal acts as described in Section 1(d)
hereof, in the aggregate amount or total value of at least Seventy-five million
pesos (P75,000,000.00), shall be guilty of the crime of plunder and shall be
punished by life imprisonment with perpetual absolute disqualification from
holding any public office. Any person who participated with said public
officer in the commission of plunder shall likewise be punished. In the
imposition of penalties, the degree of participation and the attendance of
mitigating and extenuating circumstances shall be considered by the court.
The court shall declare any and all ill-gotten wealth and their interests and
other incomes and assets including the properties and shares of stock
derived from the deposit or investment thereof forfeited in favor of the State.
(Emphasis and underscoring supplied)
An examination of the "overt or criminal acts as described in Section 1(d)" of
R.A. No. 7080 would make the similarity between plunder and bribery even
more pronounced since bribery is essentially included among these criminal
acts. Thus Section 1(d) states:
d) "Ill-gotten wealth" means any asset, property, business enterprise or
material possession of any person within the purview of Section Two (2)
hereof, acquired by him directly or indirectly through dummies, nominees,
agents, subordinates and or business associates by any combination or
series of the following means or similar schemes.
1) Through misappropriation, conversion, misuse, or malversation of public
funds or raids on the public treasury;
2) By receiving, directly or indirectly, any commission, gift, share,
percentage, kickbacks or any other form of pecuniary benefit from any

person and/or entity in connection with any government contract or project

or by reason of the office or position of the public officer concerned;
3) By the illegal or fraudulent conveyance or disposition of assets belonging
to the National Government or any of its subdivisions, agencies or
instrumentalities or government-owned or -controlled corporations and their
subsidiaries;
4) By obtaining, receiving or accepting directly or indirectly any shares of
stock, equity or any other form of interest or participation including promise
of future employment in any business enterprise or undertaking;
5) By establishing agricultural, industrial or commercial monopolies or other
combinations and/or implementation of decrees and orders intended to
benefit particular persons or special interests; or
6) By taking undue advantage of official position, authority, relationship,
connection or influence to unjustly enrich himself or themselves at the
expense and to the damage and prejudice of the Filipino people and the
Republic of the Philippines. (Emphasis supplied)
Indeed, all the above-enumerated overt acts are similar to bribery such that,
in each case, it may be said that "no reason is seen why these two classes
of cases cannot be excepted from the rule making bank deposits
confidential." 8
The crime of bribery and the overt acts constitutive of plunder are crimes
committed by public officers, and in either case the noble idea that "a public
office is a public trust and any person who enters upon its discharge does
so with the full knowledge that his life, so far as relevant to his duty, is open
to public scrutiny" applies with equal force.
Plunder being thus analogous to bribery, the exception to R.A. 1405
applicable in cases of bribery must also apply to cases of plunder.
Respecting petitioners claim that the money in his bank accounts is not the
"subject matter of the litigation," the meaning of the phrase "subject matter
of the litigation" as used in R.A. 1405 is explained in Union Bank of the
Philippines v. Court of Appeals, 9 thus:

Petitioner contends that the Court of Appeals confuses the "cause of action"
with the "subject of the action". In Yusingco v. Ong Hing Lian, petitioner
points out, this Court distinguished the two concepts.
x x x "The cause of action is the legal wrong threatened or committed, while
the object of the action is to prevent or redress the wrong by obtaining some
legal relief; but the subject of the action is neither of these since it is not the
wrong or the relief demanded, the subject of the action is the matter or thing
with respect to which the controversy has arisen, concerning which the
wrong has been done, and this ordinarily is the property or the contract and
its subject matter, or the thing in dispute."
The argument is well-taken. We note with approval the difference between
the subject of the action from the cause of action. We also find petitioners
definition of the phrase subject matter of the action is consistent with the
term subject matter of the litigation, as the latter is used in the Bank
Deposits Secrecy Act.
In Mellon Bank, N.A. v. Magsino, where the petitioner bank inadvertently
caused the transfer of the amount of US$1,000,000.00 instead of only
US$1,000.00, the Court sanctioned the examination of the bank accounts
where part of the money was subsequently caused to be deposited:
x x x Section 2 of [Republic Act No. 1405] allows the disclosure of bank
deposits in cases where the money deposited is the subject matter of the
litigation. Inasmuch as Civil Case No. 26899 is aimed at recovering the
amount converted by the Javiers for their own benefit, necessarily, an
inquiry into the whereabouts of the illegally acquired amount extends to
whatever is concealed by being held or recorded in the name of persons
other than the one responsible for the illegal acquisition."
Clearly, Mellon Bank involved a case where the money deposited was the
subject matter of the litigation since the money deposited was the very thing
in dispute. x x x" (Emphasis and underscoring supplied)
The plunder case now pending with the Sandiganbayan necessarily
involves an inquiry into the whereabouts of the amount purportedly acquired
illegally by former President Joseph Estrada.

In light then of this Courts pronouncement in Union Bank, the subject

matter of the litigation cannot be limited to bank accounts under the name of
President Estrada alone, but must include those accounts to which the
money purportedly acquired illegally or a portion thereof was alleged to
have been transferred. Trust Account No. 858 and Savings Account No.
0116-17345-9 in the name of petitioner fall under this description and must
thus be part of the subject matter of the litigation.
In a further attempt to show that the subpoenas issued by the
Sandiganbayan are invalid and may not be enforced, petitioner contends, as
earlier stated, that the information found therein, given their "extremely
detailed" character, could only have been obtained by the Special
Prosecution Panel through an illegal disclosure by the bank officials
concerned. Petitioner thus claims that, following the "fruit of the poisonous
tree" doctrine, the subpoenas must be quashed.
Petitioner further contends that even if, as claimed by respondent People,
the "extremely-detailed" information was obtained by the Ombudsman from
the bank officials concerned during a previous investigation of the charges
against President Estrada, such inquiry into his bank accounts would itself
be illegal.
Petitioner relies on Marquez v. Desierto 10 where the Court held:
We rule that before an in camera inspection may be allowed there must be
a pending case before a court of competent jurisdiction. Further, the
account must be clearly identified, the inspection limited to the subject
matter of the pending case before the court of competent jurisdiction. The
bank personnel and the account holder must be notified to be present
during the inspection, and such inspection may cover only the account
identified in the pending case. (Underscoring supplied)
As no plunder case against then President Estrada had yet been filed
before a court of competent jurisdiction at the time the Ombudsman
conducted an investigation, petitioner concludes that the information about
his bank accounts were acquired illegally, hence, it may not be lawfully used
to facilitate a subsequent inquiry into the same bank accounts.
Petitioners attempt to make the exclusionary rule applicable to the instant
case fails. R.A. 1405, it bears noting, nowhere provides that an unlawful

examination of bank accounts shall render the evidence obtained therefrom

inadmissible in evidence. Section 5 of R.A. 1405 only states that "[a]ny
violation of this law will subject the offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty
thousand pesos or both, in the discretion of the court."
The case of U.S. v. Frazin, [11] involving the Right to Financial Privacy Act
of 1978 (RFPA) of the United States, is instructive.
Because the statute, when properly construed, excludes a suppression
remedy, it would not be appropriate for us to provide one in the exercise of
our supervisory powers over the administration of justice. Where Congress
has both established a right and provided exclusive remedies for its
violation, we would "encroach upon the prerogatives" of Congress were we
to authorize a remedy not provided for by statute. United States v. Chanen,
549 F.2d 1306, 1313 (9th Cir.), cert. denied, 434 U.S. 825, 98 S.Ct. 72, 54
L.Ed.2d 83 (1977).
The same principle was reiterated in U.S. v. Thompson: [12]
x x x When Congress specifically designates a remedy for one of its acts,
courts generally presume that it engaged in the necessary balancing of
interests in determining what the appropriate penalty should be. See
Michaelian, 803 F.2d at 1049 (citing cases); Frazin, 780 F.2d at 1466.
Absent a specific reference to an exclusionary rule, it is not appropriate for
the courts to read such a provision into the act.
Even assuming arguendo, however, that the exclusionary rule applies in
principle to cases involving R.A. 1405, the Court finds no reason to apply
the same in this particular case.
Clearly, the "fruit of the poisonous tree" doctrine [13] presupposes a
violation of law. If there was no violation of R.A. 1405 in the instant case,
then there would be no "poisonous tree" to begin with, and, thus, no reason
to apply the doctrine.
How the Ombudsman conducted his inquiry into the bank accounts of
petitioner is recounted by respondent People of the Philippines, viz:
x x x [A]s early as February 8, 2001, long before the issuance of the
Marquez ruling, the Office of the Ombudsman, acting under the powers

granted to it by the Constitution and R.A. No. 6770, and acting on

information obtained from various sources, including impeachment (of then
Pres. Joseph Estrada) related reports, articles and investigative journals,
issued a Subpoena Duces Tecum addressed to Urban Bank. (Attachment
"1-b") It should be noted that the description of the documents sought to be
produced at that time included that of numbered accounts 727, 737, 747,
757, 777 and 858 and included such names as Jose Velarde, Joseph E.
Estrada, Laarni Enriquez, Guia Gomez, Joy Melendrez, Peachy Osorio,
Rowena Lopez, Kevin or Kelvin Garcia. The subpoena did not single out
account 858.
xxxx
Thus, on February 13, 2001, PDIC, as receiver of Urban Bank, issued a
certification as to the availability of bank documents relating to A/C 858 and
T/A 858 and the non-availability of bank records as to the other accounts
named in the subpoena. (Attachments "2", "2-1" and "2-b)
Based on the certification issued by PDIC, the Office of the Ombudsman on
February 16, 2001 again issued a Subpoena Duces Tecum directed to Ms.
Corazon dela Paz, as Interim Receiver, directing the production of
documents pertinent to account A/C 858 and T/C 858. (Attachment "3")
In compliance with the said subpoena dated February 16, 2001, Ms. Dela
Paz, as interim receiver, furnished the Office of the Ombudsman certified
copies of documents under cover latter dated February 21, 2001:
1. Transaction registers dated 7-02-99, 8-16-99, 9-17-99, 10-18-99, 11-2299, 1-07-00, 04-03-00 and 04-24-00;
2. Report of Unregularized TAFs & TDs for UR COIN A & B Placements of
Various Branches as of February 29, 2000 and as of December 16, 1999;
and
3. Trading Orders Nos. A No. 78102 and A No. 078125.
Trading Order A No. 07125 is filed in two copies a white copy which
showed "set up" information; and a yellow copy which showed "reversal"
information. Both copies have been reproduced and are enclosed with this
letter.

We are continuing our search for other records and documents pertinent to
your request and we will forward to you on Friday, 23 February 2001, such
additional records and documents as we might find until then. (Attachment
"4")
The Office of the Ombudsman then requested for the mangers checks,
detailed in the Subpoena Duces Tecum dated March 7, 2001. (Attachment
"5")
PDIC again complied with the said Subpoena Duces Tecum dated March 7,
2001 and provided copies of the managers checks thus requested under
cover letter dated March 16, 2001. (Attachment "6") [14] (Emphasis in the
original)
The Sandiganbayan credited the foregoing account of respondent People.
[15] The Court finds no reason to disturb this finding of fact by the
Sandiganbayan.
The Marquez ruling notwithstanding, the above-described examination by
the Ombudsman of petitioners bank accounts, conducted before a case
was filed with a court of competent jurisdiction, was lawful.
For the Ombudsman issued the subpoenas bearing on the bank accounts of
petitioner about four months before Marquez was promulgated on June 27,
2001.
While judicial interpretations of statutes, such as that made in Marquez with
respect to R.A. No. 6770 or the Ombudsman Act of 1989, are deemed part
of the statute as of the date it was originally passed, the rule is not absolute.
Columbia Pictures, Inc. v. Court of Appeals [16] teaches:
It is consequently clear that a judicial interpretation becomes a part of the
law as of the date that law was originally passed, subject only to the
qualification that when a doctrine of this Court is overruled and a different
view is adopted, and more so when there is a reversal thereof, the new
doctrine should be applied prospectively and should not apply to parties
who relied on the old doctrine and acted in good faith. (Emphasis and
underscoring supplied)

When this Court construed the Ombudsman Act of 1989, in light of the
Secrecy of Bank Deposits Law in Marquez, that "before an in camera
inspection may be allowed there must be a pending case before a court of
competent jurisdiction", it was, in fact, reversing an earlier doctrine found in
Banco Filipino Savings and Mortgage Bank v. Purisima [17].
Banco Filipino involved subpoenas duces tecum issued by the Office of the
Ombudsman, then known as the Tanodbayan, [18] in the course of its
preliminary investigation of a charge of violation of the Anti-Graft and
Corrupt Practices Act.
While the main issue in Banco Filipino was whether R.A. 1405 precluded
the Tanodbayans issuance of subpoena duces tecum of bank records in
the name of persons other than the one who was charged, this Court, citing
P.D. 1630, [19] Section 10, the relevant part of which states:
(d) He may issue a subpoena to compel any person to appear, give sworn
testimony, or produce documentary or other evidence the Tanodbayan
deems relevant to a matter under his inquiry,
held that "The power of the Tanodbayan to issue subpoenae ad
testificandum and subpoenae duces tecum at the time in question is not
disputed, and at any rate does not admit of doubt." [20]
As the subpoenas subject of Banco Filipino were issued during a
preliminary investigation, in effect this Court upheld the power of the
Tandobayan under P.D. 1630 to issue subpoenas duces tecum for bank
documents prior to the filing of a case before a court of competent
jurisdiction.
Marquez, on the other hand, practically reversed this ruling in Banco Filipino
despite the fact that the subpoena power of the Ombudsman under R.A.
6770 was essentially the same as that under P.D. 1630. Thus Section 15 of
R.A. 6770 empowers the Office of the Ombudsman to
(8) Administer oaths, issue subpoena and subpoena duces tecum, and take
testimony in any investigation or inquiry, including the power to examine and
have access to bank accounts and records;
A comparison of this provision with its counterpart in Sec. 10(d) of P.D.
1630 clearly shows that it is only more explicit in stating that the power of

the Ombudsman includes the power to examine and have access to bank
accounts and records which power was recognized with respect to the
Tanodbayan through Banco Filipino.
The Marquez ruling that there must be a pending case in order for the
Ombudsman to validly inspect bank records in camera thus reversed a
prevailing doctrine. [21] Hence, it may not be retroactively applied.
The Ombudsmans inquiry into the subject bank accounts prior to the filing
of any case before a court of competent jurisdiction was therefore valid at
the time it was conducted.
Likewise, the Marquez ruling that "the account holder must be notified to be
present during the inspection" may not be applied retroactively to the inquiry
of the Ombudsman subject of this case. This ruling is not a judicial
interpretation either of R.A. 6770 or R.A. 1405, but a "judge-made" law
which, as People v. Luvendino [22] instructs, can only be given prospective
application:
x x x The doctrine that an uncounselled waiver of the right to counsel is not
to be given legal effect was initially a judge-made one and was first
announced on 26 April 1983 in Morales v. Enrile and reiterated on 20 March
1985 in People v. Galit. x x x
While the Morales-Galit doctrine eventually became part of Section 12(1) of
the 1987 Constitution, that doctrine affords no comfort to appellant
Luvendino for the requirements and restrictions outlined in Morales and
Galit have no retroactive effect and do not reach waivers made prior to 26
April 1983 the date of promulgation of Morales. (Emphasis supplied)
In fine, the subpoenas issued by the Ombudsman in this case were legal,
hence, invocation of the "fruit of the poisonous tree" doctrine is misplaced.
At all events, even if the challenged subpoenas are quashed, the
Ombudsman is not barred from requiring the production of the same
documents based solely on information obtained by it from sources
independent of its previous inquiry.
In particular, the Ombudsman, even before its inquiry, had already
possessed information giving him grounds to believe that (1) there are bank
accounts bearing the number "858," (2) that such accounts are in the

custody of Urban Bank, and (3) that the same are linked with the bank
accounts of former President Joseph Estrada who was then under
investigation for plunder.
Only with such prior independent information could it have been possible for
the Ombudsman to issue the February 8, 2001 subpoena duces tecum
addressed to the President and/or Chief Executive Officer of Urban Bank,
which described the documents subject thereof as follows:
(a) bank records and all documents relative thereto pertaining to all bank
accounts (Savings, Current, Time Deposit, Trust, Foreign Currency
Deposits, etc) under the account names of Jose Velarde, Joseph E.
Estrada, Laarni Enriquez, Guia Gomez, Joy Melendrez, Peach Osorio,
Rowena Lopez, Kevin or Kelvin Garcia, 727, 737, 747, 757, 777 and 858.
(Emphasis and underscoring supplied)
The information on the existence of Bank Accounts bearing number "858"
was, according to respondent People of the Philippines, obtained from
various sources including the proceedings during the impeachment of
President Estrada, related reports, articles and investigative journals. [23] In
the absence of proof to the contrary, this explanation proffered by
respondent must be upheld. To presume that the information was obtained
in violation of R.A. 1405 would infringe the presumption of regularity in the
performance of official functions.
Thus, with the filing of the plunder case against former President Estrada
before the Sandiganbayan, the Ombudsman, using the above independent
information, may now proceed to conduct the same investigation it earlier
conducted, through which it can eventually obtain the same information
previously disclosed to it by the PDIC, for it is an inescapable fact that the
bank records of petitioner are no longer protected by R.A. 1405 for the
reasons already explained above.
Since conducting such an inquiry would, however, only result in the
disclosure of the same documents to the Ombudsman, this Court, in
avoidance of what would be a time-wasteful and circuitous way of
administering justice, [24] upholds the challenged subpoenas.
Respecting petitioners claim that the Sandiganbayan violated his right to
due process as he was neither notified of the requests for the issuance of

the subpoenas nor of the grant thereof, suffice it to state that the defects
were cured when petitioner ventilated his arguments against the issuance
thereof through his earlier quoted letter addressed to the Sandiganbayan
and when he filed his motions to quash before the Sandiganbayan.
IN SUM, the Court finds that the Sandiganbayan did not commit grave
abuse of discretion in issuing the challenged subpoenas for documents
pertaining to petitioners Trust Account No. 858 and Savings Account No.
0116-17345-9 for the following reasons:
1. These accounts are no longer protected by the Secrecy of Bank Deposits
Law, there being two exceptions to the said law applicable in this case,
namely: (1) the examination of bank accounts is upon order of a competent
court in cases of bribery or dereliction of duty of public officials, and (2) the
money deposited or invested is the subject matter of the litigation. Exception
(1) applies since the plunder case pending against former President Estrada
is analogous to bribery or dereliction of duty, while exception (2) applies
because the money deposited in petitioners bank accounts is said to form
part of the subject matter of the same plunder case.
2. The "fruit of the poisonous tree" principle, which states that once the
primary source (the "tree") is shown to have been unlawfully obtained, any
secondary or derivative evidence (the "fruit") derived from it is also
inadmissible, does not apply in this case. In the first place, R.A. 1405 does
not provide for the application of this rule. Moreover, there is no basis for
applying the same in this case since the primary source for the detailed
information regarding petitioners bank accounts the investigation
previously conducted by the Ombudsman was lawful.
3. At all events, even if the subpoenas issued by the Sandiganbayan were
quashed, the Ombudsman may conduct on its own the same inquiry into the
subject bank accounts that it earlier conducted last February-March 2001,
there being a plunder case already pending against former President
Estrada. To quash the challenged subpoenas would, therefore, be pointless
since the Ombudsman may obtain the same documents by another route.
Upholding the subpoenas avoids an unnecessary delay in the administration
of justice.
WHEREFORE, the petition is DISMISSED. The Sandiganbayan Resolutions
dated February 7 and 12, 2003 and March 11, 2003 are upheld.

The Sandiganbayan is hereby directed, consistent with this Courts ruling in

Marquez v. Desierto, to notify petitioner as to the date the subject bank
documents shall be presented in court by the persons subpoenaed.
SO ORDERED.

China Banking Corporation vs. Court of Appeals, 511 SCRA

110 (2006)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 140687

December 18, 2006

CHINA
BANKING
CORPORATION,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS and JOSE "JOSEPH"
GOTIANUY as substituted by ELIZABETH GOTIANUY LO, respondents.

DECISION

CHICO-NAZARIO, J.:
A Complaint for recovery of sums of money and annulment of sales of real
properties and shares of stock docketed as CEB-21445 was filed by Jose
"Joseph" Gotianuy against his son-in-law, George Dee, and his daughter,
Mary Margaret Dee, before the Regional Trial Court (RTC) of Cebu City,
Branch 58.
Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, among
his other properties, US dollar deposits with Citibank N.A. amounting to not
less than P35,000,000.00 and US$864,000.00. Mary Margaret Dee received
these amounts from Citibank N.A. through checks which she allegedly
deposited at China Banking Corporation (China Bank). He likewise accused
his son-in-law, George Dee, husband of his daughter, Mary Margaret, of
transferring his real properties and shares of stock in George Dee's name
without any consideration. Jose Gotianuy, died during the pendency of the
case before the trial court.1 He was substituted by his daughter, Elizabeth
Gotianuy Lo. The latter presented the US Dollar checks withdrawn by Mary

Margaret Dee from his US dollar placement with Citibank. The details of the
said checks are:
1) CITIBANK CHECK NO. 69003194405412 dated September 29
1997 in the amount of US$5,937.52 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;
2) CITIBANK CHECK NO. 69003194405296 dated September 29
1997 in the amount of US$7,197.59 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;
3) CITIBANK CHECK NO. 69003194405414 dated September 29
1997 in the amount of US$1,198.94 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;
4) CITIBANK CHECK NO. 69003194405413 dated September 29
1997 in the amount of US$989.04 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;
5) CITIBANK CHECK NO. 69003194405297 dated October 01 1997 in
the amount of US$766,011.97 payable to GOTIANUY: JOSE AND/OR
DEE: MARY MARGARET; and
6) CITIBANK CHECK NO. 69003194405339 dated October 09 1997 in
the amount of US$83,053.10 payable to GOTIANUY: JOSE AND/OR
DEE: MARY MARGARET.2
Upon motion of Elizabeth Gotianuy Lo, the trial court3 issued a subpoena to
Cristota Labios and Isabel Yap, employees of China Bank, to testify on the
case. The Order of the trial court dated 23 February 1999, states:
Issue a subpoena ad testificandum requiring MS. ISABEL YAP and
CRISTOTA LABIOS of China Banking Corporation, Cebu Main Branch,
corner Magallanes and D. Jakosalem Sts., Cebu City, to appear in
person and to testify in the hearing of the above entitled case on March
1, 1999 at 8:30 in the morning, with regards to Citibank Checks (Exhs.
"AAA" to "AAA-5") and other matters material and relevant to the
issues of this case.4
China Bank moved for a reconsideration. Resolving the motion, the trial
court issued an Order dated 16 April 1999 and held:

The Court is of the view that as the foreign currency fund (Exhs. "AAA"
to "AAA-5") is deposited with the movant China Banking Corporation,
Cebu Main Branch, Cebu City, the disclosure only as to the name or in
whose name the said fund is deposited is not violative of the law.
Justice will be better served if the name or names of the depositor of
said fund shall be disclosed because such a disclosure is material and
important to the issues between the parties in the case at bar.
Premises considered, the motion for reconsideration is denied partly
and granted partly, in the sense that Isabel Yap and/or Cristuta Labios
are directed to appear before this Court and to testify at the trial of this
case on April 20, 1999, May 6 & 7, 1999 at 10:00 o'clock in the
morning and only for the purpose of disclosing in whose name or
names is the foreign currency fund (Exhs. "AAA" to "AAA-5") deposited
with the movant Bank and not to other matters material and relevant to
the issues in the case at bar.5
From this Order, China Bank filed a Petition for Certiorari6 with the Court of
Appeals. In a Decision7 dated 29 October 1999, the Court of Appeals
denied the petition of China Bank and affirmed the Order of the RTC.
In justifying its conclusion, the Court of Appeals ratiocinated:
From the foregoing, it is pristinely clear the law specifically
encompasses only the money or funds in foreign currency deposited in
a bank. Thus, the coverage of the law extends only to the foreign
currency deposit in the CBC account where Mary Margaret Dee
deposited the Citibank checks in question and nothing more.
It has to be pointed out that the April 16, 1999 Order of the court of
origin modified its previous February 23, 1999 Order such that the
CBC representatives are directed solely to divulge "in whose name or
names is the foreign currency fund (Exhs. "AAA" to "AAA-5") deposited
with the movant bank." It precluded inquiry on "other materials and
relevant to the issues in the case at bar." We find that the directive of
the court below does not contravene the plain language of RA 6426 as
amended by P.D. No. 1246.
The contention of petitioner that the [prescription] on absolute
confidentiality under the law in question covers even the name of the

depositor and is beyond the compulsive process of the courts is

palpably untenable as the law protects only the deposits itself but not
the name of the depositor. To uphold the theory of petitioner CBC is
reading into the statute "something that is not within the manifest
intention of the legislature as gathered from the statute itself, for to
depart from the meaning expressed by the words, is to alter the
statute, to legislate and not to interpret, and judicial legislation should
be avoided. Maledicta expositio quae corrumpit textum It is a
dangerous construction which is against the words. Expressing the
same principle is the maxim: Ubi lex non distinguit nec nos distinguere
debemos, which simply means that where the law does not distinguish,
we should not make any distinction." (Gonzaga, Statutes and their
Construction, p. 75.)8
From the Decision of the Court of Appeals, China Bank elevated the case to
this Court based on the following issues:
I
THE HONORABLE COURT OF APPEALS HAS INTERPRETED THE
PROVISION OF SECTION 8 OF R.A. 6426, AS AMENDED,
OTHERWISE KNOWN AS THE FOREIGN CURRENCY DEPOSIT
ACT, IN A MANNER CONTRARY TO THE LEGISLATIVE PURPOSE,
THAT IS, TO PROVIDE ABSOLUTE CONFIDENTIALITY OF
WHATEVER INFORMATION RELATIVE TO THE FOREIGN
CURRENCY DEPOSIT.
II
PRIVATE RESPONDENT IS NOT THE OWNER OF THE
QUESTIONED FOREIGN CURRENCY DEPOSIT. THUS, HE
CANNOT INVOKE THE AID OF THE COURT IN COMPELLING THE
DISCLOSURE OF SOMEONE ELSE'S FOREIGN CURRENCY
DEPOSIT ON THE FLIMSY PRETEXT THAT THE CHECKS (IN
FOREIGN CURRENCY) HE HAD ISSUED MAY HAVE ENDED UP
THEREIN.
III

PETITIONER CAN RIGHTLY INVOKE THE PROVISION OF SEC. 8,

R.A. 6426, IN BEHALF OF THE FOREIGN CURRENCY DEPOSITOR,
OWING TO ITS SOLEMN OBLIGATION TO ITS CLIENT TO
EXERCISE EXTRAORDINARY DILIGENCE IN THE HANDLING OF
THE ACCOUNT.9
As amended by Presidential Decree No. 1246, the law reads:
SEC. 8. Secrecy of Foreign Currency Deposits. All foreign currency
deposits authorized under this Act, as amended by Presidential Decree
No. 1035, as well as foreign currency deposits authorized under
Presidential Decree No. 1034, are hereby declared as and considered
of an absolutely confidential nature and, except upon the written
permission of the depositor, in no instance shall such foreign currency
deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative
or legislative or any other entity whether public or private: Provided,
however, that said foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body
whatsoever. (As amended by PD No. 1035, and further amended by
PD No. 1246, prom. Nov. 21, 1977) (Emphasis supplied.)
Under the above provision, the law provides that all foreign currency
deposits authorized under Republic Act No. 6426, as amended by Sec. 8,
Presidential Decree No. 1246, Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential Decree No. 1034
are considered absolutely confidential in nature and may not be inquired
into. There is only one exception to the secrecy of foreign currency deposits,
that is, disclosure is allowed upon the written permission of the depositor.
This much was pronounced in the case of Intengan v. Court of Appeals,10
where it was held that the only exception to the secrecy of foreign currency
deposits is in the case of a written permission of the depositor.
It must be remembered that under the whereas clause of Presidential
Decree No. 1246 which amended Sec. 8 of Republic Act No. 6426, the
Foreign Currency Deposit System including the Offshore Banking System
under Presidential Decree 1034 were intended to draw deposits from
foreign lenders and investors, and we quote:

Whereas, in order to assure the development and speedy growth of

the Foreign Currency Deposit System and the Offshore Banking
System in the Philippines, certain incentives were provided for under
the two Systems such as confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest income of depositors
who are nonresidents and are not engaged in trade or business in the
Philippines;
Whereas, making absolute the protective cloak of confidentiality over
such foreign currency deposits, exempting such deposits from tax, and
guaranteeing the vested rights of depositors would better encourage
the inflow of foreign currency deposits into the banking institutions
authorized to accept such deposits in the Philippines thereby placing
such institutions more in a position to properly channel the same to
loans and investments in the Philippines, thus directly contributing to
the economic development of the country.
As to the deposit in foreign currencies entitled to be protected under the
confidentiality rule, Presidential Decree No. 1034,11 defines deposits to
mean funds in foreign currencies which are accepted and held by an
offshore banking unit in the regular course of business, with the obligation to
return an equivalent amount to the owner thereof, with or without interest.12
It is in this light that the court in the case of Salvacion v. Central Bank of the
Philippines,13 allowed the inquiry of the foreign currency deposit in question
mainly due to the peculiar circumstances of the case such that a strict
interpretation of the letter of the law would result to rank injustice. Therein,
Greg Bartelli y Northcott, an American tourist, was charged with criminal
cases for serious illegal detention and rape committed against then 12 yearold Karen Salvacion. A separate civil case for damages with preliminary
attachment was filed against Greg Bartelli. The trial court issued an Order
granting the Salvacions' application for the issuance of a writ of preliminary
attachment. A notice of garnishment was then served on China Bank where
Bartelli held a dollar account. China Bank refused, invoking the secrecy of
bank deposits. The Supreme Court ruled: "In fine, the application of the law
depends on the extent of its justice x x x It would be unthinkable, that the
questioned law exempting foreign currency deposits from attachment,
garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever would be used

as a device by an accused x x x for wrongdoing, and in so doing, acquitting

the guilty at the expense of the innocent.14
With the foregoing, we are now tasked to determine the single material
issue of whether or not petitioner China Bank is correct in its submission
that the Citibank dollar checks with both Jose Gotianuy and/or Mary
Margaret Dee as payees, deposited with China Bank, may not be looked
into under the law on secrecy of foreign currency deposits. As a corollary
issue, sought to be resolved is whether Jose Gotianuy may be considered a
depositor who is entitled to seek an inquiry over the said deposits.
The Court of Appeals, in allowing the inquiry, considered Jose Gotianuy, a
co-depositor of Mary Margaret Dee. It reasoned that since Jose Gotianuy is
the named co-payee of the latter in the subject checks, which checks were
deposited in China Bank, then, Jose Gotianuy is likewise a depositor
thereof. On that basis, no written consent from Mary Margaret Dee is
necessitated.
We agree in the conclusion arrived at by the Court of Appeals.
The following facts are established: (1) Jose Gotianuy and Mary Margaret
Dee are co-payees of various Citibank checks;15 (2) Mary Margaret Dee
withdrew these checks from Citibank;16 (3) Mary Margaret Dee admitted in
her Answer to the Request for Admissions by the Adverse Party sent to her
by Jose Gotianuy17 that she withdrew the funds from Citibank upon the
instruction of her father Jose Gotianuy and that the funds belonged
exclusively to the latter; (4) these checks were endorsed by Mary Margaret
Dee at the dorsal portion; and (5) Jose Gotianuy discovered that these
checks were deposited with China Bank as shown by the stamp of China
Bank at the dorsal side of the checks.
Thus, with this, there is no issue as to the source of the funds. Mary
Margaret Dee declared the source to be Jose Gotianuy. There is likewise no
dispute that these funds in the form of Citibank US dollar Checks are now
deposited with China Bank.
As the owner of the funds unlawfully taken and which are undisputably now
deposited with China Bank, Jose Gotianuy has the right to inquire into the
said deposits.

A depositor, in cases of bank deposits, is one who pays money into the
bank in the usual course of business, to be placed to his credit and subject
to his check or the beneficiary of the funds held by the bank as trustee.18
On this score, the observations of the Court of Appeals are worth reiterating:
Furthermore, it is indubitable that the Citibank checks were drawn
against the foreign currency account with Citibank, NA. The monies
subject of said checks originally came from the late Jose Gotianuy, the
owner of the account. Thus, he also has legal rights and interests in
the CBC account where said monies were deposited. More
importantly, the Citibank checks (Exhibits "AAA" to "AAA-5") readily
demonstrate (sic) that the late Jose Gotianuy is one of the payees of
said checks. Being a co-payee thereof, then he or his estate can be
considered as a co-depositor of said checks. Ergo, since the late Jose
Gotianuy is a co-depositor of the CBC account, then his request for the
assailed subpoena is tantamount to an express permission of a
depositor for the disclosure of the name of the account holder. The
April 16, 1999 Order perforce must be sustained.19 (Emphasis
supplied.)
One more point. It must be remembered that in the complaint of Jose
Gotianuy, he alleged that his US dollar deposits with Citibank were illegally
taken from him. On the other hand, China Bank employee Cristuta Labios
testified that Mary Margaret Dee came to China Bank and deposited the
money of Jose Gotianuy in Citibank US dollar checks to the dollar account
of her sister Adrienne Chu.20 This fortifies our conclusion that an inquiry into
the said deposit at China Bank is justified. At the very least, Jose Gotianuy
as the owner of these funds is entitled to a hearing on the whereabouts of
these funds.
All things considered and in view of the distinctive circumstances attendant
to the present case, we are constrained to render a limited pro hac vice
ruling.21 Clearly it was not the intent of the legislature when it enacted the
law on secrecy on foreign currency deposits to perpetuate injustice. This
Court is of the view that the allowance of the inquiry would be in accord with
the rudiments of fair play,22 the upholding of fairness in our judicial system
and would be an avoidance of delay and time-wasteful and circuitous way of
administering justice.23

WHEREFORE, premises considered, the Petition is DENIED. The Decision

of the Court of Appeals dated 29 October 1999 affirming the Order of the
RTC, Branch 58, Cebu City dated 16 April 1999 is AFFIRMED and this case
is ordered REMANDED to the trial court for continuation of hearing with
utmost dispatch consistent with the above disquisition. No costs.
SO ORDERED.

Ana Rivera vs. People's Bank and Trust Company, 73 Phil. 546
(1942)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-47757

April 7, 1942

ANA
RIVERA,
plaintiff-appellant,
vs.
PEOPLES
BANK
AND
TRUST
CO.,
defendant-appellee.
MINNIE STEPHENSON, in her capacity as administratix of the intestate
estate of EDGAR Stephenson, intervenor-appellee.
Cecilio
I.
Lim,
Chief
Public
Defender,
for
appellant.
Antonio
M.
Opisso
for
intervenor-appellee.
No appearance for appellee Peoples Bank & Trust Co.
OZAETA, J.:
The question raised in this appeal is the validity of the survivorship
agreement made by and between Edgar Stephenson, now deceased, and
Ana Rivera, appellant herein, which read as follows:
SURVIVORSHIP AGREEMENT
Know All Men by These Presents:
That we hereby agree with each other and with the PEOPLES BANK
AND TRUST COMPANY, Manila, Philippine Islands (hereinafter called
the Bank), that all moneys now or hereafter deposited by us or either of
us with the Bank in our savings account shall be deposited in and
received by the Bank with the understanding and upon the condition
that said money be deposited without consideration of its previous
ownership, and that said money and all interest thereon, if any there
be, shall be the property of both of us joint tenants, and shall be
payable to and collectible by either of us during our joint lives, and after

the death of one of us shall belong to and be the sole property of the
survivor, and shall be payable to and collectible by such survivor.
And we further covenant and agree with each other and the Bank, its
successors or assigns, that the receipt or check of either of us during
our joint lives, or the receipt or check of the survivor, for any payment
made from this account, and shall be valid and sufficient and discharge
to the Bank for such payment.
The Bank is hereby authorized to accept and deposit to this account all
checks made payable to either or both of us, when endorsed by either
or both of us or one for the other.
This is a joint and several agreement and is binding upon each of us,
our heirs, executors, administrators, and assigns.
In witness whereof we have signed our names here to this 17th day of
October, 1931.
(Sgd.) EDGAR STEPHENSON
(Sgd.)
Ana
Rivera
Address: 799 Sta. Mesa, Manila

(Sgd.)
FRED
(Sgd.)
Y.

W.
E.

Witness:
BOHLER
Cox

S. A. #4146
Ana Rivera was employed by Edgar Stephenson as housekeeper from the
year 1920 until his death on June 8, 1939. On December 24, Stephenson
opened an account in his name with the defendant Peoples Bank by
depositing therein the sum of P1,000. On October 17, 1931, when there was
a balance of P2,072 in said account, the survivorship agreement in question
was executed and the said account was transferred to the name of "Edgar
Stephenson and/or Ana Rivera." At the time of Stephenson's death Ana
Rivera held the deposit book, and there was a balance in said account of
P701. 43, which Ana Rivera claimed but which the bank refused to pay to
her upon advice of its attorneys who gave the opinion that the survivorship
agreement was of doubtful validity. Thereupon Ana Rivera instituted the
present action against the bank, and Minnie Stephenson, administratix of

the estate of the deceased, intervened and claimed the amount for the
estate, alleging that the money deposited in said account was and is the
exclusive property of the deceased.
The trial court held that the agreement in question, viewed from its effect
during the lives of the parties, was a mere power of attorney authorizing Ana
Rivera to withdraw the deposit, which power terminated upon the death of
the principal, Edgar Stephenson; but that, viewed from its effect after the
death of either of the parties, the agreement was a donation mortis causa
with reference to the balance remaining at the death of one of them, which,
not having been executed with the formalities of a testamentary disposition
as required by article 620 of the Civil Code, was of no legal effect.
The defendant bank did not appear in this Court. Counsel for the intervenorappellee in his brief contends that the survivorship agreement was a
donation mortis causa from Stephenson to Ana Rivera of the bank account
in question and that, since it was not executed with the formalities of a will, it
can have no legal effect.
We find no basis for the conclusion that the survivorship agreement was a
mere power of attorney from Stephenson to Ana Rivera, or that it is a gift
mortis causa of the bank account in question from him to her. 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 of
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 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.
Is the survivorship agreement valid? Prima facie, we think it is valid. It is an
aleatory contract supported by law a lawful consideration the mutual
agreement of the joint depositors permitting either of them to withdraw the
whole deposit during their lifetime, and transferring the balance to the
survivor upon the death of one of them. The trial court said that the Civil
Code "contains no provisions sanctioning such an agreement" We think it is
covered by article 1790 of the Civil Code, which provides as follows:
ART. 1790. By an aleatory contract one of the parties binds himself, or
both reciprocally bind themselves, to give or to 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.
(See also article 1255.)
The case of Macam vs. Gatmaitan (decided March 11, 1937), 36 Off. Gaz.,
2175, is in point. Two friends Juana Gatmaitan and Leonarda Macam, who
had lived together for some time, agreed in writing that the house of strong
materials which they bought with the money belonging to Leonarda Macam
and the Buick automobile and certain furniture which belonged to Juana
Gatmaitan shall belong to the survivor upon the death of one of them and
that "this agreement shall be equivalent to a transfer of the rights of the one
who dies first and shall be kept by the survivor." After the death of Leonarda
Macam, her executrix assailed that document on the ground that with
respect to the house the same constituted a donation mortis causa by
Leonarda Macam in favor of Juana Gatmaitan. In affirming the judgment of
the trial court absolving the defendants from the complaint this Court,
speaking through Chief Justice Avacea, said:
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 of the furniture if Juana had died first. (36
Off. Gaz., 2176.)
Furthermore, "it is well established that a bank account may be so created
that two persons shall be joint owners thereof during their mutual lives, and
the survivor take the whole on the death of the other. The right to make
such joint deposits has generally been held not to be done with by statutes
abolishing joint tenancy and survivorship generally as they existed at
common law." (7 Am. Jur., 299.)
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 the case.
The agreement appealed from is reversed and another judgment will be
entered in favor of the plaintiff ordering the defendant bank to pay to her the
sum of P701.43, with legal interest thereon from the date of the complaint,
and the costs in both instances. So ordered.
Yulo, C.J., Moran, Paras, and Bocobo, JJ., concur.

Vitug vs. Court of Appeals, 183 SCRA 755 (1990)

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 82027 March 29, 1990
ROMARICO
G.
VITUG,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINOCORONA, 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, 2 the 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. 35342038 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 in Rivera 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. 35342038 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. 35342038, 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-takeall" 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.

Feati Bank and Trust Company vs. Court of Appeals, 196 SCRA
576 (1990)
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION

G.R. No. 94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION),
petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:p

This is a petition for review seeking the reversal of the decision of the Court
of Appeals dated June 29, 1990 which affirmed the decision of the Regional
Trial Court of Rizal dated October 20, 1986 ordering the defendants
Christiansen and the petitioner, to pay various sums to respondent Villaluz,
jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant
Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic
meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee,

Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
Pacific National Bank of Los Angeles, California issued Irrevocable Letter of
Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now
Citytrust) with the instruction to the latter that it "forward the enclosed letter
of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security
Pacific National Bank and that it be accompanied by the following
documents:
1. Signed Commercial Invoice in four copies showing the number
of the purchase order and certifying that
a. All terms and conditions of the purchase order have
been complied with and that all logs are fresh cut and
quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all
logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3
original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship
and Merchandise Broker.
c. One set of non-negotiable documents was airmailed
to Han Mi Trade Development Company and one set to
Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with
Consignee and Parties to be advised by Hans Axel Christiansen,
showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana,
California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480,
Santa Ana, California 92711 and Han Mi Trade Development
Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and
Merchandise Broker, stating that logs have been approved prior
to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs
and Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was
chartered by Christiansen. Before its loading, the logs were inspected by
custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from
the Bureau of Customs (Records, Vol. I, p. 124) and representatives
Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records,
Vol. I, pp. 16-17) all of whom certified to the good condition and exportability
of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu
Wang issued a mate receipt of the cargo which stated the same are in good
condition (Records, Vol. I, p. 363). However, Christiansen refused to issue
the certification as required in paragraph 4 of the letter of credit, despite
several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank
and Trust Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July
31, 1971) without the private respondent receiving any certification from
Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the
private respondent to bring the matter before the Central Bank. In a
memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated
August 3, 1971, in all log exports, the certification of the lumber

inspectors of the Bureau of Forestry . . . shall be considered final

for purposes of negotiating documents. Any provision in any letter
of credit covering log exports requiring certification of buyer's
agent or representative that said logs have been approved for
shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10
per cubic meter. Hanmi Trade Development Company, on the other hand
sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute
the certification proved futile, Villaluz, on September 1, 1971, instituted an
action for mandamus and specific performance against Christiansen and the
Feati Bank and Trust Company (now Citytrust) before the then Court of First
Instance of Rizal. The petitioner was impleaded as defendant before the
lower court only to afford complete relief should the court a quo order
Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of
him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of
the Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p.
39)
On or about 1979, while the case was still pending trial, Christiansen left the
Philippines without informing the Court and his counsel. Hence, Villaluz,
filed an amended complaint to make the petitioner solidarily liable with
Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended
complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute,
and the plaintiffs right to demand payment is absolute. Defendant
CHRISTIANSEN having accepted delivery of the logs by having
them loaded in his chartered vessel the "Zenlin Glory" and
shipping them to the consignee, his buyer Han Mi Trade in
Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay
the purchase order had clearly arisen and the plaintiff may sue
and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in
bad faith and deceit and with intent to defraud the plaintiff,
reflected in and aggravated by, not only his refusal to issue the
certification that would have enabled without question the plaintiff
to negotiate the letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit. These
accusations said defendant did not attempt to prove, as in fact he
left the country without even notifying his own lawyer. It was to the
Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand,
must be held liable together with his (sic) co-defendant for having,
by its wrongful act, i.e., its refusal to negotiate the letter of credit
in the absence of CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement was illegal), prevented
payment to the plaintiff. The said letter of credit, as may be seen
on its face, is irrevocable and the issuing bank, the Security
Pacific National Bank in Los Angeles, California, undertook by its
terms that the same shall be honored upon its presentment. On
the other hand, the notifying bank, the defendant Feati Bank and
Trust Company, by accepting the instructions from the issuing
bank, itself assumed the very same undertaking as the issuing
bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant
BANK may also be held liable under the principles and laws on
both trust and estoppel. When the defendant BANK accepted its

role as the notifying and negotiating bank for and in behalf of the
issuing bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the beneficiary of the
letter of credit. As trustee, it was then duty bound to protect the
interests of the plaintiff under the terms of the letter of credit, and
must be held liable for damages and loss resulting to the plaintiff
from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a
notifying and negotiating BANK it in effect represented to the
plaintiff that, if the plaintiff complied with the terms and conditions
of the letter of credit and presents the same to the BANK together
with the documents mentioned therein the said BANK will pay the
plaintiff the amount of the letter of credit. The Court is convinced
that it was upon the strength of this letter of credit and this implied
representation of the defendant BANK that the plaintiff delivered
the logs to defendant CHRISTIANSEN, considering that the
issuing bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other
Security for the payment of the logs. Defendant BANK cannot
now be allowed to deny its commitment and liability under the
letter of credit:
A holder of a promissory note given because of
gambling who indorses the same to an innocent holder
for value and who assures said party that the note has
no legal defect, is in estoppel from asserting that there
had been an illegal consideration for the note, and so,
he has to pay its value. (Rodriguez v. Martinez, 5 Phil.
67).
The defendant BANK, in insisting upon the certification of
defendant CHRISTIANSEN as a condition precedent to
negotiating the letter of credit, likewise in the Court's opinion
acted in bad faith, not only because of the clear declaration of the
Central Bank that such a requirement was illegal, but because the
BANK, with all the legal counsel available to it must have known
that the condition was void since it depended on the sole will of

the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil

Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in
favor of the private respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff,
ordering the defendants to pay the plaintiff, jointly and severally,
the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as
of the time payment is actually made, representing the purchase
price of the logs;
b) P17,340.00, representing government fees and charges paid
by plaintiff in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod
and Korea).
All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed,
until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two
days thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the
immediate execution of the judgment on the ground that the appeal of the
petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the
private respondent's filing of a bond.

The petitioner then filed a motion for reconsideration and a motion to

suspend the implementation of the writ of execution. Both motions were,
however, denied. Thus, petitioner filed before the Court of Appeals a petition
for certiorari and prohibition with preliminary injunction to enjoin the
immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition
and nullified the order of execution, the dispositive portion of the decision
states:
WHEREFORE, the petition for certiorari is granted. Respondent
Judge's order of execution dated December 29, 1986, as well as
his order dated January 14, 1987 denying the petitioner's urgent
motion to suspend the writ of execution against its properties are
hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank &
Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case
No. 15121. However, the execution of the same decision against
defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's
properties, and the notice of sale dated January 13, 1987 (Annex
M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent.
The Court of Appeals, in a resolution dated June 29, 1987 denied the
motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of
Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October 20,
1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses"
section of its answer that it was the bank to negotiate the letter of
credit issued by the Security Pacific National Bank of Los
Angeles, California. (Record, pp. 156, 157). Feati Bank did notify
Villaluz of such letter of credit. In fact, as such negotiating bank,
even before the letter of credit was presented for payment, Feati
Bank had already made an advance payment of P75,000.00 to

Villaluz in anticipation of such presentment. As the negotiating

bank, Feati Bank, by notifying Villaluz of the letter of credit in
behalf of the issuing bank (Security Pacific), confirmed such letter
of credit and made the same also its own obligation. This ruling
finds support in the authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives
its assurance also that the opening bank's obligation will be
performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making
it also its own undertaking, or commitment, or guaranty or
obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the
negotiating bank only upon negotiation of the letter of credit. This
stance is untenable. Assurance, commitments or guaranties
supposed to be made by notifying banks to the beneficiary of a
letter of credit, as defined above, can be relevant or meaningful
only with respect to a future transaction, that is, negotiation.
Hence, even before actual negotiation, the notifying bank, by the
mere act of notifying the beneficiary of the letter of credit,
assumes as of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in
effect also of the latter's principal or client, i.e. Hans AxelChristiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was
made by Feati Bank itself. Feati Bank should have taken steps to
secure the certification from Christiansen; and, if the latter should
still refuse to comply, to hale him to court. In short, Feati Bank
should have honored Villaluz's demand for payment of his logs by
virtue of the irrevocable letter of credit issued in Villaluz's favor
and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No.
11051, which contained the statement "Since Villaluz" draft was
not drawn strictly in compliance with the terms of the letter of
credit, Feati Bank's refusal to negotiate it was justified," did not
dispose of this question on the merits. In that case, the question

involved was jurisdiction or discretion, and not judgment. The

quoted pronouncement should not be taken as a preemptive
judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific
performance." Feati Bank may not be a party to the transaction
between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or
agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly
on specific performance as a procedural means by which the
relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and
accordingly, the appeal is hereby dismissed. Costs against the
petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the
petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED
FROM THE ESTABLISHED FACTS AND INDEED, WENT
AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON
THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW
WHEN IT HELD THAT PETITIONER BANK, BY NOTIFYING
PRIVATE RESPONDENT OF THE LETTER OF CREDIT,
CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS
OBLIGATION AS GUARANTOR OF THE ISSUING BANK.

Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN
ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT'S
DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to
be held liable under the letter of credit despite non-compliance by the
beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that
the documents tendered must strictly conform to the terms of the letter of
credit. The tender of documents by the beneficiary (seller) must include all
documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be, the money
thus paid to the beneficiary Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are
governed by the rule of strict compliance. In the Philippines, the same holds
true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741
[1933]) expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be
strictly complied with which documents, and shipping documents
must be followed as stated in the letter. There is no discretion in
the bank or trust company to waive any requirements. The terms
of the letter constitutes an agreement between the purchaser and
the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion
to accept a faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous precedents.
Since a bank deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit are material or

superfluous. The mere fact that the document was specified therein readily
means that the document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for
Documentary Credit (U.C.P. for short) in the letter of credit resulted in the
applicability of the said rules in the governance of the relations between the
parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have
already ruled in the affirmative as to the applicability of the U.C.P. in cases
before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the
Code of Commerce. Article 2 of the Code of Commerce enunciates that in
the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal complexities
arising from transactions involving letters of credit not only between the
banks themselves but also between banks and seller and/or buyer, the
applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the
issuing bank and constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn and/or
documents presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit are
complied with.
An irrevocable credit may be advised to a beneficiary through
another bank (the advising bank) without engagement on the part
of that bank, but when an issuing bank authorizes or requests
another bank to confirm its irrevocable credit and the latter does

so, such confirmation constitutes a definite undertaking of the

confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to
ascertain that they appear on their face to be in accordance with
the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which
appear on their face to be in accordance with the terms and
conditions of a credit by a bank authorized to do so, binds the
party giving the authorization to take up documents and
reimburse the bank which has effected the payment, acceptance
or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate,
accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary credit. And
since a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary
credit justifies the refusal by the correspondent bank to negotiate, accept or
pay the beneficiary, as it is not its obligation to look beyond the documents.
It merely has to rely on the completeness of the documents tendered by the
beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of
Appeals that the petitioner is not a notifying bank but a confirming bank, we
find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with
that of a confirmed credit. In its decision, the trial court ruled that the
petitioner, in accepting the obligation to notify the respondent that the
irrevocable credit has been transmitted to the petitioner on behalf of the
private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit
is not synonymous with a confirmed credit. These types of letters have
different meanings and the legal relations arising from there varies. A credit

may be an irrevocable credit and at the same time a confirmed credit or

vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is
simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under
the letter. The issuing bank does not reserve the right to revoke the credit.
On the other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it
will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank in accepting the instructions
of the issuing bank has also confirmed the letter of credit. Another error
which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed
by a correspondent bank are classified according to the obligations taken up
by it. The correspondent bank may be called a notifying bank, a negotiating
bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the letter
of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218
N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating
bank, on the other hand, is a correspondent bank which buys or discounts a
draft under the letter of credit. Its liability is dependent upon the stage of the
negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the
negotiating bank and the seller. (Scanlon v. First National Bank of Mexico,
162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the

correspondent bank itself had issued the letter of credit. (Shaterian, ExportImport Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the
enclosed original credit to the beneficiary." (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing bank,
the Security Pacific National Bank, it is indubitable that the petitioner is only
a notifying bank and not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should
have been stated in the letter of credit that the petitioner is to honor all drafts
drawn in conformity with the letter of credit. What was simply stated therein
was the instruction that the petitioner forward the original letter of credit to
the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to
notify and/or transmit the documentary of credit to the private respondent
and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but
this fact alone does not imply that the notifying bank promises to accept the
draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and
the seller, its relationship is only with that of the issuing bank and not with
the beneficiary to whom he assumes no liability. It follows therefore that
when the petitioner refused to negotiate with the private respondent, the
latter has no cause of action against the petitioner for the enforcement of his
rights under the letter. (See Kronman and Co., Inc. v. Public National Bank
of New York, supra)
In order that the petitioner may be held liable under the letter, there should
be proof that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that
the petitioner has confirmed the letter of credit. The only evidence in this
case, and upon which the private respondent premised his argument, is the
P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the
letter of credit was confirmed by the petitioner. He claims that the loan was
granted by the petitioner to him, "in anticipation of the presentment of the
letter of credit."
The proposition advanced by the private respondent has no basis in fact or
law. That the loan agreement between them be construed as an act of
confirmation is rather far-fetched, for it depends principally on speculative
reasoning.
As earlier stated, there must have been an absolute assurance on the part
of the petitioner that it will undertake the issuing bank's obligation as its
own. Verily, the loan agreement it entered into cannot be categorized as an
emphatic assurance that it will carry out the issuing bank's obligation as its
own.
The loan agreement is more reasonably classified as an isolated transaction
independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the
private respondent in anticipation that it would later be paid by the latter
upon the receipt of the letter. Yet, we would have no basis to rule definitively
that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs
on the ship "Zenlin Glory" and the only way to satisfy this need was to
borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter of
credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private
respondent, it assumed the character of a negotiating bank. Even then, the
petitioner will still not be liable, for a negotiating bank before negotiation has
no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained
the relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true
that it owes no contractual duty toward the person for whose
benefit the letter is written to discount or purchase any draft drawn

against the credit. No relationship of agent and principal, or of

trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it
cannot be held liable. Absent any definitive proof that it has confirmed the
letter of credit or has actually negotiated with the private respondent, the
refusal by the petitioner to accept the tender of the private respondent is
justified.
In regard to the finding that the petitioner became a "trustee in relation to
the plaintiff (private respondent) as the beneficiary of the letter of credit," the
same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the
beneficial enjoyment of property the legal title to which is vested to another."
(89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property
which has been conferred upon the person for the benefit of another. In
order therefore for the trust theory of the private respondent to be sustained,
the petitioner should have had in its possession a sum of money as specific
fund advanced to it by the issuing bank and to be held in trust by it in favor
of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a
specific appropriation of a sum of money in favor of the beneficiary. It only
signifies that the beneficiary may be able to draw funds upon the letter of
credit up to the designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically reserved or
has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent
bank does not receive in advance the sum of money from the buyer or the
issuing bank. On the contrary, when the correspondent bank accepts the
tender and pays the amount stated in the letter, the money that it doles out
comes not from any particular fund that has been advanced by the issuing
bank, rather it gets the money from its own funds and then later seeks
reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be
considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel on
its part resulting in the acceptance of the trust. Precisely, as a notifying
bank, its only obligation is to notify the private respondent of the existence
of the letter of credit. How then can such create estoppel when that is its
only duty under the law?
We also find erroneous the statement of the Court of Appeals that the
petitioner "acted as a guarantor of the issuing bank and in effect also of the
latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of
the contract between the buyer and the seller but also of the credit
agreement between the issuing bank and the buyer. (See Kingdom of
Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by the
latter.
The contract between the two has no bearing as to the non-compliance by
the buyer with the agreement between the latter and the seller. Their
contract is similar to that of a contract of services (to open the letter of
credit) and not that of agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the certification under
the letter of credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any
contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance of
the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to
necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the
bank's responsibility from the contract upon which it was opened. In the
second place, the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor's obligation is merely

collateral and it arises only upon the default of the person primarily liable.
On the other hand, in an irrevocable credit the bank undertakes a primary
obligation. (See National Bank of Eagle Pass, Tex v. American National
Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the
contrary, is more similar to that of an agency and not that of a guarantee. It
may be observed that the notifying bank is merely to follow the instructions
of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its
commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or
expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to
buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents
required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only
engagement is to notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the
petitioner cannot be forced to pay the amount under the letter. As we have
previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The
U.C.P. which is incorporated in the letter of credit ordains that the bank may
only pay the amount specified under the letter if all the documents tendered
are on their face in compliance with the credit. It is not tasked with the duty
of ascertaining the reason or reasons why certain documents have not been
submitted, as it is only concerned with the documents. Thus, whether or not
the buyer has performed his responsibility towards the seller is not the
bank's problem.
We are aware of the injustice committed by Christiansen on the private
respondent but we are deciding the controversy on the basis of what the law
is, for the law is not meant to favor only those who have been oppressed,
the law is to govern future relations among people as well. Its commitment
is to all and not to a single individual. The faith of the people in our justice

system may be eroded if we are to decide not what the law states but what
we believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the
certificate of approval required of the private respondent to submit under the
letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April
9, 1987 in regard to the petition before it for certiorari and prohibition with
preliminary injunction, to wit:
There is no merit in the respondent's contention that the
certification required in condition No. 4 of the letter of credit was
"patently illegal." At the time the letter of credit was issued there
was no Central Bank regulation prohibiting such a condition in the
letter of credit. The letter of credit (Exh. C) was issued on June 7,
1971, more than two months before the issuance of the Central
Bank Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of credit had already
expired on July 30, 1971 when the Central Bank memorandum
was issued. In any event, it is difficult to see how such a condition
could be categorized as illegal or unreasonable since all that
plaintiff Villaluz, as seller of the logs, could and should have done
was to refuse to load the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and
conditions of his purchase order. Apparently, Villaluz was in too
much haste to ship his logs without taking all due precautions to
assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby
NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated
June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.

Transfield Philippines, Inc. vs. Luzon Hydro Corporation, 442

SCRA 307 (2004)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 146717

November 22, 2004

TRANSFIELD
PHILIPPINES,
INC.,
petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK CORPORATION,
respondents.

DECISION

TINGA, J.:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CAG.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al.," promulgated on 31 January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract3 whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner
was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.4

The Turnkey Contract provides that: (1) the target completion date of the
Project shall be on 1 June 2000, or such later date as may be agreed upon
between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to claim
extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC
itself.5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target
completion date, or such time for completion as may be determined by the
parties' agreement, petitioner opened in favor of LHC two (2) standby letters
of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC)8 each in the amount of
US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various
EOT to complete the Project. The extensions were requested allegedly due
to several factors which prevented the completion of the Project on target
date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a
series of legal actions between the parties which culminated in the instant
petition.
The first of the actions was a Request for Arbitration which LHC filed before
the Construction Industry Arbitration Commission (CIAC) on 1 June 1999.10
This was followed by another Request for Arbitration, this time filed by
petitioner before the International Chamber of Commerce (ICC)11 on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract,12 petitionerin two separate

letters13 both dated 10 August 2000advised respondent banks of the

arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution
of disputes before the arbitral tribunals, petitioner warned respondent banks
that any transfer, release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold respondent banks
liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.214 of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on
the Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000
until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on
the securities for the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,
with prayer for temporary restraining order and writ of preliminary injunction,
against herein respondents as defendants before the Regional Trial Court
(RTC) of Makati.17 Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring, paying on, or in
any manner disposing of the Securities or any renewals or substitutes
thereof. The RTC issued a seventy-two (72)-hour temporary restraining
order on the same day. The case was docketed as Civil Case No. 00-1312
and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9
November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's
application for a writ of preliminary injunction. It ruled that petitioner had no
legal right and suffered no irreparable injury to justify the issuance of the

writ. Employing the principle of "independent contract" in letters of credit, the

trial court ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the principle of
"independent contract" could be invoked only by respondent banks since
according to it respondent LHC is the ultimate beneficiary of the Securities.
The trial court further ruled that the banks were mere custodians of the
funds and as such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the required certification of
its claims.
Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of Appeals
via a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction.20 Petitioner
submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved
with finality by the CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on the Securities for
liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to
restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main contract
between them as shown on the face of the two Standby Letters of Credit
which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner disposing of the
Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and
withdrew the total amount of US$4,950,000.00, thereby reducing the
balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari.
The appellate court expressed conformity with the trial court's decision that
LHC could call on the Securities pursuant to the first principle in credit law
that the credit itself is independent of the underlying transaction and that as
long as the beneficiary complied with the credit, it was of no moment that he
had not complied with the underlying contract. Further, the appellate court
held that even assuming that the trial court's denial of petitioner's application
for a writ of preliminary injunction was erroneous, it constituted only an error
of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE
THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND
LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES
DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS
WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ
BANK AND SECURITY BANK ARE ALLOWED TO RELEASE,
THE REMAINING BALANCE OF THE SECURITIES PRIOR TO
THE RESOLUTION OF THE DISPUTES BETWEEN
PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the
"independence principle" on letters of credit when this case falls squarely

within the "fraud exception rule." Respondent LHC deliberately

misrepresented the supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that,
under the premises, injunction was the appropriate remedy obtainable from
the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and
Supplemental Memorandum,23 alleging that in the course of the proceedings
in the ICC Arbitration, a number of documentary and testimonial evidence
came out through the use of different modes of discovery available in the
ICC Arbitration. It contends that after the filing of the petition facts and
admissions were discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays notwithstanding its
knowledge and admission that delays were excused under the Turnkey
Contractto be able to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle, petitioner urges that
this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers
that it would suffer grave irreparable damage if LHC would be allowed to
use the proceeds of the Securities and not ordered to return the amounts it
had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on
18 February 2004, the ICC handed down its Third Partial Award, declaring
that LHC wrongfully drew upon the Securities and that petitioner was
entitled to the return of the sums wrongfully taken by LHC for liquidated
damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that
petitioner's Manifestation dated 12 April 2004 enlarges the scope of its
Petition for Review of the 31 January 2001 Decision of the Court of Appeals.
LHC notes that the Petition for Review essentially dealt only with the issue
of whether injunction could issue to restrain the beneficiary of an irrevocable

letter of credit from drawing thereon. It adds that petitioner has filed two
other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties
made
claims
and
counterclaims
arising
from
petitioner's
performance/misperformance of its obligations as contractor for LHC; and
(2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon
Hydro Corporation" before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICC's partial award mentioned
in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to
Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the action to enforce the
ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil
Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping
by keeping this appeal and at the same time seeking the suit for
enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that
the Court of Appeals correctly dismissed the petition for certiorari. Invoking
the independence principle, SBC argues that it was under no obligation to
look into the validity or accuracy of the certification submitted by respondent
LHC or into the latter's capacity or entitlement to so certify. It adds that the
act sought to be enjoined by petitioner was already fait accompli and the
present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13
March 200328 posits that its actions could not be regarded as unjustified in
view of the prevailing independence principle under which it had no
obligation to ascertain the truth of LHC's allegations that petitioner defaulted
in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for
preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the
"independence principle" and "fraud exception rule" in letters of credit. Thus,
a discussion of the nature and use of letters of credit, also referred to simply
as "credits," would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customer cannot draw on the letter, it
does not function as an assignment by the customer to the beneficiary. Nor,
if properly used, is it a contract of suretyship or guarantee, because it entails
a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally
conditional, yet the draft presented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed
by merchants as a convenient and relatively safe mode of dealing with sales
of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to
have control of the goods before paying.30 The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price
under the contract for the sale of goods. However, credits are also used in
non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as
standby credits.31
There are three significant differences between commercial and standby
credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the
seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The
documents that accompany the beneficiary's draft tend to show that the
applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not
performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a

third person and assumes responsibility for payment of debt therefor to the
addressee.33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding
contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international
trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of letters
of credit incorporate the UCP.35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which
was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this
Court ruled that the observance of the UCP is justified by Article 2 of the
Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that there
being no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case
may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based
and banks are in no way concerned with or bound by such contract(s), even
if any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are presented to it.
The so-called "independence principle" assures the seller or the beneficiary
of prompt payment independent of any breach of the main contract and

precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability
or responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like
in a commercial letter of credit or repayment standby, which is identical with
the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract to
the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case,
where the credit is stipulated as irrevocable, there is a definite undertaking
by the issuing bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit are complied
with.41 Precisely, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in the main contract. As
the principle's nomenclature clearly suggests, the obligation under the letter
of credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.

Given the nature of letters of credit, petitioner's argumentthat it is only the

issuing bank that may invoke the independence principle on letters of
creditdoes not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions.
As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly
for the benefit of the parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter
of credit as a security in case the commercial transaction does not push
through, or the applicant fails to perform his part of the transaction. It is for
this reason that the party who is entitled to the proceeds of the letter of
credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled
to call on the letter of credit in essence would convert the letter of credit into
a mere guarantee. Jurisprudence has laid down a clear distinction between
a letter of credit and a guarantee in that the settlement of a dispute between
the parties is not a pre-requisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with the very nature of
the letter of credit. If a letter of credit is drawable only after settlement of the
dispute on the contract entered into by the applicant and the beneficiary,
there would be no practical and beneficial use for letters of credit in
commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more
light on the issue:
The standby credit is an attractive commercial device for many of the
same reasons that commercial credits are attractive. Essentially, these
credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are

usually triggered by a factual determination rather than by the

examination of documents.
Because parties and courts should not confuse the different functions
of the surety contract on the one hand and the standby credit on the
other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both
ensure against the obligor's nonperformance. They function, however,
in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to
complete the obligor's performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve costs
of determining whether the obligor defaulted (a matter over which the
surety and the beneficiary often litigate) plus the cost of performance.
The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong
financial institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must await
the sometimes lengthy and costly determination that the obligor has
defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects
that he will receive cash in the event of nonperformance, that he will
receive it promptly, and that he will receive it before any litigation with
the obligor (the applicant) over the nature of the applicant's
performance takes place. The standby credit has this opposite effect of
the surety contract: it reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that
litigation burden and receives his money promptly upon presentation of
the required documents. It may be that the applicant has, in fact,
performed and that the beneficiary's presentation of those documents

is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to
determine whether the applicant has in fact breached the obligation to
perform, the beneficiary, not the applicant, holds the money. Parties
that use a standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some
quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or
the issuer to litigate the performance question before payment to the
beneficiary.42
While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to draw
thereon. The situation itself emasculates petitioner's posture that LHC
cannot invoke the independence principle and highlights its puerility, more
so in this case where the banks concerned were impleaded as parties by
petitioner itself.
Respondent banks had squarely raised the independence principle to justify
their releases of the amounts due under the Securities. Owing to the nature
and purpose of the standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but to honor the credit
and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this
Contract, the Contractor at its cost shall on the Commencement Date
provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the
amount of US$8,988,907, issued and confirmed by banks or financial
institutions acceptable to the Employer. Each of the Securities must be
in form and substance acceptable to the Employer and may be
provided on an annually renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor
shall pay to the Employer by way of liquidated damages ("Liquidated
Damages for Delay") the amount of US$75,000 for each and every day

or part of a day that shall elapse between the Target Completion Date
and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of
the Contract Price. The Contractor shall pay Liquidated Damages for
Delay for each day of the delay on the following day without need of
demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due to the Contractor and/or by drawing on the
Security."45
A contract once perfected, binds the parties not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which
according to their nature, may be in keeping with good faith, usage, and
law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency
for which the Securities have been proffered. Thus, even without the use of
the "independence principle," the Turnkey Contract itself bestows upon LHC
the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's
call on the Securities is wrongful because it fraudulently misrepresented to
ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals. It
asserts that the "fraud exception" exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a situation,
petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles
of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending
resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule
upon the issue of defaultsuch issue having been submitted by the parties
to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in
their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful
draws on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment.48 The remedy for
fraudulent abuse is an injunction. However, injunction should not be granted
unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent
abuse of the independent purpose of the letter of credit and not only fraud
under the main agreement; and (c) irreparable injury might follow if
injunction is not granted or the recovery of damages would be seriously
damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is
entitled to a total extension of two hundred fifty-three (253) days which
would move the target completion date. It argued that if its claims for
extension would be found meritorious by the ICC, then LHC would not be
entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.51

Before a writ of preliminary injunction may be issued, there must be a clear

showing by the complaint that there exists a right to be protected and that
the acts against which the writ is to be directed are violative of the said
right.52 It must be shown that the invasion of the right sought to be protected
is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the
writ to prevent serious damage.53 Moreover, an injunctive remedy may only
be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard
compensation.54
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own admission,
the right of LHC to call on the Securities was contractually rooted and
subject to the express stipulations in the Turnkey Contract.55 Indeed, the
Turnkey Contract is plain and unequivocal in that it conferred upon LHC the
right to draw upon the Securities in case of default, as provided in Clause
4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of
calling upon any of the Securities, stating the nature of the default for
which the claim on any of the Securities is to be made, provided that
no notice will be required if the Employer calls upon any of the
Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14
days of their expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due, to the Contractor and/or by drawing on the
Security.57
The pendency of the arbitration proceedings would not per se make LHC's
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities. It is therefore premature and absurd
to conclude that the draws on the Securities were outright fraudulent given

the fact that the ICC and CIAC have not ruled with finality on the existence
of default.
Nowhere in its complaint before the trial court or in its pleadings filed before
the appellate court, did petitioner invoke the fraud exception rule as a
ground to justify the issuance of an injunction.58 What petitioner did assert
before the courts below was the fact that LHC's draws on the Securities
would be premature and without basis in view of the pending disputes
between them. Petitioner should not be allowed in this instance to bring into
play the fraud exception rule to sustain its claim for the issuance of an
injunctive relief. Matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a reviewing court as
they cannot be raised for the first time on appeal.59 The lower courts could
thus not be faulted for not applying the fraud exception rule not only
because the existence of fraud was fundamentally interwoven with the issue
of default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings filed in the courts
below. At any rate, petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey Contract did not require
LHC to do so and, therefore, it was merely enforcing its rights in accordance
with the tenor thereof. Obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good
faith.60 More importantly, pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code,61 petitioner could have
incorporated in its Contract with LHC, a proviso that only the final
determination by the arbitral tribunals that default had occurred would justify
the enforcement of the Securities. However, the fact is petitioner did not do
so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no obligation
to determine the veracity of LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's call thereon

was wrongful. To repeat, respondent banks' undertaking was simply to pay

once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHC's draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this
Court that the subject letters of credit had been fully drawn. This fact alone
would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court ruled
that where the period within which the former employees were prohibited
from engaging in or working for an enterprise that competed with their
former employerthe very purpose of the preliminary injunction has
expired, any declaration upholding the propriety of the writ would be entirely
useless as there would be no actual case or controversy between the
parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition mootfor any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have
no practical effect on the existing controversy.65 The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the
charge on two occasions. First, in its Counter-Manifestation dated 29 June
200466 LHC alleges that petitioner presented before this Court the same
claim for money which it has filed in two other proceedings, to wit: ICC Case
No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati.
LHC argues that petitioner's acts constitutes forum-shopping which should
be punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the

present appeal and at the same time pursuing Civil Case No. 04-332
wherein petitioner pressed for judgment on the issue of whether the funds
LHC drew on the Securities should be returnedpetitioner resorted to
forum-shopping. In both instances, however, petitioner has apparently opted
not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively
avails of several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and the
same essential facts and circumstances, and all raising substantially the
same issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse
judgment has been rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal or special civil
action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.68 To determine whether a party
violated the rule against forum-shopping, the test applied is whether the
elements of litis pendentia are present or whether a final judgment in one
case will amount to res judicata in another.69 Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court.70
Considering the seriousness of the charge of forum-shopping and the
severity of the sanctions for its violation, the Court will refrain from making
any definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within
fifteen (15) days from notice.
SO ORDERED.

Philippine National Bank vs. Pineda, 197 SCRA 1 (1991)

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION

G.R. No. L-46658 May 13, 1991

PHILIPPINE
NATIONAL
BANK,
petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the
Court of First Instance of Rizal, Branch XXI and TAYABAS CEMENT
COMPANY, INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.

FERNAN, C.J.:p
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks
to annul and set aside the orders dated March 4, 1977 and May 31, 1977
rendered in Civil Case No. 24422 1 of the Court of First Instance of Rizal,
Branch XXI, respectively granting private respondent Tayabas Cement
Company, Inc.'s application for a writ of preliminary injunction to enjoin the
foreclosure sale of certain properties in Quezon City and Negros Occidental
and denying petitioner's motion for reconsideration thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo
Spouses), obtained a loan of P580,000.00 from petitioner bank to purchase
60% of the subscribed capital stock, and thereby acquire the controlling
interest of private respondent Tayabas Cement Company, Inc. (TCC). 2 As
security for said loan, the spouses Arroyo executed a real estate mortgage
over a parcel of land covered by Transfer Certificate of Title No. 55323 of
the Register of Deeds of Quezon City known as the La Vista property.

Thereafter, TCC filed with petitioner bank an application and agreement for
the establishment of an eight (8) year deferred letter of credit (L/C) for
$7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to
cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of
Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses
executed the following documents to secure this loan accommodation:
Surety Agreement dated August 5, 1964 3 and Covenant dated August 6,
1964. 4
The imported cement plant machinery and equipment arrived from Japan
and were released to TCC under a trust receipt agreement. Subsequently,
Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C
as scheduled. TCC, however, failed to remit and/or pay the corresponding
amount covered by the drawings. Thus, on May 19, 1968, pursuant to the
trust receipt agreement, PNB notified TCC of its intention to repossess, as it
later did, the imported machinery and equipment for failure of TCC to settle
its obligations under the L/C. 5
In the meantime, the personal accounts of the spouses Arroyo, which
included another loan of P160,000.00 secured by a real estate mortgage
over parcels of agricultural land known as Hacienda Bacon located in
Isabela, Negros Occidental, had likewise become due. The spouses Arroyo
having failed to satisfy their obligations with PNB, the latter decided to
foreclose the real estate mortgages executed by the spouses Arroyo in its
favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition
for extra-judicial foreclosure under Act 3138, as amended by Act 4118 and
under Presidential Decree No. 385 of the real estate mortgage over the
properties known as the La Vista property covered by TCT No. 55323. 6
PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros
Occidental with respect to the mortgaged properties located at Isabela,
Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11,
1975. At the auction sale, PNB was the highest bidder with a bid price of
P1,000,001.00. However, when said property was about to be awarded to
PNB, the representative of the mortgagor-spouses objected and demanded

from the PNB the difference between the bid price of P1,000,001.00 and the
indebtedness of P499,060.25 of the Arroyo spouses on their personal
account. It was the contention of the spouses Arroyo's representative that
the foreclosure proceedings referred only to the personal account of the
mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13,
1975 requesting the Sheriff's Office to proceed with the sale of the subject
real properties to satisfy not only the amount of P499,060.25 owed by the
spouses Arroyos on their personal account but also the amount of
P35,019,901.49 exclusive of interest, commission charges and other
expenses owed by said spouses as sureties of TCC. 7 Said petition was
opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana
L. Dungca issued a resolution finding that the questions raised by the
parties required the reception and evaluation of evidence, hence, proper for
adjudication by the courts of law. Since said questions were prejudicial to
the holding of the foreclosure sale, she ruled that her "Office, therefore,
cannot properly proceed with the foreclosure sale unless and until there be
a court ruling on the aforementioned issues." 8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon
City, Branch V a petition for mandamus 9 against said Diana Dungca in her
capacity as City Sheriff of Quezon City to compel her to proceed with the
foreclosure sale of the mortgaged properties covered by TCT No. 55323 in
order to satisfy both the personal obligation of the spouses Arroyo as well
as their liabilities as sureties of TCC. 10
On September 6, 1976, the petition was granted and Dungca was directed
to proceed with the foreclosure sale of the mortgaged properties covered by
TCT No. 55323 pursuant to Act No. 3135 and to issue the corresponding
Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976
before the Court of First Instance of Rizal, Pasig, Branch XXI a
complaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros
Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the
issuance of a writ of preliminary injunction to restrain the foreclosure of the
mortgages over the La Vista property and Hacienda Bacon as well as a

declaration that its obligation with PNB had been fully paid by reason of the
latter's repossession of the imported machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda,
issued a restraining order 14 and on March 4, 1977, granted a writ of
preliminary injunction. 15 PNB's motion for reconsideration was denied,
hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of
preliminary injunction, namely: a) that it contravenes P.D. No. 385 which
prohibits the issuance of a restraining order against a government financial
institution in any action taken by such institution in compliance with the
mandatory foreclosure provided in Section 1 thereof; b) that the writ
countermands a final decision of a co-equal and coordinate court; c) that the
writ seeks to prohibit the performance of acts beyond the court's territorial
jurisdiction; and, d) private respondent TCC has not shown any clear legal
right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385 does
not apply to the case at bar, firstly because no foreclosure proceedings
have been instituted against it by PNB and secondly, because its account
under the L/C has been fully satisfied with the repossession of the imported
machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the question of
whether or not TCC's liability has been extinguished by the repossession of
PNB of the imported cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took
possession of the imported cement plant machinery and equipment
pursuant to the trust receipt agreement executed by and between PNB and
TCC giving the former the unqualified right to the possession and disposal
of all property shipped under the Letter of Credit until such time as all the
liabilities and obligations under said letter had been discharged. 16 In the
case of Vintola vs. Insular Bank of Asia and America 17 wherein the same
argument was advanced by the Vintolas as entrustees of imported seashells
under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to
IBAA has been extinguished inasmuch as, through no fault of

their own, they were unable to dispose of the seashells, and that
they have relinquished possession thereof to the IBAA, as owner
of the goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile
usage of the transaction involved. A letter of credit-trust receipt
arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered
by the Letter of Credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is
in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to
which a bank acquires a "security interest" in the goods. It
secures an indebtedness and there can be no such thing as
security interest that secures no obligation. As defined in our
laws:
(h) "Security interest" means a property interest in
goods, documents or instruments to secure
performance of some obligations of the entrustee or of
some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security
only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not become
the real owner of the goods. It was merely the holder of a security
title for the advances it had made to the VINTOLAS. The goods
the VINTOLAS had purchased through IBAA financing remain
their own property and they hold it at their own risk. The trust
receipt arrangement did not convert the IBAA into an investor; the
latter remained a lender and creditor.
xxx xxx xxx

Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited them
in the custody of the court, they are absolutely relieved of their
obligation to pay their loan because of their inability to dispose of
the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it
had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely
as a form of security for the advances given to TCC under the Letter of
Credit, said possession by itself cannot be considered payment of the loan
secured thereby. Payment would legally result only after PNB had
foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and
includes the sale itself. 18
Neither can said repossession amount to dacion en pago. Dation in
payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by sales. 19 Dation
in payment is the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the
obligation. 20 As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan
obligation and not for the purpose of transferring ownership thereof to PNB
in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages
executed by the spouses Arroyo as sureties of TCC. A surety is considered
in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable. 21 As sureties, the Arroyo spouses are
primarily liable as original promissors and are bound immediately to pay the
creditor the amount outstanding. 22
Under Presidential Decree No. 385 which took effect on January 31, 1974,
government financial institutions like herein petitioner PNB are required to

foreclose on the collaterals and/or securities for any loan, credit or

accommodation whenever the arrearages on such account amount to at
least twenty percent (20%) of the total outstanding obligations, including
interests and charges, as appearing in the books of account of the financial
institution concerned. 23 It is further provided therein that "no restraining
order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section
1 hereof, whether such restraining order, temporary or permanent injunction
is sought by the borrower(s) or any third party or parties . . ." 24
It is not disputed that the foreclosure proceedings instituted by PNB against
the Arroyo spouses were in compliance with the mandate of P.D. 385. This
being the case, the respondent judge acted in excess of his jurisdiction in
issuing the injunction specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction
complained of is that it interfered with the order of a co-equal and coordinate
court. Since Branch V of the CFI of Rizal had already acquired jurisdiction
over the question of foreclosure of mortgage over the La Vista property and
rendered judgment in relation thereto, then it retained jurisdiction to the
exclusion of all other coordinate courts over its judgment, including all
incidents relative to the control and conduct of its ministerial officers, namely
the sheriff thereof. 25 The foreclosure sale having been ordered by Branch V
of the CFI of Rizal, TCC should not have filed injunction proceedings with
Branch XXI of the same CFI, but instead should have first sought relief by
proper motion and application from the former court which had exclusive
jurisdiction over the foreclosure proceeding. 26
This doctrine of non-interference is premised on the principle that a
judgment of a court of competent jurisdiction may not be opened, modified
or vacated by any court of concurrent jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed
against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of
Bacolod City a jurisdictional faux pas as the Courts of First Instance, now
Regional Trial Courts, can only enforce their writs of injunction within their
respective designated territories. 28

WHEREFORE, the instant petition is hereby granted. The assailed orders

are hereby set aside. Costs against private respondent.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

Insular Bank of Asia & America vs. IAC, 167 SCRA 450 (1988)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 74834 November 17, 1988
INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL
INTERNATIONAL
BANK),
petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE
AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M.
MENDOZA, respondents.
Balili, Parado, Cavada & Maamo for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent
Spouses Mendozas.
Francisco, Zulueta & Associates for respondent Philam Life.

MELENCIO-HERRERA, J.:
An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the
Insular Bank of Asia and America (IBAA) [now the Philippine Commercial
International Bank], from the judgment of the public respondent, then the
Intermediate Appellate Court, * in CA-G.R. CV No. 03224.
Briefly, the antecedent facts disclose that sometime in 1976 and 1977
respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the
Mendozas, for brevity), obtained two (2) loans from respondent Philippine
American Life Insurance Co. (Philam Life) in the total amount of
P600,000.00 to finance the construction of their residential house at
Mandaue City. The said loans, with a 14% nominal interest rate, were to be
liquidated in equal amortizations over a period of five (5) years from March
1977 to March 1982.

To secure payment, Philam Life required that amortizations be guaranteed

by an irrevocable standby letter of credit of a commercial bank. Thus, the
Mendozas contracted with petitioner Insular Bank of Asia and America
(IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in
favor of Philam Life for the total amount of P600,000.00. The first L/C for
P500,000.00 was to expire on 1 October 1981 (Exhibit "7", IBAA) and the
second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA) These two
(2) irrevocable standby L/Cs were, in turn, secured by a real estate
mortgage for the same amount on the property of Respondent Spouses in
favor of IBAA.
On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77)
in favor of IBAA promising to pay the sum of P100,000.00 plus 19% p.a.
interest on 31 May 1979. Again, on 3 June 1977, Respondent Spouses
executed another Promissory Note (No. 564/77) binding themselves to pay
IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes
authorized IBAA "to sell at public or private sale such securities or things for
the purpose of applying their proceeds to such payments" of many particular
obligation or obligations" the Mendozas may have to IBAA. (Exhibits "34"
and "35"-IBAA, Annex "D" p. 131, Rollo)
The Mendozas failed to pay Philam Life the amortization that fell due on 1
June 1978 so that Philam Life informed IBAA that it was declaring both
loans as "entirely due and demandable" and demanded payment of
P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety
of calling ill the entire loan, Philam Life desisted and resumed availing of the
L/Cs by drawing on them for five (5) more amortizations.
On 7 September 1979, because the Mendozas defaulted on their
amortization due on 1 September 1979, Philam Life again informed IBAA
that it was declaring the entire balance outstanding on both loans, including
liquidated damages, "immediately due and payable." Philam Life then
demanded the payment of P274,779.56 from IBAA but the latter took the
position that, as a melee guarantor of the Mendozas who are the principal
debtors, its remaining outstanding obligation under the two (2) standby L/Cs
was only P30,100.60. Later, IBAA corrected the latter amount and showed
instead an overpayment arrived at as follows:
Limit

of

Liability

600,000.00

Less:

a) Payment
of Mendozas

P
280,
293.11

b) Payment
of IBAA

372,227.65
652,520.76

Overpayment
by IBAA

(
P
52,520.76)

On 21 April 1980 the Real Estate Mortgage, which secured the two (2)
standby L/Cs. was extrajudicially foreclosed by, and sold at public auction
for P775,000.00, to petitioner IBAA as the lone and highest bidder (Exhibit
"17-Mendoza"). The bid price of P775,000.00 by petitioner IBAA was arrived
at as follows:
Principal
(unpaid
advances
under the
2

P
432,386.07

standby
LCs) plus
interest &
charges
Add:

a)
Stipulated
Attorney's
fees (20%)
b)

P
86,477.20

Principals
(clean
loans) plus
accrued
interest
under
P/Ns Nos.
562/77
and
564/77

P
255,346.95

c)
Expenses
of
foreclosure

P 72.20

TOTAL

P
775,000.42

On a date that does not appear of record, Philam Life filed suit against
Respondent Spouses and IBAA before the Regional Trial Court of Manila,
Branch XXXXI, for the recovery of the sum of P274,779.56, the amount
allegedly still owing under the loan. After trial, said Court rendered a
Decision finding that IBAA had paid Philam Life only P342,127.05 and not
P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's
check in the amount of P30,100.60, which had to be deducted. With this
deduction, the Trial Court arrived at the following computation:
Limit
of
Liability
of
IBAA Less:

P
600,000.00

a) Payment
by Mendozas

P
280,
293.11

b) Payment
by IBAA

P342,127.05
P
622,420.16

Overpayment
by IBAA

P 22,420.16

Thus, the Trial Court ruled:

ACCORDINGLY, judgment is hereby rendered ordering:
(1) Defendants-spouses Ben S. Mendoza and Juanita M.
Mendoza to pay plaintiff Philippine American Life Insurance
Company the sum of P322,000.00 plus 2% per month as penalty
interest from September 12, 1979 until the whole amount is fully
paid, P10,000 as attorney's fees, and costs.
(2) Plaintiff Philippine American Life Insurance Company to refund
the sum of P22,420.16 to the defendant Insular Bank of Asia and
America plus legal interest from March 31, 1980 until the whole
amount is fully paid; and
(3) Dismissal of the counterclaim and crossclaim filed by the
defendants- spouses against the plaintiff and the defendant IBAA,
as well as the counterclaim filed by defendant IBAA against the
plaintiff. (pp. 28-29, Rollo)
In so deciding, the Trial Court took the position that IBAA, "as surety" was
discharged of its liability to the extent of the payment made by the
Mendozas, as the principal debtors, to the creditor, Philam Life.
Both Philam Life and Respondent Spouses appealed to respondent
Appellate Court, which reversed the Trial Court and ruled instead that
IBAA's liability was not reduced by virtue of the payments made by the
Mendozas. Accordingly, the Appellate Court decreed:
WHEREFORE, premises
rendered ordering:

considered,

judgment

is

hereby

1. Defendants-appellant spouses Ben S. Mendoza and Juanita M.

Mendoza and defendant-appellee IBAA to pay jointly and
severally plaintiff-appellant Philamlife, the sum of P222,000.00
plus 2% per month as penalty interest from September 12, 1979
until the whole amount is fully paid; plus P25,000.00, as attorney's

fees, and costs; however, defendant-appellee IBAA shall only be

liable up to the amount of P296,294.05;
2. Dismissal of the claim by the IBAA for a refund of P22,420.16
from the Phil-American Life Insurance Co.; and
3. Dismissal of the counterclaim and cross-claim filed by the
defendant- spouses against the plaintiff and the defendant IBAA,
as well as the counterclaim filed by defendant IBAA against the
plaintiff.
No special pronouncement as to costs in this instance. (p. 51,
Rollo).
Availing of the instant Petition, IBAA seeks a reversal of the aforesaid
judgment and the affirmance instead of that of the Trial Court. We resolved
to give due course. The issues addressed, as posited by IBAA, are:
1. Whether or not the partial payments made by the principal
obligors (respondent MENDOZAS) would have the corresponding
effect of reducing the liability of the petitioner as guarantor or
surety under the terms of the standby LCs in question.
2. Whether or not respondent Intermediate Appellate Court is
correct in disregarding a documentary evidence (O.R. No. 74323,
Exhibit 28-IBAA) showing the amount paid by petitioner and which
was admitted as evidence without objection on the paint of the
counsel for the respondent Philam.
3. Whether or not the Intermediate Appellate Court is correct in
passing sub-silencio the following points raised by the petitioner in
its Brief to sustain the decision of the Trial Court on some other
grounds.
a. Effective rate of interest imposed by respondent Philam
exceeded the allowable ceiling;
b. Respondent Philam has no right to call in at one time the two
standby letters of credit;

c. Respondent Philam failed to follow the condition in the two (2)

standby letters of credit:
which could have otherwise altered the result of the decision.
4. Whether or not the award of attorney's fees to respondent
Philam is proper in so far as petitioner is affected. (p. 15, Rollo)
The pivotal issue is the first one. IBAA stresses that it has no more liability
to Philam Life under the two (2) standby Letters of Credit and, instead, is
entitled to a refund. Whereas Philam Life and the Mendoza spouses
separately maintain that IBAA's obligation under said two (2) L/Cs is original
and primary and is not reduced by the direct payments made by the
Mendozas to Philam Life.
1. In construing the terms of a Letter of Credit, as in other contracts, it is the
intention of the parties that must govern.
Letters of credit and contracts for the issuance of such letters are
subject to the same rules of construction as are ordinary
commercial contracts. They are to receive a reasonable and not a
technical construction and although usage and custom cannot
control express terms in letters of credit, they are to be construed
with reference to all the surrounding facts and circumstances, to
the particular and often varying terms in which they may be
expressed, the circumstances and intention of the parties to them,
and the usages of the particular trade of business contemplated.
(International Banking Corp. vs. Irving National Bank, CCA N.Y.
283 F. 103, affirming DC 274 F. 122; Old Colony Trust Co. vs.
Lawyers' Title and Trust Co., CAA NY, 297 F. 152, cited in Vol.
72, CJS sec. 178, pp. 387-388).<re||an1w>
The terms of the subject Irrevocable Standby Letters of Credit read, in part,
as follows:
This credit secures the payment of any obligation of the
accountee to you under that Loan Agreement hereto attached as
Annex 'A' and made a part hereof, including those pertaining to
(a) surcharges on defaulted account; stallments, (b) increased
interest charges (in the event the law should authorize this

increase), and (c) liabilities connected with taxes stipulated to be

for Accountee's and provided however, that our maximum
liabilities hereunder shall not exceed the amount of P500,000.00
(Pl00.000.00 for the other LC).
Each drawing under this credit shall be available at any time after
one (1) day from due date of the obligations therein secured.
Each drawing under this credit shall be accomplished by your
signed statement in duplicate that the amount drawn represents
payment due and unpaid by the accountee. (pp. 11-12, Decision,
pp. 38-39, Rollo). [Emphasis our ].
Unequivocally, the subject standby Letters of Credit secure the payment of
any obligation of the Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed P600,000.00. But while
they are a security arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra vires rather than a letter
of credit, which is within the powers of a bank (Section 74[e], RA 337,
General Banking Act). 1 The standby L/Cs are, "in effect an absolute
undertaking to pay the money advanced or the amount for which credit is
given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670,
65 Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p.
1142). They are primary obligations and not accessory contracts. Being
separate and independent agreements, the payments made by the
Mendozas cannot be added in computing IBAA's liability under its own
standby letters of credit. Payments made by the Mendozas directly to
Philam Life are in compliance with their own prestation under the loan
agreements. And although these payments could result in the reduction of
the actual amount which could ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains.
Both the Trial Court and the Appellate Court found, as a fact, that there still
remains a balance on the loan, Pursuant to its absolute undertaking under
the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life
for this unexpended balance. The Appellate Court found it to be
P222,000.00, arrived at by the Trial Court and adopted by the Appellate
Court, as follows:
... In the summary of application of payments (Exhibit "KK") the
plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as

surcharges, P199,683.40 as interests, and P320,000.00 on the

principal. The P58,000.00 which is covered by OR No. 74396 was
also applied "against the total loan." Since plaintiff applied
P378,000.00 against the total indebtedness of P600,000.00 there
still remains an outstanding balance on the principal P322,000.00
(should be P222,000.00) aside from the agreed penalty interest
until the whole amount is fully paid. ... (Decision, Trial Court, p.
50, Rollo)
The amount of P222,000.00, therefore, considered as "any obligation of the
accountee" under the L/Cs will still have to be paid by IBAA under the
explicit terms thereof, which IBAA had itself supplied. Letters of credit are
strictly construed to the end that the rights of those directly parties to them
may be preserved and their interest safeguarded (Moss vs. Old Colony
Trust Co., 140 N.E. 803, 246 Mass. 138, 152).<re||an1w> Like any
other writing, it will be construed most strongly against the writer and so as
to be reasonable and consistent with honest intentions. On the whole, the
construction will be generally a strict one (Lamborn vs. National Park Bank
of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id , 204 N.Y.S.
557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As found by
the Appellate Court, however, the amount payable should not exceed
P296,294,05 (P600,000.00 less P303,705.95, the total amount found by the
Appellate Court to have been paid by IBAA to Philam Life).
2. The second issue as to whether or not documentary evidence was
disregarded by the Appellate Court regarding the amount actually paid by
IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial
Court), questions a finding of fact, which should be accorded not only
respect but even finality. It is not the function of this Court to analyze or
weigh such evidence all over again, its jurisdiction being limited to reviewing
errors of law that might have been committed by lower Courts.
3. The third issue faults respondent Appellate Court with having passed
sub-silencio over certain points raised by petitioner IBAA in his Brief
sustaining the Decision of the Trial Court. It is accepted judicial practice,
however, that Courts are not required to resolve all issues raised in
pleadings unless necessary for the resolution of the case. Apparently,
respondent Appellate Court deemed it unnecessary to pass upon those
points. Be that as it may, suffice it to state:

a) It is a matter of common knowledge in lending procedures that the

nominal interest is different from the effective rate of interest and that the
discounting interest scheme as well as the principal amortization scheme
are practices commonly resorted to by lending institutions. If IBAA
disagreed with the computation scheme adopted by Philam Life, which
could have been detected in the early stages of the controversy, IBAA could
have interposed its objections.
b) The right to call in at one time the two standby L/Cs was specifically
provided for in the Loan Agreement, which was specifically made an integral
part of the L/Cs Section 8 thereof read:
... 8. The Lender shall have the light to declare the entire balance
of the loans and all obligations of the borrower to the lender as
immediately due and payable in case the borrower fails for any
reason to comply with any payment or other obligations of the
Lender. (p. 248, Rollo)
c) The omission by Philam Life to draw the required drafts on the standby
L/Cs can be explained by the fact that all the drafts were pre-prepared, predated
and
pre-accepted by the Mendozas. Philam Life, therefore, could not have
complied to the letter with the provision in the L/Cs that drawings therefrom
were to be made by drafts for each due and unpaid amortization. Besides,
the accelaration of the entire balance of the loan was sufficient notice of
dishonor of the pre-drawn and pre-accepted drafts.
4. Coming now to the award of attorney's fees of P25,000.00, the same
appears reasonable under the circumstances of the case specially
considering that in the foreclosure of the mortgage in its favor IBAA charged
the Mendozas attorney's fees in the amount of P86,477.20, supra.
As to the liability of the Mendozas to IBAA, it bears recalling that the
Mendozas, upon their application for the opening and issuance of the
Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a
Real Estate Mortgage as security to IBAA for any payment that the latter
may remit to Philam Life on the strength of said Letters of Credit; and that
IBAA had recovered from the Mendozas the amount of P432,386.07 when it
foreclosed on the mortgaged property of said spouses in the concept of
"principal (unpaid advances under the 2 standby L/Cs plus interest and

charges)." In addition, IBAA had recovered P255,364.95 representing its

clean loans to the Mendozas plus accrued interest besides the fact that it
now has the foreclosed property. As between IBAA and the Mendozas,
therefore, there has been full liquidation. The remaining obligation of
P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole
responsibility to pay to Philam Life by virtue of its absolute and irrevocable
undertaking under the standby L/Cs. Specially so, since the promissory
notes executed by the Mendozas in favor of IBAA authorized the sale of the
mortgaged security "for the purpose of applying their proceeds to ...
payments" of their obligations to IBAA.
WHEREFORE, the Decision of respondent Intermediate Appellate Court,
dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the
Philippine Commercial International Bank) shall pay Philippine American
Life Insurance Company the sum of P222,000.00 plus 2% per month as
penalty interest from 12 September 1979 until the whole amount is fully
paid, but in no case to exceed P296,294.05, plus P25,000.00 as attorney's
fees. No costs.
SO ORDERED.

Transfield Philippines, Inc. vs. Luzon Hydro Corporation, 443 SCRA 307
(2004)

Ong vs. Philippine Commercial International Bank, 448 SCRA

705 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 160466

January 17, 2005

SPOUSES
ALFREDO
and
SUSANA
ONG,
petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255,
dated February 17, 2003, affirming the decision of the trial court denying
petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation
engaged in the manufacture and export of finished wood products.
Petitioners-spouses Alfredo and Susana Ong are its President and
Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank
(now Equitable-Philippine Commercial International Bank or E-PCIB) filed a
case for collection of a sum of money1 against petitioners-spouses.
Respondent bank sought to hold petitioners-spouses liable as sureties on
the three (3) promissory notes they issued to secure some of BMCs loans,
totalling five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its
business and applied for various loans, amounting to a total of five million

pesos, with the respondent bank. Petitioners-spouses acted as sureties for

these loans and issued three (3) promissory notes for the purpose. Under
the terms of the notes, it was stipulated that respondent bank may consider
debtor BMC in default and demand payment of the remaining balance of the
loan upon the levy, attachment or garnishment of any of its properties, or
upon BMCs insolvency, or if it is declared to be in a state of suspension of
payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and
suspension of payments with the Securities and Exchange Commission
(SEC) after its properties were attached by creditors. Respondent bank
considered debtor BMC in default of its obligations and sought to collect
payment thereof from petitioners-spouses as sureties. In due time,
petitioners-spouses filed their Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA)2 was executed
by debtor BMC, the petitioners-spouses as President and Treasurer of
BMC, and the consortium of creditor banks of BMC (of which respondent
bank is included). The MOA took effect upon its approval by the SEC on
November 27, 1992.3
Thereafter, petitioners-spouses moved to dismiss4 the complaint. They
argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action
against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMCs sureties in their contracts of loan
with respondent bank. Petitioners-spouses averred that respondent bank is
barred from pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed
to the Court of Appeals which affirmed the trial courts ruling that a creditor
can proceed against petitioners-spouses as surety independently of its right
to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by
respondent bank should be dismissed for three (3) reasons: First, the MOA
provided that during its effectivity, there shall be a suspension of filing or

pursuing of collection cases against the BMC and this provision should
benefit petitioners as sureties. Second, principal debtor BMC has been
placed under suspension of payment of debts by the SEC; petitioners
contend that it would prejudice them if the principal debtor BMC would enjoy
the suspension of payment of its debts while petitioners, who acted only as
sureties for some of BMCs debts, would be compelled to make the
payment; petitioners add that compelling them to pay is contrary to Article
2063 of the Civil Code which provides that a compromise between the
creditor and principal debtor benefits the guarantor and should not prejudice
the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which
provides that: "the guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in the debt;
but not those which are purely personal to the debtor." Petitioners aver that
if the principal debtor BMC can set up the defense of suspension of
payment of debts and filing of collection suits against respondent bank,
petitioners as sureties should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code
is misplaced as these provisions refer to contracts of guaranty. They do not
apply to suretyship contracts. Petitioners-spouses are not guarantors but
sureties of BMCs debts. There is a sea of difference in the rights and
liabilities of a guarantor and a surety. A guarantor insures the solvency of
the debtor while a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the part of the guarantor. It
is only after the creditor has proceeded against the properties of the
principal debtor and the debt remains unsatisfied that a guarantor can be
held liable to answer for any unpaid amount. This is the principle of
excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt.
As the surety insures the debt itself, he obligates himself to pay the debt if
the principal debtor will not pay, regardless of whether or not the latter is
financially capable to fulfill his obligation. Thus, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay
or no prior demand is made on the principal debtor. A surety is directly,
equally and absolutely bound with the principal debtor for the payment of
the debt and is deemed as an original promissor and debtor from the
beginning.5

Under the suretyship contract entered into by petitioners-spouses with

respondent bank, the former obligated themselves to be solidarily bound
with the principal debtor BMC for the payment of its debts to respondent
bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of
the Civil Code,6 respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of collection suits against
BMC. Respondent banks right to collect payment from the surety exists
independently of its right to proceed directly against the principal debtor. In
fact, the creditor bank may go against the surety alone without prior demand
for payment on the principal debtor.7
The provisions of the MOA regarding the suspension of payments by BMC
and the non-filing of collection suits by the creditor banks pertain only to the
property of the principal debtor BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in
the petition with the SEC.8 Secondly, there is nothing in the MOA that
involves the liabilities of the sureties whose properties are separate and
distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA
executed by BMC and signed by the creditor-banks was approved by the
SEC whose jurisdiction is limited only to corporations and corporate assets.
It has no jurisdiction over the properties of BMCs officers or
sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitionersspouses as sureties can prosper. The trial courts denial of petitioners
motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No
pronouncement as to costs.
SO ORDERED.

International Finance Corporation vs. Imperial Textile Mills,

Inc., 475 SCRA 149 (2005)
Republic
SUPREME
Manila

of

the

THIRD DIVISION
INTERNATIONAL FINANCE G.R. No. 160324
CORPORATION,
Petitioner, Present:
Panganiban, J.,
Chairman,
- versus - Sandoval-Gutierrez,*
Corona,
Carpio Morales, and
Garcia, JJ
IMPERIAL TEXTILE MILLS, Promulgated:
INC.,**
Respondent. ' November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

Philippines
COURT

T he terms of a contract govern the rights and obligations of the contracting

parties. When the obligor undertakes to be 'jointly and severally liable, it
means that the obligation is solidary. If solidary liability was instituted to
'guarantee a principal obligation, the law deems the contract to be one of
suretyship.
The creditor in the present Petition was able to show convincingly that,
although denominated as a 'Guarantee Agreement, the Contract was
actually a surety. Notwithstanding the use of the words 'guarantee and
'guarantor, the subject Contract was indeed a surety, because its terms
were clear and left no doubt as to the intention of the parties.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
assailing the February 28, 2002 Decision[2] and September 30, 2003
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The
challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of
the trial court is MODIFIED to read as follows:
1. Philippine Polyamide Industrial Corporation is ORDERED to pay
[Petitioner] International Finance Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests
as provided in the Loan Agreement;
(b) Interest of 12% per annum on accrued
interest, which shall be counted from the date
of filing of the instant action up to the actual
payment;
(c) P73,340.00 as attorney's fees;
(d) Costs of suit.

2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is

HELD secondarily liable to pay the amount herein adjudged to
[Petitioner] International Finance Corporation.[4]

The assailed Resolution denied both parties' respective Motions for

Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
On December 17, 1974, [Petitioner] International Finance Corporation
(IFC) and [Respondent] Philippine Polyamide Industrial Corporation
(PPIC) entered into a loan agreement wherein IFC extended to PPIC a
loan of US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each, beginning June 1, 1977 to
December 1, 1984, with interest at the rate of 10% per annum on the
principal amount of the loan advanced and outstanding from time to
time. The interest shall be paid in US dollars semi-annually on June 1
and December 1 in each year and interest for any period less than a
year shall accrue and be pro-rated on the basis of a 360-day year of
twelve 30-day months.
On December 17, 1974, a 'Guarantee Agreement was executed with x
x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex
agreed to guarantee PPIC's obligations under the loan agreement.
PPIC paid the installments due on June 1, 1977, December 1, 1977
and June 1, 1978. The payments due on December 1, 1978, June 1,
1979 and December 1, 1979 were rescheduled as requested by PPIC.
Despite the rescheduling of the installment payments, however, PPIC
defaulted. Hence, on April 1, 1985, IFC served a written notice of
default to PPIC demanding the latter to pay the outstanding principal
loan and all its accrued interests. Despite such notice, PPIC failed to
pay the loan and its interests.
By virtue of PPIC's failure to pay, IFC, together with DBP, applied for
the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC,
located at Calamba, Laguna, with the regional sheriff of Calamba,
Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna
issued a notice of extrajudicial sale. IFC and DBP were the only
bidders during the auction sale. IFC's bid was for P99,269,100.00

which was equivalent to US$5,250,000.00 (at the prevailing exchange

rate of P18.9084 = US$1.00). The outstanding loan, however,
amounted to US$8,083,967.00 thus leaving a balance of
US$2,833,967.00. PPIC failed to pay the remaining balance.

Consequently, IFC demanded ITM and Grandtex, as guarantors of

PPIC, to pay the outstanding balance. However, despite the demand
made by IFC, the outstanding balance remained unpaid.

Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of
Manila against PPIC and ITM for the payment of the outstanding
balance plus interests and attorney's fees.

The trial court held PPIC liable for the payment of the outstanding loan
plus interests. It also ordered PPIC to pay IFC its claimed attorney's
fees. However, the trial court relieved ITM of its obligation as
guarantor. Hence, the trial court dismissed IFC's complaint against
ITM.

xxxxxxxxx

Thus, apropos the decision dismissing the complaint against ITM, IFC
appealed [to the CA].[5]
Ruling of the Court of Appeals

The CA reversed the Decision of the trial court, insofar as the latter
exonerated ITM from any obligation to IFC. According to the appellate court,
ITM bound itself under the 'Guarantee Agreement to pay PPIC's obligation
upon default.[6] ITM was not discharged from its obligation as guarantor when

PPIC mortgaged the latter's properties to IFC.[7] The CA, however, held that
ITM's liability as a guarantor would arise only if and when PPIC could not pay.
Since PPIC's inability to comply with its obligation was not sufficiently
established, ITM could not immediately be made to assume the liability.[8]

The September 30, 2003 Resolution of the CA denied reconsideration.[9]

Hence, this Petition.[10]
The Issues

Petitioner states the issues in this wise:

I. Whether or not ITM and Grandtex[11] are sureties and

therefore, jointly and severally liable with PPIC, for the
payment of the loan.

II. Whether or not the Petition raises a question of law.

III. Whether or not the Petition raises a theory not raised in

the lower court.[12]

The main issue is whether ITM is a surety, and thus solidarily liable with
PPIC for the payment of the loan.
The Court's Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under

the Guarantee Agreement

The present controversy arose from the following Contracts: (1) the Loan
Agreement dated December 17, 1974, between IFC and PPIC;[13] and (2)
the Guarantee Agreement dated December 17, 1974, between ITM and
Grandtex, on the one hand, and IFC on the other.[14]

IFC claims that, under the Guarantee Agreement, ITM bound itself as a
surety to PPIC's obligations proceeding from the Loan Agreement.[15] For
its part, ITM asserts that, by the terms of the Guarantee Agreement, it was
merely a guarantor[16] and not a surety. Moreover, any ambiguity in the
Agreement should be construed against IFC -- the party that drafted it.[17]
Language of the
Contract

The premise of the Guarantee Agreement is found in its preambular clause,

which reads:

Whereas,

(A) By an Agreement of even date herewith between IFC

and
PHILIPPINE
POLYAMIDE
INDUSTRIAL
CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC agrees
to extend to the Company a loan (herein called the Loan) of
seven million dollars ($7,000,000) on the terms therein set
forth, including a provision that all or part of the Loan may be
disbursed in a currency other than dollars, but only on
condition that the Guarantors agree to guarantee the

obligations of the Company in respect of the Loan as

hereinafter provided.

(B) The Guarantors, in order to induce IFC to enter into the

Loan Agreement, and in consideration of IFC entering into
said Agreement, have agreed so to guarantee such
obligations of the Company.[18]

The obligations of the guarantors are meticulously expressed in the

following provision:

Section 2.01. The Guarantors jointly and severally, irrevocably,

absolutely and unconditionally guarantee, as primary obligors and not
as sureties merely, the due and punctual payment of the principal of,
and interest and commitment charge on, the Loan, and the principal of,
and interest on, the Notes, whether at stated maturity or upon
prematuring, all as set forth in the Loan Agreement and in the
Notes.[19]

The Agreement uses 'guarantee and guarantors, prompting ITM to base its
argument on those words.[20] This Court is not convinced that the use of
the two words limits the Contract to a mere guaranty. The specific
stipulations in the Contract show otherwise.

Solidary Liability
Agreed to by ITM

While referring to ITM as a guarantor, the Agreement specifically stated that

the corporation was 'jointly and severally liable. To put emphasis on the
nature of that liability, the Contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety.

Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC

for the latter's obligations under the Loan Agreement with IFC. ITM thereby
brought itself to the level of PPIC and could not be deemed merely
secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC.
ITM's liability commenced only when it guaranteed PPIC's obligation. It
became a surety when it bound itself solidarily with the principal obligor.
Thus, the applicable law is as follows:

Article 2047. By guaranty, a person, called the guarantor binds himself

to the creditor to fulfill the obligation of the principal in case the latter
should fail to do so.

If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract shall be called suretyship.[22]

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil

Code on 'Joint and Solidary Obligations. Relevant to this case is Article
1216, which states:

The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of
them shall not be an obstacle to those which may subsequently be

directed against the others, so long as the debt has not been fully
collected.
Pursuant to this provision, petitioner (as creditor) was justified in taking
action directly against respondent.
No Ambiguity in the
Undertaking

The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term jointly and severally, the use of the
word 'guarantor to refer to a 'surety does not violate the law.[23] As Article
2047 provides, a suretyship is created when a guarantor binds itself
solidarily with the principal obligor. Likewise, the phrase in the Agreement -'as primary obligor and not merely as surety -- stresses that ITM is being
placed on the same level as PPIC. Those words emphasize the nature of
their liability, which the law characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one of
guaranty.[24] This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound by
a primary or an independent obligation.[25] The very terms of a contract
govern the obligations of the parties or the extent of the obligor's liability.
Thus, this Court has ruled in favor of suretyship, even though contracts
were denominated as a 'Guarantor's Undertaking [26] or a 'Continuing
Guaranty.[27]

Contracts have the force of law between the parties,[28] who are free to
stipulate any matter not contrary to law, morals, good customs, public order
or public policy.[29] None of these circumstances are present, much less
alleged by respondent. Hence, this Court cannot give a different meaning to
the plain language of the Guarantee Agreement.

Indeed, the finding of solidary liability is in line with the premise provided in
the 'Whereas' clause of the Guarantee Agreement. The execution of the
Agreement was a condition precedent for the approval of PPIC's loan from
IFC. Consistent with the position of IFC as creditor was its requirement of a
higher degree of liability from ITM in case PPIC committed a breach. ITM
agreed with the stipulation in Section 2.01 and is now estopped from
feigning ignorance of its solidary liability. The literal meaning of the
stipulations control when the terms of the contract are clear and there is no
doubt as to the intention of the parties.[30]

We note that the CA denied solidary liability, on the theory that the parties
would not have executed a Guarantee Agreement if they had intended to
name ITM as a primary obligor.[31] The appellate court opined that ITM's
undertaking was collateral to and distinct from the Loan Agreement. On this
point, the Court stresses that a suretyship is merely an accessory or a
collateral to a principal obligation.[32] Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct,
primary and absolute; or equivalent to that of a regular party to the
undertaking.[33] A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the
obligations constituted by the latter.[34]
ITM's Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in
declaring the former secondarily liable.[35] A surety is considered in law to
be on the same footing as the principal debtor in relation to whatever is
adjudged against the latter.[36] Evidently, the dispositive portion of the
assailed Decision should be modified to require ITM to pay the amount
adjudged in favor of IFC.

Peripheral Issues

In addition to the main issue, ITM raised procedural infirmities allegedly

justifying the denial of the present Petition. Before the trial court and the CA,

IFC had allegedly instituted different arguments that effectively changed the
corporation's theory on appeal, in violation of this Court's previous
pronouncements.[37] ITM further claims that the main issue in the present
case is a question of fact that is not cognizable by this Court.[38]

These contentions deserve little consideration.

Alleged Change of
Theory on Appeal

Petitioner's arguments before the trial court (that ITM was a 'primary
obligor') and before the CA (that ITM was a 'surety') were related and
intertwined in the action to enforce the solidary liability of ITM under the
Guarantee Agreement. We emphasize that the terms primary obligor and
'surety were premised on the same stipulations in Section 2.01 of the
Agreement. Besides, both terms had the same legal consequences. There
was therefore effectively no change of theory on appeal. At any rate, ITM
failed to show to this Court a disparity between IFC's allegations in the trial
court and those in the CA. Bare allegations without proof deserve no
credence.

Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for
Review,[39] the Court has recognized exceptions,[40] one of which applies

to the present case. The assailed Decision was based on a

misapprehension of facts,[41] which particularly related to certain
stipulations in the Guarantee Agreement -- stipulations that had not been
disputed by the parties. This circumstance compelled the Court to review
the Contract firsthand and to make its own findings and conclusions
accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision
and Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is
declared a surety to Philippine Polyamide Industrial Corporation. ITM is
ORDERED to pay International Finance Corporation the same amounts
adjudged against PPIC in the assailed Decision. No costs.

SO ORDERED.

JN Development Corporation vs. Philippine Export and

Foreign Loan Guarantee Corporation, 468 SCRA 555 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
[G.R. No. 151060. August 31, 2005]
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR
STA. ANA, Petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION, respondent.
[G.R. No. 151311. August 31, 2005]
NARCISO V. CRUZ, Petitioner, vs. PHILIPPINE EXPORT and FOREIGN
LOAN GUARANTEE CORPORATION, respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision[1] of the Court
of Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and
Foreign Loan Guarantee Corporation v. JN Development Corporation, et al.,
which reversed the Decision of the Regional Trial Court (RTC) of Makati,
Branch 60.
On 13 December 1979, petitioner JN Development Corporation (JN') and
Traders Royal Bank (TRB) entered into an agreement whereby TRB would
extend to JN an Export Packing Credit Line for Two Million Pesos
(P2,000,000.00). The loan was covered by several securities, including a
real estate mortgage[2] and a letter of guarantee from respondent Philippine
Export and Foreign Loan Guarantee Corporation (PhilGuarantee'), now
Trade and Investment Development Corporation of the Philippines, covering
seventy percent (70%) of the credit line.[3] With PhilGuarantee issuing a
guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor

Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of

Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8
October 1980 TRB requested PhilGuarantee to make good its guarantee.[8]
PhilGuarantee informed JN about the call made by TRB, and inquired about
the action of JN to settle the loan.[9] Having received no response from JN,
on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four
Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,824.34).[10] Subsequently, PhilGuarantee made several demands on
JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo Sta.
Ana, proposed to settle the obligation 'by way of development and sale of
the mortgaged property.[11] PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and
damages against herein petitioners.
In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee's
Complaint as well as the counterclaim of petitioners. It ruled that petitioners
are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial to
this holding was the court's finding that TRB was able to foreclose the real
estate mortgage executed by JN, thus extinguishing petitioners'
obligation.[13] Moreover, there was no showing that after the said
foreclosure, TRB had demanded from JN any deficiency or the payment of
the difference between the proceeds of the foreclosure sale and the actual
loan.[14] In addition, the RTC held that since PhilGuarantee's guarantee
was good for only one year from 17 December 1979, or until 17 December
1980, and since it was not renewed after the expiry of said period,
PhilGuarantee had no more legal duty to pay TRB on 10 March 1981.[15]
The RTC likewise ruled that Cruz cannot be held liable under the
Undertaking since he was not the one who signed the document, in line with
its finding that his signature found in the records is totally different from the
signature on the Undertaking.[16]
According to the RTC, the failure of TRB to sue JN for the recovery of the
loan precludes PhilGuarantee from seeking recoupment from the spouses
Sta. Ana and Cruz what it paid to TRB. Thus, PhilGuarantee's payment to
TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.[17]

Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The

appellate court reversed the RTC and ordered petitioners to pay
PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty
Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge
and interest.[18]
In reaching its denouement, the CA held that the RTC's finding that the loan
was extinguished by virtue of the foreclosure sale of the mortgaged property
had no factual support,[19] and that such finding is negated by Rodrigo Sta.
Ana's testimony that JN did not receive any notice of foreclosure from
PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same
mortgaged property to PhilGuarantee to settle its obligations with the
latter.[21]
The CA also ruled that JN's obligation had become due and demandable
within the one-year period of effectivity of the guarantee; thus,
PhilGuarantee's payment to TRB conformed with its guarantee, although
the payment itself was effected one year after the maturity date of the
loan.[22] Contrary to the trial court's finding, the CA ruled that the contract of
guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantee's consent to the extensions granted by TRB to JN.[23]
Interpreting Art. 2058 of the Civil Code,[24] the appellate court explained
that while the provision states that the guarantor cannot be compelled to
pay unless the properties of the debtor are exhausted, the guarantor is not
precluded from waiving the benefit of excussion and paying the obligation
altogether.[25]
Finally, the CA found that Narciso Cruz was unable to prove the alleged
forgery of his signature in the Undertaking, the evidence presented not
being sufficient to overcome the presumption of regularity of the
Undertaking which is a notarized document. [26]
Petitioners sought reconsideration of the Decision and prayed for the
admission of documents evidencing the foreclosure of the real estate
mortgage, but the motion for reconsideration was denied by the CA for lack
of merit. The CA ruled that the documentary evidence presented by
petitioners cannot be considered as newly discovered evidence, it being
already in existence while the case was pending before the trial court, the
very forum before which it should have been presented. Besides, a

foreclosure sale per se is not proof of petitioners' payment of the loan to

PhilGuarantee, the CA added.[27]
So now before the Court are the separate petitions for review of the CA
Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060,
posit that the CA erred in interpreting Articles 2079, 2058, and 2059 of the
Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R.
No. 151311 claims that the CA erred when it held that petitioners are liable
to PhilGuarantee despite its payment after the expiration of its contract of
guarantee and the lack of PhilGuarantee's consent to the extensions
granted by TRB to JN. Moreover, Cruz questions the reversal of the ruling of
the trial court anent his liability as a signatory to the Undertaking.[29]
On the other hand, PhilGuarantee maintains that the date of default, not the
actual date of payment, determines the liability of the guarantor and that
having paid TRB when the loan became due, it should be indemnified by
petitioners.[30] It argues that, contrary to petitioners' claim, there could be
no waiver of its right to excussion more explicit than its act of payment to
TRB very directly.[31] Besides, the right to excussion is for the benefit of the
guarantor and is not a defense for the debtor to raise and use to evade
liability.[32] Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruz's signature on the Undertaking,
which is a notarized document and as such must be accorded the
presumption of regularity.[33]
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so.[34] The guarantor who pays for a debtor, in turn, must be indemnified by
the latter.[35] However, the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor.[36] This is what is
otherwise known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against
the principal debtor have been expanded. Thus, it was held that the creditor
must first obtain a judgment against the principal debtor before assuming to
run after the alleged guarantor, 'for obviously the 'exhaustion of the
principal's property cannot even begin to take place before judgment has

been obtained.[37] The law imposes conditions precedent for the invocation
of the defense. Thus, in order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor upon the latter's
demand for payment and point out to the creditor available property of the
debtor within the Philippines sufficient to cover the amount of the debt.[38]
While a guarantor enjoys the benefit of excussion, nothing prevents him
from paying the obligation once demand is made on him. Excussion, after
all, is a right granted to him by law and as such he may opt to make use of it
or waive it. PhilGuarantee's waiver of the right of excussion cannot prevent
it from demanding reimbursement from petitioners. The law clearly requires
the debtor to indemnify the guarantor what the latter has paid.[39]
Petitioners' claim that PhilGuarantee had no more obligation to pay TRB
because of the alleged expiration of the contract of guarantee is untenable.
The guarantee, dated17 December 1979, states:
In the event of default by JNDC and as a consequence thereof,
PHILGUARANTEE is made to pay its obligation arising under the aforesaid
guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4
million or 70% of the total obligation unpaid
....
This guarantee shall be valid for a period of one (1) year from date hereof
but may be renewed upon payment by JNDC of the guarantee fee at the
same rate of 1.5% per annum.[40]
The guarantee was only up to 17 December 1980. JN's obligation with TRB
fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB
on 08 October 1980. That payment was actually made only on 10 March
1981 does not take it out of the terms of the guarantee. What is controlling
is that default and demand on PhilGuarantee had taken place while the
guarantee was still in force.
There is likewise no merit in petitioners' claim that PhilGuarantee's failure to
give its express consent to the alleged extensions granted by TRB to JN
had extinguished the guarantee. The requirement that the guarantor should
consent to any extension granted by the creditor to the debtor under Art.
2079 is for the benefit of the guarantor. As such, it is likewise waivable by

the guarantor. Thus, even assuming that extensions were indeed granted by
TRB to JN, PhilGuarantee could have opted to waive the need for consent
to such extensions. Indeed, a guarantor is not precluded from waiving his
right to be notified of or to give his consent to extensions obtained by the
debtor. Such waiver is not contrary to public policy as it is purely personal
and does not affect public interest.[41] In the instant case, PhilGuarantee's
waiver can be inferred from its actual payment to TRB after the latter's
demand, despite JN's failure to pay the renewal/guarantee fee as indicated
in the guarantee.[42]
For the above reasons, there is no basis for petitioner's claim that
PhilGuarantee was a mere volunteer payor and had no legal obligation to
pay TRB. The law does not prohibit the payment by a guarantor on his own
volition, heedless of the benefit of excussion. In fact, it recognizes the right
of a guarantor to recover what it has paid, even if payment was made before
the debt becomes due,[43] or if made without notice to the debtor,[44]
subject of course to some conditions.
Petitioners' invocation of our ruling in Willex Plastic Industries, Corp. v.
Court of Appeals[45] is misplaced, if not irrelevant. In the said case, the
guarantor claimed that it could not be proceeded against without first
exhausting all of the properties of the debtor. The Court, finding that there
was an express renunciation of the benefit of excussion in the contract of
guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not
invoking the benefit of excussion. It cannot be overemphasized that
excussion is a right granted to the guarantor and, therefore, only he may
invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to
extensions of payment, is a protective device pertaining to and conferred on
the guarantor. These may be invoked by the guarantor against the creditor
as defenses to bar the unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of these defenses when it paid its
obligation according to the tenor of the guarantee once demand was made
on it. What is peculiar in the instant case is that petitioners, the principal
debtors themselves, are muddling the issues and raising the same defenses
against the guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the guarantor. The

Court cannot countenance their self-seeking desire to be exonerated from

the duty to reimburse PhilGuarantee after it had paid TRB on their behalf
and to unjustly enrich themselves at the expense of PhilGuarantee.
Petitioners assert that TRB's alleged foreclosure of the real estate mortgage
over the land executed as security for the loan agreement had extinguished
PhilGuarantee's obligation; thus, PhilGuarantee's recourse should be
directed against TRB, as per the pari-passu provision[46] in the contract of
guarantee.[47] We disagree.
The foreclosure was made on 27 August 1993, 'after the case was
submitted for decision in 1992 and before the issuance of the decision of the
court a quo in 1998.[48] Thus, foreclosure was resorted to by TRB against
JN when they both had become aware that PhilGuarantee had already paid
TRB and that there was a pending case filed by PhilGuarantee against
petitioners. This matter was not raised and proved in the trial court, nor in
the appeal before the CA, but raised for the first time in petitioners' motion
for reconsideration in the CA. In their appellants' Brief, petitioners claimed
that 'there was no need for the defendant-appellee JNDC to present any
evidence before the lower court to show that indeed foreclosure of the REM
took place.[49] As properly held by the CA,
Firstly, the documents evidencing foreclosure of mortgage cannot be
considered as newly discovered evidence. The said documents were
already subsisting and should have been presented during the trial of the
case. The alleged foreclosure sale was made on August 23, 1993 ' while the
decision was rendered by the trial court on August 20, 1998 about five (5)
years thereafter. These documents were likewise not submitted by the
defendants-appellees when they submitted their appellees' Brief to this
Court. Thus, these cannot be considered as newly discovered evidence but
are more correctly ascribed as suppressed forgotten evidence Secondly, the
alleged foreclosure sale is not proof of payment of the loan by defendantappellees to the plaintiffs-appellants.[50]
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for
JN, and its cause of action was premised on its payment of JN's obligation
after the latter's default. PhilGuarantee was well within its rights to demand
reimbursement for such payment made, regardless of whether the creditor,
TRB, was subsequently able to obtain payment from JN. If double payment
was indeed made, then it is JN which should go after TRB, and not

PhilGuarantee. Petitioners have no one to blame but themselves, having

allowed the foreclosure of the property for the full value of the loan despite
knowledge of PhilGuarantee's payment to TRB. Having been aware of such
payment, they should have opposed the foreclosure, or at the very least,
filed a supplemental pleading with the trial court informing the same of the
foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee,
not being parties to the said agreement. The clause is clearly for the benefit
of the guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of
settlement of JN's obligations to PhilGuarantee, the very same parcel of
land mortgaged as security for the loan agreement. This further weakens
the position of petitioners, since it becomes obvious that they acknowledged
the payment made by PhilGuarantee on their behalf and that they were in
fact willing to negotiate with PhilGuarantee for the settlement of the said
obligation before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the
trial court. Save for the denial of Narciso Cruz that it was not his signature in
the Undertaking and the perfunctory comparison of the signatures, nothing
in the records would support the claim of forgery. Forgery cannot be
presumed and must be proved by clear, positive and convincing evidence
and the burden of proof lies on the party alleging forgery.[52] Mere denial
will not suffice to overcome the positive value of the Undertaking, which is a
notarized document, has in its favor the presumption of regularity, and
carries the evidentiary weight conferred upon it with respect to its due
execution.[53] Even in cases where the alleged forged signature was
compared to samples of genuine signatures to show its variance therefrom,
this Court still found such evidence insufficient.[54] Mere variance of the
signatures cannot be considered as conclusive proof that the same were
forged.[55]
WHEREFORE, the consolidated petitions are DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

People's Bank and Trust Co. vs. Odom, 64 Phil. 126 (1937)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-43670

February 25, 1937

PEOPLE
BANK
AND
TRUST
vs.
W. J. ODOM, defendant-appellant.

COMPANY,

Gibbs,
McDonough
and
Ohnick and Opisso for appellee.

Ozaeta

plaintiff-appellee,

for

appellant.

IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant the balance of
an overdraft owing to it from the latter, and to foreclose the mortgage of
properties to guarantee his obligation. The defendant appealed from the
judgment of the Court of First Instance of Manila ordering him to pay to the
plaintiff the sum of P138,403.68, with 9 per cent interest per annum from
January 4, 1934, until fully paid, plus P500 as attorney's fees, and the costs.
The judgment decreed that the principal and interest should be paid within
three months, failing which the mortgaged properties will be sold at public
auction, consisting of the rights, title and interest of the defendant in the
contracts of lease of the building known as the "Sugar News Co., Building"
and "Edward J. Nell Co. Building" as well as his rights, title, and interest in
the land on which the two buildings are constructed, and that the proceeds
of the sale should be applied to the payment of the amount of the judgment.
On January 12, 1927, the defendant entered into a contract with A. D. Gibbs
(Exhibit E) whereby the latter authorized him to construct two concrete
buildings of three floors each, upon his land on Loaisa Street, District of
Binondo, City of Manila, described in certificate of title No. 27584. Upon that
date, the building known as the Sugar News Co. Building was completely
constructed and its first floor was occupied by the People Bank and Trust
Co., but the two upper floors were not fully equipped; the other building

known as the "Edward J. Nell Co. Building" was then under construction.
Under the contract the defendant bore all the expenses of consideration
thereof Gibbs assigned to him all the rents which the building may produce
for a period of eight (8) years from November 1, 1926, as to the first floor
then already occupied, and as to the other floors to be equipped, from the
date they are thus fully equipped. As to the other building, "Edward J. Nell
Co. Building", the parties agreed that the defendant would also bear all the
expenses of construction until it is fully completed, and in consideration
thereof Gibbs assigned to him all the rent which it may produce for a period
of the eight (8) years and three (3) months from the date of the termination
of its construction; this period, however, to be counted from the completion
of each floor in the event that the floors composing the building should not
be completed and equipped at the same time.
By virtue of contracts entered into with the plaintiff, the defendant obtained
an overdraft from the former amounting to P110,000. To secure this
overdraft, the defendant, on April 26, 1928, assigned to the plaintiff all his
rights, title and interest in the contracts of lease with the Sugar News
Company, Manila Machinery and Supply Co., Inc., and T. Yamamoto of the
various portions of the "Sugar News Company Building", as well as the
rights, title and interest which he had acquired in the land on which the said
building was constructed under the contract which he had with A. D. Gibbs.
As additional security, the defendant also assigned to the plaintiff insurance
policy No. 402894 for P100,000 issued by the Manufacturers Life Insurance
Company (Exhibit C).
The overdraft was increased to P150,000, and to secure the payment
thereof the defendant executed Exhibit B on September 18, 1928, in favor of
the plaintiff, whereby he assigned to the latter also by way of guaranty the
same securities which he had given for the overdraft of P110,000.
On January 20, 1931, the overdraft was again increased to P165,000, and
to guarantee the payment thereof the defendant executed Exhibit D
whereby he assigned to the plaintiff his rights, title and interest in the
contracts of lease with Edward J. Nell Company, El Progreso, Inc., and
France & Goulette of various portions of the "Edward J. Nell Company
Building"; in whatever contracts of lease of any portion of the same building
which he may enter not in the future, and the rights, title and interest which

he had in the land occupied by the building according to his contract with A.
D. Gibbs on January 12, 1927.
On the same date, January 20, 1931, the plaintiff and the defendant
executed Exhibit F, whereby the latter assigned to the former his right to
collect the rents of the "Edward J. Nell Company Building" to secure the
payment of the overdraft of P165.000 with interest at 9 per cent per annum.
The annual rentals then produced by the building were the following: from
Edward J. Nell Company P1,3000, from El Progreso P300 and from the
Lyric Film Exchange, Inc., successor of France & Goulette, P800.
Pursuant to the aforesaid contracts, the defendant drew funds upon plaintiff
by way of overdrafts, and on January 4, 1934, his account showed a
balance against him in the amount of P138,403.68, including stipulated
interest up to said date.
The defendant contends in his first assigned error that the contract Exhibit D
took the place of the previous conrtracts Exhibit B and C. To resolve this
point, it is necessary to take into account the intention of the parties
expressed in the contract Exhibit D and the terms in which it was drawn. It
was executed, according to the contract itself, as a result of the increase of
the overdraft to P165,000 as well as the additional guaranty given by
defendant, consisting of the assignment by way of guaranty of his rights in
his contracts of lease of the Edward J. Nell Company Building and of his
rights in the land occupied by the same building. Clause 3 of said contract
stipulated that the contract Exhibit C of April 26, 1928, was incorporated
therein and also constituted a guaranty of the payment of the overdraft as
increased to P165,000. In the light of these facts, it is evident that the
intention of the parties was neither to set aside the previous contracts nor to
substitute Exhibit D therefor.
In his second assignment of error the defendant contends that the court
should have held that the obligation contracted by him was with a term, and
the parties not having fixed the date of payment, the plaintiff should have
first brought an action to fix said date under article 1128 of the Civil Code
providing that, when it is to be inferred from the nature and circumstances of
the obligation that it was intended to grant the debtor time to pay, and the
term is not otherwise stated, the courts should fix the date of the maturity of
the obligation. The contract Exhibit D is a complement of the contracts
Exhibits B and C, hence, its language and the intention of the parties must

be interpreted in relation to and jointly with those of the latter under the
provisions of article 1285 of the same Code. It was expressly stipulated in
Exhibits B and C that the obligation contracted by the defendant shall expire
and be due upon demand of the plaintiff, and in view of the fact that the
latter deed was incorporated in Exhibit D as above stated and that the
defendant was required by the plaintiff to pay all his indebtedness, it is plain
that the obligation was without a term and that it became due and is
demandable. Wherefore, article 1128 of the Civil Code relied upon is not
applicable.
The subject of the third assignment of error is the ruling of the court that the
contracts evidenced by Exhibits B, C and D are one of mortgage and that
the plaintiff's action is for the foreclosure thereof. The defendant vigorously
argues that none of the three contracts is one of mortgage, but an
assignment of rights, because in none of said contracts did the parties
intend to constitute a mortgage. A careful examination of the documents
shows, in our opinion, that they were really mortgage contracts inasmuch as
they were executed to guarantee the principal obligations of the defendant,
consisting of the overdrafts of the indebtedness resulting therefrom. It
positively appears in each of them that the defendant assigned to the
plaintiff all his rights in the contracts of lease, in the land, and in the
insurance policy to guarantee his indebtedness resulting from the
overdrafts. An assignment to guarantee an obligation as in effect a
mortgage and not an absolute conveyance of title which confers ownership
on the assignee. (Title Guaranty & Surety Co. vs. Witmire 195 Fed., 41, 44;
Polhemus vs. Trainer, 30 Cal., 685; Campbell vs. Woodstock Iron Co., 83
Ala., 351; Dunham vs. Whitehead, 21 N. Y., 131; Woodward vs. Crump, 32
S. W., 195.) In Exhibits C and D it was stipulated, among other things, that if
the defendant should comply with all the conditions of the contracts and
should pay his indebtedness, together with interest at 9 per cent per annum,
the assignments would become null and void, otherwise they would remain
in full force. If the parties' intention as contended by the defendant were that
the assignments are absolute, and not by way of guaranty or mortgage, the
stipulation would not have been made because it would be inconsistent with
the will of the contracting parties. Wherefore, we hold that the third
assignment of error is untenable.
As a corollary of his theory that the contracts are absolute conveyances, the
defendant contends in his fourth and last assignment of error that his civil

liability has ceased and that he does not now owe the plaintiff anything. The
conclusions that we have reached in resolving the next preceding
assignment of error show that this last contention of the defendant is equally
untenable. The assignments he made not being absolute, and the plaintiff
having established that he has not paid his total overdraft, inasmuch as he
still owes the amount of money above stated, with interest, it is evident that
he is not yet relieved of his obligation.
Before closing, it is necessary to pass upon an aspect of the case which
substantially affects the rights of the defendant. Under the contracts, the
plaintiff was authorized to collect the rents of the two buildings during the
period, in turn, might be that fixed in the contract entered into between the
defendant and A. D. Gibbs. We use the conditional form because the
contracts of lease have not been put in evidence, hence, we cannot point
out the duration thereof with precision. On the other hand, the plaintiff
liquidated the account of the defendant up to January 4, 1934, only, and in
the appealed judgment it was decreed that the mortgaged rights be sold at
public auction should the defendant fail to pay his indebtedness within three
months. If the indebtedness has already been paid with the rents which the
plaintiff failed to account for, then there would be no ground to take this
step. If the indebtedness has not yet been fully paid, neither would it be
proper to sell any of the rights in the mortgage contracts of lease because
the latter have already matured according to the contract with Gibbs. For
this reason, it is necessary to provide for the one and the other case. As to
the insurance policy, nothing can be said about it as the appealed judgment
is silent thereon.
In view of the foregoing, we affirm the appealed judgment, except that part
ordering the public sale of the mortgaged rights, with costs to the defendant
and appellant. The plaintiff is ordered to account to the defendant for the
rents received from two buildings which have not been included in its
liquidation, Exhibit G-4, and within ten days from notice of this judgment by
the court of origin, it shall file a written liquidation showing the final state of
the account of the defendant. So ordered.
Avancea, C.J., Villa-Real, Abad Santos, Diaz, Laurel and Concepcion, JJ.,
concur.

Lopez vs. Court of Appeals, 114 SCRA 671 (1982)

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. L-33157 June 29, 1982
BENITO
H.
LOPEZ,
petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC., respondents.

GUERRERO, J.:
On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount
of P20,000.00 from the Prudential Bank and Trust Company. On the same
date, he executed a promissory note for the same amount, in favor of the
said Bank, binding himself to repay the said sum one (1) year after the said
date, with interest at the rate of 10% per annum. In addition to said
promissory note, he executed Surety Bond No. 14164 in which he, as
principal, and Philippine American General Insurance Co., Inc.
(PHILAMGEN) as surety, bound themselves jointly and severally in favor of
Prudential Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed "to indemnify the Company and
keep it indemnified and hold the same harmless from and against any and
all damages, losses, costs, stamps, taxes, penalties, charges and expenses
of whatever kind and nature which the Company shall or may at any time
sustain or incur in consequence of having become surety upon the bond." 1
At the same time, Lopez executed a deed of assignment of 4,000 shares of
the Baguio Military Institution entitled "Stock Assignment Separate from
Certificate", which reads:

This deed of assignment executed by BENITO H. LOPEZ,

Filipino, of legal age, married and with residence and postal
address at Baguio City, Philippines, now and hereinafter called
the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., a corporation duly organized
and existing under and by virtue of the laws of the Philippines,
with principal offices at Wilson Building, Juan Luna, Manila,
Philippines, now and hereinafter called the "ASSIGNEE-SURETY
COMPANY"
WITNESSETH
That for and in consideration of the obligations undertaken by the
ASSIGNEE-SURETY COMPANY under the terms and conditions
of SURETY BOND NO. 14164, issued on behalf of said BENITO
H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST
COMPANY, Manila, Philippines, in the amount of TWENTY
THOUSAND PESOS ONLY (P20,000.00), Philippine Currency,
and for value received, the ASSIGNOR hereby sells, assigns, and
transfers unto THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC., Four Thousand (4,000) shares of the
Baguio military Institute, Inc. standing in the name of said
Assignor on the books of said Baguio Military Institute, Inc.
represented by Certificate No. 44 herewith and do hereby
irrevocably constitutes and appoints THE PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC. as attorney to
transfer the said stock on the books of the within named military
institute with full power of substitution in the premises. 2
With the execution of this deed of assignment, Lopez endorsed the stock
certificate and delivered it to Philamgen.
It appears from the evidence on record that the loan of P20,000.00 was
approved conditioned upon the posting of a surety bond of a bonding
company acceptable to the bank. Thus, Lopez persuaded Emilio Abello,
Assistant Executive Vice-President of Philamgen and member of the Bond
Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant
Vice- President and Manager of the Bonding Department, to accommodate
him in putting up the bond against the security of his shares of stock with
the Baguio Military Institute, Inc. It was their understanding that if he could

not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential
Bank would buy the shares of stocks and out of the proceeds thereof, the
loan would be paid to the Prudential Bank.
On June 2, 1960, Lopez' obligation matured without it being settled. Thus,
the Prudential Bank made demands for payment both upon Lopez and
Philamgen. In turn, Philamgen sent Lopez several written demands for the
latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with
said demands. Hence, the Prudential Bank sometime in August, 1961 filed a
case against them to enforce payment on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio
Abello and Pio Pedrosa regarding their commitment to buy the shares of
stock of Lopez in the event that the latter failed to pay his obligations to the
Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to
transfer the shares of stock to Philamgen and made a commitment that
thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so
that the proceeds could be paid to the bank, and in the meantime
Philamgen will not pay the bank because it did not want payment under the
terms of the bank. 3
Due to said commitment and instruction of Vice-President Abello, Assistant
Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44
for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock
Certificate No. 44 in the name of Lopez was accordingly cancelled and in
lieu thereof Stock Certificate No. 171 was issued by the Baguio Military
Institute in the name of Philamgen on November 17, 1961.
The complaint was thereafter dismissed. But when no payment was still
made by the principal debtor or by the surety, the Prudential Bank filed on
November 8, 1963 another complaint for the recovery of the P20,000.00. On
November 18, 1963, after being informed of said complaint, Lopez
addressed the following letter to Philamgen:
Dear Mr. Sumawang:
This is with reference to yours of the 13th instant advising me of a
complaint filed against us by Prudential Bank & Trust Co.
regarding my loan of P20,000.00. In this connection, I would like
to know what happened to my shares of stocks of Baguio Military

Academy which were pledged to your goodselves to secure said

obligation. These shares of stock I think are more than enough to
answer for said obligation. 4
On December 9, 1963, Philamgen was forced to pay the Prudential Bank
the sum of P27,785.89 which included the principal loan and accumulated
interest and the Prudential Bank executed a subrogation receipt on the
same date.
On March 18, 1965, Philamgen brought an action in the Court of First
Instance of Manila (Civil Case No. 60272, "The Philippine American General
Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said
amount. After hearing, the said court rendered judgment dismissing the
complaint holding:
The contention of the plaintiff that the stock of the defendant were
merely pledged to it by the defendant is not borne out by the
evidence. On the contrary, it appears to be contradicted by the
facts of the case. The shares of stock of the defendant were
actually transferred to the plaintiff when it became clear after the
plaintiff and the defendant had been sued by the Prudential Bank
that plaintiff would be compelled to make the payment to the
Prudential Bank, in view of the inability of the defendant Benito H.
Lopez to pay his said obligation. The certificate bearing No. 44
was cancelled and upon request of the plaintiff to the Baguio
Military Institute a new certificate of stock was issued in the name
of the plaintiff bearing No. 171, by means of which plaintiff
became the registered owner of the 4,000 shares originally
belonging to the defendant.
It is noteworthy that the transfer of the stocks of the defendant in
the name of the plaintiff company was made at the instance of
Messrs. Abello and Pedrosa, who promised to buy the same from
the plaintiff. Now that these shares of stock of the defendant had
already been transferred in the name of the plaintiff, the
defendant has already divested himself of the said stocks, and it
would seem that the remedy of the plaintiff is to go after Messrs.
Abello and Pedrosa on their promise to pay for the said stocks. To
go after the defendant after the plaintiff had already become the
owner of his shares of stock and compel him to pay his obligation

to the Prudential Bank would be most unfair, unjust and illogical

for it would amount to double payment on his part. After the
plaintiff had already appropriated the said shares of stock, it has
already lost its right to recover anything from the defendant, for
the reason that the transfer of the said stocks was made without
qualification. This transfer takes the form of a reimbursement of
what plaintiff had paid to the Prudential Bank, thereby depriving
the plaintiff of its right to go after the defendant herein. 5
Philamgen appealed to the Court of Appeals raising these assignments of
errors:
I
The lower court erred in finding that the evidence does not bear
out the contention of plaintiff that the shares of stock belonging to
defendant were transferred by him to plaintiff by way of pledge.
II
The lower court erred in finding that plaintiff company
appropriated unto itself the shares of stock pledged to it by
defendant Benito Lopez and in finding that, with the transfer of the
stock in the name of plaintiff company, the latter has already been
paid or reimbursed what it paid to Prudential Bank.
III
The lower court erred in not finding that the instant case is one
where the pledge has abandoned the security and elected instead
to enforce his claim against the pledgor by ordinary action. 6
On December 17, 1970, the Court of Appeals promulgated a decision in
favor of the Philamgen, thereby upholding the foregoing assignments of
errors. It declared that the stock assignment was a mere pledge that the
transfer of the stocks in the name of Philamgen was not intended to make it
the owner thereof; that assuming that Philamgen had appropriated the
stocks, this appropriation is null and void as a stipulation authorizing it is a
pactum commissorium; and that pending payment, Philamgen is merely
holding the stock as a security for the payment of Lopez' obligation. The
dispositive portion of the said decision states:

WHEREFORE, the decision of the lower court is hereby reversed,

and another one is hereby entered ordering the defendant to pay
the plaintiff the sum of P27,785.89 with interest at the rate of 12%
per annum from December 9, 1963, 10% of the P27,785.89 as
attorney's fees and the costs of the suit. 7
The motion for reconsideration with prayer to set the same for oral argument
having been denied, Lopez brought this petition for review on certiorari
presenting for resolution these questions:
a) Where, as in this case, a party "sells, assigns and transfers" and delivers
shares of stock to another, duly endorsed in blank, in consideration of a
contingent obligation of the former to the latter, and, the obligations having
arisen, the latter causes the shares of stock to be transferred in its name,
what is the juridical nature of the transaction-a dation in payment or a
pledge?
b) Where, as in this case, the debtor assigns the shares of stock to the
creditor under an agreement between the latter and determinate third
persons that the latter would buy the shares of stock so that the obligations
could be paid out of the proceeds, was there a novation of the obligation by
substitution of debtor? 8
Philamgen failed to file its comment on the petition for review on certiorari
within the extended period which expired on March 19, 1971. This Court
thereby resolved to require Lopez to file his brief. 9
Under the first assignment of error, Lopez argues in his brief:
That the Court of Appeals erred in holding that when petitioner
"sold, assigned, transferred" and delivered shares of stock, duly
endorsed in blank, to private respondent in consideration of a
contingent obligation of the former to the latter and the obligation
having thereafter arisen, the latter caused the shares of stock to
be transferred to it, taking a new certificate of stock in its name,
the transaction was a pledge, and in not holding instead that it
was a dation in payment. 10
Considering the explicit terms of the deed denominated "Stock Assignment
Separate from Certificate", hereinbefore copied verbatim, Lopez sold,

assigned and transferred unto Philamgen the stocks involved "for and in
consideration of the obligations undertaken" by Philamgen "under the terms
and conditions of the surety bond executed by it in favor of the Prudential
Bank" and "for value received". On its face, it is neither pledge nor dation in
payment. The document speaks of an outright sale as there is a complete
and unconditional divestiture of the incorporeal property consisting of stocks
from Lopez to Philamgen. The transfer appears to have been an absolute
conveyance of the stocks to Philamgen whether or not Lopez defaults in the
payment of P20,000.00 to Prudential Bank. While it is a conveyance in
consideration of a contingent obligation, it is not itself a conditional
conveyance.
It is true that if Lopez should "well and truly perform and fulfill all the
undertakings, covenants, terms, conditions, and agreements stipulated" in
his promissory note to Prudential Bank, the obligation of Philamgen under
the surety bond would become null and void. Corollarily, the stock
assignment, which is predicated on the obligation of Philamgen under the
surety bond, would necessarily become null and void likewise, for want of
cause or consideration under Article 1352 of the New Civil Code. But this is
not the case here because aside from the obligations undertaken by
Philamgen under the surety bond, the stock assignment had other
considerations referred to therein as "value received". Hence, based on the
manifest terms thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock Assignment Separate from
Certificate", however, We hold and rule that the transaction should not be
regarded as an absolute conveyance in view of the circumstances obtaining
at the time of the execution thereof.
It should be remembered that on June 2, 1959, the day Lopez obtained a
loan of P20,000.00 from Prudential Bank, Lopez executed a promissory
note for ?20,000.00, plus interest at the rate of ten (10%) per cent per
annum, in favor of said Bank. He likewise posted a surety bond to secure
his full and faithful performance of his obligation under the promissory note
with Philamgen as his surety. In return for the undertaking of Philamgen
under the surety bond, Lopez executed on the same day not only an
indemnity agreement but also a stock assignment.
The indemnity agreement and the stock assignment must be considered
together as related transactions because in order to judge the intention of

the contracting parties, their contemporaneous and subsequent acts shall

be principally considered. (Article 1371, New Civil Code). Thus, considering
that the indemnity agreement connotes a continuing obligation of Lopez
towards Philamgen while the stock assignment indicates a complete
discharge of the same obligation, the existence of the indemnity agreement
whereby Lopez had to pay a premium of P1,000.00 for a period of one year
and agreed at all times to indemnify Philamgen of any and all kinds of
losses which the latter might sustain by reason of it becoming a surety, is
inconsistent with the theory of an absolute sale for and in consideration of
the same undertaking of Philamgen. There would have been no necessity
for the execution of the indemnity agreement if the stock assignment was
really intended as an absolute conveyance. Hence, there are strong and
cogent reasons to conclude that the parties intended said stock assignment
to complement the indemnity agreement and thereby sufficiently guarantee
the indemnification of Philamgen should it be required to pay Lopez' loan to
Prudential Bank.
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was
used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge. However,
even though a transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified and
explained by a contemporaneous writing declaring it to have been
a deposit of the property as collateral security. It has been said
that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the use of the
terms ordinarily importing conveyance, of absolute ownership will
not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other
circumstances excluding an intent to pledge. 11
We agree with the holding of the respondent Court of Appeals that the stock
assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and

circumstances leading to the execution of the stock assignment, Exhibit C,

and the admission of Lopez prove that it is in fact a pledge. The appellate
court is correct in ruling that the following requirements of a contract of
pledge have been satisfied: (1) that it be constituted to secure the fulfillment
of a principal obligation; (2) that the pledgor be the absolute owner of the
thing pledged; and (3) that the person constituting the pledge has the free
disposal of the property, and in the absence thereof, that he be legally
authorized for the purpose. (Article 2085, New Civil Code).
Article 2087 of the New Civil Code providing that it is also the essence of
these contracts (pledge, mortgage, and antichresis) that when the principal
obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor, further supports
the appellate court's ruling, which We also affirm. On this point further, the
Court of Appeals correctly ruled:
In addition to the requisites prescribed in article 2085, it is
necessary, in order to constitute the contract of pledge, that the
thing pledged be placed in the possession of the creditor, or of a
third person by common agreement. (Art. 2093, N.C.C.)
Incorporeal rights, including shares of stock may also be pledged
(Art. 2095, N.C.C.) All these requisites are found in the
transaction between the parties leading to the execution of the
Stock Assignment, Exhibit C. And that it is a pledge was admitted
by the defendant in his letter of November 18, 1963, Exhibit G,
already quoted above, where he asked what had happened to his
shares of stock "which were pledged to your goodselves to
secure the said obligation". The testimony of the defendantappellee that it was their agreement or understanding that if he
would be unable to pay the loan to the Prudential Bank, plaintiff
could sell the shares of stock or appropriate the same in full
payment of its debt is a mere after-thought, conceived after he
learned of the transfer of his stock to the plaintiff in the books of
the Baguio Military Institute.
We also do not agree with the contention of petitioner that "petitioner's 'sale
assignment and transfer' unto private respondent of the shares of stock,
coupled with their endorsement in blank and delivery, comes exactly under
the Civil Code's definition of dation in payment, a long recognized and

deeply rooted concept in Civil Law denominated by Spanish commentators

as 'adjudicacion en pago'".
According to Article 1245 of the New Civil Code, dation in payment,
whereby property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales.
Speaking of the concept of dation in payment, it is well to cite that:
Dation in payment is the delivery and transmission of ownership
of a thing by the debtor to the creditor as an accepted equivalent
of the performance of the obligation. (2 Castan 525; 8 Manresa,
324) The property given may consist, not only of a thing, but also
of a real right (such as a usufruct) or of a credit against a third
person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff
317). Thus, it has been held that the assignment to the creditor of
the interest of the debtor in an inheritance in payment of his debt,
is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil.
576)
The modern concept of dation in payment considers it as a
novation by change of the object, and this is to our mind the more
juridically correct view. Our Civil Code, however, provides in this
article that, where the debt is in money, the law on sales shall
govern; in this case, the act is deemed to be a sale, with the
amount of the obligation to the extent that it is extinguished being
considered as the price. Does this mean that there can be no
dation in payment if the debt is not in money? We do not think so.
It is precisely in obligations which are not money debts, in which
the true juridical nature of dation in payment becomes manifest.
There is a real novation with immediate performance of the new
obligation. The fact that there must be a prior agreement of the
parties on the delivery of the thing in lieu of the original prestation
shows that there is a novation which, extinguishes the original
obligation, and the delivery is a mere performance of the new
obligation.
The dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement,

express or implied, or by their silence, consider the thing as

equivalent to the obligation, in which case the obligation is totally
extinguished. (8 Manresa 324; 3 Valverde 174 fn
Assignment of property by the debtor to his creditors, provided for
in article 1255, is similar to dation in payment in that both are
substitute forms of performance of an obligation. Unlike the
assignment for the benefit of creditors, however, dation in
payment does not involve plurality of creditors, nor the whole of
the property of the debtor. It does not suppose a situation of
financial difficulties, for it may be made even by a person who is
completely solvent. It merely involves a change of the object of
the obligation by agreement of the parties and at the same time
fulfilling the same voluntarily. (8 Manresa 324). 12
Considering the above jurisprudence, We find that the debt or obligation at
bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000
shares of stock to Philamgen. Lopez' obligation would arise only when he
would default in the payment of the principal obligation (the loan) to the
bank and Philamgen had to pay for it. Such fact being adverse to the nature
and concept of dation in payment, the same could not have been
constituted when the stock assignment was executed. Moreover, there is no
express provision in the terms of the stock assignment between Philamgen
and Lopez that the principal obligation (which is the loan) is immediately
extinguished by reason of such assignment.
In case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests. Under American jurisprudence,
A distinction might also be made between delivery of property in
payment of debt and delivery of such property as collateral
security for the debt. Generally, such a transfer was presumed to
be made for collateral security, in the absence of evidence
tending to show an intention on the part of the parties that the
transfer was in satisfaction of the debt. This presumption of a
transfer for collateral security arose particularly where the
property given was commercial paper, or some other 'specialty'
chose of action, that conferred rights upon transfer by delivery of

a different nature from the debt, whose value was neither intrinsic
nor apparent and was not agreed upon by the parties. 13
Petitioner's argument that even assuming, arguendo that the transaction
was at its inception a pledge, it gave way to a dation in payment when the
obligation secured came into existence and private respondent had the
stocks transferred to it in the corporate books and took a stock certificate in
its name, is without merit. The fact that the execution of the stock
assignment is accompanied by the delivery of the shares of stock, duly
endorsed in blank to Philamgen is no proof that the transaction is a dation in
payment. Likewise, the fact that Philamgen had the shares of stock
transferred to it in the books of the corporation and took a certificate in its
name in lieu of Lopez which was cancelled does not amount to conversion
of the stock to one's own use. The transfer of title to incorporeal property is
generally an essential part of the delivery of the same in pledge. It merely
constitutes evidence of the pledgee's right of property in the thing pledged.
By the contract of pledge, the pledgor does not part with his
general right of property in the collateral. The general property
therein remains in him, and only a special property vests in the
pledgee. The pledgee does not acquire an interest in the property,
except as a security for his debt. Thus, the pledgee holds
possession of the security subject to the rights of the pledgor; he
cannot acquire any interest therein that is adverse to the pledgor's
title. Moreover, even where the legal title to incorporeal property
which may be pledged is transferred to a pledgee as collateral
security, he takes only a special property therein Such transfer
merely performs the office that the delivery of possession does in
case of a pledge of corporeal property.
xxx xxx xxx
The pledgee has been considered as having a lien on the pledged
property. The extent of such lien is measured by the amount of
the debt or the obligation that is secured by the collateral, and the
lien continues to exist as long as the pledgee retains actual or
symbolic possession of the property, and the debt or obligation
remains unpaid. Payment of the debt extinguishes the lien.

Though a pledgee of corporation stock does not become

personally liable as a stockholder of the company, he may have
the shares transferred to him on the books of the corporation if he
has been authorized to do so.
The general property in the pledge remains in the pledgor after
default as well as prior thereto. The failure of the pledgor to pay
his debt at maturity in no way affects the nature of the pledgee's
rights concerning the property pledged, except that he then
becomes entitled to proceed to make the security available in the
manner prescribed by law or by the terms of the contract, ... . 14
In his second assignment of error, petitioner contends that the Court of
Appeals erred in not holding that since private respondent entered into an
agreement with determinate third persons whereby the latter would buy the
said shares so sold, assigned and transferred to the former by the petitioner
for the purpose of paying petitioner's obligation out of the proceeds, there
was a novation of the obligation by substitution of debtor.
We do not agree.
Under Article 1291 of the New Civil Code, obligations may be modified by:
(1) changing their object or principal condition; (2) substituting the person of
the debtor; (3) subrogating a third person in the rights of the creditor. And in
order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other.
(Article 1292, N.C.C.) Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles 1236
and 1237. (Article 1293, N.C.C.)
Commenting on the second concept of novation, that is, substituting the
person of the debtor, Manresa opines, thus:
In this kind of novation it is pot enough to extend the juridical
relation to a third person; it is necessary that the old debtor be
released from the obligation, and the third person or new debtor
take his place in the relation. Without such release, there is no

novation; the third person who has assumed the obligation of the
debtor merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are
considered obligated jointly. (8 Manresa 435, cited in Tolentino,
Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. IV, p. 360)
In the case at bar, the undertaking of Messrs. Emilio Abello and Pio
Pedrosa that they would buy the shares of stock so that Philamgen could be
reimbursed from the proceeds that it paid to Prudential Bank does not
necessarily imply the extinguishment of the liability of petitioner Lopez.
Since it was not established nor shown that Lopez would be released from
responsibility, the same does not constitute novation and hence, Philamgen
may still enforce the obligation. As the Court of Appeals correctly held that
"(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr.
Pedrosa would buy the stocks was a purely private arrangement between
them, not an agreement between (Philamgen) and (Lopez)" and which We
hereby affirm, petitioner's second assignment of error must be rejected.
In fine, We hold and rule that the transaction entered into by and between
petitioner and respondent under the Stock Assignment Separate From
Certificate in relation to the Surety Bond No. 14164 and the Indemnity
Agreement, all executed and dated June 2, 1959, constitutes a pledge of
the 40,000 shares of stock by the petitioner-pledgor in favor of the private
respondent-pledgee, and not a dacion en pago. It is also Our ruling that
upon the facts established, there was no novation of the obligation by
substitution of debtor.
The promise of Abello and Pedrosa to buy the shares from private
respondent not having materialized (which promise was given to said
respondent only and not to petitioner) and no action was taken against the
two by said respondent who chose instead to sue the petitioner on the
Indemnity Agreement, it is quite clear that this respondent has abandoned
its right and interest over the pledged properties and must, therefore,
release or return the same to the petitioner-pledgor upon the latter's
satisfaction of his obligation under the Indemnity Agreement.
It must also be made clear that there is no double payment nor unjust
enrichment in this case because We have ruled that the shares of stock
were merely pledged. As the Court of Appeals said:

The appellant (Philam) is not enriching himself at the expense of

the appellee. True, the stock certificate of the appellee had been
in the name of the appellant but the transfer was merely nominal,
and was not intended to make the plaintiff the owner thereof. No
offer had been made for the return of the stocks to the defendant.
As the appellant had stated, the appellee could have the stocks
transferred to him anytime as long as he reimburses the plaintiff
the amount it had paid to the Prudential Bank. Pending payment,
plaintiff is merely holding the certificates as a pledge or security
for the payment of defendant's obligation.
The above holding of the appellate court is correct and We affirm the same.
As to the third assignment of error which is merely the consequence of the
first two assignments of errors, the same is also devoid of merit.
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the
Court of Appeals is hereby AFFIRMED in toto, with costs against the
petitioner.
SO ORDERED.

Manila Banking Corporation vs. Teodoro, 169 SCRA 95 (1989)

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. L-53955 January 13, 1989
THE
MANILA
BANKING
CORPORATION,
plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendantsappellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila,
Branch XVII in Civil Case No. 78178 for collection of sum of money based
on promissory notes executed by the defendants-appellants in favor of
plaintiff-appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered (a) sentencing
defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro
jointly and severally, to pay plaintiff the sum of P15,037.11 plus
12% interest per annum from September 30, 1969 until fully paid,
in payment of Promissory Notes No. 11487, plus the sum of
P1,000.00 as attorney's fees; and (b) sentencing defendant
Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus
interest at 12% per annum from September 30, 1969 until fully
paid, in payment of Promissory Notes Nos. 11515 and 11699,
plus the sum of P500.00 an attorney's fees.
With Costs against defendants.

The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro,
Sr., jointly and severally, executed in favor of plaintiff a
Promissory Note (No. 11487) for the sum of P10,420.00 payable
in 120 days, or on August 25, 1966, at 12% interest per annum.
Defendants failed to pay the said amount inspire of repeated
demands and the obligation as of September 30, 1969 stood at P
15,137.11 including accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio
Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed
in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699)
for P8,000.00 and P1,000.00 respectively, payable in 120 days at
12% interest per annum. Father and Son made a partial payment
on the May 3, 1966 promissory Note but none on the June 20,
1966 Promissory Note, leaving still an unpaid balance of
P8,934.74 as of September 30, 1969 including accrued interest
and service charge.
The three Promissory Notes stipulated that any interest due if not
paid at the end of every month shall be added to the total amount
then due, the whole amount to bear interest at the rate of 12% per
annum until fully paid; and in case of collection through an
attorney-at-law, the makers shall, jointly and severally, pay 10%
of the amount over-due as attorney's fees, which in no case shall
be leas than P200.00.
It appears that on January 24, 1964, the Son executed in favor of
plaintiff a Deed of Assignment of Receivables from the
Emergency Employment Administration in the sum of P44,635.00.
The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts and other credit
accommodations extended to defendants as security for the
payment of said sum and the interest thereon, and that
defendants do hereby remise, release and quitclaim all its rights,
title, and interest in and to the accounts receivables. Further.
(1) The title and right of possession to said accounts
receivable is to remain in the assignee, and it shall

have the right to collect the same from the debtor, and
whatsoever the Assignor does in connection with the
collection of said accounts, it agrees to do as agent and
representative of the Assignee and in trust for said
Assignee ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality
of said accounts receivable, and the due and punctual
payment thereof unto the assignee, ... on demand, ...
and further, that Assignor warrants the solvency and
credit worthiness of each and every account.
(7) The Assignor does hereby guarantee the payment
when due on all sums payable under the contracts
giving rise to the accounts receivable ... including
reasonable attorney's fees in enforcing any rights
against the debtors of the assigned accounts receivable
and will pay upon demand, the entire unpaid balance of
said contract in the event of non-payment by the said
debtors of any monthly sum at its due date or of any
other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the
future there will be justly owing from the Assignor to the
Assignee ...
In their stipulations of Fact, it is admitted by the parties that
plaintiff extended loans to defendants on the basis and by reason
of certain contracts entered into by the defunct Emergency
Employment Administration (EEA) with defendants for the
fabrication of fishing boats, and that the Philippine Fisheries
Commission succeeded the EEA after its abolition; that nonpayment of the notes was due to the failure of the Commission to
pay defendants after the latter had complied with their contractual

obligations; and that the President of plaintiff Bank took steps to

collect from the Commission, but no collection was effected.
For failure of defendants to pay the sums due on the Promissory
Note, this action was instituted on November 13, 1969, originally
against the Father, Son, and the latter's wife. Because the Father
died, however, during the pendency of the suit, the case as
against him was dismiss under the provisions of Section 21, Rule
3 of the Rules of Court. The action, then is against defendants
Son and his wife for the collection of the sum of P 15,037.11 on
Promissory Note No. 14487; and against defendant Son for the
recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and
11699, plus interest on both amounts at 12% per annum from
September 30, 1969 until fully paid, and 10% of the amounts due
as attorney's fees.
Neither of the parties presented any testimonial evidence and
submitted the case for decision based on their Stipulations of Fact
and on then, documentary evidence.
The issues, as defined by the parties are: (1) whether or not
plaintiff claim is already considered paid by the Deed of Assign.
judgment of Receivables by the Son; and (2) whether or not it is
plaintiff who should directly sue the Philippine Fisheries
Commission for collection.' (Record on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment adverse to
defendants. On June 8, 1972, defendants filed a motion for reconsideration
(Record on Appeal, p. 33) which was denied by the trial court in its order of
June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants
filed with the lower court their notice of appeal together with the appeal bond
(Record on Appeal, p. 38). The record of appeal was forwarded to the Court
of Appeals on August 22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a
single assignment of error, that is
THAT THE DECISION IN QUESTION AMOUNTS TO A
JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE

PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO

LACK OR EXCESS OF JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its
resolution promulgated on March 6, 1980, certified the case to this Court
(Rollo, p. 24). The record on Appeal was forwarded to this Court on March
31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered
that the case be docketed and declared submitted for decision (Rollo, p.
33).
On March 7, 1988, considering the length of time that the case has been
pending with the Court and to determine whether supervening events may
have rendered the case moot and academic, the Court resolved (1) to
require the parties to MOVE IN THE PREMISES within thirty days from
notice, and in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed with the
entry of judgment accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review
interposed by defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the
assignment of receivables has the effect of payment of all the loans
contracted by appellants from appellee bank; and (2) whether or not
appellee bank must first exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against appellants for
collections of loan under the promissory notes which are plaintiffs bases in
the action for collection in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or donation, and without the need of the consent of the
debtor, transfers his credit and its accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the
assignor could have enforced it against the debtor. ... It may be in the form
of a sale, but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his creditor a
credit he has against a third person, or it may constitute a donation as when

it is by gratuitous title; or it may even be merely by way of guaranty, as

when the creditor gives as a collateral, to secure his own debt in favor of the
assignee, without transmitting ownership. The character that it may assume
determines its requisites and effects. its regulation, and the capacity of the
parties to execute it; and in every case, the obligations between assignor
and assignee will depend upon the judicial relation which is the basis of the
assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code
of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables
executed by appellants in favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on
January 24, 1964 did not transfer the ownership of the receivables to
appellee bank and release appellants from their loans with the bank
incurred under promissory notes Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of
certain credits, loans, overdrafts, and their credit accommodations in the
sum of P10,000.00 extended to appellants by appellee bank, and as
security for the payment of said sum and the interest thereon; that
appellants as assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable assigned (lst
paragraph). It was further stipulated that the assignment will also stand as a
continuing guaranty for future loans of appellants to appellee bank and
correspondingly the assignment shall also extend to all the accounts
receivable; appellants shall also obtain in the future, until the consideration
on the loans secured by appellants from appellee bank shall have been fully
paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a
quitclaim in consideration of their indebtedness to appellee bank, not mere
guaranty, in view of the following provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto
said assignee all its rights, title and interest in the accounts

receivable described hereunder. (Emphasis

appellants, first par., Deed of Assignment).

supplied

by

... that the title and right of possession to said account receivable
is to remain in said assignee and it shall have the right to collect
directly from the debtor, and whatever the Assignor does in
connection with the collection of said accounts, it agrees to do so
as agent and representative of the Assignee and it trust for said
Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on
Appeal, p. 27)
The character of the transactions between the parties is not, however,
determined by the language used in the document but by their intention.
Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured
Transaction, Section 50) said:
The characters of the transaction between the parties is to be
determined by their intention, regardless of what language was
used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge.
However, even though a transfer, if regarded by itself, appellate to
have been absolute, its object and character might still be
qualified and explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral security. It has
been Id that a transfer of property by the debtor to a creditor, even
if sufficient on its farm to make an absolute conveyance, should
be treated as a pledge if the debt continues in existence and is
not discharged by the transfer, and that accordingly, the use of
the terms ordinarily exporting conveyance, of absolute ownership
will not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and ambiguous language or other circumstances
excluding an intent to pledge. (Lopez v. Court of Appeals, 114
SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from a sale
transaction. It cannot be said to have been constituted by virtue of a dation
in payment for appellants' loans with the bank evidenced by promissory
note Nos. 11487, 11515 and 11699 which are the subject of the suit for

collection in Civil Case No. 78178. At the time the deed of assignment was
executed, said loans were non-existent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487
is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966
(Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it
was a dation in payment for P10,000.00, the amount of credit from appellee
bank indicated in the deed of assignment. At the time the assignment was
executed, there was no obligation to be extinguished except the amount of
P10,000.00. Moreover, in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral security for
the bank loans of appellants, as a continuing guaranty for whatever sums
would be owing by defendants to plaintiff, as stated in stipulation No. 9 of
the deed.
In case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in
the contracts of lease of two buildings as well as her rights, title and interest
in the land on which the buildings were constructed to secure an overdraft
from a bank amounting to P110,000.00 which was increased to
P150,000.00, then to P165,000.00 was considered by the Court to be
documents of mortgage contracts inasmuch as they were executed to
guarantee the principal obligations of the defendant consisting of the
overdrafts or the indebtedness resulting therefrom. The Court ruled that an
assignment to guarantee an obligation is in effect a mortgage and not an
absolute conveyance of title which confers ownership on the assignee
(People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies
against the Philippine Fisheries Commission before it can proceed against
appellants for collection of loans under their promissory notes, must also be
answered in the negative.

The obligation of appellants under the promissory notes not having been
released by the assignment of receivables, appellants remain as the
principal debtors of appellee bank rather than mere guarantors. The deed of
assignment merely guarantees said obligations. That the guarantor cannot
be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the
debtor, under Article 2058 of the New Civil Code does not therefore apply to
them. It is of course of the essence of a contract of pledge or mortgage that
when the principal obligation becomes due, the things in which the pledge
or mortgage consists may be alienated for the payment to the creditor
(Article 2087, New Civil Code). In the instant case, appellants are both the
principal debtors and the pledgors or mortgagors. Resort to one is,
therefore, resort to the other.
Appellee bank did try to collect on the pledged receivables. As the
Emergency Employment Agency (EEA) which issued the receivables had
been abolished, the collection had to be coursed through the Office of the
President which disapproved the same (Record on Appeal, p. 16). The
receivable became virtually worthless leaving appellants' loans from
appellee bank unsecured. It is but proper that after their repeated demands
made on appellants for the settlement of their obligations, appellee bank
should proceed against appellants. It would be an exercise in futility to
proceed against a defunct office for the collection of the receivables
pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed
decision of the trial court is affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.
Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results reached by my
distinguished brother Bidin in respect of both of the principal issues he
addressed in his opinion.

I would merely wish to add a few lines in respect of the point made by Bidin,
J., that "the character of the transactions between the parties is not,
however, determined by the language used in the document but by their
intention.' This statement is basically not exceptionable, so far as it goes. It
might, however, be borne in mind that the intent of the parties to the
transaction is to be determined in the first instance, by the very language
which they use. The deed of assignment contains language which suggest
that the parties intended to effect a complete alienation of title to and rights
over the receivables which are the subject of the assignment. This language
is comprised of works like "remise," "release and quitclaim" and clauses like
"the title and right of possession to said accounts receivable is to remain in
said assignee" who "shall have the right to collect directly from the debtor."
The same intent is also suggested by the use of the words "agent and
representative of the assignee" in reffering to the assignor.
The point that appears to me to be worth making is that although in its form,
the deed of assignment of receivables partakes of the nature of a complete
alienation of the receivables assigned, such form should be taken in
conjunction with, and indeed must be qualified and controlled by, other
language showing an intent of the parties that title to the receivables shall
pass to the assignee for the limited purpose of securing another, principal;
obligation owed by the assignor to the assignee. Title moves from assignor
to asignee but that title is defeasible being designed to collateralize the
principal obligation. Operationally, what this means is that the assignee is
burdened with an obligation of taking the proceeds of the receivables
assigned and applying such proceeds to the satisfaction of the principal
obligation and returning any balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an absolute
conveyance of title over the receivables assigned, essentially for the
convenience of the assignee. Without such formally unlimited conveyance
of title, the assignee would have to treat the deed of assignment as no more
than a deed of pledge or of chattel mortgage. In other words, in such
hypothetical case, should the assignee seek to realize upon the security
given to him through the deed of assignment (which would then have to
comply with the documentation and registration requirements of a pledge or
chattel mortgage), the assignee would have to foreclose upon the securities
or credits assigned and place them on public sale and there acquire the
same. It should be recalled that under the principle which forbids a pactum

commisorium Article 2088, Civil Code), a mortgagee or pledgee is

prohibited from simply taking and appropriating the personal property turned
over to him as security for the payment of a principal obligation. A deed of
assignment by way of security avoids the necessity of a public sale impose
by the rule on pactum commisorium, by in effect placing the sale of the
collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance, the deed of
assignment of receivables combines elements of both a complete or
absolute alienation of the credits being assigned and a security
arrangement to assure payment of a principal obligation. Where the second
element is absent, that is, where there is nothing to indicate that the parties
intended the deed of assignment to function as a security device, it would of
course follow that the simple absolute conveyance embodied in the deed of
assignment would be operative; the assignment would constitute essentially
a mode of payment or dacion en pago. Put a little differently, in order that a
deed of assignment of receivables which is in form an absolute conveyance
of title to the credits being assigned, may be qualified and treated as a
security arrangement, language to such effect must be found in the
document itself and that language, precisely, is embodied in the deed of
assignment in the instant case. Finally, it might be noted that that deed
simply follows a form in standard use in commercial banking.

Integrated Realty Corp. vs Philippine National Bank,174 SCRA

295 (1989)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. L-60705 June 28, 1989
INTEGRATED REALTY CORPORATION and RAUL L. SANTOS,
petitioners,
vs.
PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE
HON. COURT OF APPEALS, respondents.
G.R. No. L-60907 June 28, 1989
OVERSEAS
BANK
OF
MANILA,
petitioner,
vs.
COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and
RAUL L. SANTOS, respondents.

REGALADO, J.:
In these petitions for review on certiorari, Integrated Realty Corporation and
Raul Santos (G.R. No. 60705), and Overseas Bank of Manila (G.R. No.
60907) appeal from the decision of the Court of Appeals, 1 the decretal
portion of which states:
WHEREFORE, with the modification that appellee Overseas Bank
of Manila is ordered to pay to the appellant Raul Santos the sum
of P 700,000.00 due under the time deposit certificates Nos. 2308
and 2367 with 6 1/2 (sic) interest per annum from date of issue
until fully paid, the appealed decision is affirmed in all other
respects.

In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC

and Raul L. Santos (hereafter, Santos) seek the dismissal of the complaint
filed by the Philippine National Bank (hereafter, PNB), or in the event that
they be held liable thereunder, to revive and affirm that portion of the
decision of the trial court ordering Overseas Bank of Manila (hereafter,
OBM) to pay IRC and Santos whatever amounts the latter will pay to PNB,
with interest from the date of payment. 2
On the other hand, in G.R. No. 60907, petitioner OBM challenges the
decision of respondent court insofar as it holds OBM liable for interest on
the time deposit with it of Santos corresponding to the period of its closure
by order of the Central Bank. 3
In its assailed decision, the respondent Court of Appeals, quoting from the
decision of the lower court, 4 narrated the antecedents of this case in this
wise:
The facts of this case are not seriously disputed by any of the
parties. They are set forth in the decision of the trial court as
follows:
Under date 11 January 1967 defendant Raul L. Santos made a
time deposit with defendant OBM in the amount of P 500,000.00.
(Exhibit-10 OBM) and was issued a Certificate of Time Deposit
No. 2308 (Exhibit 1 Santos, Exhibit D). Under date 6 February
1967 defendant Raul L. Santos also made a time deposit with
defendant OBM in the amount of P 200,000.00 (Exhibit 11 OBM
and was issued certificate of Time Deposit No. 2367 (Exhibit 2
Santos, Exhibit E).
Under date 9 February 1967 defendant IRC thru its Presidentdefendant Raul L. Santos, applied for a loan and/or credit line
(Exhibit A) in the amount of P 700,000.00 with plaintiff bank. To
secure the said loan, defendant Raul L. Santos executed on
August 11, 1967 a Deed of Assignment (Exhibit C) of the two time
deposits (Exhibits 1-Santos and 2 Santos, also Exhibits D and E)
in favor of plaintiff. Defendant OBM gave its conformity to the
assignment thru letter dated 11 August 1967 (Exhibit F). On the
same date, defendant IRC thru its President Raul L. Santos, also
executed a Deed of Conformity to Loan Conditions (Exhibit G).

The defendant OBM after the due dates of the time deposit
certificates, did not pay plaintiff PNB. Plaintiff demanded payment
from defendants IRC and Raul L. Santos (Exhibit K) and from
defendant OBM (Exhibit L). Defendants IRC and Raul L. Santos
replied that the obligation (loan) of defendant IRC was deemed
paid with the irrevocable assignment of the time deposit
certificates (Exhibits 5 Santos, 6 Santos and 7 Santos).
On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC
and Santos the loan of P 700,000.00 with interest as well as
attomey's fees. It impleaded OBM as a defendant to compel it to
redeem and pay to it Santos' time deposit certificates with
interest, plus exemplary and corrective damages, attorney's fees,
and cost.
In their answer to the complaint, IRC and Santos alleged that
PNB has no cause of action against them because their obligation
to PNB was fully paid or extinguished upon the' irrevocable'
assignment of the time deposit certificates, and that they are not
answerable for the insolvency of OBM They filed a counterclaim
for damages against PNB and a cross-claim against OBM
alleging that OBM acted fraudulently in refusing to pay the time
deposit certificates to PNB resulting in the filing of the suit against
them by PNB, and that, therefore, OBM should pay them
whatever amount they may be ordered by the court to pay PNB
with interest. They also asked that OBM be ordered to pay them
compensatory, moral, exemplary and corrective damages.
In its answer to the complaint, OBM denied knowledge of the time
deposit certificates because the alleged time deposit of Santos
'does not appear in its books of account.
Whereupon, IRC and Santos, with leave of court, filed a thirdparty complaint against Emerito B. Ramos, Jr., president of OBM
and Rodolfo R. Sunico, treasurer of said bank, who allegedly
received the time deposits of Santos and issued the certificates
therefor.
Answering the third-party complaint, Ramos and Sunico alleged
that IRC and Santos have no cause of action against them

because they received and signed the time deposit certificates as

officers of OBM that the time deposits are recorded in the
subsidiary ledgers of the bank and are 'civil liabilities of the
defendant OBM
On November 18, 1970, OBM filed an amended or supplemental
answer to the complaint, acknowledging the certificates of time
deposit that it issued to Santos, and admitting its failure to pay the
same due to its distressed financial situation. As affirmative
defenses, it alleged that by reason of its state of insolvency its
operations have been suspended by the Central Bank since
August 1, 1968; that the time deposits ceased to earn interest
from that date; that it may not give preference to any depositor or
creditor; and that payment of the plaintiffs claim is prohibited.
On January 30, 1976, the lower court rendered judgment for the
plaintiff, the dispositive portion of which reads as foIlows
WHEREFORE, judgment is hereby rendered, ordering:
1. The defendant Integrated Realty Corporation and Raul L.
Santos to pay the plaintiff, jointly and solidarily, the total amount
of P 700,000.00 plus interest at the rate of 9% per annum from
maturity dates of the two promissory notes on January 11 and
February 6, 1968, respectively (Exhibits M and I), plus 1-1/ 2%
additional interest effective February 28, 1968 and additional
penalty interest of 1% per annum of the Id amount of P
700,000.00 from the time of maturity of Id loan up to the time the
said amount of P 700,000.00 is actually paid to the plaintiff;
2. The defendants topay l0% of the amount of P 700,000.00 as
and for attorney's fees;
3. The defendant Overseas Bank of Manila to pay cross-plaintiffs
Integrated Realty Corporation and Raul L. Santos whatever
amounts the latter will pay to the plaintiff with interest from date of
payment;

4. The defendant Overseas Bank of Manila to pay cross-plaintiffs

Integrated Realty Corporation and Raul L. Santos the amount of P
10,000.00 as and for attorney's fees;
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the costs.
SO ORDERED. 5
IRC Santos and OBM all appealed to the respondent Court of Appeals. As
stated in limine, on March 16, 1982 respondent court promulgated its
appealed decision, with a modification and the deletion of that portion of the
judgment of the trial court ordering OBM to pay IRC and Santos whatever
amounts they will pay to PNB with interest from the date of payment.
Therein defendants-appellants, through separate petitions, have brought the
said decision to this Court for review.
1. The first issue posed before us for resolution is whether the
liability of IRC and Santos with PNB should be deemed to have
been paid by virtue of the deed of assignment made by the former
in favor of PNB, which reads:
KNOW ALL MEN BY THESE PRESENTS;
I, RAUL L. SANTOS, of legal age, Filipino, with residence and
postal address at 661 Richmond St., Mandaluyong, Rizal for and
in consideration of certain loans, overdrafts and other credit
accommodations granted or those that may hereafter be granted
to me/us by the PHILIPPINE NATIONAL BANK, have assigned,
transferred and conveyed and by these presents, do hereby
assign, transfer and convey by way of security unto said
PHILIPPINE NATIONAL BANK its successors and assigns the
following Certificates of Time Deposit issued by the OVERSEAS
BANK OF MANILA, its CONFORMITY issued on August 11,
1967, hereto enclosed as Annex ' A', in favor of RAUL L.
SANTOS and/or NORA S. SANTOS, in the aggregate sum of
SEVEN HUNDRED THOUSAND PESOS ONLY (P 700,000.00),
Philippine Currency, ....

xxx xxx xxx

It is also understood that the herein Assignor/s shall remain hable
for any outstanding balance of his/their obligation if the Bank is
unable to actually receive or collect the above assigned sums ,
monies or properties resulting from any agreements, orders or
decisions of the court or for any other cause whatsoever. 6
xxx xxx xxx
Respondent Court of Appeals did not consider the aforesaid
assignment as payment, thus:
The contention of IRC and Santos that the irrevocable assignment
of the time deposit certificates to PNB constituted payment' of
their obligation to the latter is not well taken.
Where a certificate of deposit in a bank, payable at a future day,
was handed over by a debtor to his creditor, it was not payment,
unless there was an express agreement on the part of the creditor
to receive it as such, and the question whether there was or was
not such an agreement, was one of facts to be decided by the
jury. (Downey vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See
also Michie, Vol. 5-B Banks and Banking, p. 200). 7
We uphold respondent court on this score.
In Lopez vs. Court of appeals, et al., 8 petitioner Benito Lopez obtained a
loan for P 20,000.00 from the Prudential Bank and Trust Company. On the
same day, he executed a promissory note in favor of the bank and, in
addition, he executed a surety bond in which he, as principal, and Philippine
American General Insurance Co., Inc. (Philamgen), as surety, bound
themselves jointly and severally in favor of the bank for the payment of the
loan. On the same occasion, Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed to indemnify the company against
any damages which the latter may sustain in consequence of having
become a surety upon the bond. At the same time, Lopez executed a deed
of assignment of his shares of stock in the Baguio Military Institute, Inc. in
favor of Philamgen. When Lopez' obligation matured without being settled,
Philamgen caused the transfer of the shares of stocks to its name in order

that it may sell the same and apply the proceeds thereof in payment of the
loan to the bank. However, when no payment was still made by the principal
debtor or surety, the bank filed a complaint which compelled Philamgen to
pay the bank. Thereafter, Philamgen filed an action to recover the amount of
the loan against Lopez. The trial court therein held that the obligation of
Lopez was deemed paid when his shares of stocks were transferred in the
name of Philamgen. On appeal, the Court of Appeals ruled that Lopez was
still liable to Philamgen because, pending payment, Philamgen was merely
holding the stock as security for the payment of Lopez' obligation.
In upholding the finding therein of the Court of Appeals, We held
that:
Notwithstanding the express terms of the 'Stock Assignment
Separate from Certificate', however, We hold and rule that the
transaction should not be regarded as an absolute conveyance in
view of the circumstances obtaining at the time of the execution
thereof.
It should be remembered that on June 2, 1959, the day Lopez
obtained a loan of P 20,000.00 from Prudential Bank, Lopez
executed a promissory note for P 20,000.00, plus interest at the
rate of ten (10%) per cent per annum, in favor of said Bank. He
likewise posted a surety bond to secure his full and faithful
performance of his obligation under the promissory note with
Philamgen as his surety. In return for the undertaking of
Philamgen under the surety bond, Lopez executed on the same
day not only an indemnity agreement but also a stock
assignment.
The indemnity agreement and stock assignment must be
considered together as related transactions because in order to
judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. (Article 1371, New Civil Code). Thus, considering that
the indemnity agreement connotes a continuing obligation of
Lopez towards Philamgen while the stock assignment indicates a
complete discharge of the same obligation, the existence of the
indemnity agreement whereby Lopez had to pay a premium of P
l,000.00 for a period of one year and agreed at all times to

indemnify Philamgen of any and all kinds of losses which the

latter might sustain by reason of it becoming a surety, is
inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would
have been no necessity for the execution of the indemnity
agreement if the stock assignment was really intended as an
absolute conveyance. ...
Along the same vein, in the case at bar it would not have been necessary
on the part of IRC and Santos to execute promissory notes in favor of PNB
if the assignment of the time deposits of Santos was really intended as an
absolute conveyance.
There are cogent reasons to conclude that the parties intended said deed of
assignment to complement the promissory notes. In declaring that the deed
of assignment did not operate as payment of the loan so as to extinguish
the obligations of IRC and Santos with PNB, the trial court advanced several
valid bases, to wit:
a. It is clear from the Deed of Assignment that it was only by way
of security;
xxx xxx xxx
b. The promissory notes (Exhibits H and I) were executed on
August 16, 1967. If defendants IRC and Raul L. Santos, upon
executing the Deed of Assignment on August 11, 1967 had
already paid their loan of P 700,000.00 or otherwise extinguished
the same, why were the promissory notes made on August 16,
1967 still executed by IRC and signed by Raul L. Santos as
President?
c. In the application for a credit line (Exhibit A),the time deposits
were offered as collateral. 9
For all intents and purposes, the deed of assignment in this case is actually
a pledge. Adverting again to the Court's pronouncements in Lopez, supra,
we quote therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was

used or what the form of the transfer was. If it was intended to

secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge. However,
even though a transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified and
explained by a contemporaneous writing declaring it to have been
a deposit of the property as collateral security. It has been said
that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the use of the
terms ordinarily importing conveyance, of absolute ownership will
not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other
circumstances excluding an intent to pledge. 10
The facts and circumstances leading to the execution of the deed of
assignment, as found by the court a quo and the respondent court, yield
said conclusion that it is in fact a pledge. The deed of assignment has
satisfied the requirements of a contract of pledge (1) that it be constituted to
secure the fulfillment of a principal obligation; (2) that the pledgor be the
absolute owner of the thing pledged; (3) that the persons constituting the
pledge have the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose. 11 The further requirement
that the thing pledged be placed in the possession of the creditor, or of a
third person by common agreement 12 was complied with by the execution
of the deed of assignment in favor of PNB.
It must also be emphasized that Santos, as assignor, made an express
undertaking that he would remain liable for any outstanding balance of his
obligation should PNB be unable to actually receive or collect the assigned
sums resulting from any agreements, orders or decisions of the court or for
any other cause whatsoever. The term "for any cause whatsoever" is broad
enough to include the situation involved in the present case.

Under the foregoing circumstances and considerations, the unavoidable

conclusion is that IRC and Santos should be held liable to PNB for the
amount of the loan with the corresponding interest thereon.
2. We find nothing illegal in the interest of one and one-half
percent (1-1/2%) imposed by PNB pursuant to the resolution of its
Board which presumably was done in accordance with ordinary
banking procedures. Not only did IRC and Santos fail to
overcome the presumption of regularity of business transactions,
but they are likewise estopped from questioning the validity
thereof for the first time in this petition. There is nothing in the
records to show that they raised this issue during the trial by
presenting countervailing evidence. What was merely touched
upon during the proceedings in the court below was the alleged
lack of notice to them of the board resolution, but not the veracity
or validity thereof.
3. On the issue of whether OBM should be held liable for interests
on the time deposits of IRC and Santos from the time it ceased
operations until it resumed its business, the answer is in the
negative.
We have held in The Overseas Bank of Manila vs. Court of Appeals and
Tony D. Tapia, 13 that:
It is a matter of common knowledge, which We take judicial notice
of, that what enables a bank to pay stipulated interest on money
deposited with it is that thru the other aspects of its operation it is
able to generate funds to cover the payment of such interest.
Unless a bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or their
proceeds and generally engage in other banking and financing
activities from which it can derive income, it is inconceivable how
it can carry on as a depository obligated to pay stipulated interest.
Conventional wisdom dictated; this inexorable fair and just
conclusion. And it can be said that all who deposit money in
banks are aware of such a simple economic proposition petition.
Consequently, it should be deemed read into every contract of
deposit with a bank that the obligation to pay interest on the
deposit ceases the moment the operation of the bank is

completely suspended by the duly constituted authority, the

Central Bank.
We consider it of trivial consequence that the stoppage of the
bank's operation by the Central Bank has been subsequently
declared illegal by the Supreme Court, for before the Court's
order, the bank had no alternative under the law than to obey the
orders of the Central Bank. Whatever be the juridical significance
of the subsequent action of the Supreme Court, the stubborn fact
remained that the petitioner was totally crippled from then on from
earning the income needed to meet its obligations to its
depositors. If such a situation cannot, strictly speaking, be legally
denominated as 'force majeure', as maintained by private
respondent, We hold it is a matter of simple equity that it be
treated as such.
The Court further adjured that:
Parenthetically, We may add for the guidance of those who might
be concerned, and so that unnecessary litigations be avoided
from further clogging the dockets of the courts, that in the light of
the considerations expounded in the above opinion, the same
formula that exempts petitioner from the payment of interest to its
depositors during the whole period of factual stoppage of its
operations by orders of the Central Bank, modified in effect by the
decision as well as the approval of a formula of rehabilitation by
this Court, should be, as a matter of consistency, applicable or
followed in respect to all other obligations of petitioner which
could not be paid during the period of its actual complete closure.
We cannot accept the holding of the respondent Court of Appeals that the
above-cited decisions apply only where the bank is in a state of liquidation.
In the very case aforecited, this issue was likewise raised and We resolved:
Thus, Our task is narrowed down to the resolution of the legal
problem of whether or not, for purposes of the payment of the
interest here in question, stoppage of the operations of a bank by
a legal order of liquidation may be equated with actual cessation
of the bank's operation, not different, factually speaking, in its

effects, from legal liquidation the factual cessation having been

ordered by the Central Bank.
In the case of Chinese Grocer's Association, et al. vs. American
Apothecaries, 65 Phil. 395, this Court held:
As to the second assignment of error, this Court, in G.R. No.
43682, In re Liquidation of the Mercantile Bank of China, Tan
Tiong Tick, claimant and appellant vs. American Apothecaries, C.,
et al., claimants and appellees, through Justice Imperial, held the
following:
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 earn 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 businesses and before the
latter has been declared in a state of liquidation. Moreover, the
bank being authorized by law to make use 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 dates of the
Id 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.
The Court of Appeals considered this ruling inapplicable to the
instant case, precisely because, as contended by private
respondent, the said Apothecaries case had in fact in
contemplation a valid order of liquidation of the bank concerned,
whereas here, the order of the Central Bank of August 13, 1968
completely forbidding herein petitioner to do business preparatory
to its liquidation was first restrained and then nullified by this
Supreme Court. In other words, as far as private respondent is
concerned, it is the legal reason for cessation of operations, not

the actual cessation thereof, that matters and is decisive insofar

as his right to the continued payment of the interest on his deposit
during the period of cessation is concerned.
In the light of the peculiar circumstances of this particular case,
We disagree. It is Our considered view, after mature deliberation,
that it is utterly unfair to award private respondent his prayer for
payment of interest on his deposit during the period that petitioner
bank was not allowed by the Central Bank to operate.
4. Lastly, IRC and Santos claim that OBM should reimburse them
for whatever amounts they may be adjudged to pay PNB by way
of compensation for damages incurred, pursuant to Articles 1170
and 2201 of the Civil Code.
It appears that as early as April, 1967, the financial situation of OBM had
already caused mounting concern in the Central Bank. 14 On December 5,
1967, new directors and officers drafted from the Central Bank (CB) itself,
the Philippine National Bank (PNB) and the Development Bank of the
Philippines (DBP) were elected and installed and they took over the
management and control of the Overseas Bank. 15 However, it was only on
July 31, 1968 when OBM was excluded from clearing with the CB under
Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968,
pursuant to Resolution No. 1290 of the CB OBM's operations were
suspended. 16 These CB resolutions were eventually annulled and set aside
by this Court on October 4, 1971 in the decision rendered in the herein cited
case of Ramos.
Thus, when PNB demanded from OBM payment of the amounts due on the
two time deposits which matured on January 11, 1968 and February 6,
1968, respectively, there was as yet no obstacle to the faithful compliance
by OBM of its liabilities thereunder. Consequently, for having incurred in
delay in the performance of its obligation, OBM should be held liable for
damages. 17 When respondent Santos invested his money in time deposits
with OBM they entered into a contract of simple loan or mutuum, 18 not a
contract of deposit.
While it is true that under Article 1956 of the Civil Code no interest shall be
due unless it has been expressly stipulated in writing, this applies only to
interest for the use of money. It does not comprehend interest paid as

damages. 19 OBM contends that it had agreed to pay interest only up to the
dates of maturity of the certificates of time deposit and that respondent
Santos is not entitled to interest after the maturity dates had expired, unless
the contracts are renewed. This is true with respect to the stipulated
interest, but the obligations consisting as they did in the payment of money,
under Article 1108 of the Civil Code he has the right to recover damages
resulting from the default of OBM and the measure of such damages is
interest at the legal rate of six percent (6%) per annum on the amounts due
and unpaid at the expiration of the periods respectively provided in the
contracts. In fine, OBM is being required to pay such interest, not as interest
income stipulated in the certificates of time deposit, but as damages for
failure and delay in the payment of its obligations which thereby compelled
IRC and Santos to resort to the courts.
The applicable rule is that legal interest, in the nature of damages for noncompliance with an obligation to pay a sum of money, is recoverable from
the date judicial or extra-judicial demand is made, 20 Which latter mode of
demand was made by PNB, after the maturity of the certificates of time
deposit, on March 1, 1968. 21 The measure of such damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed
upon in the certificates of deposit 22 Which is six and onehalf percent (61/2%). Such interest due or accrued shall further earn legal interest from the
time of judicial demand. 23
We reject the proposition of IRC and Santos that OBM should reimburse
them the entire amount they may be adjudged to pay PNB. It must be noted
that their liability to pay the various interests of nine percent (9%) on the
principal obligation, one and one-half percent (1-1/2%) additional interest
and one percent (1%) penalty interest is an offshoot of their failure to pay
under the terms of the two promissory notes executed in favor of PNB. OBM
was never a party to Id promissory notes. There is, therefore, no privity of
contract between OBM and PNB which will justify the imposition of the
aforesaid interests upon OBM whose liability should be strictly confined to
and within the provisions of the certificates of time deposit involved in this
case. In fact, as noted by respondent court, when OBM assigned as error
that portion of the judgment of the court a quo requiring OBM to make the
disputed reimbursement, IRC and Santos did not dispute that objection of
OBM Besides, IRC and Santos are not without fault. They likewise acted in
bad faith when they refuse to comply with their obligations under the

promissory notes, thus incurring liability for all damages reasonably

attributable to the non-payment of said obligations. 24
WHEREFORE, judgment is hereby rendered, ordering:
1. Integrated Realty Corporation and Raul L. Santos to pay
Philippine National Bank, jointly and severally, the total amount of
seven hundred thousand pesos (P 700,000.00), with interest
thereon at the rate of nine percent (9%) per annum from the
maturity dates of the two promissory notes on January 11 and
February 6, 1968, respectively, plus one and one-half percent (11/2%) additional interest per annum effective February 28, 1968
and additional penalty interest of one percent (1%) per annum of
the said amount of seven hundred thousand pesos (P
700,000.00) from the time of maturity of said loan up to the time
the said amount of seven hundred thousand pesos (P
700,000.00) is fully paid to Philippine National Bank.
2. Integrated Realty Corporation and Raul L. Santos to pay
solidarily Philippine National Bank ten percent (10%) of the
amount of seven hundred thousand pesos (P 700,000.00) as and
for attorney's fees.
3. Overseas Bank of Manila to pay Integrated Realty Corporation
and Raul L. Santos the sum of seven hundred thousand pesos (P
700,000.00) due under Time Deposit Certificates Nos. 2308 and
2367, with interest thereon of six and one-half percent (6-1/2%)
per annum from their dates of issue on January 11, 1967 and
February 6, 1967, respectively, until the same are fully paid,
except that no interest shall be paid during the entire period of
actual cessation of operations by Overseas Bank of Manila;
4. Overseas Bank of Manila to pay Integrated Realty Corporation
and Raul L. Santos six and one-half per cent (6-1/2%) interest in
the concept of damages on the principal amounts of said
certificates of time deposit from the date of extrajudicial demand
by PNB on March 1, 1968, plus legal interest of six percent (6%)
on said interest from April 6, 1968, until fifth payment thereof,
except during the entire period of actual cessation of operations of
said bank.

5. Overseas Bank of Manila to pay Integrated Realty Corporation

and Raul L. Santos ten thousand pesos (P l0,000.00) as and for
attorney's fees.
SO ORDERED.

Yau Chu vs. Court of Appeals, 177 SCRA 793 (1989)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. L-78519 September 26, 1989
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS
TRADING ENTERPRISES, INC., respondents.
Francisco A. Lara, Jr. for petitioner.
D. T. Ramos and Associates for respondent Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:
This is a petition for review on certiorari to annul and set aside the Court of
Appeals' decision dated October 28, 1986 in CA-G.R. CV No. 03269 which
affirmed the decision of the trial court in favor of the private respondents in
an action to recover the petitioners' time deposits in the respondent Family
Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement
on credit from CAMS Trading Enterprises, Inc. (hereafter "CAMS Trading"
for brevity). To guaranty payment for her cement withdrawals, she executed
in favor of Cams Trading deeds of assignment of her time deposits in the
total sum of P320,000 in the Family Savings Bank (hereafter the Bank).
Except for the serial numbers and the dates of the time deposit certificates,
the deeds of assignment, which were prepared by her own lawyer, uniformly
provided

... That the assignment serves as a collateral or guarantee for the

payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from
said company, per separate contract executed between us.
On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an
unpaid account with it in the sum of P314,639.75. It asked that it be allowed
to encash the time deposit certificates which had been assigned to it by Mrs.
Chu. It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu
admitting that her outstanding account with Cams Trading was P404,500.
After verbally advising Mrs. Chu of the assignee's request to encash her
time deposit certificates and obtaining her verbal conformity thereto, the
Bank agreed to encash the certificates.It delivered to Cams Trading the sum
of P283,737.75 only, as one time deposit certificate (No. 0048120954)
lacked the proper signatures. Upon being informed of the encashment, Mrs.
Chu demanded from the Bank and Cams Trading that her time deposit be
restored. When neither complied, she filed a complaint to recover the sum
of P283,737.75 from them. The case was docketed in the Regional Trial
Court of Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX), as Civil
Case No. 38861.
In a decision dated December 12, 1983, the trial court dismissed the
complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which
affirmed the dismissal of her complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates
as a pactum commissorium; and
2. In not finding that the obligations secured by her time deposits
had already been paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of
pledge, but, as the collateral was also money or an exchange of "peso for
peso," the provision in Article 2112 of the Civil Code for the sale of the thing
pledged at public auction to convert it into money to satisfy the pledgor's

obligation, did not have to be followed. All that had to be done to convert the
pledgor's time deposit certificates into cash was to present them to the bank
for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a pacto commissorio
which is prohibited under Art. 2088 of the Civil Code. A pacto commissorio
is a provision for the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its maturity. The
prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds
a pledge or mortgage over property whose value is much more than the
debt. Where, as in this case, the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it was
not illegal for the creditor to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's consent.
Whether the debt had already been paid as now alleged by the debtor, is a
factual question which the Court of Appeals found not to have been proven
for the evidence which the debtor sought to present on appeal, were
receipts for payments made prior to July 18, 1980. Since the petitioner
signed on July 18, 1980 a letter admitting her indebtedness to be in the sum
of P404,500, and there is no proof of payment made by her thereafter to
reduce or extinguish her debt, the application of her time deposits, which
she had assigned to the creditor to secure the payment of her debt, was
proper. The Court of Appeals did not commit a reversible error in holding
that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.

Caltex (Philippines), Inc. vs. Court of Appeals, 212 SCRA 448

(1992)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX
(PHILIPPINES),
INC.,
petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,
respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615 1 affirming with modifications, the earlier decision of the Regional
Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution,
through its Sucat Branch issued 280 certificates of time deposit
(CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD
Dates Serial Nos. Quantity Amount
22
Feb.
82
26
Feb.
82
2
Mar.
82
4
Mar.
82
5
Mar.
82
5
Mar.
82
5
Mar.
82
8
Mar.
82
9
Mar.
82
9
Mar.
82
9
Mar.
82

Total
===== ========

90101
74602
74701
90127
74797
89965
70147
90001
90023
89991
90251
280

to
to
to
to
to
to
to
to
to
to
to

CTD
90120
74691
74740
90146
94800
89986
90150
90020
90050
90000
90272

20
90
40
20
4
22
4
20
28
10
22

P80,000
360,000
160,000
80,000
16,000
88,000
16,000
80,000
112,000
40,000
88,000

P1,120,000

2. Angel dela Cruz delivered the said certificates of time (CTDs)

to herein plaintiff in connection with his purchased of fuel products
from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 4850).
4. On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant's Exhibit
281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant's Exhibits 282561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a
loan from defendant bank in the amount of Eight Hundred
Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time

Deposit (Exhibit 562) which stated, among others, that he (de la

Cruz) surrenders to defendant bank "full control of the indicated
time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN, February 9,
1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally informing it
of its possession of the CTDs in question and of its decision to
pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz" as
well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter setoff and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint,

praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner
did not become a holder in due course of the said certificates of deposit;
and (3) in disregarding the pertinent provisions of the Code of Commerce
relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
SECURITY
AND
6778
Ayala
Metro
SUCAT
CERTIFICATE
Rate 16%

TRUST
Ave.,
Makati
Manila,
OFFICEP
OF

BANK
COMPANY
No.
90101
Philippines
4,000.00
DEPOSIT

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this
Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS
Pesos, Philippine Currency, repayable to said depositor
731 days. after date, upon presentation and surrender
of this certificate, with interest at the rate of 16% per
cent per annum.
(Sgd. Illegible) (Sgd. Illegible)


AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the amount
deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever
purports to be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who
made the deposit and further engages itself to pay said depositor
the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d)

set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per
books of the bank, the depositor referred (sic) in these
certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that
Angel dela Cruz was the one who cause (sic) the
amount.
Atty. Calida:
q And no other person or entity or company, Mr.
Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of
these certificates of time deposit insofar as the bank is
concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability

of an instrument is determined from the writing, that is, from the face of the
instrument itself. 9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner's
aforesaid witness merely declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously other parties not privy to
the transaction between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence, the situation would
require any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity.
12

The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la
Cruz, whom petitioner chose not to implead in this suit for reasons of its
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for
the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it
as a security for De la Cruz' purchases of its fuel products. Any doubt as to
whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations notwithstanding.
Under the doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to
falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent
bank, as defendant in the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be required to
aver with sufficient definiteness or particularity (a) the due date or dates of
payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it
by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff
corporation opposed the motion. 18 Had it produced the receipt prayed for, it

could have proved, if such truly was the fact, that the CTDs were delivered
as payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be
adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the parties is
to be determined by their intention, regardless of what
language was used or what the form of the transfer
was. If it was intended to secure the payment of money,
it must be construed as a pledge; but if there was some
other intention, it is not a pledge. However, even though
a transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified
and explained by contemporaneous writing declaring it
to have been a deposit of the property as collateral
security. It has been said that a transfer of property by
the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a
pledge if the debt continues in inexistence and is not
discharged by the transfer, and that accordingly the use
of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such
a transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof. 22 In the present case, however, there was no

negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as security
for the purchases of Angel de la Cruz (and we even disregard the fact that
the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent
disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving the
right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz. 25
Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz
in favor of respondent bank was embodied in a public instrument. 27 With
regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs,
neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements of
the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate
the CTDs before the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount to
saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if
accepted, would render a pre-trial delimitation of issues a useless exercise.
33

Still, even assuming arguendo that said issue of negligence was raised in
the court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules to
be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the
CTDs in the case at bar, are merely permissive and not mandatory. The
very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it

may be, may apply to the judge or court of competent jurisdiction,
asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to
prevent the ownership of the instrument that a duplicate be issued
him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to
558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for some valid
ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically restricts
or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.

Allied Banking Corp. vs. Ordofiez, 192 SCRA 246 (1990)

SECOND DIVISION
[G.R. No. 82495 : December 10, 1990.]
192 SCRA 246
ALLIED BANKING CORPORATION, Petitioner, vs. HON. SECRETARY
SEDFREY ORDOEZ (Public Respondent) and ALFREDO CHING (Private
Respondent), Respondents.
DECISION

PADILLA, J.:

In this special civil action for Certiorari, the interpretation by the Department
of Justice of the penal provision of PD 115, the Trust Receipts Law, is
assailed by petitioner.
The relevant facts are as follows:
On 23 January 1981, Philippine Blooming Mills (PBM, for short) thru its duly
authorized officer, private respondent Alfredo Ching, applied for the
issuance of commercial letters of credit with petitioner's Makati branch to
finance the purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot
High Fired Refractory Sliding Nozzle Bricks.
Petitioner issued an irrevocable letter of credit in favor of Nikko Industry Co.,
Ltd. (Nikko) by virtue of which the latter drew four (4) drafts which were
accepted by PBM and duly honored and paid by the petitioner bank.:- nad
To secure payment of the amount covered by the drafts, and in
consideration of the transfer by petitioner of the possession of the goods to
PBM, the latter as entrustee, thru private respondent, executed four (4)
Trust Receipt Agreements with maturity dates on 19 May, 3 and 24 June
1981 acknowledging petitioner's ownership of the goods and its (PBM'S)

obligation to turn over the proceeds of the sale of the goods, if sold, or to
return the same, if unsold within the stated period.
Out of the said obligation resulted an overdue amount of P1,475,274.09.
Despite repeated demands, PBM failed and refused to either turn over the
proceeds of the sale of the goods or to return the same.
On 7 September 1984, petitioner filed a criminal complaint against private
respondent for violation of PD 115 before the office of the Provincial Fiscal
of Rizal. After preliminary investigation wherein private respondent failed to
appear or submit a counter-affidavit and even refused to receive the
subpoena, the Fiscal found a prima facie case for violation of PD 115 on
four (4) counts and filed the corresponding information in court.
Private respondent appealed the Fiscal's resolution to the Department of
Justice on three (3) grounds:
1. Lack of proper preliminary investigation;
2. The Provincial Fiscal of Rizal did not have jurisdiction over the case, as
respondent's obligation was purely civil;
3. There had been a novation of the obligation by the substitution of the
person of the Rehabilitation Receivers in place of both PBM and private
respondent Ching.
Then Secretary of Justice (now Senator) Neptali A. Gonzales, in a 24
September 1986 letter/resolution, 1 held:
"Your contention that respondent's obligation was purely a civil one, is
without any merit. The four (4) Trust Receipt Agreements entered into by
respondent and complainant appear regular in form and in substance. Their
agreement regarding interest, not being contrary to law, public policy or
morals, public order or good custom, is a valid stipulation which does not
change the character of the said Trust Receipt Agreements. Further, as
precisely pointed out by complainant, raw materials for manufacture of
goods to be ultimately sold are proper objects of a trust receipt. Thus,
respondent's failure to remit to the complainant proceeds of the sale of the
finished products if sold or the finished products themselves if not sold, at
the maturity dates of the trust receipts, constitutes a violation of P.D. 115." 2

A motion for reconsideration alleged that, as PBM was under rehabilitation

receivership, no criminal liability can be imputed to herein respondent
Ching. On 17 March 1987, Undersecretary Silvestre H. Bello III denied said
motion. The pertinent portion of the denial resolution states::-cralaw
"It cannot be denied that the offense was consummated long before the
appointment of rehabilitation receivers. The filing of a criminal case against
respondent Ching is not only for the purpose of effectuating a collection of a
debt but primarily for the purpose of punishing an offender for a crime
committed not only against the complaining witness but also against the
state. The crime of estafa for violation of the Trust Receipts Law is a special
offense or mala prohibita. It is a fundamental rule in criminal law that when
the crime is punished by a special law, the act alone, irrespective of its
motives, constitutes the offense. In the instant case the failure of the
entrustee to pay complainant the remaining balance of the value of the
goods covered by the trust receipt when the same became due constitutes
the offense penalized under Section 13 of P.D. No. 115; and on the basis of
this failure alone, the prosecution has sufficient evidence to establish a
prima facie case (Res. No. 671, s. 1981; Allied Banking Corporation vs.
Reinhard Sagemuller, et al., Provincial Fiscal of Rizal, September 18,
1981).
"Likewise untenable is your contention that 'rehabilitation proceedings must
stay the attempt to enforce a liability in view of Section 4 of P.D. No. 1758.'
Section 4 of P.D. No. 1758, provides, among others: '. . . Provided, further,
that upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be
suspended accordingly.
"You will note that the term 'all actions for claims' refer only to actions for
money claims but not to criminal liability of offenders." 3
Another motion for reconsideration was filed by respondent on 9 April 1987
to which an opposition was filed by the petitioner. Private respondent also
filed a supplemental request for reconsideration dated 28 December 1987
with two (2) additional grounds, namely:

". . . 3) there is no evidence on record to show that respondent was in

particeps criminis in the act complained of; and 4) there could be no
violation of the trust receipt agreements because the articles imported by
the corporation and subject of the trust receipts were fungible or
consummable goods and do not form part of the steel product itself. These
goods were not procured to be sold in whatever state or condition they were
in or were supposed to be after the manufacturing process." 4
Because of private respondent's clarification that the goods subject of the
trust receipt agreements were dolomites which were specifically used for
patching purposes over the surface of furnaces and nozzle bricks which are
insulating materials in the lower portion of the ladle which do not form part of
the steel product itself, Justice Secretary Sedfrey Ordoez, on 11 January
1988, "rectified" his predecessor's supposed reversible error, and held::cralaw
". . . it is clear that what the law contemplates or covers are goods which
have, for their ultimate destination, the sale thereof or if unsold, their
surrender to the entruster, this whether the goods are in their original form
or in their manufactured/processed state. Since the goods covered by the
trust receipts and subject matter of these proceedings are to be utilized in
the operation of the equipment and machineries of the corporation, they
could not have been contemplated as being covered by PD 115. It is
axiomatic that penal statutes are strictly construed against the state and
liberally in favor of the accused (People vs. Purisima, 86 SCRA 542,
People vs. Terrado, 125 SCRA 648). This means that penal statutes cannot
be enlarged or extended by intendment, implication, or any equitable
consideration (People vs. Garcia, 85 Phil. 651). Thus, not all transactions
covered by trust receipts may be considered as trust receipt transactions
defined and penalized under PD 115.
x x x
Apparently, the trust receipt agreements were executed as security for the
payment of the drafts. As such, the main transaction was that of a loan. . . .
In essence, therefore, the relationship between the Bank and the
corporation, consequently, the respondent herein likewise included, is that
of debtor and creditor.
x x x

WHEREFORE, premises considered, our resolution dated September 24,

1986, recorded 119 Resolution No. 456, series of 1986, and that dated
March 17, 1987, the latter being necessarily dependent upon and incidental
to the former, are hereby abrogated and abandoned. You are hereby
directed to move for the withdrawal of the informations and the dismissal of
the criminal cases filed in court . . ." 5
This time, petitioner Allied Bank filed a motion for reconsideration of the
Ordoez resolution, which was resolved by the Department of Justice on 17
February 1988, enunciating that PD 115 covers goods or components of
goods which are ultimately destined for sale. It concluded that:
". . . The goods subject of the instant case were shown to have been used
and/or consumed in the operation of the equipment and machineries of the
corporation, and are therefore outside the ambit of the provisions of PD 115
albeit covered by Trust Receipt agreements . . . Finally, it is noted that
under the Sia vs. People (121 SCRA 655 (1983), and Vintola vs. Insular
Bank of Asia and America (150 SCRA 578 (1987) rulings, the trend in the
Supreme Court appears to be to the effect that trust receipts under PD 115
are treated as security documents for basically loan transactions, so much
so that criminal liability is virtually obliterated and limiting liability of the
accused to the civil aspect only.
WHEREFORE, your motion for reconsideration is hereby DENIED." 6
From the Department of Justice, petitioner is now before this Court praying
for writs of Certiorari and prohibition to annul the 11 January and 17
February 1988 DOJ rulings, mainly on two (2) grounds:
1. public respondent is without power or authority to declare that a violation
of PD 115 is not criminally punishable, thereby rendering a portion of said
law inoperative or ineffectual.: nad
2. public respondent acted with grave abuse of discretion in holding that the
goods covered by the trust receipts are outside the contemplation of PD
115.
Private and public respondents both filed their comments on the petition to
which a consolidated reply was filed. After the submission of the parties'
respective memoranda, the case was calendared for deliberation.

Does the penal provision of PD 115 (Trust Receipts Law) apply when the
goods covered by a Trust Receipt do not form part of the finished products
which are ultimately sold but are instead, utilized/used up in the operation of
the equipment and machineries of the entrustee-manufacturer?
The answer must be in the affirmative, Section 4 of said PD 115 says in
part:
"Sec. 4. What constitutes a trust receipt transaction. A trust receipt
transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entrustee, and another
person referred to in this Decree as the entrustee, whereby the entruster,
who owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a 'trust receipt' wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or instruments themselves, if they
are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, . . ."
Respondent Ching contends that PBM is not in the business of selling
Magtar Branch Dolomites or High Fired Refractory Sliding Nozzle Bricks, it
is a manufacturer of steel and steel products. But PBM, as entrustee under
the trust receipts has, under Sec. 9 of PD 115, the following obligations,
inter alia: (a) receive the proceeds of sale, in trust for the entruster and turn
over the same to the entruster to the extent of the amount owing to him or
as appears on the trust receipt; (b) keep said goods or proceeds thereof
whether in money or whatever form, separate and capable of identification
as property of the entruster; (c) return the goods, documents or instruments
in the event of non-sale, or upon demand of the entruster; and (d) observe
all other terms and conditions of the trust receipt not contrary to the
provisions of said Decree. 7
The trust receipts, there is an obligation to repay the entruster. 8 Their terms
are to be interpreted in accordance with the general rules on contracts, the
law being alert in all cases to prevent fraud on the part of either party to the

transaction. 9 The entrustee binds himself to sell or otherwise dispose of the

entrusted goods with the obligation to turn over to the entruster the
proceeds if sold, or return the goods if unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in the trust receipt. A
violation of this undertaking constitutes estafa under Sec. 13, PD 115.
And even assuming the absence of a clear provision in the trust receipt
agreement, Lee v. Rodil 10 and Sia v. CA 11 have held: Acts involving the
violation of trust receipt agreements occurring after 29 January 1973 (when
PD 115 was issued) would render the accused criminally liable for estafa
under par. 1(b), Art. 315 of the Revised Penal Code, pursuant to the explicit
provision in Sec. 13 of PD 115. 12 The act punishable is malum prohibitum.
Respondent Secretary's prognostication of the Supreme Court's supposed
inclination to treat trust receipts as mere security documents for loan
transactions, thereby obliterating criminal liability, appears to be a
misjudgment. 13
In an attempt to escape criminal liability, private respondent claims PD 115
covers goods which are ultimately destined for sale and not goods for use in
manufacture. But the wording of Sec. 13 covers failure to turn over the
proceeds of the sale of entrusted goods, or to return said goods if unsold or
disposed of in accordance with the terms of the trust receipts. Private
respondent claims that at the time of PBM's application for the issuance of
the LC's, it was not represented to the petitioner that the items were
intended for sale, 14 hence, there was no deceit resulting in a violation of
the trust receipts which would constitute a criminal liability. Again, we cannot
uphold this contention. The non-payment of the amount covered by a trust
receipt is an act violative of the entrustee's obligation to pay. There is no
reason why the law should not apply to all transactions covered by trust
receipts, except those expressly excluded. 15
The Court takes judicial notice of customary banking and business practices
where trust receipts are used for importation of heavy equipment,
machineries and supplies used in manufacturing operations. We are
perplexed by the statements in the assailed DOJ resolution that the goods
subject of the instant case are outside the ambit of the provisions of PD 115
albeit covered by Trust Receipt Agreements (17 February 1988 resolution)
and that not all transactions covered by trust receipts may be considered as
trust receipt transactions defined and penalized under PD 115 (11 January

1988 resolution). A construction should be avoided when it affords an

opportunity to defeat compliance with the terms of a statute.: nad
"A construction of a statute which creates an inconsistency should be
avoided when a reasonable interpretation can be adopted which will not do
violence to the plain words of the act and will carry out the intention of
Congress.
In the construction of statutes, the courts start with the assumption that the
legislature intended to enact an effective law, and the legislature is not to be
presumed to have done a vain thing in the enactment of a statute. Hence, it
is a general principle, embodied in the maxim, 'ut res magis valeat quam
pereat,' that the courts should, if reasonably possible to do so without
violence to the spirit and language of an act, so interpret the statute to give
it efficient operation and effect as a whole. An interpretation should, if
possible, be avoided, under which a statute or provision being construed is
defeated, or as otherwise expressed, nullified, destroyed, emasculated,
repealed, explained away, or rendered insignificant, meaningless,
inoperative, or nugatory." 16
The penal provision of PD 115 encompasses any act violative of an
obligation covered by the trust receipt; it is not limited to transactions in
goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold.
To uphold the Justice Department's ruling would contravene not only the
letter but the spirit of PD 115.
"An examination of P.D. 115 shows the growing importance of trust receipts
in Philippine business, the need to provide for the rights and obligations of
parties to a trust receipt transaction, the study of the problems involved and
the action by monetary authorities, and the necessity of regulating the
enforcement of rights arising from default or violations of trust receipt
agreements. The legislative intent to meet a pressing need is clearly
expressed . . ." 17
WHEREFORE, the petition is granted. The temporary restraining order
issued on 13 April 1988 restraining the enforcement of the questioned DOJ
resolutions dated 11 January 1988 and 17 February 1988 directing the
provincial fiscal to move for the dismissal of the criminal case filed before

the RTC of Makati, Branch 143 and the withdrawal of IS-No. 84-3140, is
made permanent. Let this case be remanded to said RTC for disposition in
accordance with this decision.
SO ORDERED.

Colinares vs. Court of Appeals, 339 SCRA 609 (2000)

FIRST DIVISION
[G.R. No. 90828. September 5, 2000]
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE
PHILIPPINES, respondents.
DECISION
DAVIDE, JR., C.J.:
In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were
contracted for a consideration of P40,000 by the Carmelite Sisters of
Cagayan de Oro City to renovate the latters convent at Camaman-an,
Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical
board 2x4x, 300 SF tanguile wood tiles 12x12, 260 SF Marcelo
economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders
Centre for the construction project. The following day, 31 October 1979,
Petitioners applied for a commercial letter of credit with the Philippine
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor
of CM Builders Centre. PBC approved the letter of credit for P22,389.80 to
cover the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt as security. The loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal
deposit as partial payment of the loan.
On 7 May 1980, PBC wrote to Petitioners demanding that the amount be
paid within seven days from notice. Instead of complying with PBCs
demand, Veloso confessed that they lost P19,195.83 in the Carmelite
Monastery Project and requested for a grace period of until 15 June 1980 to
settle the account.
PBC sent a new demand letterto Petitioners on 16 October 1980 and
informed them that their outstanding balance as of 17 November 1979 was
P20,824.40 exclusive of attorneys fees of 25%.

On 2 December 1980, Petitioners proposed that the terms of payment of the

loan be modified as follows: P2,000 on or before 3 December 1980, and
P1,000 per month starting 31 January 1980 until the account is fully paid.
Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4
December 1980, and thereafter P500 on 11 February 1981, 16 March 1981,
and 20 April 1981. Concurrently with the separate demand for attorneys
fees by PBCs legal counsel, PBC continued to demand payment of the
balance.
On 14 January 1983, Petitioners were charged with the violation of P.D. No.
115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal
Code in an Information which was filed with Branch 18, Regional Trial Court
of Cagayan de Oro City. The accusatory portion of the Information reads:
That on or about October 31, 1979, in the City of Cagayan de Oro,
Philippines, and within the jurisdiction of this Honorable Court, the abovenamed accused entered into a trust receipt agreement with the Philippine
Banking Corporation at Cagayan de Oro City wherein the accused, as
entrustee, received from the entruster the following goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the part of the
accused-entrustee to hold the aforesaid items in trust for the entruster
and/or to sell on cash basis or otherwise dispose of the said items and to
turn over to the entruster the proceeds of the sale of said goods or if there
be no sale to return said items to the entruster on or before January 29,
1980 but that the said accused after receipt of the goods, with intent to
defraud and cause damage to the entruster, conspiring, confederating
together and mutually helping one another, did then and there wilfully,
unlawfully and feloniously fail and refuse to remit the proceeds of the sale of
the goods to the entruster despite repeated demands but instead converted,
misappropriated and misapplied the proceeds to their own personal use,

benefit and gain, to the damage and prejudice of the Philippine Banking
Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a clean loan
as per verbal guarantee of Cayo Garcia Tuiza, PBCs former manager. He
and petitioner Colinares signed the documents without reading the fine print,
only learning of the trust receipt implication much later. When he brought
this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was
a mere formality.
On 7 July 1986, the trial court promulgated its decision convicting
Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of the
Revised Penal Code and sentencing each of them to suffer imprisonment of
two years and one day of prision correccional as minimum to six years and
one day of prision mayor as maximum, and to solidarily indemnify PBC the
amount of P20,824.44, with legal interest from 29 January 1980, 12 %
penalty charge per annum, 25% of the sums due as attorneys fees, and
costs.
The trial court considered the transaction between PBC and Petitioners as a
trust receipt transaction under Section 4, P.D. No. 115. It considered
Petitioners use of the goods in their Carmelite monastery project an act of
disposing as contemplated under Section 13, P.D. No. 115, and treated
the charge invoice for goods issued by CM Builders Centre as a document
within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which was
docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that the
trial court erred in ruling that they violated the Trust Receipt Law, and in
holding them criminally liable therefor. In the alternative, they contend that
at most they can only be made civilly liable for payment of the loan.
In its decision 6 March 1989, the Court of Appeals modified the judgment of
the trial court by increasing the penalty to six years and one day of prision
mayor as minimum to fourteen years eight months and one day of reclusion

temporal as maximum. It held that the documentary evidence of the

prosecution prevails over Velosos testimony, discredited Petitioners claim
that the documents they signed were in blank, and disbelieved that they
were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration
alleging that the Disclosure Statement on Loan/Credit Transaction
(hereafter Disclosure Statement) signed by them and Tuiza was suppressed
by PBC during the trial. That document would have proved that the
transaction was indeed a loan as it bears a 14% interest as opposed to the
trust receipt which does not at all bear any interest. Petitioners further
maintained that when PBC allowed them to pay in installment, the
agreement was novated and a creditor-debtor relationship was created.
In its resolutionof 16 October 1989 the Court of Appeals denied the Motion
for New Trial/Reconsideration because the alleged newly discovered
evidence was actually forgotten evidence already in existence during the
trial, and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on 16 November
1989. They raised the following issues:
I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL
ON THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY,
DISCLOSURE ON LOAN/CREDIT TRANSACTION, WHICH IF
INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT,
DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR
NOT THE ACCUSED WERE PROPERLY CHARGED, TRIED AND
CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO
ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION
OF THE SO-CALLED TRUST RECEIPT CONVERTING THE TRUSTORTRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General urged
us to deny the petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the
ground that they had already fully paid PBC on 2 February 1990 the amount

of P70,000 for the balance of the loan, including interest and other charges,
as evidenced by the different receipts issued by PBC, and that the PBC
executed an Affidavit of desistance.
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that payment
of the loan was akin to a voluntary surrender or plea of guilty which merely
serves to mitigate Petitioners culpability, but does not in any way extinguish
their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition and
required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to the ponente.
Thereafter, we required the parties to move in the premises and for
Petitioners to manifest if they are still interested in the further prosecution of
this case and inform us of their present whereabouts and whether their bail
bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of Appeals
of Petitioners Motion for New Trial and the true nature of the contract
between Petitioners and the PBC. As to the latter, Petitioners assert that it
was an ordinary loan, not a trust receipt agreement under the Trust
Receipts Law.
The grant or denial of a motion for new trial rests upon the discretion of the
judge. New trial may be granted if: (1) errors of law or irregularities have
been committed during the trial prejudicial to the substantial rights of the
accused; or (2) new and material evidence has been discovered which the
accused could not with reasonable diligence have discovered and produced
at the trial, and which, if introduced and admitted, would probably change
the judgment.
For newly discovered evidence to be a ground for new trial, such evidence
must be (1) discovered after trial; (2) could not have been discovered and
produced at the trial even with the exercise of reasonable diligence; and (3)

material, not merely cumulative, corroborative, or impeaching, and of such

weight that, if admitted, would probably change the judgment. It is essential
that the offering party exercised reasonable diligence in seeking to locate
the evidence before or during trial but nonetheless failed to secure it.
We find no indication in the pleadings that the Disclosure Statement is a
newly discovered evidence.
Petitioners could not have been unaware that the two-page document
exists. The Disclosure Statement itself states, NOTICE TO BORROWER:
YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL
SIGN. Assuming Petitioners copy was then unavailable, they could have
compelled its production in court, which they never did. Petitioners have
miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that they searched again their voluminous
records, meticulously and patiently, until they discovered this new and
material evidence only upon learning of the Court of Appeals decision and
after they were shocked by the penalty imposed. Clearly, the alleged
newly discovered evidence is mere forgotten evidence that jurisprudence
excludes as a ground for new trial.
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt
transaction as any transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain
specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein the entrustee
binds himself to hold the designated goods, documents or instruments with
the obligation to turn over to the entruster the proceeds thereof to the extent
of the amount owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is
covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the
owner.
Failure of the entrustee to turn over the proceeds of the sale of the goods,
covered by the trust receipt to the entruster or to return said goods if they
were not disposed of in accordance with the terms of the trust receipt shall
be punishable as estafa under Article 315 (1) of the Revised Penal Code,
without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case at bar reveals that
the transaction intended by the parties was a simple loan, not a trust receipt
agreement.
Petitioners received the merchandise from CM Builders Centre on 30
October 1979. On that day, ownership over the merchandise was already
transferred to Petitioners who were to use the materials for their
construction project. It was only a day later, 31 October 1979, that they went
to the bank to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction
where goods are owned by the bank and only released to the importer in
trust subsequent to the grant of the loan. The bank acquires a security
interest in the goods as holder of a security title for the advances it had
made to the entrustee. The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in
full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or
successor in interest. To secure that the bank shall be paid, it takes full title
to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called
upon to pay for them; hence, the importer has never owned the goods and
is not able to deliver possession. In a certain manner, trust receipts partake
of the nature of a conditional sale where the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price.

Trust receipt transactions are intended to aid in financing importers and

retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.
The antecedent acts in a trust receipt transaction consist of the application
and approval of the letter of credit, the making of the marginal deposit and
the effective importation of goods through the efforts of the importer.
PBC attempted to cover up the true delivery date of the merchandise, yet
the trial court took notice even though it failed to attach any significance to
such fact in the judgment. Despite the Court of Appeals contrary view that
the goods were delivered to Petitioners previous to the execution of the
letter of credit and trust receipt, we find that the records of the case speak
volubly and this fact remains uncontroverted. It is not uncommon for us to
peruse through the transcript of the stenographic notes of the proceedings
to be satisfied that the records of the case do support the conclusions of the
trial court. After such perusal Grego Mutia, PBCs credit investigator,
admitted thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and trust
receipt agreement were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this
letter of credit and trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this
document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?

A October 31, 1979.

COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been
superimposed with numeral 1.
During the cross and re-direct examinations he also impliedly admitted that
the transaction was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan
to the accused you admit that?
A Because in the bank the loan is considered part of the loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower
will pay the bank on a certain specified date with interest
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the transaction
was a loan was also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short
it was a special kind of loan. What can you say as to that?
A I dont think that would be a trust receipt because we were made to
understand by the manager who encouraged us to avail of their facilities
that they will be granting us a loan
PBC could have presented its former bank manager, Cayo Garcia Tuiza,
who contracted with Petitioners, to refute Velosos testimony, yet it only
presented credit investigator Grego Mutia. Nowhere from Mutias testimony
can it be gleaned that PBC represented to Petitioners that the transaction

they were entering into was not a pure loan but had trust receipt
implications.
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether the latter
is the owner. Here, it is crystal clear that on the part of Petitioners there was
neither dishonesty nor abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.
The Information charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The mala prohibita
nature of the alleged offense notwithstanding, intent as a state of mind was
not proved to be present in Petitioners situation. Petitioners employed no
artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead, Petitioners sought favorable
terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the
goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their
construction project. At no time did title over the construction materials pass
to the bank, but directly to the Petitioners from CM Builders Centre. This
impresses upon the trust receipt in question vagueness and ambiguity,
which should not be the basis for criminal prosecution in the event of
violation of its provisions.
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution
should they be unable to pay it may be unjust and inequitable, if not
reprehensible. Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is
prone to misinterpretation, as had happened in this case. Eventually, PBC
showed its true colors and admitted that it was only after collection of the
money, as manifested by its Affidavit of Desistance.

WHEREFORE, the challenged Decision of 6 March 1989 and the

Resolution of 16 October 1989 of the Court of Appeals in CA-GR. No.
05408 are REVERSED and SET ASIDE. Petitioners are hereby
ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in
relation to Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.

Development Bank of the Philippines vs. Prudential Bank, 475

SCRA 623 (2005)
Republic
SUPREME
Manila

of

the

THIRD DIVISION

DEVELOPMENT BANK OF G.R. No. 143772

THE PHILIPPINES,
Petitioner,
Present:

PANGANIBAN, J., Chairman,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
CARPIO MORALES and
GARCIA, JJ.
PRUDENTIAL BANK,
Respondent. Promulgated:
November 22, 2005

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

Philippines
COURT

DECISION
CORONA, J.:

Development Bank of the Philippines (DBP) assails in this petition for review
on certiorari under Rule 45 of the Rules of Court the December 14, 1999
decision[1] and the June 8, 2000 resolution of the Court of Appeals in CAG.R. CV No. 45783. The challenged decision dismissed DBP's appeal and
affirmed the February 12, 1991 decision of the Regional Trial Court of
Makati, Branch 137 in Civil Case No. 88-931 in toto, while the impugned
resolution denied DBP's motion for reconsideration for being pro forma.
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial
letter of credit with respondent Prudential Bank for US$498,000. This was in
connection with its importation of 5,000 spindles for spinning machinery with
drawing frame, simplex fly frame, ring spinning frame and various
accessories, spare parts and tool gauge. These were released to Litex
under covering 'trust receipts' it executed in favor of Prudential Bank. Litex
installed and used the items in its textile mill located in Montalban, Rizal.

On October 10, 1980, DBP granted a foreign currency loan in the amount of
US$4,807,551 to Litex. To secure the loan, Litex executed real estate and
chattel mortgages on its plant site in Montalban, Rizal, including the
buildings and other improvements, machineries and equipments there.
Among the machineries and equipments mortgaged in favor of DBP were
the articles covered by the 'trust receipts.

Sometime in June 1982, Prudential Bank learned about DBP's plan for the
overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank
notified DBP of its claim over the various items covered by the 'trust
receipts' which had been installed and used by Litex in the textile mill.

Prudential Bank informed DBP that it was the absolute and juridical owner
of the said items and they were thus not part of the mortgaged assets that
could be legally ceded to DBP.

For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed
on the real estate and chattel mortgages, including the articles claimed by
Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP
acquired the foreclosed properties as the highest bidder.

Subsequently, DBP caused to be published in the September 2, 1984 issue

of the Times Journal an invitation to bid in the public sale to be held on
September 10, 1984. It called on interested parties to submit bids for the
sale of the textile mill formerly owned by Litex, the land on which it was built,
as well as the machineries and equipments therein. Learning of the
intended public auction, Prudential Bank wrote a letter dated September 6,
1984 to DBP reasserting its claim over the items covered by 'trust receipts'
in its name and advising DBP not to include them in the auction. It also
demanded the turn-over of the articles or alternatively, the payment of their
value.

An exchange of correspondences ensued between Prudential Bank and

DBP. In reply to Prudential Bank's September 6, 1984 letter, DBP requested
documents to enable it to evaluate Prudential Bank's claim. On September
28, 1994, Prudential Bank provided DBP the requested documents. Two
months later, Prudential Bank followed up the status of its claim. In a letter
dated December 3, 1984, DBP informed Prudential Bank that its claim had
been referred to DBP's legal department and instructed Prudential Bank to
get in touch with its chief legal counsel. There being no concrete action on
DBP's part, Prudential Bank, in a letter dated July 30, 1985, made a final
demand on DBP for the turn-over of the contested articles or the payment of
their value. Without the knowledge of Prudential Bank, however, DBP sold
the Litex textile mill, as well as the machineries and equipments therein, to
Lyon Textile Mills, Inc. (Lyon) on June 8, 1987.

Since its demands remained unheeded, Prudential Bank filed a complaint

for a sum of money with damages against DBP with the Regional Trial Court
of Makati, Branch 137, on May 24, 1988. The complaint was docketed as
Civil Case No. 88-931.
On February 12, 1991, the trial court decided[2] in favor of Prudential Bank.
Applying the provisions of PD 115, otherwise known as the 'Trust Receipts
Law, it ruled:

When PRUDENTIAL BANK released possession of the subject

properties, over which it holds absolute title to LITEX upon the
latter's execution of the trust receipts, the latter was bound to hold
said properties in trust for the former, and (a) to sell or otherwise
dispose of the same and to turn over to PRUDENTIAL BANK the
amount still owing; or (b) to return the goods if unsold. Since
LITEX was allowed to sell the properties being claimed by
PRUDENTIAL BANK, all the more was it authorized to mortgage
the same, provided of course LITEX turns over to PRUDENTIAL
BANK all amounts owing. When DBP, well aware of the status of
the properties, acquired the same in the public auction, it was
bound by the terms of the trust receipts of which LITEX was the
entrustee. Simply stated, DBP held no better right than LITEX,
and is thus bound to turn over whatever amount was due
PRUDENTIAL BANK. Being a trustee ex maleficio of
PRUDENTIAL BANK, DBP is necessarily liable therefor. In fact,
DBP may well be considered as an agent of LITEX when the
former sold the properties being claimed by PRUDENTIAL BANK,
with the corresponding responsibility to turn over the proceeds of
the same to PRUDENTIAL BANK.[3] (Citations omitted)

The dispositive portion of the decision read:

WHEREFORE, judgment is hereby rendered ordering defendant

DEVELOPMENT BANK OF THE PHILIPPINES to pay plaintiff
PRUDENTIAL BANK:

a)

P3,261,834.00, as actual damages, with interest

thereon computed from 10 August 1985 until the entire
amount shall have been fully paid;

b)

P50,000.00 as exemplary damages; and

c)

10% of the total amount due as and for attorney's

fees.

SO ORDERED.

Aggrieved, DBP filed an appeal with the Court of Appeals. However, the
appellate court dismissed the appeal and affirmed the decision of the trial
court in toto. It applied the provisions of PD 115 and held that ownership
over the contested articles belonged to Prudential Bank as entrustor, not to
Litex. Consequently, even if Litex mortgaged the items to DBP and the latter
foreclosed on such mortgage, DBP was duty-bound to turn over the
proceeds to Prudential Bank, being the party that advanced the payment for
them.
On DBP's argument that the disputed articles were not proper objects of a
trust receipt agreement, the Court of Appeals ruled that the items were part
of the trust agreement entered into by and between Prudential Bank and
Litex. Since the agreement was not contrary to law, morals, public policy,
customs and good order, it was binding on the parties.
Moreover, the appellate court found that DBP was not a mortgagee in good
faith. It also upheld the finding of the trial court that DBP was a trustee ex
maleficio of Prudential Bank over the articles covered by the 'trust receipts.

DBP filed a motion for reconsideration but the appellate court denied it for
being pro forma. Hence, this petition.

Trust receipt transactions are governed by the provisions of PD 115 which

defines such a transaction as follows:

Section 4. What constitutes a trust receipt transaction. ' A trust

receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a
signed document called a 'trust receipt wherein the entrustee
binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in accordance with
the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or

procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That, in
the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether
in its original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or

(c) to load, unload, ship or tranship or otherwise deal with

them in a manner preliminary or necessary to their sale; or

2. In the case of instruments, (a) to sell or procure their sale

or exchange; or (b) to deliver them to a principal; or (c) to
effect the consummation of some transactions involving
delivery to a depository or register; or (d) to effect their
presentation, collection or renewal.
xxxxxxxxx

In a trust receipt transaction, the goods are released by the entruster (who
owns or holds absolute title or security interests over the said goods) to the
entrustee on the latter's execution and delivery to the entruster of a trust
receipt. The trust receipt evidences the absolute title or security interest of
the entruster over the goods. As a consequence of the release of the goods
and the execution of the trust receipt, a two-fold obligation is imposed on the
entrustee, namely: (1) to hold the designated goods, documents or
instruments in trust for the purpose of selling or otherwise disposing of them
and (2) to turn over to the entruster either the proceeds thereof to the extent
of the amount owing to the entruster or as appears in the trust receipt, or the
goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt. In the case of goods, they may also be
released for other purposes substantially equivalent to (a) their sale or the
procurement of their sale; or (b) their manufacture or processing with the
purpose of ultimate sale, in which case the entruster retains his title over the
said goods whether in their original or processed form until the entrustee
has complied fully with his obligation under the trust receipt; or (c) the
loading, unloading, shipment or transshipment or otherwise dealing with
them in a manner preliminary or necessary to their sale.[4] Thus, in a trust
receipt transaction, the release of the goods to the entrustee, on his
execution of a trust receipt, is essentially for the purpose of their sale or is
necessarily connected with their ultimate or subsequent sale.

Here, Litex was not engaged in the business of selling spinning machinery,
its accessories and spare parts but in manufacturing and producing textile
and various kinds of fabric. The articles were not released to Litex to be
sold. Nor was the transfer of possession intended to be a preliminary step
for the said goods to be ultimately or subsequently sold. Instead, the
contemporaneous and subsequent acts of both Litex and Prudential Bank
showed that the imported articles were released to Litex to be installed in its
textile mill and used in its business. DBP itself was aware of this. To support
its assertion that the contested articles were excluded from goods that could
be covered by a trust receipt, it contended:

First. That the chattels in controversy were procured by DBP's

mortgagor Lirag Textile Mills (LITEX') for the exclusive use of its
textile mills. They were not procured -

(a) to sell or otherwise procure their sale;

(b) to manufacture or process the goods with the
purpose of ultimate sale.[5] (emphasis supplied)

Hence, the transactions between Litex and Prudential Bank were allegedly
not trust receipt transactions within the meaning of PD 115. It follows that,
contrary to the decisions of the trial court and the appellate court, the
transactions were not governed by the Trust Receipts Law.

We disagree.

The various agreements between Prudential Bank and Litex commonly

denominated as trust receipts' were valid. As the Court of Appeals correctly

ruled, their provisions did not contravene the law, morals, good customs,
public order or public policy.

The agreements uniformly provided:

Received, upon the Trust hereinafter mentioned from the

PRUDENTIAL BANK (hereinafter referred to as BANK) the
following goods and merchandise, the property of said BANK
specified in the bill of lading as follows:

Amount
of Bill

Description
Security

of Marks
Nos.

& Vessel

and in consideration thereof, I/We hereby agree to hold said

goods in trust for the BANK and as its property with liberty to sell
the same for its account but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or
the proceeds thereof) either by way of conditional sale, pledge, or
otherwise.

x x x x x x x x x[6] (Emphasis supplied)

The articles were owned by Prudential Bank and they were only held by
Litex in trust. While it was allowed to sell the items, Litex had no authority to
dispose of them or any part thereof or their proceeds through conditional
sale, pledge or any other means.

Article 2085 (2) of the Civil Code requires that, in a contract of pledge or
mortgage, it is essential that the pledgor or mortgagor should be the
absolute owner of the thing pledged or mortgaged. Article 2085 (3) further
mandates that the person constituting the pledge or mortgage must have
the free disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose.

Litex had neither absolute ownership, free disposal nor the authority to
freely dispose of the articles. Litex could not have subjected them to a
chattel mortgage. Their inclusion in the mortgage was void[7] and had no
legal effect.[8] There being no valid mortgage, there could also be no valid
foreclosure or valid auction sale.[9] Thus, DBP could not be considered
either as a mortgagee or as a purchaser in good faith.[10]

No one can transfer a right to another greater than what he himself has.[11]
Nemo dat quod non habet. Hence, Litex could not transfer a right that it did
not have over the disputed items. Corollarily, DBP could not acquire a right
greater than what its predecessor-in-interest had. The spring cannot rise
higher than its source.[12] DBP merely stepped into the shoes of Litex as
trustee of the imported articles with an obligation to pay their value or to
return them on Prudential Bank's demand. By its failure to pay or return
them despite Prudential Bank's repeated demands and by selling them to
Lyon without Prudential Bank's knowledge and conformity, DBP became a
trustee ex maleficio.

On the matter of actual damages adjudged by the trial court and affirmed by
the Court of Appeals, DBP wants this Court to review the evidence
presented during the trial and to reverse the factual findings of the trial
court. This Court is, however, not a trier of facts and it is not its function to
analyze or weigh evidence anew.[13] The rule is that factual findings of the
trial court, when adopted and confirmed by the CA, are binding and
conclusive on this Court and generally will not be reviewed on appeal.[14]

While there are recognized exceptions to this rule, none of the established
exceptions finds application here.
With regard to the imposition of exemplary damages, the appellate court
agreed with the trial court that the requirements for the award thereof had
been sufficiently established. Prudential Bank's entitlement to compensatory
damages was likewise amply proven. It was also shown that DBP was
aware of Prudential Bank's claim as early as July, 1982. However, it ignored
the latter's demand, included the disputed articles in the mortgage
foreclosure and caused their sale in a public auction held on April 19, 1983
where it was declared as the highest bidder. Thereafter, in the series of
communications between them, DBP gave Prudential Bank the false
impression that its claim was still being evaluated. Without acting on
Prudential Bank's plea, DBP included the contested articles among the
properties it sold to Lyon in June, 1987. The trial court found that this chain
of events showed DBP's fraudulent attempt to prevent Prudential Bank from
asserting its rights. It smacked of bad faith, if not deceit. Thus, the award of
exemplary damages was in order. Due to the award of exemplary damages,
the grant of attorney's fees was proper.[15]

DBP's assertion that both the trial and appellate courts failed to address the
issue of prescription is of no moment. Its claim that, under Article 1146 (1) of
the Civil Code, Prudential Bank's cause of action had prescribed as it
should be reckoned from October 10, 1980, the day the mortgage was
registered, is not correct. The written extra-judicial demand by the creditor
interrupted the prescription of action.[16] Hence, the four-year prescriptive
period which DBP insists should be counted from the registration of the
mortgage was interrupted when Prudential Bank wrote the extra-judicial
demands for the turn over of the articles or their value. In particular, the last
demand letter sent by Prudential Bank was dated July 30, 1988 and this
was received by DBP the following day. Thus, contrary to DBP's claim,
Prudential Bank's right to enforce its action had not yet prescribed when it
filed the complaint on May 24, 1988.

WHEREFORE, the petition is hereby DENIED. The December 14, 1999

decision and June 8, 2000 resolution of the Court of Appeals in CA-G.R. CV
No. 45783 are AFFIRMED.

Costs against the petitioner.

SO ORDERED.

Rosario Textile Mills vs. Home Bankers Savings and Trust

Company, 462 SCRA 88 (2005)
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 137232

June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO,

petitioners,
vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the petition for review on certiorari assailing the
Decision1 of the Court of Appeals dated March 31, 1998 in CA-G.R. CV No.
48708 and its Resolution dated January 12, 1999.
The facts of the case as found by the Court of Appeals are:
"Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from
Home Bankers Savings & Trust Co. for an Omnibus Credit Line for P10
million. The bank approved RTMCs credit line but for only P8 million. The
bank notified RTMC of the grant of the said loan thru a letter dated March 2,
1989 which contains terms and conditions conformed by RTMC thru
Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement
in favor of the bank, in which he bound himself jointly and severally with
RTMC for the payment of all RTMCs indebtedness to the bank from 1989 to
1990. RTMC availed of the credit line by making numerous drawdowns,
each drawdown being covered by a separate promissory note and trust
receipt. RTMC, represented by Yujuico, executed in favor of the bank a total
of eleven (11) promissory notes.

Despite the lapse of the respective due dates under the promissory notes
and notwithstanding the banks demand letters, RTMC failed to pay its
loans. Hence, on January 22, 1993, the bank filed a complaint for sum of
money against RTMC and Yujuico before the Regional Trial Court, Br. 16,
Manila.
In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they
should be absolved from liability. They claimed that although the grant of the
credit line and the execution of the suretyship agreement are admitted, the
bank gave assurance that the suretyship agreement was merely a formality
under which Yujuico will not be personally liable. They argue that the
importation of raw materials under the credit line was with a grant of option
to them to turn-over to the bank the imported raw materials should these fail
to meet their manufacturing requirements. RTMC offered to make such turnover since the imported materials did not conform to the required
specifications. However, the bank refused to accept the same, until the
materials were destroyed by a fire which gutted down RTMCs premises.
For failure of the parties to amicably settle the case, trial on the merits
proceeded. After the trial, the Court a quo rendered a decision in favor of
the bank, the decretal part of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in
favor of plaintiff and against defendants who are ordered to pay jointly and
severally in favor of plaintiff, inclusive of stipulated 30% per annum interest
and penalty of 3% per month until fully paid, under the following promissory
notes:
90-1116 6-20-90 P737,088.25 9-18-90
(maturity)
90-1320 7-13-90 P650,000.00

10-1190

90-1334 7-17-90 P422,500.00

10-1590

90-1335 7-17-90 P422,500.00

10-1590

90-1347 7-18-90 P795,000.00 10-16-

90
90-1373 7-20-90 P715,900.00

10-1890

90-1397 7-27-90 P773,500.00

10-2090

90-1429 7-26-90 P425,750.00

10-2490

90-1540 8-7-90

P720,984.00 11-5-90

90-1569 8-9-90

P209,433.75 11-8-90

90-0922 5-28-90 P747,780.00 8-26-90

The counterclaims of defendants are hereby DISMISSED.
SO ORDERED." (OR, p. 323; Rollo, p. 73)."2
Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of
Appeals, contending that under the trust receipt contracts between the
parties, they merely held the goods described therein in trust for respondent
Home Bankers Savings and Trust Company (the bank) which owns the
same. Since the ownership of the goods remains with the bank, then it
should bear the loss. With the destruction of the goods by fire, petitioners
should have been relieved of any obligation to pay.
The Court of Appeals, however, affirmed the trial courts judgment, holding
that the bank is merely the holder of the security for its advance payments
to petitioners; and that the goods they purchased, through the credit line
extended by the bank, belong to them and hold said goods at their own risk.
Petitioners then filed a motion for reconsideration but this was denied by the
Appellate Court in its Resolution dated January 12, 1999.
Hence, this petition for review on certiorari ascribing to the Court of Appeals
the following errors:
"I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

THAT THE ACTS OF THE PETITIONERS-DEFENDANTS WERE
TANTAMOUNT TO A VALID AND EFFECTIVE TENDER OF THE GOODS
TO THE RESPONDENT-PLAINTIFF.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING
THE DOCTRINE OF RES PERIT DOMINO IN THE CASE AT BAR
CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE
DEFECTIVE RAW MATERIALS BY THE PETITIONERS-DEFENDANTS
TO THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION
IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS
WITH THE RESPONDENT-PLAINTIFF.
III
THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF
THE CIVIL CODE AND THE LONG-STANDING JURISPRUDENCE THAT
INTENTION OF THE PARTIES IS PRIMORDIAL IN ITS FAILURE TO
UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY
AGREEMENT WAS A MERE FORMALITY AND DID NOT INTEND TO
HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.
IV
ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS
VALID AND EFFECTIVE, THE HONORABLE COURT OF APPEALS
VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT
LIABLE UNLESS THE DEBTOR IS HIMSELF LIABLE.
V
THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF
TRUST RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE
RESPONDENT."
The above assigned errors boil down to the following issues: (1) whether the
Court of Appeals erred in holding that petitioners are not relieved of their
obligation to pay their loan after they tried to tender the goods to the bank

which refused to accept the same, and which goods were subsequently lost
in a fire; (2) whether the Court of Appeals erred when it ruled that petitioners
are solidarily liable for the payment of their obligations to the bank; and (3)
whether the Court of Appeals violated the Trust Receipts Law.
On the first issue, petitioners theorize that when petitioner RTMC imported
the raw materials needed for its manufacture, using the credit line, it was
merely acting on behalf of the bank, the true owner of the goods by virtue of
the trust receipts. Hence, under the doctrine of res perit domino, the bank
took the risk of the loss of said raw materials. RTMCs role in the transaction
was that of end user of the raw materials and when it did not accept those
materials as they did not meet the manufacturing requirements, RTMC
made a valid and effective tender of the goods to the bank. Since the bank
refused to accept the raw materials, RTMC stored them in its warehouse.
When the warehouse and its contents were gutted by fire, petitioners
obligation to the bank was accordingly extinguished.
Petitioners stance, however, conveniently ignores the true nature of its
transaction with the bank. We recall that RTMC filed with the bank an
application for a credit line in the amount of P10 million, but only P8 million
was approved. RTMC then made withdrawals from this credit line and
issued several promissory notes in favor of the bank. In banking and
commerce, a credit line is "that amount of money or merchandise which a
banker, merchant, or supplier agrees to supply to a person on credit and
generally agreed to in advance."3 It is the fixed limit of credit granted by a
bank, retailer, or credit card issuer to a customer, to the full extent of which
the latter may avail himself of his dealings with the former but which he must
not exceed and is usually intended to cover a series of transactions in which
case, when the customers line of credit is nearly exhausted, he is expected
to reduce his indebtedness by payments before making any further
drawings.4
It is thus clear that the principal transaction between petitioner RTMC and
the bank is a contract of loan. RTMC used the proceeds of this loan to
purchase raw materials from a supplier abroad. In order to secure the
payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this
security arrangement. Simply stated, the trust receipts were mere securities.

In Samo vs. People,5 we described a trust receipt as "a security transaction

intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased."6
In Vintola vs. Insular Bank of Asia and America,7 we elucidated further that
"a trust receipt, therefore, is a security agreement, pursuant to which a bank
acquires a security interest in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation."8
Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a "security
interest" as follows:
"(h) Security Interest means a property interest in goods, documents, or
instruments to secure performance of some obligation of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only."
Petitioners insistence that the ownership of the raw materials remained with
the bank is untenable. In Sia vs. People,9 Abad vs. Court of Appeals,10 and
PNB vs. Pineda,11 we held that:
"If under the trust receipt, the bank is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the
loan feature thereof..."12
Thus, petitioners cannot be relieved of their obligation to pay their loan in
favor of the bank.
Anent the second issue, petitioner Yujuico contends that the suretyship
agreement he signed does not bind him, the same being a mere formality.
We reject petitioner Yujuicos contentions for two reasons.
First, there is no record to support his allegation that the surety agreement
is a "mere formality;" and

Second, as correctly held by the Court of Appeals, the Suretyship

Agreement signed by petitioner Yujuico binds him. The terms clearly show
that he agreed to pay the bank jointly and severally with RTMC. The parole
evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in
point, thus:
"SEC. 9. Evidence of written agreements. When the terms of an
agreement have been reduced in writing, it is considered as containing all
the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of
the written agreement.
However, a party may present evidence to modify, explain, or add to the
terms of the written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written
agreement;
(b) The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their
successors in interest after the execution of the written agreement.
x x x."
Under this Rule, the terms of a contract are rendered conclusive upon the
parties and evidence aliunde is not admissible to vary or contradict a
complete and enforceable agreement embodied in a document.13 We have
carefully examined the Suretyship Agreement signed by Yujuico and found
no ambiguity therein. Documents must be taken as explaining all the terms
of the agreement between the parties when there appears to be no
ambiguity in the language of said documents nor any failure to express the
true intent and agreement of the parties.14
As to the third and final issue At the risk of being repetitious, we stress
that the contract between the parties is a loan. What respondent bank
sought to collect as creditor was the loan it granted to petitioners.

Petitioners recourse is to sue their supplier, if indeed the materials were

defective.
WHEREFORE, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are
AFFIRMED IN TOTO. Costs against petitioners.
SO ORDERED.

Vintola vs. IBAA, 150 SCRA 578 (1987)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 73271 May 29, 1987
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA, defendantsappellants,
vs.
INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellee.

MELENCIO-HERRERA, J.:
This case was appealed to the Intermediate Appellate Court which,
however, certified the same to this Court, the issue involved being purely
legal.
The facts are not disputed.
On August 20, 1975 the spouses Tirso and Loreta Vintola (the VINTOLAS,
for short), doing business under the name and style "Dax Kin International,"
engaged in the manufacture of raw sea shells into finished products, applied
for and were granted a domestic letter of credit by the Insular Bank of Asia
and America (IBAA), Cebu City. 1 in the amount of P40,000.00. The Letter
of Credit authorized the bank to negotiate for their account drafts drawn by
their supplier, one Stalin Tan, on Dax Kin International for the purchase of
puka and olive seashells. In consideration thereof, the VINTOLAS, jointly
and severally, agreed to pay the bank "at maturity, in Philippine currency,
the equivalent, of the aforementioned amount or such portion thereof as
may be drawn or paid, upon the faith of the said credit together with the
usual charges."
On the same day, August 20, 1975, having received from Stalin Tan the
puka and olive shells worth P40,000.00, the VINTOLAS executed a Trust
Receipt agreement with IBAA, Cebu City. Under that Agreement, the

VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's
property with liberty to sell the same for its account, " and "in case of sale"
to turn over the proceeds as soon as received to (IBAA) the due date
indicated in the document was October 19, 1975.
Having defaulted on their obligation, IBAA demanded payment from the
VINTOLAS in a letter dated January 1, 1976. The VINTOLAS, who were
unable to dispose of the shells, responded by offering to return the goods.
IBAA refused to accept the merchandise, and due to the continued refusal
of the VINTOLAS to make good their undertaking, IBAA charged them with
Estafa for having misappropriated, misapplied and converted for their own
personal use and benefit the aforesaid goods. During the trial of the criminal
case the VINTOLAS turned over the seashells to the custody of the Trial
Court.
On April 12, 1982, the then Court of First Instance of Cebu, Branch VII,
acquitted the VINTOLAS of the crime charged, after finding that the element
of misappropriation or conversion was inexistent. Concluded the Court:
Finally, it should be mentioned that under the trust receipt, in the
event of default and/or non-fulfillment on the part of the accused
of their undertaking, the bank is entitled to take possession of the
goods or to recover its equivalent value together with the usual
charges. In either case, the remedy of the Bank is civil and not
criminal in nature. ... 2
Shortly thereafter, IBAA commenced the present civil action to recover the
value of the goods before the Regional Trial Court of Cebu, Branch XVI.
Holding that the complaint was barred by the judgment of acquittal in the
criminal case, said Court dismissed the complaint. However, on IBAA's
motion, the Court granted reconsideration and:
1. Order(ed)defendants jointly and severally to pay the plaintiff the
sum of Seventy Two Thousand Nine Hundred Eighty Two and
27/100 (P72,982.27), Philippine Currency, plus interest of 14%
per annum and service charge of one (1%) per cent per annum
computed from judicial demand and until the obligation is fully
paid;

2. Ordered defendants jointly and severally to pay attorney's fees

to the plaintiff in the sum of Four Thousand (P4,000.00) pesos,
Philippine Currency, plus costs of the suit. 3
The VINTOLAS rest their present appeal on the principal allegation that
their acquittal in the Estafa case bars IBAA's filing of the civil action because
IBAA had not reserved in the criminal case its right to enforce separately
their civil liability. They maintain that by intervening actively in the
prosecution of the criminal case through a private prosecutor, IBAA had
chosen to file the civil action impliedly with the criminal action, pursuant to
Section 1, Rule 111 of the 1985 Rules on Criminal Procedure, reading:
Section 1. Institution of criminal and civil action. When a
criminal action is instituted, the civil action for the recovery of civil
liability arising from the offense charged is impliedly instituted with
the criminal action, unless the offended party expressly waives
the civil action or reserves his right to institute it separately. ...
and that since the judgment in the criminal case had made a declaration
that the facts from which the civil action might arise did not exist, the filing of
the civil action arising from the offense is now barred, as provided by
Section 3-b of Rule 111 of the same Rules providing:
(b) Extinction of the penal action does not carry with it extinction
of the civil, unless the extinction proceeds from a declaration in a
final judgment that the fact from which the civil might arise did not
exist. In other cases, the person entitled to the civil action may
institute it in the jurisdiction in the manner provided by law against
the person who may be liable for restitution of the thing and
reparation or indemnity for the damage suffered.
Further, the VINTOLAS take the position that their obligation to IBAA has
been extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have relinguished
possession thereof to the IBAA, as owner of the goods, by depositing them
with the Court.
The foregoing submission overlooks the nature and mercantile usage of the
transaction involved. A letter of credit-trust receipt arrangement is endowed
with its own distinctive features and characteristics. Under that set-up, a

bank extends a loan covered by the Letter of Credit, with the trust receipt as
a security for the loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature which is in
the covering trust receipt.
Thus, Section 4 of P.D. No. 115 defines a trust receipt transaction as:
... any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or
holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instrument thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any one of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale, ...
A trust receipt, therefore, is a security agreement, pursuant to which a bank
acquires a "security interest" in the goods. "It secures an indebtedness and
there can be no such thing as security interest that secures no obligation." 4
As defined in our laws:
(h) "Security Interest"means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only. 5

As elucidated in Samo vs. People 6 "a trust receipt is considered as a

security transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral of the merchandise imported or purchased."
Contrary to the allegation of the VINTOLAS, IBAA did not become the real
owner of the goods. It was merely the holder of a security title for the
advances it had made to the VINTOLAS The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold
it at their own risk. The trust receipt arrangement did not convert the IBAA
into an investor; the latter remained a lender and creditor.
... for the bank has previously extended a loan which the L/C
represents to the importer, and by that loan, the importer should
be the real owner of the goods. If under the trust receipt, the bank
is made to appear as the owner, it was but an artificial expedient,
more of a legal fiction than fact, for if it were so, it could dispose of
the goods in any manner it wants, which it cannot do, just to give
consistency with the purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof. ... 7
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely
relieved of their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it had made
under the Letter of Credit. In so arguing, the VINTOLAS conveniently close
their eyes to their application for a Letter of Credit wherein they expressly
obligated themselves in these terms:
IN CONSIDERATION THEREOF, I/we promise and agree to pay
you at maturity in Philippine Currency the equivalent of the above
amount or such portion thereof as may be drawn or paid upon the
faith of said credit together with the usual charges. ... (Exhibit "A")

They further agreed that their marginal deposit of P8,000.00, later increased
to P11,000.00
be applied, without further proceedings or formalities to pay or
reduce our obligation under this letter of credit or its
corresponding Trust Receipt. (Emphasis supplied) 8
The foregoing premises considered, it follows that the acquittal of the
VINTOLAS in the Estafa case is no bar to the institution of a civil action for
collection. It is inaccurate for the VINTOLAS to claim that the judgment in
the estafa case had declared that the facts from which the civil action might
arise, did not exist, for, it will be recalled that the decision of acquittal
expressly declared that "the remedy of the Bank is civil and not criminal in
nature." This amounts to a reservation of the civil action in IBAA's favor, for
the Court would not have dwelt on a civil liability that it had intended to
extinguish by the same decision. 9 The VINTOLAS are liable ex contractu
for breach of the Letter of Credit Trust Receipt, whether they did or they
did not "misappropriate, misapply or convert" the merchandise as charged
in the criminal case. 10 Their civil liability does not arise ex delicto, the
action for the recovery of which would have been deemed instituted with the
criminal-action (unless waived or reserved) and where acquittal based on a
judicial declaration that the criminal acts charged do not exist would have
extinguished the civil action. 11 Rather, the civil suit instituted by IBAA is
based ex contractu and as such is distinct and independent from any
criminal proceedings and may proceed regardless of the result of the latter.
Under the situational circumstances of the parties, they are governed by
Article 31 of the Civil Code, explicitly providing:
Art. 31. When the civil action is based on an obligation not arising
from the act or omission complained of as a felony, such civil
action may proceed independently of the criminal proceedings
and regardless of the result of the latter.
WHEREFORE, finding no reversible error in the judgment appealed from,
the same is hereby AFFIRMED. No costs.
SO ORDERED.

People vs. Nitafan, 207 SCRA 726 (1992)

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 81559-60 April 6, 1992
PEOPLE OF THE PHILIPPINES, (public petitioner) and ALLIED BANKING
CORPORATION
(private
petitioner),
vs.
HON. JUDGE DAVID G. NITAFAN (public respondent) and BETTY SIA
ANG (private respondent).

GUTIERREZ, JR., J.:

This petition for certiorari involves an issue that has been raised before this
Court several times in the past. The petitioner, in effect, is asking for a reexamination of our decisions on the issue of whether or not an entrustee in
a trust receipt agreement who fails to deliver the proceeds of the sale or to
return the goods if not sold to the entruster-bank is liable for the crime of
estafa.
Petitioner Allied Banking Corporation charged Betty Sia Ang with estafa in
Criminal Case No. 87-53501 in an information which alleged:
That on or about July 18, 1980, in the City of Manila, Philippines,
the said accused, being then the proprietress of Eckart
Enterprises, a business entity located at 756 Norberto Amoranto
Avenue, Quezon City, did then and there wilfully, unlawfully and
feloniously defraud the Allied Banking Corporation, a banking
institution, represented by its Account Officer, Raymund S. Li, in
the following manner, to wit: the said accused received in trust
from the aforesaid bank Gordon Plastics, plastic sheeting and
Hook Chromed, in the total amount of P398,000.00, specified in a
trust receipt and covered by Domestic Letter of Credit No. DLC-

002-801254, under the express obligation on the part of said

accused to sell the same and account for the proceeds of the sale
thereof, if sold, or to return said merchandise, if not sold, on or
before October 16, 1980, or upon demand, but the said accused,
once in possession of the said articles, far from complying with
the aforesaid obligation, notwithstanding repeated demands made
upon her to that effect, paid only the amount of P283,115.78,
thereby leaving unaccounted for the amount of P114,884.22
which, once in her possession, with intent to defraud, she
misappropriated, misapplied and converted to her own personal
use and benefit, to the damage and prejudice of said Allied
Banking Corporation in the aforesaid sum of P114,884.22,
Philippine Currency. (Rollo, pp. 13-14)
The accused filed a motion to quash the information on the ground that the
facts charged do not constitute an offense.
On January 7, 1988, the respondent judge granted the motion to quash. The
order was anchored on the premise that a trust receipt transaction is an
evidence of a loan being secured so that there is, as between the parties to
it, a creditor-debtor relationship. The court ruled that the penal clause of
Presidential Decree No. 15 on the Trust Receipts Law is inoperative
because it does not actually punish an offense mala prohibita. The law only
refers to the relevant estafa provision in the Revised Penal Code. The Court
relied on the judicial pronouncements in People v. Cuevo, 104 SCRA 312
[1981] where, for lack of the required number of votes, this Court upheld the
dismissal of a charge for estafa for a violation of a trust receipt agreement;
and in Sia v. People, 121 SCRA 655 [1983] where we held that the violation
merely gives rise to a civil obligation. At the time the order to quash was
issued or on January 7, 1988, these two decisions were the only most
recent ones. Hence, this petition.
The private respondent adopted practically the same stance of the lower
court. She likewise asserts that P.D. 115 is unconstitutional as it violates the
constitutional prohibition against imprisonment for non-payment of a debt.
She argues that where no malice exists in a breach of a purely commercial
undertaking, P.D. 115 imputes it.
This Court notes that the petitioner bank brought a similar case before this
Court in G.R. No. 82495, entitled Allied Banking Corporation v. Hon.

Secretary Sedfrey Ordoez and Alfredo Ching which we decided on

December 10, 1990 (192 SCRA 246). In that case, the petitioner additionally
questioned, and we accordingly reversed, the pronouncement of the
Secretary of Justice limiting the application of the penal provision of P.D.
115 only to goods intended to be sold to the exclusion of those still to be
manufactured.
As in G.R. No. 82495, we resolve the instant petition in the light of the
Court's ruling in Lee v. Rodil, 175 SCRA 100 [1989] and Sia v. Court of
Appeals, 166 SCRA 263 [1988]. We have held in the latter cases that acts
involving the violation of trust receipt agreements occurring after 29 January
1973 (date of enactment of P.D. 115) would make the accused criminally
liable for estafa under paragraph 1 (b), Article 315 of the Revised Penal
Code (RPC) pursuant to the explicit provision in Section 13 of P.D. 115.
The relevant penal provision of P.D. 115 provides:
Sec. 13 of P.D. No. 115 provides:
. . . Penalty clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
Hundred and Fifteen, paragraph one (b) of Act Numbered Three
Thousand Eight Hundred and Fifteen, as amended, otherwise
known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials
or persons therein responsible for the offense, without prejudice
to the civil liabilities arising from the criminal offense.
Section 1 (b), Article 315 of the RPC under which the violation is made to
fall, states:
. . . Swindling (estafa). Any person who shall defraud another
by any of the means mentioned herein below . . . :

xxx xxx xxx

b. By misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such
money, good, or other property.
The factual circumstances in the present case show that the alleged
violation was committed sometime in 1980 or during the effectivity of P.D.
115. The failure, therefore, to account for the P114,884.22 balance is what
makes the accused-respondent criminally liable for estafa. The Court
reiterates its definitive ruling that, in the Cuevo and Sia (1983) cases relied
upon by the accused, P.D. 115 was not applied because the questioned
acts were committed before its effectivity. (Lee v. Rodil, supra, p. 108) At
the time those cases were decided, the failure to comply with the obligations
under the trust receipt was susceptible to two interpretations. The Court in
Sia adopted the view that a violation gives rise only to a civil liability as the
more feasible view "before the promulgation of P.D. 115," notwithstanding
prior decisions where we ruled that a breach also gives rise to a liability for
estafa. (People v. Yu Chai Ho, 53 Phil. 874 [1929]; Samo v. People, 115
Phil. 346 [1962]; Philippine National Bank v. Arrozal, 103 Phil. 213 [1958];
Philippine National Bank v. Viuda e Hijos de Angel Jose, 63 Phil. 814
[1936]).
Contrary to the reasoning of the respondent court and the accused, a trust
receipt arrangement does not involve a simple loan transaction between a
creditor and debtor-importer. Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself.
(Vintola v. Insular Bank of Asia and America, 151 SCRA 578 [1987]) That
second feature is what provides the much needed financial assistance to
our traders in the importation or purchase of goods or merchandise through
the use of those goods or merchandise as collateral for the advancements
made by a bank. (Samo v. People, supra). The title of the bank to the
security is the one sought to be protected and not the loan which is a
separate and distinct agreement.

The Trust Receipts Law punishes the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner or not. The law does not seek to enforce
payment of the loan. Thus, there can be no violation of a right against
imprisonment for non-payment of a debt.
Trust receipts are indispensable contracts in international and domestic
business transactions. The prevalent use of trust receipts, the danger of
their misuse and/or misappropriation of the goods or proceeds realized from
the sale of goods, documents or instruments held in trust for entrusterbanks, and the need for regulation of trust receipt transactions to safeguard
the rights and enforce the obligations of the parties involved are the main
thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D.
115, like Batas Pambansa Blg. 22, punishes the act "not as an offense
against property, but as an offense against public order. . . ." The misuse of
trust receipts therefore should be deterred to prevent any possible havoc in
trade circles and the banking community (citing Lozano v. Martinez, 146
SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public
interest that the law now specifically designates a breach of a trust receipt
agreement to be an act that "shall" make one liable for estafa.
The offense is punished as a malum prohibitum regardless of the existence
of intent or malice. A mere failure to deliver the proceeds of the sale or the
goods if not sold, constitutes a criminal offense that causes prejudice not
only to another, but more to the public interest.
We are continually re-evaluating the opposite view which insists that the
violation of a trust receipt agreement should result only in a civil action for
collection. The respondent contends that there is no malice involved. She
cites the dissent of the late Chief Justice Claudio Teehankee in Ong v.
Court of Appeals, (124 SCRA 578 [1983]) to wit:
The old capitalist orientation of putting importers in jail for
supposed estafa or swindling for non-payment of the price of the
imported goods released to them under trust receipts (a purely
commercial transaction) under the fiction of the trust receipt
device, should no longer be permitted in this day and age.
As earlier stated, however, the law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of the bank.

The Court reiterates that the enactment of P.D. 115 is a valid exercise of the
police power of the State and is, thus, constitutional. (Lee v. Rodil, supra;
Lozano v. Martinez, supra) The arguments of the respondent are
appropriate for a repeal or modification of the law and should be directed to
Congress. But until the law is repealed, we are constrained to apply it.
WHEREFORE, the petition is hereby GRANTED. The Order of the
respondent Regional Trial Court of Manila, Branch 52 dated January 7,
1988 is SET ASIDE. Let this case be remanded to the said court for
disposition in accordance with this decision.
SO ORDERED.

Torres vs. Limjap, 56 Phil. 141 (1931)

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. 34385

September 21, 1931

ALEJANDRA
TORRES,
ET
AL.,
plaintiff-appellees,
vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the
deceased Jose B. Henson, defendant-appellant.
x---------------------------------------------------------x
G.R. No. 34386

September 21, 1931

SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,

vs.
FRANCISCO LIMJAP, Special Administration of the estate of the
deceased Jose B. Henson, defendant-appellant.
Duran,
Lim
and
Tuason
Guevara, Francisco and Recto for appellees.

for

appellant.

JOHNSON, J.:
These two actions were commenced in the Court of First Instance of Manila
on April 16, 1930, for the purpose of securing from the defendant the
possession of two drug stores located in the City of Manila, covered by two
chattel mortgages executed by the deceased Jose B. Henson in favor of the
plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime,
executed in their favor a chattel mortgage (Exhibit A) on his drug store at
Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan
of P7,000, although it was made to appear in the instrument that the loan
was for P20,000.

In the second case the plaintiffs alleged that they were the heirs of the late
Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in
favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his
three drug stores known as Henson's Pharmacy, Farmacia Henson and
Botica Hensonina, to secure a loan of P50,000, which was later reduced to
P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta,
remained as the only security by agreement of the parties.
In both cases the plaintiffs alleged that the defendant violated the terms of
the mortgage and that, in consequence thereof they became entitled to the
possession of the chattels and to foreclose their mortgages thereon. Upon
the petition of the plaintiffs and after the filing of the necessary bonds, the
court issued in each case an order directing the sheriff of the City of Manila
to take immediate possession of said drug stores.
The defendant filed practically the same answer to both complaints. He
denied generally and specifically the plaintiffs' allegations, and set up the
following special defenses:
(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A,
in G.R. No. 34286) are null and void for lack of sufficient particularity in the
description of the property mortgaged; and
(2) That the chattels which the plaintiffs sought to recover were not the
same property described in the mortgage.
The defendant also filed a counterclaim for damages in the sum of P20,000
in the first case and P100,000 in the second case.
Upon the issue thus raised by the pleadings, the two causes were tried
together by agreement of the parties. After hearing the evidence adduced
during the trial and on July 17, 1930, the Honorable Mariano Albert, judge,
in a very carefully prepared opinion, arrived at the conclusion (a) that the
defendant defaulted in the payment of interest on the loans secured by the
mortgages, in violation of the terms thereof; (b) that by reason of said failure
said mortgages became due, and (c) that the plaintiffs, as mortgagees, were
entitled to the possession of the drug stores Farmacia Henson at Nos. 101103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta.
Accordingly, a judgment was rendered in favor of the plaintiffs and against
the defendant, confirming the attachment of said drug stores by the sheriff

of the City of Manila and the delivery thereof to the plaintiffs. The dispositive
part of the decision reads as follows:
En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado
en todas sus partes los ordenes de fechas 16 y 17 de abril de presente
ano, dictadas en las causas Nos. 37096 y 37097, respectivamente, y
declara definitiva la entrega hecha a los demandantes por el Sheriff de
Manila de las boticas en cuestion. Se condena en costas al
demandado en ambas causas.
From the judgment the defendant appealed, and now makes the following
assignments of error:
I. The lower court erred in failing to make a finding on the question of
the sufficiency of the description of the chattels mortgaged and in
failing to hold that the chattel mortgages were null and void for lack of
particularity in the description of the chattels mortgaged.
II. The lower court erred in refusing to allow the defendant to introduce
evidence tending to show that the stock of merchandise found in the
two drug stores was not in existence or owned by the mortgagor at the
time of the execution of the mortgages in question.
III. The lower court erred in holding that the administrator of the
deceased is now estopped from contesting the validity of the
mortgages in question.
IV. The lower court erred in failing to make a finding on the
counterclaims of the defendant.
With reference to the first assignment of error, we deem it unnecessary to
discuss the question therein raised, inasmuch as according to our view on
the question of estoppel, as we shall hereinafter set forth in our discussion
of the third assignment of error, the defendant is estopped from questioning
the validity of these chattel mortgages.
In his second assignment of error the appellant attacks the validity of the
stipulation in said mortgages authorizing the mortgagor to sell the goods
covered thereby and to replace them with other goods thereafter acquired.
He insists that a stipulation authorizing the disposal and substitution of the
chattels mortgaged does not operate to extend the mortgage to after-

acquired property, and that such stipulation is in contravention of the

express provision of the last paragraph of section 7 Act No. 1508, which
reads as follows:
A chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as the
property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.
In order to give a correct construction to the above-quoted provision of our
Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must
first be ascertained. When said Act was placed on our statute books by the
United States Philippine Commission on July 2, 1906, the primary aim of
that law-making body was undoubtedly to promote business and trade in
these Islands and to give impetus to the economic development of the
country. Bearing this in mind, it could not have been the intention of the
Philippine Commission to apply the provision of section 7 above quoted to
stores open to the public for retail business, where the goods are constantly
sold and substituted with new stock, such as drug stores, grocery stores,
dry-goods stores, etc. If said provision were intended to apply to this class
of business, it would be practically impossible to constitute a mortgage on
such stores without closing them, contrary to the very spirit about a
handicap to trade and business, would restrain the circulation of capital, and
would defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.
In the interpretation and construction of a statute the intent of the law-maker
should always be ascertained and given effect, and courts will not follow the
letter of a statute when it leads away from the true intent and purpose of the
Legislature and to conclusions inconsistent with the spirit of the Act. On this
subject, Sutherland, the foremost authority on statutory construction, says:
The Intent of Statute is the Law. If a statute is valid it is to have
effect according to the purpose and intent of the lawmaker. The intent
is the vital part, the essence of the law, and the primary rule of
construction is to ascertain and give effect to that intent. The intention
of the legislature in enacting a law is the law itself, and must be
enforced when ascertained, although it may not be consistent with the
strict letter of the statute. Courts will not follow the letter of a statute

when it leads away from the true intent and purpose of the legislature
and to conclusions inconsistent with the general purpose of the act.
Intent is the spirit which gives life to a legislative enactment. In
construing statutes the proper course is to start out and follow the true
intent of the legislature and to adopt that sense which harmonizes best
with the content and promotes in the fullest manner the apparent policy
and objects of the legislature. (Vol. II Sutherland, Statutory
Construction, pp. 693-695.)
A stipulation in the mortgage, extending its scope and effect to afteracquired property, is valid and binding
. . . where the after-acquired property is in renewal of, or in substitution
for, goods on hand when the mortgage was executed, or is purchased
with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.)
Cobbey, a well-known authority on Chattel Mortgages, recognizes the
validity of stipulations relating to after-acquired and substituted chattels. His
views are based on the decisions of the supreme courts of several states of
the Union. He says: "A mortgage may, by express stipulations, be drawn to
cover goods put in stock in place of others sold out from time to time. A
mortgage may be made to include future acquisitions of goods to be added
to the original stock mortgaged, but the mortgage must expressly provide
that such future acquisitions shall be held as included in the mortgage. ...
Where a mortgage covering the stock in trade, furniture, and fixtures in the
mortgagor's store provides that "all goods, stock in trade, furniture, and
fixtures hereafter purchased by the mortgagor shall be included in and
covered by the mortgage," the mortgage covers all after-acquired property
of the classes mentioned, and, upon foreclosure, such property may be
taken and sold by the mortgagee the same as the property in possession of
the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on
Chattel Mortgages, sec. 361, pp. 474, 475.)
In harmony with the foregoing, we are of the opinion (a) that the provision of
the last paragraph of section 7 of Act No. 1508 is not applicable to drug
stores, bazaars and all other stores in the nature of a revolving and floating
business; (b) that the stipulation in the chattel mortgages in question,
extending their effect to after-acquired property, is valid and binding; and (c)
that the lower court committed no error in not permitting the defendant-

appellant to introduce evidence tending to show that the goods seized by

the sheriff were in the nature of after-acquired property.
With reference to the third assignment of error, we agree with the lower
court that, from the facts of record, the defendant-appellant is estopped from
contenting the validity of the mortgages in question. This feature of the case
has been very ably and fully discussed by the lower court in its decision,
and said discussion is made, by reference, a part of this opinion.
As to the fourth assignment of error regarding the counterclaims of the
defendant-appellant, it may be said that in view of the conclusions reached
by the lower court, which are sustained by this court, the lower court
committed no error in not making any express finding as to said
counterclaims. As a matter of form, however, the counter-claims should
have been dismissed, but as the trial court decided both cases in favor of
the plaintiffs and confirmed and ratified the orders directing the sheriff to
take possession of the chattels on behalf of the plaintiffs, there was, in
effect, a dismissal of the defendant's counterclaims.
For all of the foregoing, we are of the opinion and so hold that the judgment
appealed from is in accordance with the facts and the law, and the same
should be and is hereby affirmed, with costs. So ordered.
Avancea, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real,
and Imperial, JJ., concur.

People's Bank and Trust Co. vs. Dahican Lumber Company, 20

SCRA 84 (1967)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC
CO.
OF
MANILA,
plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER
CORPORATION and CONNELL BROS. CO. (PHIL.), defendantsappellants.
Angel
S.
Gamboa
for
Laurel Law Offices for plaintiffs-appellants.

defendants-appellants.

DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West
Virginia corporation licensed to do business in the Philippines hereinafter
referred to as ATLANTIC sold and assigned all its rights in the Dahican
Lumber concession to Dahican Lumber Company hereinafter referred to
as DALCO for the total sum of $500,000.00, of which only the amount of
$50,000.00 was paid. Thereafter, to develop the concession, DALCO
obtained various loans from the People's Bank & Trust Company
hereinafter referred to as the BANK amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced
by five promissory notes of $50,000.00 each, maturing on different dates,
executed by both DALCO and the Dahican America Lumber Corporation, a
foreign corporation and a stockholder of DALCO, hereinafter referred to
as DAMCO, all payable to the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950
DALCO executed in favor of the BANK the latter acting for itself and as

trustee for the Export-Import Bank of Washington D.C. a deed of

mortgage covering five parcels of land situated in the province of Camarines
Norte together with all the buildings and other improvements existing
thereon and all the personal properties of the mortgagor located in its place
of business in the municipalities of Mambulao and Capalonga, Camarines
Norte (Exhibit D). On the same date, DALCO executed a second mortgage
on the same properties in favor of ATLANTIC to secure payment of the
unpaid balance of the sale price of the lumber concession amounting to the
sum of $450,000.00 (Exhibit G). Both deeds contained the following
provision extending the mortgage lien to properties to be subsequently
acquired referred to hereafter as "after acquired properties" by the
mortgagor:
All property of every nature and description taken in exchange or
replacement, and all buildings, machinery, fixtures, tools equipment
and other property which the Mortgagor may hereafter acquire,
construct, install, attach, or use in, to, upon, or in connection with the
premises, shall immediately be and become subject to the lien of this
mortgage in the same manner and to the same extent as if now
included therein, and the Mortgagor shall from time to time during the
existence of this mortgage furnish the Mortgagee with an accurate
inventory of such substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of
Camarines Norte. In addition thereto DALCO and DAMCO pledged to the
BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to
secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon
its maturity, the BANK paid the same to the Export-Import Bank of
Washington D.C., and the latter assigned to the former its credit and the first
mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO
up to April 1, 1953 to pay the overdue promissory note.
After July 13, 1950 the date of execution of the mortgages mentioned
above DALCO purchased various machineries, equipment, spare parts
and supplies in addition to, or in replacement of some of those already
owned and used by it on the date aforesaid. Pursuant to the provision of the
mortgage deeds quoted theretofore regarding "after acquired properties,"
the BANK requested DALCO to submit complete lists of said properties but

the latter failed to do so. In connection with these purchases, there

appeared in the books of DALCO as due to Connell Bros. Company
(Philippines) a domestic corporation who was acting as the general
purchasing agent of DALCO thereinafter called CONNELL the sum of
P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special
meeting called for the purpose, passed a resolution agreeing to rescind the
alleged sales of equipment, spare parts and supplies by CONNELL and
DAMCO to it. Thereafter, the corresponding agreements of rescission of
sale were executed between DALCO and DAMCO, on the one hand and
between DALCO and CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC,
demanded that said agreements be cancelled but CONNELL and DAMCO
refused to do so. As a result, on February 12, 1953; ATLANTIC and the
BANK, commenced foreclosure proceedings in the Court of First Instance of
Camarines Norte against DALCO and DAMCO. On the same date they filed
an ex-parte application for the appointment of a Receiver and/or for the
issuance of a writ of preliminary injunction to restrain DALCO from removing
its properties. The court granted both remedies and appointed George H.
Evans as Receiver. Upon defendants' motion, however, the court, in its
order of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material
allegations of the complaint and alleging several affirmative defenses and a
counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention
alleging that it was the owner and possessor of some of the equipments,
spare parts and supplies which DALCO had acquired subsequent to the
execution of the mortgages sought to be foreclosed and which plaintiffs
claimed were covered by the lien. In its order of March 18,1953 the Court
granted the motion, as well as plaintiffs' motion to set aside the order
discharging the Receiver. Consequently, Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment
of the complaint, and asserting affirmative defenses and a counterclaim.

Upon motion of the parties the Court, on September 30, 1953, issued an
order transferring the venue of the action to the Court of First Instance of
Manila where it was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the
sale of all the machineries, equipment and supplies of DALCO, and the
same were subsequently sold for a total consideration of P175,000.00 which
was deposited in court pending final determination of the action. By a similar
agreement one-half (P87,500.00) of this amount was considered as
representing the proceeds obtained from the sale of the "undebated
properties" (those not claimed by DAMCO and CONNELL), and the other
half as representing those obtained from the sale of the "after acquired
properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum
of P200,000,00 with 7% interest per annum from July 13, 1950, Plus
another sum of P100,000.00 with 5% interest per annum from July 13,
1950; plus 10% on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of
P900,000.00 with 4% interest per annum from July 3, 1950, plus 10%
on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum
of P425,860.55, and to pay unto Dahican American Lumber Co. the
sum of P2,151,678.24 both with legal interest from the date of the filing
of the respective answers of those parties, 10% of the principals as
attorney's fees;
4. Orders that of the sum realized from the sale of the properties of
P175,000.00, after deducting the recognized expenses, one-half
thereof be adjudicated unto plaintiffs, the court no longer specifying the
share of each because of that announced intention under the
stipulation of facts to "pool their resources"; as to the other one-half,
the same should be adjudicated unto both plaintiffs, and defendant
Dahican American and Connell Bros. in the proportion already set forth

on page 9, lines 21, 22 and 23 of the body of this decision; but with the
understanding that whatever plaintiffs and Dahican American and
Connell Bros. should receive from the P175,000.00 deposited in the
Court shall be applied to the judgments particularly rendered in favor of
each;
5. No other pronouncement as to costs; but the costs of the
receivership as to the debated properties shall be borne by People's
Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co.,
pro-rata.
On the following day, the Court issued the following supplementary
decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby
amended in order to add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within
ninety (90) days, the Court orders the sale at public auction of the
lands object of the mortgages to satisfy the said mortgages and costs
of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after
acquired properties" were subject to the deeds of mortgage mentioned
heretofore; that said properties were acquired from suppliers other than
DAMCO and CONNELL; that even granting that DAMCO and CONNELL
were the real suppliers, the rescission of the sales to DALCO could not
prejudice the mortgage lien in favor of plaintiffs; that considering the
foregoing, the proceeds obtained from the sale of the "after acquired
properties" as well as those obtained from the sale of the "undebated
properties" in the total sum of P175,000.00 should have been awarded
exclusively to plaintiffs by reason of the mortgage lien they had thereon; that
damages should have been awarded to plaintiffs against defendants, all of
them being guilty of an attempt to defraud the former when they sought to
rescind the sales already mentioned for the purpose of defeating their
mortgage lien, and finally, that defendants should have been made to bear
all the expenses of the receivership, costs and attorney's fees.

On the other hand, defendants-appellants contend that the trial court erred:
firstly, in not holding that plaintiffs had no cause of action against them
because the promissory note sued upon was not yet due when the action to
foreclose the mortgages was commenced; secondly, in not holding that the
mortgages aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in accordance with
the Chattel Mortgage Law, the court erring, as a consequence, in holding
that said properties were subject to the mortgage lien in favor of plaintiffs;
thirdly, in not holding that the provision of the fourth paragraph of each of
said mortgages did not automatically make subject to such mortgages the
"after acquired properties", the only meaning thereof being that the
mortgagor was willing to constitute a lien over such properties; fourthly, in
not ruling that said stipulation was void as against DAMCO and CONNELL
and in not awarding the proceeds obtained from the sale of the "after
acquired properties" to the latter exclusively; fifthly, in appointing a Receiver
and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties"
placed under receivership was damnum absque injuria and, consequently,
in not awarding, to said parties the corresponding damages claimed in their
counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's
fees and in requiring DAMCO and CONNELL to pay the costs of the
Receivership, instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of
defendants also as appellants submit a total of seventeen. However, the
multifarious issues thus before Us may be resolved, directly or indirectly, by
deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject
to the deeds of mortgage subject of foreclosure?; secondly, assuming that
they are subject thereto, are the mortgages valid and binding on the
properties aforesaid inspite of the fact that they were not registered in
accordance with the provisions of the Chattel Mortgage Law?; thirdly,
assuming again that the mortgages are valid and binding upon the "after
acquired properties", what is the effect thereon, if any, of the rescission of
sales entered into, on the one hand, between DAMCO and DALCO, and
between DALCO and CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear

that all property of every nature and description taken in exchange or
replacement, as well as all buildings, machineries, fixtures, tools,
equipments, and other property that the mortgagor may acquire, construct,
install, attach; or use in, to upon, or in connection with the premises that
is, its lumber concession "shall immediately be and become subject to
the lien" of both mortgages in the same manner and to the same extent as if
already included therein at the time of their execution. As the language thus
used leaves no room for doubt as to the intention of the parties, We see no
useful purpose in discussing the matter extensively. Suffice it to say that the
stipulation referred to is common, and We might say logical, in all cases
where the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be used thus
becoming subject to the inevitable wear and tear but with the
understanding express or implied that they shall be replaced with
others to be thereafter acquired by the mortgagor. Such stipulation is neither
unlawful nor immoral, its obvious purpose being to maintain, to the extent
allowed by circumstances, the original value of the properties given as
security. Indeed, if such properties were of the nature already referred to, it
would be poor judgment on the part of the creditor who does not see to it
that a similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of
mortgage in question cover the "after acquired properties" of DALCO, the
same are void and ineffectual because they were not registered in
accordance with the Chattel Mortgage Law. In support of this and of the
proposition that, even if said mortgages were valid, they should not
prejudice them, the defendants argue (1) that the deeds do not describe the
mortgaged chattels specifically, nor were they registered in accordance with
the Chattel Mortgage Law; (2) that the stipulation contained in the fourth
paragraph thereof constitutes "mere executory agreements to give a lien"
over the "after acquired properties" upon their acquisition; and (3) that any
mortgage stipulation concerning "after acquired properties" should not
prejudice creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention.
As adverted to hereinbefore, it states that all property of every nature,
building, machinery etc. taken in exchange or replacement by the mortgagor
"shall immediately be and become subject to the lien of this mortgage in the

same manner and to the same extent as if now included therein". No clearer
language could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to
affect third persons, a chattel mortgage must be registered and must
describe the mortgaged chattels or personal properties sufficiently to enable
the parties and any other person to identify them, We say that such law
does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old
Civil Code still in force, there can be no doubt that the provisions of said
code must govern their interpretation and the question of their validity. It
happens however, that Articles 334 and 1877 of the old Civil Code are
substantially reproduced in Articles 415 and 2127, respectively, of the new
Civil Code. It is, therefore, immaterial in this case whether we take the
former or the latter as guide in deciding the point under consideration.
Article 415 does not define real property but enumerates what are
considered as such, among them being machinery, receptacles, instruments
or replacements intended by owner of the tenement for an industry or works
which may be carried on in a building or on a piece of land, and shall tend
directly to meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held
that inasmuch as "the chattels were placed in the real properties mortgaged
to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art.
2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334,
paragraph 5 of the Civil Code (old) gives the character of real property to
machinery, liquid containers, instruments or replacements intended by the
owner of any building or land for use in connection with any industry or trade
being carried on therein and which are expressly adapted to meet the
requirements of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held
that a mortgage constituted on a sugar central includes not only the land on
which it is built but also the buildings, machinery and accessories installed

at the time the mortgage was constituted as well as the buildings, machinery
and accessories belonging to the mortgagor, installed after the constitution
thereof .
It is not disputed in the case at bar that the "after acquired properties" were
purchased by DALCO in connection with, and for use in the development of
its lumber concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July 13, 1950. In
Law, therefore, they must be deemed to have been immobilized, with the
result that the real estate mortgages involved herein which were
registered as such did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties" and affect third
parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo,
61 Phil. 709, claim that the "after acquired properties" did not become
immobilized because DALCO did not own the whole area of its lumber
concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the
ones obtaining in the present. In the former, the Davao Sawmill Company,
Inc., had repeatedly treated the machinery therein involved as personal
property by executing chattel mortgages thereon in favor of third parties,
while in the present case the parties had treated the "after acquired
properties" as real properties by expressly and unequivocally agreeing that
they shall automatically become subject to the lien of the real estate
mortgages executed by them. In the Davao Sawmill decision it was, in fact,
stated that "the characterization of the property as chattels by the appellant
is indicative of intention and impresses upon the property the character
determined by the parties" (61 Phil. 112, emphasis supplied). In the present
case, the characterization of the "after acquired properties" as real property
was made not only by one but by both interested parties. There is,
therefore, more reason to hold that such consensus impresses upon the
properties the character determined by the parties who must now be held in
estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central
Altagracia, Inc. (225 U.S. 58) where it was held that while under the general
law of Puerto Rico, machinery placed on property by a tenant does not
become immobilized, yet, when the tenant places it there pursuant to

contract that it shall belong to the owner, it then becomes immobilized as to

that tenant and even as against his assignees and creditors who had
sufficient notice of such stipulation. In the case at bar it is not disputed that
DALCO purchased the "after acquired properties" to be placed on, and be
used in the development of its lumber concession, and agreed further that
the same shall become immediately subject to the lien constituted by the
questioned mortgages. There is also abundant evidence in the record that
DAMCO and CONNELL had full notice of such stipulation and had never
thought of disputed validity until the present case was filed. Consequently all
of them must be deemed barred from denying that the properties in question
had become immobilized.
What We have said heretofore sufficiently disposes all the arguments
adduced by defendants in support their contention that the mortgages under
foreclosure are void, and, that, even if valid, are ineffectual as against
DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over
the "after acquired properties" superior to the mortgage lien constituted
thereon in favor of plaintiffs. It is defendants' contention that in relation to
said properties they are "unpaid sellers"; that as such they had not only a
superior lien on the "after acquired properties" but also the right to rescind
the sales thereof to DALCO.
This contention it is obvious would have validity only if it were true that
DAMCO and CONNELL were the suppliers or vendors of the "after acquired
properties". According to the record, plaintiffs did not know their exact
identity and description prior to the filing of the case bar because DALCO, in
violation of its obligation under the mortgages, had failed and refused
theretofore to submit a complete list thereof. In the course of the
proceedings, however, when defendants moved to dissolve the order of
receivership and the writ of preliminary injunction issued by the lower court,
they attached to their motion the lists marked as Exhibits 1, 2 and 3
describing the properties aforesaid. Later on, the parties agreed to consider
said lists as identifying and describing the "after acquire properties," and
engaged the services of auditors to examine the books of DALCO so as to
bring out the details thereof. The report of the auditors and its annexes
(Exhibits V, V-1 V4) show that neither DAMCO nor CONNELL had
supplied any of the goods of which they respective claimed to be the unpaid

seller; that all items were supplied by different parties, neither of whom
appeared to be DAMCO or CONNELL that, in fact, CONNELL collected a
5% service charge on the net value of all items it claims to have sold to
DALCO and which, in truth, it had purchased for DALCO as the latter's
general agent; that CONNELL had to issue its own invoices in addition to
those o f the real suppliers in order to collect and justify such service
charge.
Taking into account the above circumstances together with the fact that
DAMCO was a stockholder and CONNELL was not only a stockholder but
the general agent of DALCO, their claim to be the suppliers of the "after
acquired required properties" would seem to be preposterous. The most
that can be claimed on the basis of the evidence is that DAMCO and
CONNELL probably financed some of the purchases. But if DALCO still
owes them any amount in this connection, it is clear that, as financiers, they
can not claim any right over the "after acquired properties" superior to the
lien constituted thereon by virtue of the deeds of mortgage under
foreclosure. Indeed, the execution of the rescission of sales mentioned
heretofore appears to be but a desperate attempt to better or improve
DAMCO and CONNELL's position by enabling them to assume the role of
"unpaid suppliers" and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly ineffectual, not only because
they are not the "unpaid sellers" they claim to be but also because there is
abundant evidence in the record showing that both DAMCO and CONNELL
had known and admitted from the beginning that the "after acquired
properties" of DALCO were meant to be included in the first and second
mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the
rescission, expressly or otherwise, is of no consequence and does not make
the rescission valid and legally effective. It must be stated clearly, however,
in justice to Belden, that, as a member of the Board of Directors of DALCO,
he opposed the resolution of December 15, 1952 passed by said Board and
the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on
February 12, 1953 was premature because the promissory note sued upon
did not fall due until April 1 of the same year, concluding from this that,
when the action was commenced, the plaintiffs had no cause of action.

Upon this question the lower court says the following in the appealed
judgment;
The other is the defense of prematurity of the causes of action in that
plaintiffs, as a matter of grace, conceded an extension of time to pay
up to 1 April, 1953 while the action was filed on 12 February, 1953,
but, as to this, the Court taking it that there is absolutely no debate that
Dahican Lumber Co., was insolvent as of the date of the filing of the
complaint, it should follow that the debtor thereby lost the benefit to the
period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198,
New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs
reached in the aggregate, P1,200,000 excluding interest while the
aggregate price of the "after-acquired" chattels claimed by Connell
under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V,
report of auditors, and as a matter of fact, almost all the properties
were sold afterwards for only P175,000.00, page 47, Vol. IV, and the
Court understanding that when the law permits the debtor to enjoy the
benefits of the period notwithstanding that he is insolvent by his giving
a guaranty for the debt, that must mean a new and efficient guaranty,
must concede that the causes of action for collection of the notes were
not premature.
Very little need be added to the above. Defendants, however, contend that
the lower court had no basis for finding that, when the action was
commenced, DALCO was insolvent for purposes related to Article 1198,
paragraph 1 of the Civil Code. We find, however, that the finding of the trial
court is sufficiently supported by the evidence particularly the resolution
marked as Exhibit K, which shows that on December 16, 1952 in the
words of the Chairman of the Board DALCO was "without funds, neither
does it expect to have any funds in the foreseeable future." (p. 64, record on
appeal).
The remaining issues, namely, whether or not the proceeds obtained from
the sale of the "after acquired properties" should have been awarded
exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they
should be distributed among said parties, whether or not the distribution

should be pro-rata or otherwise; whether or not plaintiffs are entitled to

damages; and, lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata basis or
exclusively by one or some of them are of a secondary nature as they are
already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired
properties" and the "undebated properties", it is clear, in view of our opinion
sustaining the validity of the mortgages in relation thereto, that said
proceeds should be awarded exclusively to the plaintiffs in payment of the
money obligations secured by the mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants,
the law (Articles 1313 and 1314 of the New Civil Code) provides that
creditors are protected in cases of contracts intended to defraud them; and
that any third person who induces another to violate his contract shall be
liable for damages to the other contracting party. Similar liability is
demandable under Arts. 20 and 21 which may be given retroactive effect
(Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and
DAMCO, after failing to pay the fifth promissory note upon its maturity,
conspired jointly with CONNELL to violate the provisions of the fourth
paragraph of the mortgages under foreclosure by attempting to defeat
plaintiffs' mortgage lien on the "after acquired properties". As a result, the
plaintiffs had to go to court to protect their rights thus jeopardized.
Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what
the latter claim, namely, the difference between the alleged total obligation
secured by the mortgages amounting to around P1,200,000.00, plus the
stipulated interest and attorney's fees, on the one hand, and the proceeds
obtained from the sale of "after acquired properties", and of those that were
not claimed neither by DAMCO nor CONNELL, on the other. Considering
that the sale of the real properties subject to the mortgages under
foreclosure has not been effected, and considering further the lack of
evidence showing that the true value of all the properties already sold was
not realized because their sale was under stress, We feel that We do not
have before Us the true elements or factors that should determine the
amount of damages that plaintiffs are entitled recover from defendants. It is,

however, our considered opinion that, upon the facts established, all the
expenses of the Receivership, which was deemed necessary to safeguard
the rights of the plaintiffs, should be borne by the defendants, jointly and
severally, in the same manner that all of them should pay to the plaintiffs,
jointly a severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that
the plaintiffs are entitled to recover from the defendants, the record of this
case shall be remanded below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other
respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P.,
Zaldivar, Sanchez and Castro, JJ., concur.

Belgian Catholic Missionaries vs. Magallanes Press, 49 Phil.

647 (1926)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-25729

November 24, 1926

THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-appellee,

vs.
MAGALLANES
PRESS,
INC.,
ET
AL.,
defendants.
JOSE MARIA MEMIJE, appellant.
Antonio M. Opisso, Romualdez Hermanos and Luciano de la Rosa for
appellant.
Cavanna, Aboitiz & Agan for appellee.

VILLA-REAL, J.:
This is an appeal by Jose Marie Memije from a judgment of the Court
of First Instance of Manila the dispositive part of which is as follows:
For all the foregoing, the court is of the opinion that the plaintiff has a
right to the relief prayed for in its complaint. Wherefore, judgment is
rendered declaring that Exhibits C and D, that is, the mortgage deeds
in question in this proceeding, in so far as they prejudice the rights of
the plaintiff, are null and void; that the preliminary injunction issued in
this case against the defendant Jose Ma. Memije is final and absolute;
and that the plaintiff recover the amount of the fire insurance policies of
the defendant "Magallanes Press, Inc.," which, or the representatives
of which, is hereby ordered to endorse said insurance policies to the
plaintiff, with the costs of the proceedings against the defendants, with
the exception of J.P. Heilbronn Co., Inc. It is so ordered.

In support of his appeal, the appellant assigns the following supposed

errors as committed by the lower court in its judgment, to wit: (1) The court
erred in overruling the demurrer filed by this defendant to the complaint in
this action; (2) the trial court erred in giving the plaintiff corporation
possession of the property mortgaged to this appellant without following the
necessary proceedings or complying with the provisions of the law; (3) the
trial court erred in issuing the writ of preliminary injunction against the
appellant and E. E. Elser, restraining the former from receiving from the
latter, or the latter from delivering to the former, the amount of the insurance
policies covering the property mortgaged to the appellant, which was
damaged by the fire that occurred in the establishment of the Magallanes
Press, Inc; (4) the trial court erred in giving to the unnecessary intervention
of the Magallanes Press, Inc., in the execution of the deed Exhibit C an
interpretation which is neither based upon law nor upon the contract; (5) the
trial court erred in ordering the suspension of the foreclosure of the
appellant's mortgage on the property of the Magallanes Press, Inc.; (6) the
trial court erred, under the facts proven in this case, in applying article 1297
of the Civil Code; (7) the trial court erred in finding in its decision that the
defendant Jose Ma. Memije should not have executed the documents
Exhibits C and D without taking into account the rights of the plaintiff
corporation, The Belgian Catholic Missionaries, Inc; (8) the trial court erred
in declaring Exhibits C and D null and void in so far as they prejudice the
rights of the plaintiff, over whose credit that of the herein appellant is
preferential; in declaring the writ of preliminary injunction issued against the
defendant Jose Ma. Memije final and absolute; in giving judgment for the
plaintiff to recover the amount of the fire insurance policies of the defendant
the Magallanes Press, Inc; and (9) the trial court erred in not making any
pronouncement as to the counterclaim and cross-complaint of the defendant
Jose Ma. Memije in this action, nor taking the same into consideration and
rendering judgment thereon in favor of said defendant.
The oral evidence has not been forwarded to this court so that we are
compelled to base our opinion exclusively upon the documentary evidence
and the facts found and stated by the trial court in its judgment.
It appears that on December 1, 1921, the Magallanes Press, through
its manager H. Camena, executed a promissory note in favor of J. P.
Heilbronn & Co., Inc., for the sum of P3,472.92, with interest at 10 per cent
per annum, payable at the rate of P250 a month, plus the interest earned on

the unpaid balance, until the whole amount of the indebtedness shall have
been paid, the first payment to be made on January 1, 1922, with the
condition that upon the failure to pay any monthly installment or the interest
earned on the unpaid balance, the whole amount of the indebtedness shall
become due, and the maker shall pay the payee an additional sum
equivalent to 15 per cent of the total balance, for attorney's fee and
expenses of collection, forfeiting all right of exemption.
On the same date, December 1, 1921, the said Magallanes Press,
through its managers H. Camena, also executed a promissory note in favor
of J. P. Heilbronn & Co., Inc., for the sum of P10,715.77, with interest at 12
per cent per annum, payable at the rate of P500 a month, together with the
interest earned on the unpaid balance, until the whole amount of the
indebtedness shall have been paid, the first payment to be made on
January 1, 1922, with the condition that upon the failure to pay any monthly
installment or the interest earned on the unpaid balance, the whole amount
of the indebtedness shall become due, and the maker shall pay the payee
an additional sum equal to 15 per cent of the total balance for attorney's fee
and expenses of collection, forfeiting all right of exemption.
To secure the payment of said promissory notes which amounted to a
total of P14,188.69, H. Camena, as general manager of the Magallanes
Press, executed a chattel mortgage on all of the printing machinery and its
accessories, belonging to the said Magallanes Press, in favor of J. P.
Heilbronn & Co., Inc.
One June 19, 1922, the Magallanes Press Co., Inc., successor to the
Magallanes Press, with all the latter's rights and obligations, through its duly
authorized president, E. F. Clemente, executed a chattel mortgage on the
same printing machinery ad its accessories in favor of the Belgian Catholic
Missionaries Co., Inc., which the Magallanes Press had mortgaged to J. P.
Heilbronn & Co., Inc., to secure the payment of a loan of P30,500, with
interest at 12 per cent per annum, which the said Magallanes Press & Co.,
Inc., had obtained from the Belgian Catholic Missionaries Co., Inc., the
duration of the mortgage loan being one year from the execution of the
mortgage deed.
In December, 1922 the appellant Jose Ma. Memije made a loan in the
sum of P2,000 to E. F. Clemente which was paid on account of the
indebtedness of the Magallanes Press to J. P. Heilbronn & co., Inc.,

together with the sum of P1,641 which A. F. Mendoza owed said E. F.

Clemente.
On the occasion of the issuance of the writ of attachment in civil
cause No. 23818 of the Court of First Instance of Manila, entitled Jose Ma.
Cavanna vs. the Magallanes Press Co., Inc., the defendant Jose Ma.
Memije, on February 21, 1923, filed an intervention in said case.
All the promissory note executed by the Magallanes Press in favor of
J. P. Heilbronn & Co., Inc., having been overdue for non-payment of the
installments as well as the respective chattel mortgage, the said J. P.
Heilbronn & Co., Inc., transferred all its mortgage credit against the
Magallanes Press to Jose Ma. Memije in consideration of the sum of
P8,280.90, the balance of said mortgage credit.
On March 14, 1923, Enrique Clemente, as manager of the Megallane
Press Co., Inc., executed a deed in favor of Jose Ma. Memije by virtue of
which the chattel mortgage which was given by the Magallanes Press in
favor of J. P. Heilbronn & Co., Inc., and transferred by the latter to Jose Ma.
Memije, was made to cover an additional loan of P5,895.79, which included
the sum of P2,000 which said Jose Ma. Memije had advanced said Enrique
Clemente in December, 1922.
On April 21, 1923, a fire occurred in the building where the pointing
machinery, its accessories and other personal property of the Magallanes
Press Co., Inc., were located and which were covered by said chattel
mortgages. Said property was insured, and the insurance policies covering
it were endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the
chattel mortgage thereon in favor of the latter. When J. P. Heilbronn & Co.,
Inc., transferred its mortgage credit to Jose Ma. Memije it, in turn, endorsed
said insurance policies to him. The insurance companies were disposed to
pay the respective insurance policies, which amounted to P7,686.45, but
due to the issuance of the above-mentioned writ of preliminary injunction,
payment could not be made.
Due to the filing of the complaint in the present case on May 9, 1923,
and the issuance of the writ of preliminary injunction on May 10th of the
same year, Jose Ma. Memije was unable to collect the amount of the
insurance policies, and when he was summoned under the complaint on
May 14, 1923, he made demand on the Magallanes Press Co., Inc., for the

payment of his mortgage credit on the same date the manager of said
corporation, E. F. Clemente, permitted the secretary of the said corporation
to place the property covered by the mortgage into the hands of the said
Jose Ma. Memije in order that the same might be sold, but the sale could
not be consummated due to the issuance of the said writ of preliminary
injunction.
The first question raised by the defendant and appellant has
reference to the overruling of the demurrer filed by him to complaint.
One of the grounds of said demurrer was that the complaint in this
case did not allege facts sufficient to constitute a cause of action against the
said defendant, in that, notwithstanding the fact that the said complaint was
instituted to annul the document of transfer of the mortgage credit Exhibit C,
it was not alleged in the said complaint that the defendant Jose Ma. Memije
had any intention to defraud the interests of the plaintiff corporation, which
was absolutely impossible due to the nature of the transaction and the
preferential character of the mortgage credit of J. P. Heilbronn & Co., Inc.
As to this paragraph of the complaint, the plaintiff company having
known of the existence of a chattel mortgage in favor of J. P. Heilbronn &
Co., Inc., the latter, either as the first or as the second mortgage, had a
perfect right to transfer its mortgage credit, without the knowledge or
consent of any other mortgagee, inasmuch as whoever acquired it, would
have exactly the same status as the transferor with the same rights and
obligations. The fact, therefore, that the Magallanes Press Co., Inc., had
consented to the transfer of the mortgage credit of J. P. Heilbronn & Co.,
Inc., to Jose Ma. Memije, does not constitute a fraud that an vitiate the said
transfer, inasmuch as the order of preference of the mortgages has not
been altered, and its allegations does not constitute a cause of action to
annul the said transfer.
In regard to the allegation contained in the ninth paragraph of the
complaint, it is very clear that the increase made by Jose Ma. Memije in the
mortgage credit acquired by him from J.P. Heilbronn & Co., Inc., and the
extension made by the Magallanes Press, Inc., of the mortgage to said
additional credit without the knowledge or consent of the plaintiff company,
as second mortgagee, prejudices the credit of the latter, inasmuch as the
security for the payment of said credit was reduced as to it, and, therefore,

constitute a fraud that vitiates the contract of extension of the mortgage

evidence by the deed Exhibit D, rendering it void.lawphil.net
The facts allege in paragraph 9 of the complaint are sufficient to
constitute a cause of action of nullity, and the lower court did nor err in
overruling the demurrer filed by the defendant Jose Ma. Memije.
In regard to the second assignment of error, it appears that the
defendant Jose Ma. Memije having attempted to foreclose the mortgage, by
which the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc.,
was secured, in order to recover not only the original credit but also the
increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with
a petition for a writ of preliminary injunction against the sheriff, in whose
hands the foreclosure of the mortgage was placed. The writ of preliminary
injunction having been issued, upon the filing of a bond in the sum of
P15,000, and there being no person more interested in the conservation
and custody of the property covered by the mortgage than said plaintiff
company, being the largest creditor, it applied and obtained from the court
the possession of the same.
Contrary to the contention of the appellant, this case is not one of
replevin but simply a proceeding instituted by the plaintiff for the deposit of
the property in litigation, upon the filing of a bond, said plaintiff, acting as a
receiver by authority of the court, being the person most interested in the
conservation and care of the same (sec. 174, Act No. 190; 11 C. J., 726).
The lower court, therefore, did not err in authorizing the plaintiff
company to take possession of the personal property in litigation upon the
filing of a bond sufficient to secure the conservation or value thereof.
The third assignment of error raises the question as to the preference
of right between the plaintiff company and the defendant over the
mortgaged property and the amount of the insurance policies covering a
part thereof which was destroyed by fire.
As we have seen in the statement of the pertinent facts necessary for
the clear and accurate solution of the questions of law involved in the
present appeal, the firm of J. P. Heilbronn & Co., Inc., had a mortgage credit
against the Magallanes Press for the sum of P14,186.69, secured by a first
chattel mortgage. The plaintiff company, the Belgian Catholic Missionaries

Co., Inc., also had a mortgage credit for the amount of P30,500, secured by
a second mortgage on the same personal property. After this second
mortgage had been executed, the payment of the mortgage credit of J.P.
Heilbronn & Co., Inc., became due, which credit had been reduced to the
sum of P8,280,90 through partial payments, and the herein defendantappellant Jose Ma. Memije acquired said mortgage credit and increased it
by P5,895.59 of which increase P2,000 was a previous loan.
There is no question but that J. P. Heilbronn & Co., Inc., at the time of
the transfer of this mortgage rights to Jose Ma. Memije, had a preferential
right over that of the Belgian Catholic Missionaries Co., Inc., for the
remainder of the amount of the mortgage credit, that is, P8,280.90. The
plaintiff company had a preferential right to the rest of the value of the
mortgaged property after deducting the remaining mortgage credit of J. P.
Heilbronn & Co., Inc.
The increase of P5,895.59 made by the defendant Jose Ma. Memije
in favor of the Magallanes Press Co., Inc., and the extension of the
mortgage thereto, are not only subordinate to the mortgage credit of the
plaintiff company, being subsequent in time and in registration, but said
increase in the security is also void. The increase of the mortgage security
becomes a new mortgage in itself, inasmuch as the original mortgage did
not contain any stipulation in regard to the increase of the mortgage credit,
and even if it did, said increase would take effect only from the date of the
increase. A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date the same are made
and not from the date of the mortgage (11 C. J., 448; 5 R. C. L., 420-421).
In accordance with the provisions of section 5 of Act No. 1508, known as
the Chattle Mortgage Law, the parties to the original deeds swore that the
same was mortgaged "to secure the obligations specified therein and for no
other purpose." Neither the increase in question, nor the extension of the
mortgage to secure the payment of the same is specified in the deed,
consequently said extension is void. "Where the statute provides that the
parties to a chattel mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the mortgagee, it is obvious
that a valid mortgage cannot be made to secure a debt to be thereafter
contacted." (11 C. J., 448.)
Briefly, therefore, we have the following:

(a) That Jose Ma. Memije has a preferential right to the value of the
chattels mortgage and the amount of the insurance policies up to the
sum of P8,280.90;
(b) That the plaintiff corporation, the Belgian Catholic Missionaries Co.,
Inc., has a right to the remainder of the value of said chattels and the
insurance policies up to the amount of P30,500, after deducting the
preferential credit of Jose Ma. Memije;
(c) That as to the increase of P5,895.59, the right of the defendant
Jose Ma. Memije is that of an ordinary creditor.
In regard to the damages claimed by the defendant in his
counterclaim and which is the subject-matter of his remaining assignments
of error, said defendant has a right to interest at 12 per cent on the
P8,280.90 the amount of the mortgage credit acquired by him from J. P.
Heilbronn & Co., Inc., from February 26, 1923, the date of the acquisition
until fully paid.
For the foregoing reasons, the judgment appealed from is revoked
and it is ordered the another be entered declaring all the mortgages
overdue, and the mortgage credit of Jose Ma. Memije preferential over that
of the Belgian Catholic Missionaries Co., Inc., up to the amount of
P8,280.90, with interest at the rate of 12 per cent per annum from February
26, 1923, until fully paid; the mortgage credit of the Belgian Catholic
Missionaries Co., Inc., for the sum of P30,500 with interest at the rate of 12
per cent per annum, from June 19, 1922, until fully paid, plus the sum of
P3,000 for attorney's fees, over the additional credit of Jose Ma. Memije for
P5,895.59; and ordering the foreclosure of the said mortgages by selling the
mortgaged property at public auction, to the proceeds of which shall be
added the amount of the insurance policies and the above-mentioned
credits in the order of preference above established, without special
pronouncement as to costs. So ordered.
Avancea, C. J., Johnson, Street, Ostrand and Johns, JJ., concur.

Acme Shoe, Rubber and Plastic Corp. vs. Court of Appeals,

260 SCRA 714 (1996)
Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC,
petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and
REGIONAL SHERIFF OF CALOOCAN CITY, respondents.

VITUG, J.:p
Would it be valid and effective to have a clause in a chattel mortgage that
purports to likewise extend its coverage to obligations yet to be contracted
or incurred? This question is the core issue in the instant petition for review
on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner
"Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for
and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way
of security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect
(c) If the MORTGAGOR, his heirs, executors or administrators
shall well and truly perform the full obligation or obligations abovestated according to the terms thereof, then this mortgage shall be
null and void. . . .

In case the MORTGAGOR executes subsequent promissory note

or notes either as a renewal of the former note, as an extension
thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments
on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations
were existing on the date thereof. This mortgage shall also stand
as security for said obligations and any and all other obligations of
the MORTGAGOR to the MORTGAGEE of whatever kind and
nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage. 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation.
Subsequently, in 1981, it obtained from respondent bank additional financial
accommodations totalling P2,700,000.00. 2 These borrowings were on due
date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner
corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the
loan was not settled at maturity. 3 Respondent bank thereupon applied for
an extra judicial foreclosure of the chattel mortgage, herein before cited,
with the Sheriff of Caloocan City, prompting petitioner corporation to
forthwith file an action for injunction, with damages and a prayer for a writ of
preliminary injunction, before the Regional Trial Court of Caloocan City (Civil
Case No. C-12081). Ultimately, the court dismissed the complaint and
ordered the foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14
August 1991, affirmed, "in all respects," the decision of the court a quo. The
motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially dinied
on 04 March 1992 by this Court for having been insufficient in form and
substance. Private respondent filed a motion to dismiss the petition while

petitioner corporation filed a compliance and an opposition to private

respondent's motion to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment
thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is
imposed 6 which the Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of sound judicial
discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that
can unnecessarily clog the docket and needlessly consume the time of the
Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective
for, after all, the dispensation of justice is the core reason for the existence
of courts. In this instance, once again, the Court is constrained to relax the
rules in order to give way to and uphold the paramount and overriding
interest of justice.
Contracts of security are either personal or real. In contracts of personal
security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debt or is secured by the personal commitment of
another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an
encumbrance of property in pledge, the placing of movable property in
the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real
estate mortgage, by the execution of a public instrument encumbering the
real property covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an immovable
property with the obligation to apply such fruits to the payment of interest, if
owing, and thereafter to the principal of his credit upon the essential
condition that if the obligation becomes due and the debtor defaults, then
the property encumbered can be alienated for the payment of the obligation,
7
but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character 8 of the
agreement. As the law so puts it, once the obligation is complied with, then
the contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally

secure after-incurred obligations so long as these future debts are
accurately described, 10 a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to be
contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed
either by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel Mortgage Law.
11
Refusal on the part of the borrower to execute the agreement so as to
cover the after-incurred obligation can constitute an act of default on the
part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts
extant at the time of constitution and during the life of the chattel mortgage
sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of
good faith. While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith 12),
the fact, however, that the statute has provided that the parties to the
contract must execute an oath that
. . . (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one
not entered into for the purpose of fraud. 13
makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract
was the P3,000,000.00 loan which petitioner corporation later fully
paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment
of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes

Press,
said

Inc.,

et

al.,

14

the

Court

. . . A mortgage that contains a stipulation in regard to future

advances in the credit will take effect only from the date the same
are made and not from the date of the mortgage. 15
The significance of the ruling to the instant problem would be that since
the 1978 chattel mortgage had ceased to exist coincidentally with the
full payment of the P3,000,000.00 loan, 16 there no longer was any
chattel mortgage that could cover the new loans that were concluded
thereafter.
We find no merit in petitioner corporation's other prayer that the case should
be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." 17 This prayer is not reflected in its complaint
which has merely asked for the amount of P3,000,000.00 by way of moral
damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said:
Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar
injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life all of which cannot be
suffered by respondent bank as an artificial person. 20
While Chua Pac is included in the case, the complaint, however,
clearly states that he has merely been so named as a party in
representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in
pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the

trial court, respondent Court of Appeals should be required to
justify its decision which completely disregarded the basic laws on
obligations and contracts, as well as the clear provisions of the
Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction. 21 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to
the admonition in Guerrero vs. Villamor; 22 thus:
(L)awyers . . . should bear in mind their basic duty "to observe
and maintain the respect due to the courts of justice and judicial
officers and . . . (to) insist on similar conduct by others." This
respectful attitude towards the court is to be observed, "not for the
sake of the temporary incumbent of the judicial office, but for the
maintenance of its supreme importance." And it is through a
scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts and
judicial officers . . . 23
The virtues of humility and of respect and concern for others must still
live on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal recourse
by private respondent as may still be warranted as an unsecured creditor.
No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.

Ong Liong Tiak vs. Luneta Motor Co., 66 Phil. 459 (1938)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-44552

November 7, 1938

ONG
LIONG
TIAK,
plaintiff-appellant,
vs.
LUNETA MOTOR COMPANY and the SHERIFF OF MANILA, defendantappellees.
Felipe
S.
Jose Agbulos for appellees.

Abeleda

for

appellant.

DIAZ, J.:
Ong Liong Tiak appealed from the decision rendered by the Court of
First Instance of Manila in civil case No. 47997 of said court, overruling and
dismissing his complaint, wherein he sought an injunction against the
defendant and a judgment in his favor for damages in the sum of P500, plus
the costs. In his brief, Ong Liong Tiak, the appellant, makes the following
enumeration of the errors alleged by him to have been committed by the
lower court in rendering its decision appealed from, to wit:
1. The trial court erred in holding that the indebtedness of
Jeronimo Angeles to Macondray and Co., Inc., was also guaranteed by
the chattel mortgage executed by S. Arellano Choa Siong in favor of
the Luneta Motor Co.
2. The trial court erred in holding that the automobile in question
was still encumbered at the time it was sold by S. Arellano Choa Siong
to the plaintiff-appellant.

3. The trial court erred in not finding as a fact that the chattel
mortgage over the automobile in question was extinguished upon
payment of the last promissory note.
4. The trial court erred in not holding that the automobile in
question was, at the time of the levy on execution by the defendant
sheriff, the exclusive property of the plaintiff-appellant.
It is undisputed that about August 21, 1933, S. Arellano Choa Siong,
the registered owner of Chrysler Sedan automobile, motor No. 4253, serial
No. 6524936, transferred the ownership thereof to the plaintiff-appellant, to
which effect he endorsed his certificate of registration, Exhibit A, in favor of
the latter. lawphi1.net
S. Arellano Choa Siong purchased said automobile from the Luneta
Motor Co. about June 11, 1931. However, instead of paying the price
thereof, which was P1,800 he executed eighteen promissory notes for P100
each in favor of the vendor, binding himself to redeem one after another,
every month. To secure the payment of said eighteen promissory notes and
that of articles he might take from his creditor, such as gasoline, tires,
automobile accessories, etc., and to secure also the payment of any other
obligation that he might contract with it, he constituted a mortgage on the
automobile in question, executing to that effect in favor of the Luneta Motor
Co., the instrument of mortgage, Exhibit 2, one of the clauses of which
reads as follows:
. . . it being expressly agreed further that this mortgage shall also
serve as security for the payment to the said mortgagee in addition to
the aforesaid notes of the purchase price or cost of any and all
gasoline, tires, automobile accessories or parts, and repairs furnished
or made by the said mortgagee at any time up to the date this
mortgage is completely satisfied as and when the same becomes due,
and of any other indebtedness of the mortgagor in favor of the
mortgagee incurred in any other manner whatever. (Emphasis ours.)
About the months of October and
November, 1932, one
Jeronimo Angeles obtained from Macondray & Co., Inc. paints and other
merchandise of the total value of P407. For the payment of this amount, S.
Arellano Choa Siong acted as surety up to the sum of P300, having paid the
sum of balance P160 on account, on March 30, 1933, thereby leaving a

balance against him in the sum of P140. In this state of affairs, Macondray &
Co., Inc., assigned its credit against S. Arellano Choa Siong, who offered no
objection thereto. On the contrary, he paid P40 on account, shortly
thereafter, thereby leaving a balance of P100. About April 4, 1933, S.
Arellano Choa Siong made the last payment of the eighteen promissory
notes which he had executed in favor of the defendant-appellee. However,
as there still existed in its favor a credit of P100 for the paints and other
merchandise taken by Jeronimo Angeles from Macondray & Co., Inc. under
the personal guaranty of S. Arellano Choa Siong, which sum was assigned
to it by said Macondray & Co., Inc. without any objection on the part of S.
Arellano Choa Siong, the defendant-appellee refused to cancel the
instrument of mortgage Exhibit 2. On the contrary, it foreclosed to mortgage
constituted in its favor, causing the sheriff to attach the above-mentioned
automobile. It is for the purpose of setting aside said attachment that the
plaintiff filed his complaint in this case, seeking what has already been set
forth hereinbefore.
Taking into account the circumstances of the case, and particularly
the obligation assumed by S. Arellano Choa Siong, according to the terms
of the above-quoted clause of the instrument of mortgage Exhibit 2, this
court holds that the lower court committed one of the errors attributed to it
by the appellant. It was right in holding that, by interpreting the terms of
Exhibit 2, the automobile in question is still remained subject to the lien
stated in said instrument, inasmuch as the account, which S. Arellano Choa
Siong accepted and bound himself to pay for Jeronimo Angeles, had not
been completely settled. Instruments of mortgage, as said Exhibit 2, are
binding, while they subsist, not only upon the parties executing them but
also upon those who later, by purchase or otherwise, acquire the properties
referred to therein. The right of those who so acquire said properties should
not and can not be superior to that of the creditor who has in his favor an
instrument of mortgage executed for the formalities of the law, in good faith,
and without the least indication of fraud. This is all the more true in the
present case, because, when the plaintiff purchased the automobile in
question on august 22, 1933, he knew, or at least, it is presumed that he
knew, by the mere fact that the instrument of mortgage, Exhibit 2, was
registered in the office of the register of deeds of Manila, that said
automobile was subject to a mortgage lien. In purchasing it, with full
knowledge that such circumstances existed, it should be presumed that he
did so, very much willing to respect the lien existing thereon, since he

should not have expected that with the purchase, he would acquire a better
right than that which the vendor then had.
For all the foregoing consideration, finding as this court finds that the
decision appealed from is in accordance with law, the same is hereby
affirmed, with the costs to the appellant. So ordered.
Avancea C.J., Villa-Real, Abad Santos, Imperial and Laurel, JJ., concur.

Prudential Bank vs. Alviar, 464 SCRA 353 (2005)

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 150197, July 28, 2005
PRUDENTIAL
BANK,
vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

Petitioner,

DECISION
Tinga, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner Prudential Bank seeks the reversal of the Decision[1] of the
Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543
affirming the Decision of the Regional Trial Court (RTC) of Pasig City,
Branch 160, in favor of respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the
registered owners of a parcel of land in San Juan, Metro Manila, covered by
Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of
Rizal. On 10 July 1975, they executed a deed of real estate mortgage in
favor of petitioner Prudential Bank to secure the payment of a loan worth
P250,000.00.[2] This mortgage was annotated at the back of TCT No.
438157. On 4 August 1975, respondents executed the corresponding
promissory note, PN BD#75/C-252, covering the said loan, which provides
that the loan matured on 4 August 1976 at an interest rate of 12% per
annum with a 2% service charge, and that the note is secured by a real
estate mortgage as aforementioned.[3] Significantly, the real estate
mortgage contained the following clause:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or

________________ hereinafter referred to, irrespective of number, as

DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of mortgage unto the Mortgagee, its
successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or which may hereafter
be erected or constructed thereon, of which the Mortgagor declares that
he/it is the absolute owner free from all liens and incumbrances. . . .[4]
On 22 October 1976, Don Alviar executed another promissory note, PN
BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying
that the loan was secured by a "hold-out" on the mortgagors foreign
currency savings account with the bank under Account No. 129, and that
the mortgagors passbook is to be surrendered to the bank until the amount
secured by the "hold-out" is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading,
Inc., of which the husband and wife were President and Chairman of the
Board and Vice President,[6] respectively, PN BD#76/C-430 covering
P545,000.000. As provided in the note, the loan is secured by "Clean-Phase
out TOD CA 3923," which means that the temporary overdraft incurred by
Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan
in compliance with a Central Bank circular directing the discontinuance of
overdrafts.[7]
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the
latter of its approval of a straight loan of P545,000.00, the proceeds of which
shall be used to liquidate the outstanding loan of P545,000.00 TOD. The
letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and
the chattel mortgage on various heavy and transportation equipment.[8]

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be

applied to the obligations of G.B. Alviar Realty and Development, Inc. and
for the release of the real estate mortgage for the P450,000.00 loan
covering the two (2) lots located at Vam Buren and Madison Streets, North
Greenhills, San Juan, Metro Manila. The payment was acknowledged by
petitioner who accordingly released the mortgage over the two properties.[9]
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the
mortgage on the property covered by TCT No. 438157. Per petitioners
computation, respondents had the total obligation of P1,608,256.68,
covering the three (3) promissory notes, to wit: PN BD#75/C-252 for
P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for
P545,000.00, plus assessed past due interests and penalty charges. The
public auction sale of the mortgaged property was set on 15 January
1980.[10]
Respondents filed a complaint for damages with a prayer for the issuance of
a writ of preliminary injunction with the RTC of Pasig,[11] claiming that they
have paid their principal loan secured by the mortgaged property, and thus
the mortgage should not be foreclosed. For its part, petitioner averred that
the payment of P2,000,000.00 made on 6 March 1979 was not a payment
made by respondents, but by G.B. Alviar Realty and Development Inc.,
which has a separate loan with the bank secured by a separate
mortgage.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the
Sheriff to proceed with the extra-judicial foreclosure.[13] Respondents
sought reconsideration of the decision.[14] On 24 August 1994, the trial
court issued an Order setting aside its earlier decision and awarded
attorneys fees to respondents.[15] It found that only the P250,000.00 loan
is secured by the mortgage on the land covered by TCT No. 438157. On the
other hand, the P382,680.83 loan is secured by the foreign currency deposit
account of Don A. Alviar, while the P545,000.00 obligation was an
unsecured loan, being a mere conversion of the temporary overdraft of
Donalco Trading, Inc. in compliance with a Central Bank circular. According
to the trial court, the "blanket mortgage clause" relied upon by petitioner
applies only to future loans obtained by the mortgagors, and not by parties
other than the said mortgagors, such as Donalco Trading, Inc., for which
respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following

assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only
the promissory note BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for
P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered
by the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for
P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract
of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffsappellees attorneys fees for P20,000.00.[16]
The Court of Appeals affirmed the Order of the trial court but deleted the
award of attorneys fees.[17] It ruled that while a continuing loan or credit
accommodation based on only one security or mortgage is a common
practice in financial and commercial institutions, such agreement must be
clear and unequivocal. In the instant case, the parties executed different
promissory notes agreeing to a particular security for each loan. Thus, the
appellate court ruled that the extrajudicial foreclosure sale of the property for
the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid
the P250,000.00 covered by PN BD#75/C-252 since the payment of
P2,000,000.00 adverted to by respondents was issued for the obligations of
G.B. Alviar Realty and Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of
errors raised in the Court of Appeals as grounds herein.
Petitioner maintains that the "blanket mortgage clause" or the "dragnet
clause" in the real estate mortgage expressly covers not only the
P250,000.00 under PN BD#75/C-252, but also the two other promissory
notes included in the application for extrajudicial foreclosure of real estate
mortgage.[20] Thus, it claims that it acted within the terms of the mortgage

contract when it filed its petition for extrajudicial foreclosure of real estate
mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,[21] Tad-Y v.
Philippine National Bank,[22] Quimson v. Philippine National Bank,[23] C &
C Commercial v. Philippine National Bank,[24] Mojica v. Court of
Appeals,[25] and China Banking Corporation v. Court of Appeals,[26] all of
which upheld the validity of mortgage contracts securing future
advancements.
Anent the Court of Appeals conclusion that the parties did not intend to
include PN BD#76/C-345 in the real estate mortgage because the same
was specifically secured by a foreign currency deposit account, petitioner
states that there is no law or rule which prohibits an obligation from being
covered by more than one security.[27] Besides, respondents even
continued to withdraw from the same foreign currency account even while
the promissory note was still outstanding, strengthening the belief that it was
the real estate mortgage that principally secured all of respondents
promissory notes.[28] As for PN BD#76/C-345, which the Court of Appeals
found to be exclusively secured by the Clean-Phase out TOD 3923,
petitioner posits that such security is not exclusive, as the "dragnet clause"
of the real estate mortgage covers all the obligations of the respondents.[29]
Moreover, petitioner insists that respondents attempt to evade foreclosure
by the expediency of stating that the promissory notes were executed by
them not in their personal capacity but as corporate officers. It claims that
PN BD#76/C-430 was in fact for home construction and personal
consumption of respondents. Thus, it states that there is a need to pierce
the veil of corporate fiction.[30]
Finally, petitioner alleges that the mortgage contract was executed by
respondents with knowledge and understanding of the "dragnet clause,"
being highly educated individuals, seasoned businesspersons, and political
personalities.[31] There was no oppressive use of superior bargaining
power in the execution of the promissory notes and the real estate
mortgage.[32]
For their part, respondents claim that the "dragnet clause" cannot be applied
to the subsequent loans extended to Don Alviar and Donalco Trading, Inc.
since these loans are covered by separate promissory notes that expressly
provide for a different form of security.[33] They reiterate the holding of the
trial court that the "blanket mortgage clause" would apply only to loans

obtained jointly by respondents, and not to loans obtained by other

parties.[34] Respondents also place a premium on the finding of the lower
courts that the real estate mortgage clause is a contract of adhesion and
must be strictly construed against petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity
of the "blanket mortgage clause" or the "dragnet clause"; (ii) the coverage of
the "blanket mortgage clause"; and consequently, (iii) the propriety of
seeking foreclosure of the mortgaged property for the non-payment of the
three loans.
At this point, it is important to note that one of the loans sought to be
included in the "blanket mortgage clause" was obtained by respondents for
Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by
respondents on behalf of Donalco Trading, Inc. and not in their personal
capacity. Petitioner asks the Court to pierce the veil of corporate fiction and
hold respondents liable even for obligations they incurred for the
corporation. The mortgage contract states that the mortgage covers "as well
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary." Well-settled
is the rule that a corporation has a personality separate and distinct from
that of its officers and stockholders. Officers of a corporation are not
personally liable for their acts as such officers unless it is shown that they
have exceeded their authority.[36] However, the legal fiction that a
corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or
an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.[37] PN BD#76/C430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the "blanket mortgage
clause." Moreover, petitioner is unable to show that respondents are hiding
behind the corporate structure to evade payment of their obligations. Save
for the notation in the promissory note that the loan was for house
construction and personal consumption, there is no proof showing that the
loan was indeed for respondents personal consumption. Besides, petitioner
agreed to the terms of the promissory note. If respondents were indeed the
real parties to the loan, petitioner, a big, well-established institution of long
standing that it is, should have insisted that the note be made in the name of

respondents themselves, and not to Donalco Trading Inc., and that they
sign the note in their personal capacity and not as officers of the
corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet clause" in American
jurisprudence, is one which is specifically phrased to subsume all debts of
past or future origins. Such clauses are "carefully scrutinized and strictly
construed."[38] Mortgages of this character enable the parties to provide
continuous dealings, the nature or extent of which may not be known or
anticipated at the time, and they avoid the expense and inconvenience of
executing a new security on each new transaction.[39] A "dragnet clause"
operates as a convenience and accommodation to the borrowers as it
makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of
extra legal services, recording fees, et cetera.[40] Indeed, it has been
settled in a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts,[41] and the amounts named as
consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered.[42]
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of mortgage unto the Mortgagee, its
successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or which may hereafter
be erected or constructed thereon, of which the Mortgagor declares that

he/it is the absolute owner free from all liens and incumbrances. . . .[43]
(Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and
respondents intended the real estate mortgage to secure not only the
P250,000.00 loan from the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents. The terms of the
above provision being clear and unambiguous, there is neither need nor
excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of "dragnet
clauses" or "blanket mortgage clauses," are of a different factual milieu from
the instant case. There, the subsequent loans were not covered by any
security other than that for the mortgage deeds which uniformly contained
the "dragnet clause."
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar
was secured by a "hold-out" on his foreign currency savings account, while
PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of
assignment on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and
by a chattel mortgage on various heavy and transportation equipment. The
matter of PN BD#76/C-430 has already been discussed. Thus, the critical
issue is whether the "blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended, or particularly, to
PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on
this question. One school advocates that a "dragnet clause" so worded as to
be broad enough to cover all other debts in addition to the one specifically
secured will be construed to cover a different debt, although such other debt
is secured by another mortgage.[44] The contrary thinking maintains that a
mortgage with such a clause will not secure a note that expresses on its
face that it is otherwise secured as to its entirety, at least to anything other
than a deficiency after exhausting the security specified therein,[45] such
deficiency being an indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the arrangement.[46]

The latter school represents the better position. The parties having
conformed to the "blanket mortgage clause" or "dragnet clause," it is
reasonable to conclude that they also agreed to an implied understanding
that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the
sufficiency of the first security is a corollary component of the "dragnet
clause." But of course, there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for which another
security was given it could not be inferred that such loan was made in
reliance solely on the original security with the "dragnet clause," but rather,
on the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in
the cited case made an inquiry whether the second loan was made in
reliance on the original security containing a "dragnet clause." Accordingly,
finding a different security was taken for the second loan no intent that the
parties relied on the security of the first loan could be inferred, so it was
held. The rationale involved, the court said, was that the "dragnet clause" in
the first security instrument constituted a continuing offer by the borrower to
secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the
offer.[47]
In another case, it was held that a mortgage with a "dragnet clause" is an
"offer" by the mortgagor to the bank to provide the security of the mortgage
for advances of and when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent advance was
made because (1) the second note was secured by a chattel mortgage on
certain vehicles, and the clause therein stated that the note was secured by
such chattel mortgage; (2) there was no reference in the second note or
chattel mortgage indicating a connection between the real estate mortgage
and the advance; (3) the mortgagor signed the real estate mortgage by her
name alone, whereas the second note and chattel mortgage were signed by
the mortgagor doing business under an assumed name; and (4) there was
no allegation by the bank, and apparently no proof, that it relied on the
security of the real estate mortgage in making the advance.[48]

Indeed, in some instances, it has been held that in the absence of clear,
supportive evidence of a contrary intention, a mortgage containing a
"dragnet clause" will not be extended to cover future advances unless the
document evidencing the subsequent advance refers to the mortgage as
providing security therefor.[49]
It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory
notes. While the existence and validity of the "dragnet clause" cannot be
denied, there is a need to respect the existence of the other security given
for PN BD#76/C-345. The foreclosure of the mortgaged property should
only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any
amount not covered by the security for the second promissory note. As held
in one case, where deeds absolute in form were executed to secure any
and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the
payment of such note, was in the absence of a special agreement to the
contrary, within the protection of the mortgage, notwithstanding the giving of
the special security.[50] This is recognition that while the "dragnet clause"
subsists, the security specifically executed for subsequent loans must first
be exhausted before the mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory
notes subject of this case, is a contract of adhesion, to which respondents
only participation was the affixing of their signatures or "adhesion"
thereto.[51] A contract of adhesion is one in which a party imposes a readymade form of contract which the other party may accept or reject, but which
the latter cannot modify.[52]
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be
strictly construed against the party responsible for its preparation.[53] If the
parties intended that the "blanket mortgage clause" shall cover subsequent
advancement secured by separate securities, then the same should have
been indicated in the mortgage contract. Consequently, any ambiguity is to
be taken contra proferentum, that is, construed against the party who
caused the ambiguity which could have avoided it by the exercise of a little
more care.[54] To be more emphatic, any ambiguity in a contract whose

terms are susceptible of different interpretations must be read against the

party who drafted it,[55] which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared
by petitioner, and as such are likewise contracts of adhesion. Being of such
nature, the same should be interpreted strictly against petitioner and with
even more reason since having been accomplished by respondents in the
presence of petitioners personnel and approved by its manager, they could
not have been unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and
the trial court found that respondents have not yet paid the P250,000.00,
and gave no credence to their claim that they paid the said amount when
they paid petitioner P2,000,000.00. Thus, the mortgaged property could still
be properly subjected to foreclosure proceedings for the unpaid
P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A
SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of
course to defenses which are available to respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 59543 is AFFIRMED.
Costs against petitioner.
SO ORDERED.

Cuyco vs. Cuyco, 487 SCRA 693 (2006)

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 168736

April 19, 2006

SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, Petitioners,

vs.
SPOUSES RENATO CUYCO and FILIPINA CUYCO, Respondents.

DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the Decision1 of the Court of
Appeals (CA) in CA G.R. CV No. 62352 dated November 5, 2003 which
modified the Decision2 of the Regional Trial Court (RTC) of Quezon City,
Branch 105 in Civil Case No. Q-97-32130 dated January 27, 1999, as well
as the Resolution3 dated June 28, 2005 denying the motion for
reconsideration thereof.
The facts of the case are as follows:
Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the
amount of P1,500,000.00 from respondents, spouses Renato and Filipina
Cuyco, payable within one year at 18% interest per annum, and secured by
a Real Estate Mortgage4 over a parcel of land with improvements thereon
situated in Cubao, Quezon City covered by TCT No. RT-43723 (188321).5
Subsequently, petitioners obtained additional loans from the respondents in
the aggregate amount of P1,250,000.00, broken down as follows: (1)
P150,000.00 on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3)
P500,000.00 on September 5, 1992; (4) P200,000.00 on October 29, 1992;
and (5) P250,000.00 on January 13, 1993.6

Petitioners made payments amounting to P291,700.00,7 but failed to settle

their outstanding loan obligations. Thus, on September 10, 1997,
respondents filed a complaint8 for foreclosure of mortgage with the RTC of
Quezon City, which was docketed as Civil Case No. Q-97-32130. They
alleged that petitioners loans were secured by the real estate mortgage;
that as of August 31, 1997, their indebtedness amounted to P6,967,241.14,
inclusive of the 18% interest compounded monthly; and that petitioners
refusal to settle the same entitles the respondents to foreclose the real
estate mortgage.
Petitioners filed a motion to dismiss9 on the ground that the complaint states
no cause of action which was denied by the RTC10 for lack of merit.
In their answer,11 petitioners admitted their loan obligations but argued that
only the original loan of P1,500,000.00 was secured by the real estate
mortgage at 18% per annum and that there was no agreement that the
same will be compounded monthly.
On January 27, 1999, the RTC rendered judgment12 in favor of the
respondents, the dispositive portion of which reads:
WHEREFORE, in the light of the foregoing, the Court renders judgment on
the Complaint in favor of the plaintiffs and hereby orders the defendants to
pay to the Court or to the plaintiffs the amounts of P6,332,019.84, plus
interest until fully paid, P25,000.00 as attorneys fees, and costs of suit,
within a period of one hundred and twenty (120) days from the entry of
judgment, and in case of default of such payment and upon proper motion,
the property shall be ordered sold at public auction to satisfy the judgment.
Further, defendants[] counterclaim is dismissed.
SO ORDERED.13
Petitioners appealed to the CA reiterating their previous claim that only the
amount of P1,500,000.00 was secured by the real estate mortgage.14 They
also contended that the RTC erred in ordering the foreclosure of the real
estate mortgage to satisfy the total indebtedness of P6,532,019.84, as of
January 10, 1999, plus interest until fully paid, and in imposing legal interest
of 12% per annum on the stipulated interest of 18% from the filing of the
case until fully paid.15

On November 5, 2003, the CA partially granted the petition and modified the
RTC decision insofar as the amount of the loan obligations secured by the
real estate mortgage. It held that by express intention of the parties, the real
estate mortgage secured the original P1,500,000.00 loan and the
subsequent loans of P150,000.00 and P500,000.00 obtained on July 1,
1992 and September 5, 1992, respectively. As regards the loans obtained
on May 31, 1992, October 29, 1992 and January 13, 1993 in the amounts of
P150,000.00, P200,000.00 and P250,000.00, respectively, the appellate
tribunal held that the parties never intended the same to be secured by the
real estate mortgage. The Court of Appeals also found that the trial court
properly imposed 12% legal interest on the stipulated interest from the date
of filing of the complaint. The dispositive portion of the Decision reads:
WHEREFORE, the instant appeal is PARTIALLY GRANTED. The assailed
decision of the Regional Trial Court of Quezon City, Branch 105, in Civil
Case No. Q-97-32130 is hereby MODIFIED to read:
"WHEREFORE, in the light of the foregoing, the Court renders judgment on
the Complaint in favor of the plaintiffs and hereby orders the defendants to
pay to the Court or to the plaintiffs the amount of P2,149,113.92[,]
representing the total outstanding principal loan of the said defendants, plus
the stipulated interest at the rate of 18% per annum accruing thereon until
fully paid, within a period of one hundred and twenty days from the entry of
judgment, and in case of default of such payment and upon motion, the
property, subject of the real estate mortgage contract, shall be ordered sold
at public auction in satisfaction of the mortgage debts.1avvphil.net
Defendants are further, ordered to pay the plaintiffs the following:
1. the legal interest at the rate of 12% per annum on the stipulated
interest of 18% per annum, computed from the filing of the complaint
until fully paid;
2. the sum of P25,000.00 as and for attorneys fees; and
3. the costs of suit."
SO ORDERED.16
Hence, the instant petition for review on the sole issue:

WHETHER OR NOT PETITIONERS MUST PAY RESPONDENTS LEGAL

INTEREST OF 12% PER ANNUM ON THE STIPULATED INTEREST OF
18% PER ANNUM, COMPUTED FROM THE FILING OF THE COMPLAINT
UNTIL FULL PAID.17
Petitioners contend that the imposition of the 12% legal interest per annum
on the stipulated interest of 18% per annum computed from the filing of the
complaint until fully paid was not provided in the real estate mortgage
contract, thus, the same has no legal basis.
We are not persuaded.
While a contract is the law between the parties,18 it is also settled that an
existing law enters into and forms part of a valid contract without the need
for the parties expressly making reference to it.19 Thus, the lower courts
correctly applied Article 2212 of the Civil Code as the basis for the
imposition of the legal interest on the stipulated interest due. It reads:
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
The foregoing provision has been incorporated in the comprehensive
summary of existing rules on the computation of legal interest enunciated by
the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,20 to wit:
1. When an obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established

with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit. (Emphasis supplied)
In the case at bar, the evidence shows that petitioners obtained several
loans from the respondent, some of which as held by the CA were secured
by real estate mortgage and earned an interest of 18% per annum. Upon
default thereof, respondents demanded payment from the petitioners by
filing an action for foreclosure of the real estate mortgage. Clearly, the case
falls under the rule stated in paragraph 1.
Applying the rules in the computation of interest, the principal amount of
loans subject of the real estate mortgage must earn the stipulated interest of
18% per annum, which interest, as long as unpaid, also earns legal interest
of 12% per annum, computed from the date of the filing of the complaint on
September 10, 1997 until finality of the Courts Decision. Such interest is not
due to stipulation but due to the mandate of the law21 as embodied in Article
2212 of the Civil Code. From such date of finality, the total amount due shall
earn interest of 12% per annum until satisfied.22
Certainly, the computed interest from the filing of the complaint on
September 10, 1997 would no longer be true upon the finality of this Courts
decision. In accordance with the rules laid down in Eastern Shipping Lines,
Inc. v. Court of Appeals, we derive the following formula23 for the RTCs
guidance:
TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments made

Interest = principal x 18 % per annum x no. of years from due date until
finality of judgment
Interest on interest = Interest computed as of the filing of the complaint
(September 10, 1997) x 12% x no. of years until finality of judgment
Total amount due as of the date of finality of judgment will earn an interest
of 12% per annum until fully paid.
In Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing
Corporation,24 this Court held that the total amount due on the contracts of
loan may be easily determined by the trial court through a simple
mathematical computation based on the formula specified above.
Mathematics is an exact science, the application of which needs no further
proof from the parties.
As regards what loans were secured by the real estate mortgage,
respondents contended that all five additional loans were intended by the
parties to be secured by the real estate mortgage. Thus, the CA erred in
ruling that only two of the five additional loans were secured by the real
estate mortgage when the documents evidencing said loans would show at
least three loans were secured by the real estate mortgage, namely: (1)
P150,000.00 obtained on May 31, 1992; (2) P150,000.00 obtained on July
1, 1992; and (3) P500,000.00 obtained on September 5, 1992.25
In their Reply, petitioners alleged that their petition only raised the sole issue
of interest on the interest due, thus, by not filing their own petition for review,
respondents waived their privilege to bring matters for the Courts review
that do not deal with the sole issue raised.
Procedurally, the appellate court in deciding the case shall consider only the
assigned errors, however, it is equally settled that the Court is clothed with
ample authority to review matters not assigned as errors in an appeal, if it
finds that their consideration is necessary to arrive at a just disposition of
the case.26
Moreover, as an exception to the rule that findings of facts of the CA are
conclusive and binding on the Court,27 an independent evaluation of facts
may be done by it when the findings of facts are conflicting,28 as in this
case.

The RTC held that all the additional loans were secured by the real estate
mortgage, thus:
There is, therefore, a preponderance of evidence to show that the parties
agreed that the additional loans would be against the mortgaged property. It
is of no moment that the Deed of Mortgage (Exh. B) was not amended and
thereafter annotated at the back of the title (Exh. C) because under Article
2125 of the Civil Code, if the instrument of mortgage is not recorded, the
mortgage is nevertheless binding between the parties. It is extremely
difficult for the court to perceive that the plaintiffs required the defendants to
execute a mortgage on the first loan and thereafter fail to do so on the
succeeding loans. Such contrary behavior is unlikely.29
The CA modified the RTC decision holding that:
However, the real estate mortgage contract was supplemented by the
express intention of the mortgagors (defendants-appellants) to secure the
subsequent loans they obtained from the mortgagees (plaintiffs-appellees),
on 01 July 1992, in the amount of P150,000.00, and on 05 September 1992,
in the amount of P500,000.00. The mortgagors (defendants-appellants)
intention to secure a larger amount than that stated in the real estate
mortgage contract was unmistakable in the acknowledgment receipts they
issued on the said loans. The acknowledgment receipts read:
"July 1, [1]992
"Received from Mr. & Mrs. Renato Q. Cuyco PCIB Ck # 498243 in the
amount of P150,000.00 July 1/92 as additional loan against mortgaged
property TCT No. RT-43723 (188321) Q.C.
(SGD) Adelina S. Cuyco"
"Sept. 05/92
"Received from Mr. R. Cuyco the amount of P500,000.00 (five hundred
thousand) PCIB Ck # 468657 as additional loan from mortgage property
TCT RT-43723.
(SGD) Adelina S. Cuyco"

In such case, the specific amount mentioned in the real estate mortgage
contract no longer controls. By express intention of the mortgagors
(defendants-appellants) the real estate mortgage contract, as
supplemented, secures the P1,500,000.00 loan obtained on 25 November
1991; the P150,000.00 loan obtained on 01 July 1992; and the P500,000.00
loan obtained on 05 September 1992. All these loans are subject to
stipulated interest of 18% per annum provided in the real estate mortgage
contract.
With respect to the other subsequent loans of the defendants-appellants in
the amount of P150,000.00, obtained on 31 May 1992; in the amount of
P200,000.00, obtained on 29 October 1992; and, in the amount of
P250,000.00, obtained on 13 January 1993, nothing in the records remotely
suggests that the mortgagor (defendants-appellants), likewise, intended the
said loans to be secured by the real estate mortgage contract.
Consequently, we rule that the trial court did err in declaring said loans to be
secured by the real estate mortgage contract.30
As a general rule, a mortgage liability is usually limited to the amount
mentioned in the contract.31 However, the amounts named as consideration
in a contract of mortgage do not limit the amount for which the mortgage
may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered. This stipulation is
valid and binding between the parties and is known in American
Jurisprudence as the "blanket mortgage clause," also known as a "dragnet
clause." 32
A "dragnet clause" operates as a convenience and accommodation to the
borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et cetera.33
While a real estate mortgage may exceptionally secure future loans or
advancements, these future debts must be sufficiently described in the
mortgage contract. An obligation is not secured by a mortgage unless it
comes fairly within the terms of the mortgage contract.34
The pertinent provisions of the November 26, 1991 real estate mortgage
reads:

That the MORTGAGOR is indebted unto the MORTGAGEE in the sum of

ONE MILLION FIVE THOUSAND PESOS (sic) (1,500,000.00) Philippine
Currency, receipt whereof is hereby acknowledged and confessed, payable
within a period of one year, with interest at the rate of eighteen percent
(18%) per annum;
That for and in consideration of said indebtedness, the MORTGAGOR does
hereby convey and deliver by way of MORTGAGE unto said MORTGAGEE,
the latters heirs and assigns, the following realty together with all the
improvements thereon and situated at Cubao, Quezon City, and described
as follows:
xxxx
PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause
to be paid unto the MORTGAGEE or his heirs and assigns, the said
indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS
(1,500,000.00), Philippine Currency, together with the agreed interest
thereon, within the agreed term of one year on a monthly basis then this
MORTGAGE shall be discharged, and rendered of no force and effect,
otherwise it shall subsist and be subject to foreclosure in the manner and
form provided by law.
It is clear from a perusal of the aforequoted real estate mortgage that there
is no stipulation that the mortgaged realty shall also secure future loans and
advancements. Thus, what applies is the general rule above stated.
Even if the parties intended the additional loans of P150,000.00 obtained on
May 30, 1992, P150,000.00 obtained on July 1, 1992, and P500,00.00
obtained on September 5, 1992 to be secured by the same real estate
mortgage, as shown in the acknowledgement receipts, it is not sufficient in
law to bind the realty for it was not made substantially in the form prescribed
by law.
In order to constitute a legal mortgage, it must be executed in a public
document, besides being recorded. A provision in a private document,
although denominating the agreement as one of mortgage, cannot be
considered as it is not susceptible of inscription in the property registry. A
mortgage in legal form is not constituted by a private document, even if such
mortgage be accompanied with delivery of possession of the mortgage

property.35 Besides, by express provisions of Section 127 of Act No. 496, a

mortgage affecting land, whether registered under said Act or not registered
at all, is not deemed to be sufficient in law nor may it be effective to
encumber or bind the land unless made substantially in the form therein
prescribed. It is required, among other things, that the document be signed
by the mortgagor executing the same, in the presence of two witnesses, and
acknowledged as his free act and deed before a notary public. A mortgage
constituted by means of a private document obviously does not comply with
such legal requirements.36
What the parties could have done in order to bind the realty for the
additional loans was to execute a new real estate mortgage or to amend the
old mortgage conformably with the form prescribed by the law. Failing to do
so, the realty cannot be bound by such additional loans, which may be
recovered by the respondents in an ordinary action for collection of sums of
money.
Lastly, the CA held that to discharge the real estate mortgage, payment only
of the principal and the stipulated interest of 18% per annum is sufficient as
the mortgage document does not contain a stipulation that the legal interest
on the stipulated interest due, attorneys fees, and costs of suit must be paid
first before the same may be discharged.37
We do not agree.
Section 2, Rule 68 of the Rules of Court provides:
SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial
in such action the court shall find the facts set forth in the complaint to be
true, it shall ascertain the amount due to the plaintiff upon the
mortgage debt or obligation, including interest and other charges as
approved by the court, and costs, and shall render judgment for the sum
so found due and order that the same be paid to the court or to the
judgment obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment, and that in
default of such payment the property shall be sold at public auction to
satisfy the judgment. (Emphasis added)
Indeed, the above provision of the Rules of Court provides that the
mortgaged property may be charged not only for the mortgage debt or

obligation but also for the interest, other charges and costs approved by the
court. Thus, to discharge the real estate mortgage, petitioners must pay the
respondents (1) the total amount due, as computed in accordance with the
formula indicated above, that is, the principal loan of P1,500,000.00, the
stipulated interest of 18%, the interest on the stipulated interest due of 12%
computed from the filing of the complaint until finality of the decision less
partial payments made, (2) the 12% legal interest on the total amount due
from finality until fully satisfied, (3) the reasonable attorneys fees of
P25,000.00 and (4) the costs of suit, within the period specified by the
Rules. Should the petitioners default in the payment thereof, the property
shall be sold at public auction to satisfy the judgment.
WHEREFORE, in view of the foregoing, the Decision of the Court of
Appeals in CA G.R. CV No. 62352 dated November 5, 2003, which modified
the Decision of the Regional Trial Court of Quezon City, Branch 105, in Civil
Case No. Q-97-32130, is AFFIRMED with the MODIFICATIONS that
petitioners are ordered to pay the respondents (1) the total amount due, as
computed by the RTC in accordance with the formula specified above, (2)
the legal interest of 12% per annum on the total amount due from such
finality until fully paid, (3) the reasonable amount of P25,000.00 as
attorneys fees, and (4) the costs of suit, within a period of not less than 90
days nor more than 120 days from the entry of judgment, and in case of
default of such payment the property shall be sold at public auction to
satisfy the judgment.
SO ORDERED.

Garrido vs. Tuason, 24 SCRA 727 (1968)

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-23768

August 23, 1968

JOSE
GARRIDO,
vs.
PILAR G. TUASON, defendant-appellee.
Pedro
Bernardino
Flores
David S. Ignacio for defendant-appellee.

plaintiff-appellant,

for

plaintiff-appellant.

CONCEPCION, C.J.:
Appeal from a decision of the Court of First Instance of Manila, certified to
us by the Court of Appeals, only questions of law being raised by plaintiffappellant.
On October 17, 1959, Jose Garrido commenced Civil Case No. 71763 of
the Municipal Court of Manila, for the foreclosure of a chattel mortgage,
executed in his favor by defendant, Pilar G. Tuason, to guarantee the
payment of a debt in the sum of P1,000, as well as for the recovery of
attorney's fees and the costs. After appropriate proceedings, decision was
rendered, on November 14, 1959, ordering the defendant to pay to plaintiff
"the sum of P1,000 with interest thereon at the rate of 1% per month from
June 30, 1959 until the whole amount is fully paid, plus the sum of P100 for
attorney's fees, and the costs."
In compliance with a writ of execution, issued on December 9, 1959, after
this decision had become final, a car of the defendant was, on January 2,
1960, sold, by the Provincial Sheriff of Rizal, at public auction, to the
plaintiff, as the highest bidder, for the sum of P550. On January 28, 1960,
plaintiff filed two (2) motions, namely: one, praying that the sum of P165,
allegedly spent by him to carry out said writ of execution, be added to the
unsatisfied portion of the aforementioned decision, presumably as part of

the costs, and another, for an alias writ of execution for the sum of
P1,290.58, as the aggregate outstanding balance allegedly due under said
decision. Both motions were denied in an order dated February 27, 1960.
Plaintiff's motion for reconsideration of this order was denied on March 19,
1960.1wph1.t
Soon later, or on April 1, 1960, plaintiff commenced Civil Case No. 76462,
of said court, against the same defendant whose husband was included,
as her co-defendant, on May 27, 1960 for the recovery of said alleged
balance of P1,290.58. On motion of said defendants, plaintiff's complaint in
said case No. 76462 was dismissed by the Municipal Court, on August 31,
1960. Plaintiff appealed to the Court of First Instance of Manila, which, in
due course rendered its decision, on April 17, 1961, dismissing the case,
without pronouncement as to costs, upon the ground that, pursuant to
Article 2115 of the Civil Code of the Philippines, plaintiff has no cause of
action against the defendants. Hence, this appeal by the plaintiff.
Article 2115 of said Code reads:1wph1.t
... The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper
case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price
of the sale is less, neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary.
The Court of First Instance must have applied this precept in view of Article
2141 of the same Code, pursuant to which the provisions thereof on pledge
shall be applicable to chattel mortgages "insofar as they are not in conflict
with the Chattel Mortgage Law." We have already held, however,1 that said
Article 2115 is inconsistent with the provisions of the Chattel Mortgage
Law,2 and that, accordingly, the chattel mortgage creditor may maintain an
action3 for the deficiency.
Then, again, said Court would seem to have acted under the impression,
that, since Case No. 71763 was one for the foreclosure of a chattel
mortgage, the decision therein rendered was for such foreclosure; but such
was not the nature of said decision, for it merely ordered the defendant to
pay the sum of P1,000, with interest thereon, in addition to attorney's fees

and the costs. It did not order the sale of the property mortgaged to the
plaintiff or of any other particular property, for the satisfaction of his credit
against the defendant. It did not purport to enforce plaintiff's lien over the
mortgaged property. In other words, it was an ordinary money judgment, to
which said Articles 2115 and 2141 were absolutely irrelevant.
The municipal court erred, therefore, in denying plaintiff's motion of January
28, 1960, for the issuance of an alias writ of execution in Case No. 71763,
less than five (5) years having elapsed since the decision therein was
rendered on November 14, 1959. As a consequence, plaintiff could have
and should have appealed from the order of denial of said motion; but, he
did not do so, and, instead, he brought the case at bar, thereby allowing
said order to become final. Thus, the principle of res adjudicata bars the
present action, which, accordingly, was dismissed properly.
WHEREFORE, the decision appealed from is hereby affirmed, with costs
against plaintiff-appellant. It is so ordered.1wph1.t
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

Magna Financial Services Group, Inc. vs. Colarina, 477 SCRA

245(2005)
SECOND DIVISION
MAGNA FINANCIAL SERVICES GROUP, INC., P e t i t i o n e r , vs. ELIAS
COLARINA, R e s p o n d e n t. G.R. No. 158635 December 9, 2005

DECISION

CHICO-NAZARIO, J.:

The undisputed facts of this case show that on 11 June 1997, Elias Colarina
bought on installment from Magna Financial Services Group, Inc., one (1)
unit of Suzuki Multicab, more particularly described as follows:

MAKE - SUZUKI MULTICAB

MODEL - ER HT
ENGINE NO. - 834963
FRAME NO. - LTO -067886-RO7-C
COLOR - WHITE[1]

After making a down payment, Colarina executed a promissory note for the
balance of P229,284.00 payable in thirty-six (36) equal monthly installments
at P6,369.00 monthly, beginning 18 July 1997. To secure payment thereof,
Colarina executed an integrated promissory note and deed of chattel
mortgage over the motor vehicle.

Colarina failed to pay the monthly amortization beginning January 1999,

accumulating an unpaid balance of P131,607.00. Despite repeated
demands, he failed to make the necessary payment. On 31 October 2000
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin[2] before the Municipal Trial Court in Cities
(MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.[3] Upon
the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC.
On 27 December 2000, summons, together with a copy of the Writ of
Replevin, was served on Colarina who voluntarily surrendered physical
possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January
2001, the aforesaid motor vehicle was turned over by the sheriff to Magna
Financial Services Group, Inc.[4] On 12 July 2001, Colarina was declared in
default for having filed his answer after more than six (6) months from the
service of summons upon him. Thereupon, the trial court rendered judgment
based on the facts alleged in the Complaint. In a decision dated 23 July
2001, it held:[5]

WHEREFORE, judgment is hereby rendered in favor of plaintiff

Magna Financial Services Group, Inc. and against the defendant
Elias Colarina, ordering the latter:
a) to pay plaintiff the principal sum of one hundred thirty
one thousand six hundred seven (P131,607.00)
pesos plus penalty charges at 4.5% per month
computed from January, 1999 until fully paid;
b) to pay plaintiff P10,000.00 for attorney's fees; and
c) to pay the costs.
The foregoing money judgment shall be paid within ninety (90)
days from the entry of judgment. In case of default in such
payment, the one (1) unit of Suzuki Multicab, subject of the writ of
replevin and chattel mortgage, shall be sold at public auction to
satisfy the said judgment.[6]

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch
4, where the case was docketed as Civil Case No. 10013. During the
pendency of his appeal before the RTC, Colarina died and was substituted
in the case by his heirs.[7] In a decision dated 30 January 2002, the RTC
affirmed in toto the decision of the MTCC.[8]

Colarina filed a Petition for Review before the Court of Appeals, docketed as
CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals
rendered its decision[9] holding:

. . . We find merit in petitioners' assertion that the MTC and the

RTC erred in ordering the defendant to pay the unpaid balance of
the purchase price of the subject vehicle irrespective of the fact
that the instant complaint was for the foreclosure of its chattel
mortgage. The principal error committed by the said courts was
their immediate grant, however erroneous, of relief in favor of the
respondent for the payment of the unpaid balance without
considering the fact that the very prayer it had sought was
inconsistent with its allegation in the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial
foreclosure of the chattel mortgage. The fact that the respondent
had unconscionably sought the payment of the unpaid balance
regardless of its complaint for the foreclosure of the said
mortgage is glaring proof that it intentionally devised the same to
deprive the defendant of his rights. A judgment in its favor will in
effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant
for the unpaid balance of its purchase price. In such a case, the
respondent would luckily have its cake and eat it too.
Unfortunately for the defendant, the lower courts had readily,

probably unwittingly, made themselves abettors to respondent's

devise to the detriment of the defendant.
...

WHEREFORE, finding error in the assailed decision, the instant

petition is hereby GRANTED and the assailed decision is hereby
REVERSED AND SET ASIDE. Let the records be remanded to
the court of origin. Accordingly, the foreclosure of the chattel
mortgage over the subject vehicle as prayed for by the
respondent in its complaint without any right to seek the payment
of the unpaid balance of the purchase price or any deficiency
judgment against the petitioners pursuant to Article 1484 of the
Civil Code of the Philippines, is hereby ORDERED.[10]

A Motion for Reconsideration dated 11 February 2003[11] filed by Magna

Financial Services Group, Inc., was denied by the Court of Appeals in a
resolution dated 22 May 2003.[12] Hence, this Petition for Review on
Certiorari based on the sole issue:

WHAT IS THE TRUE NATURE OF A FORECLOSURE OF

CHATTEL MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN
EXERCISE OF THE 3RD OPTION UNDER ARTICLE 1484,
PARAGRAPH 3 OF THE CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of Appeals

and asserts that a mortgage is only an accessory obligation, the principal
one being the undertaking to pay the amounts scheduled in the promissory
note. To secure the payment of the note, a chattel mortgage is constituted

on the thing sold. It argues that an action for foreclosure of mortgage is

actually in the nature of an action for sum of money instituted to enforce the
payment of the promissory note, with execution of the security. In case of an
extrajudicial foreclosure of chattel mortgage, the petition must state the
amount due on the obligation and the sheriff, after the sale, shall apply the
proceeds to the unpaid debt. This, according to petitioner, is the true nature
of a foreclosure proceeding as provided under Rule 68, Section 2 of the
Rules of Court.[13]

On the other hand, respondent countered that the Court of Appeals correctly
set aside the trial court's decision due to the inconsistency of the remedies
or reliefs sought by the petitioner in its Complaint where it prayed for the
custody of the chattel mortgage and at the same time asked for the payment
of the unpaid balance on the motor vehicle.[14]

Article 1484 of the Civil Code explicitly provides:

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

which is payable in installments, the vendor may exercise any of
the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to
pay;
(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held:

'Undoubtedly the principal object of the above amendment (referring to Act
4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses
committed in connection with the foreclosure of chattel mortgages. This
amendment prevents mortgagees from seizing the mortgaged property,
buying it at foreclosure sale for a low price and then bringing the suit against
the mortgagor for a deficiency judgment. The almost invariable result of this
procedure was that the mortgagor found himself minus the property and still
owing practically the full amount of his original indebtedness.

In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:

WHEREFORE, it is respectfully prayed that judgment render

ordering defendant:
1. To pay the principal sum of P131,607.00 with penalty charges
at 4.5% per month from January 1999 until paid plus liquidated
damages.
2. Ordering defendant to reimburse the plaintiff for attorney's fee
at 25% of the amount due plus expenses of litigation at not less
than P10,000.00.
3. Ordering defendant to surrender to the plaintiff the possession
of the Multicab described in paragraph 2 of the complaint.
4. Plaintiff prays for other reliefs just and equitable in the
premises.
It is further prayed that pendent lite, an Order of Replevin issue
commanding the Provincial Sheriff at Legazpi City or any of his
deputies to take such multicab into his custody and, after
judgment, upon default in the payment of the amount adjudged

due to the plaintiff, to sell said chattel at public auction in

accordance with the chattel mortgage law.[16]

In its Memorandum before us, petitioner resolutely declared that it has opted
for the remedy provided under Article 1484(3) of the Civil Code,[17] that is,
to foreclose the chattel mortgage.

It is, however, unmistakable from the Complaint that petitioner preferred to

avail itself of the first and third remedies under Article 1484, at the same
time suing for replevin. For this reason, the Court of Appeals justifiably set
aside the decision of the RTC. Perusing the Complaint, the petitioner, under
its prayer number 1, sought for the payment of the unpaid amortizations
which is a remedy that is provided under Article 1484(1) of the Civil Code,
allowing an unpaid vendee to exact fulfillment of the obligation. At the same
time, petitioner prayed that Colarina be ordered to surrender possession of
the vehicle so that it may ultimately be sold at public auction, which remedy
is contained under Article 1484(3). Such a scheme is not only irregular but
is a flagrant circumvention of the prohibition of the law. By praying for the
foreclosure of the chattel, Magna Financial Services Group, Inc. renounced
whatever claim it may have under the promissory note.[18]

Article 1484, paragraph 3, provides that if the vendor has availed himself of
the right to foreclose the chattel mortgage, 'he shall have no further action
against the purchaser to recover any unpaid balance of the purchase price.
Any agreement to the contrary shall be void. In other words, in all
proceedings for the foreclosure of chattel mortgages executed on chattels
which have been sold on the installment plan, the mortgagee is limited to
the property included in the mortgage.[19]

Contrary to petitioner's claim, a contract of chattel mortgage, which is the

transaction involved in the present case, is in the nature of a conditional

sale of personal property given as a security for the payment of a debt, or

the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a
sum of money or doing some other act named.[20] If the condition is
performed according to its terms, the mortgage and sale immediately
become void, and the mortgagee is thereby divested of his title.[21] On the
other hand, in case of non payment, foreclosure is one of the remedies
available to a mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure that for which the mortgage was
given. Foreclosure may be effected either judicially or extrajudicially, that is,
by ordinary action or by foreclosure under power of sale contained in the
mortgage. It may be effected by the usual methods, including sale of goods
at public auction.[22] Extrajudicial foreclosure, as chosen by the petitioner,
is attained by causing the mortgaged property to be seized by the sheriff, as
agent of the mortgagee, and have it sold at public auction in the manner
prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law.[23]
This rule governs extrajudicial foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of foreclosure
under Article 1484(3) of the Civil Code, it is bound by its election and thus
may not be allowed to change what it has opted for nor to ask for more. On
this point, the Court of Appeals correctly set aside the trial court's decision
and instead rendered a judgment of foreclosure as prayed for by the
petitioner.

The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel. Thus, in Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would
bar the creditor (who chooses to foreclose) from recovering any unpaid
balance.[25] And it is deemed that there has been foreclosure of the
mortgage when all the proceedings of the foreclosure, including the sale of
the property at public auction, have been accomplished.[26]

That there should be actual foreclosure of the mortgaged vehicle was

reiterated in the case of De la Cruz v. Asian Consumer and Industrial
Finance Corporation:[27]

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage
as shown by the fact that no auction sale of the vehicle was ever conducted.
As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No.
50449, 30 January 1982, 111 SCRA 421) '
Under the law, the delivery of possession of the mortgaged
property to the mortgagee, the herein appellee, can only operate
to extinguish appellant's liability if the appellee had actually
caused the foreclosure sale of the mortgaged property when it
recovered possession thereof (Northern Motors, Inc. v. Sapinoso,
33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28
SCRA 161 [1969]; Motors Co., Inc. v. Fernandez, 99 Phil. 782
[1956]).

Be that as it may, although no actual foreclosure as contemplated under the

law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has persistently
and consistently avowed that it elects the remedy of foreclosure, the Court

of Appeals, thus, ruled correctly in directing the foreclosure of the said

vehicle without more.

WHEREFORE, premises considered, the instant petition is DENIED for lack

of merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.

SO ORDERED.

Register of Deeds vs. China Banking Corporation, 4 SCRA

1145 (1962)
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-11964

April 28, 1962

REGISTER
of
DEEDS
OF
MANILA,
petitioner-appellee,
vs.
CHINA BANKING CORPORATION, respondent-appellant.
Office
of
the
Solicitor
General
Sycip-Salazar,
Luna
and
Associates
Alfonso Ponce Enrile as Amicus Curiae.

for
petitioner-appellee.
for
respondent-appellant.

DIZON, J.:
Appeal from a resolution of the Land Registration Commission holding "that
the deed of transfer in favor of an alien bank, subject of the present
Consulta, is unregisterable for being in contravention of the Constitution of
the Philippines".
In an information filed on June 16, 1953 in the Court of First Instance of
Manila (Criminal Case No. 22908) Alfonso Pangilinan and one Guillermo
Chua were charged with qualified theft, the money involved amounting to
P275,000.00. On September 18, 1956, Pangilinan and his wife, Belen Sta.
Ana, executed a public instrument entitled DEED OF TRANSFER whereby,
after admitting his civil liability in favor of his employer, the China Banking
Corporation, in relation to the offense aforesaid, he ceded and transferred to
the latter, in satisfaction thereof, a parcel of land located in the City of
Manila, registered in the name of "Belen Sta. Ana, married to Alfonso
Pangilinan" (Transfer Certificate of Title No. 32230). On October 24, 1956
the deed was presented for registration to the Register of Deeds of the City
of Manila, but because the transferee the China Banking Corporation
was alien-owned and, as such, barred from acquiring lands in the
Philippines, in accordance with the provisions of Section 5, Article XIII of the

Constitution of the Philippines, said officer submitted the matter of its

registration to the Land Registration Commission for resolution. After
granting the parties concerned ample opportunity to submit their views upon
the issue, the Commission issued the resolution appealed from.
Plainly stated, the question before Us is whether appellant an alienowned bank can acquire ownership of the residential lot covered by
Transfer Certificate of Title No. 32230 by virtue of the deed of transfer
mentioned heretofore (Vide pages 1-6 of the Record on Appeal).
Maintaining the affirmative, appellant argues that: (a) the temporary holding
of land by an alien-owned commercial bank under a public instrument such
as the deed of transfer in question "bears no reasonable connection with the
constitutional purpose" underlying the provisions of Section 5, Article XIII of
the Constitution of the Philippines; hence, such holding or acquisition "was
not within the contemplation of the framers of the Constitution"; (b) by
judicial as well as by executive-administrative an legislative construction, the
constitutional prohibition against alien landholding does not preclude
enjoyment by aliens of temporary rights and land; (c) under the provisions of
Section 25 of Republic Act No. 337 (General Banking Act) an alien or an
alien-owned commercial bank may acquire land in the Philippines subject to
the obligation of disposing of it within 5 years from the date of its acquisition.
1wph1.t
Upon the other hand, the argument supporting the appealed resolution is
that the privilege of acquiring real estate granted to commercial banks under
the provisions of Section 25 of Republic Act No. 337 was not intended as an
amendment, much less as a nullification of the constitutional prohibition
against alien acquisition of lands in the Philippines, the same being merely
an exception to the general rule, under existing banking and corporation
laws, that banks and corporations can engage only in the particular
business for which they were specifically created; that a mere statute, like
the republic act relied upon by, appellant, cannot amend the Constitution;
that in connection with the particular constitutional prohibition involved
herein, it is the character and nature of the possession whether in strict
ownership or otherwise and not the length of possession that is material,
the result being that, if real property is to be held in ownership, an alien may
not legally do so even for a single day.

After considering the arguments adduced by appellant in its brief, jointly with
those expounded in the briefs submitted by Alfonso Ponce Enrile and
William H. Quasha and Associates, as amici curiae, on the one hand, and
on the other, those relied upon in the brief submitted by the Office of the
Solicitor General on behalf of the Commission, we are inclined to uphold, as
we do uphold, the appealed resolution.
To support its view appellant relies particularly upon paragraphs (c) and (d),
Section 25 of Republic Act 337 which read as follows: .
SEC. 25. Any commercial bank may purchase, hold, and convey real
estate for the following purposes:
xxx

xxx

xxx

(c) Such shall be conveyed to it in satisfaction of debts previously

contracted in the course of its dealings; .
(d) Such as it shall purchase at sales under judgments, decrees,
mortgages, or trust deeds held by it and such as it shall purchase to
secure debts due to it.
But no such bank shall hold the possession of any real estate under
mortgage or trust deed, or the title and possession of any real estate
purchased to secure any debt due to it, for a longer period than five
years.
Assuming, arguendo, that under the provisions of the aforesaid Act any
commercial bank, whether alien-owned or controlled or not, may purchase
and hold real estate for the specific purposes and in the particular cases
enumerated in Section 25 thereof, we find that the case before Us does not
fall under anyone of them.
Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to
purchase and hold such real estate as shall be conveyed to it in satisfaction
of debts previously contracted in the course of its dealings, We deem it quite
clear and free from doubt that the "debts" referred to in this provision are
only those resulting from previous loans and other similar transactions made
or entered into by a commercial bank in the ordinary course of its business
as such. Obviously, whatever "civil liability" arising from the criminal
offense of qualified theft was admitted in favor of appellant bank by its

former employee, Alfonso Pangilinan, was not a debt resulting from a loan
or a similar transaction had between the two parties in the ordinary course
of banking business.
Neither do the provisions of paragraph (d) of the Same section apply to the
present case because the deed of transfer in question can in no sense be
considered as a sale made by virtue of a judgment, decree, mortgage, or
trust deed held by appellant bank. In the same manner it cannot be said that
the real property in question was purchased by appellant "to secure debts
due to it", considering that, as stated heretofore, the term debt employed in
the pertinent legal provision can logically refer only to such debts as may
become payable to appellant bank as a result of a banking transaction.
That the constitutional prohibition under consideration has for its purpose
the preservation of the patrimony of the nation can not be denied, but
appellant and the amici curiae claim that it should be liberally construed so
that the prohibition be limited to the permanent acquisition of real estate by
aliens whether natural or juridical persons. This, of course, would make
legal the ownership acquired by appellant bank by virtue of the deed of
transfer mentioned heretofore, subject to its obligation to dispose of it in
accordance with law, within 5 years from the date of its acquisition. We can
not give assent to this contention, in view of the fact that the constitutional
prohibition in question is absolute in terms. We have so held in Ong Sui Si
Temple vs. The Register of Deeds of Manila (G. R. No. L-6776, prom. May
21, 1955) where we said, inter alia, the following:
We are of the opinion that the Court below has correctly held that in
view of the absolute terms of section 5, Title XIII, of the Constitution,
the provisions of Act 271 of the old Philippine Commission must be
deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that
Save in cases of hereditary succession no private agricultural
land shall be transferred or assigned except to individuals,
corporations or associations qualified to acquire or hold lands of
the public domain in the Philippines.
the Constitution makes no exception in favor of religious associations.
Neither is there any such saving found in Sections 1 and 2 of Article
XIII, restricting the acquisition of public agricultural lands and other

natural resources to "corporations or associations at least sixty per

centum of the capital of which is owned by such citizens" (of the
Philippines). (Emphasis ours) .
Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao (50
O.G., 5239) where a lease of a parcel of land for a total period of 50 years in
favor of an alien corporation was held to be registerable, the reason we
gave for such ruling was that a lease unlike a sale does not involve
the transfer of dominion over the land, the clear implication from this being
that transfer of ownership over land, even for a limited period of time, is not
permissible in view of the constitutional prohibition. The reason for this is
manifestly the desire and purpose of the Constitution to place and keep in
the hands of the people the ownership over private lands in order not to
endanger the integrity of the nation. Inasmuch as when an alien buys land
he acquires and will naturally exercise ownership over the same, either
permanently or temporarily, to that extent his acquisition jeopardizes the
purpose of the Constitution.
Some may say that this construction is too narrow and unwise; to this we
answer that it is not our privilege to determine the wisdom or lack of wisdom
of this constitutional mandate. It is, rather, Our sworn duty to enforce it free
from qualifications and distinctions that tend to render futile the
constitutional intent.
WHEREFORE, the resolution appealed from is hereby affirmed, with costs.

Paderes vs. Court of Appeals, 463 SCRA 504 (2005)

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
Spouses RODRIGO PADERES and SONIA PADERES , Petitioners, versus - The Hon. COURT OF APPEALS,[1] Hon. CARLOTA P.
VALENZUELA, in her capacity as the Liquidator of Banco Filipino Savings
and Mortgage Bank Respondents. G. R. No. 147074 July 15, 2005
Spouses ISABELO BERGARDO and JUANA HERMINIA BERGARDO,
Petitioners, - versus - The Hon. COURT OF APPEALS,1 Hon. CARLOTA
P. VALENZUELA, in her capacity as the Liquidator of Banco Filipino
Savings and Mortgage Bank, Respondents. G. R. No. 147075 July 15, 2005
xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xx
DECISION
CARPIO MORALES, J.:
By their Petition for review on certiorari under Rule 45 of the Rules of
Court, petitioners spouses Rodrigo and Sonia Paderes and spouses Isabelo
and Juana Bergado seek the reversal of the September 20, 2000
Decision[3] and February 16, 2001 Resolution of the Court of Appeals,
which dismissed their original Petition and denied their Motion for
Reconsideration, respectively.

On September 14, 1982, Manila International Construction Corporation

(MICC) executed a real estate mortgage[4] over 21 registered parcels of
land including the improvements thereon in favor of Banco Filipino Savings

and Mortgage Bank (Banco Filipino) in order to secure a loan of

P1,885,000.00. The mortgage was registered with the Registry of Deeds of
Pasay City and annotated on the corresponding transfer certificates of title
(TCTs) covering the properties on December 17, 1982.[5]

The 21 mortgaged properties included two lots, one with an area of

264 square meters, and the other with an area of 263, both located in the
then Municipality of Paraaque (now Paraaque City) covered by TCT Nos.
61062[6] and 61078,[7] respectively.

Subsequently or in August 1983, MICC sold the lot[8] covered by TCT

No. 61078, together with the house[9] thereon, to the petitioners in the first
case, the Paderes spouses. And on January 9, 1984, MICC sold the
house[10] built on the lot covered by TCT No. 61062 to the petitioners in the
second case, the Bergado spouses. Neither sale was registered,
however.[11]

On January 25, 1985, for failure of MICC to settle its obligations, Banco
Filipino filed a verified Petition[12] for the extrajudicial foreclosure of MICC's
mortgage. At the auction sale of the foreclosed properties on March 25,
1985, Banco Filipino submitted a bid of P3,092,547.82 and was declared
the highest bidder. A Certificate of Sale[13] was issued in its favor which
was registered with the Registry of Deeds and annotated on the
corresponding TCTs covering the mortgaged properties on July 29, 1985.

No redemption of the foreclosed mortgage having been made within

the reglementary period, Carlota P. Valenzuela, the then Liquidator of
Banco Filipino, filed on October 16, 1987 an ex parte Petition[14] for the
issuance of a Writ of Possession of the foreclosed properties with the
Regional Trial Court (RTC) of Makati. After hearing, the Petition was
granted by Order dated September 8, 1988[15] of Branch 59 of the RTC.

On November 7, 1996, copies of the Writ of Possession dated

November 5, 1996, together with a notice addressed to MICC 'and/or All
persons claiming rights under them to voluntarily vacate the premises within
7 days from receipt thereof, were served on petitioners.[16]

Instead of vacating the two lots, however, petitioners filed separate

petitions before the Court of Appeals, docketed as C.A. G.R. Numbers
42470 and 42471 which were later consolidated,[17] assailing the validity of
the Writ of Possession.

On September 20, 2000, the Court of Appeals promulgated its

questioned Decision[18] dismissing the consolidated petitions for lack of
merit and upholding the validity of the Writ of Possession.

Petitioners' Motion for Reconsideration of the appellate court's decision

having been denied by Resolution of February 16, 2001, they jointly come
before this Court arguing that: (1) having purchased their respective
properties in good faith from MICC, they are third parties whose right thereto
are superior to that of Banco Filipino; (2) they are still entitled to redeem the
properties and in fact a binding agreement between them and the bank had
been reached; (3) their respective houses should not have been included in
the auction sale of the mortgaged properties; (4) on the contrary, as builders
in good faith, they are entitled to the benefits of Article 448 of the Civil Code;
and (5) the writ of possession issued by the RTC in 1996 had already lost its
validity and efficacy.

The petition must be denied.

In extra-judicial foreclosures of real estate mortgages, the issuance of

a writ of possession, which is an order commanding the sheriff to place a
person in possession of the foreclosed property,[19] is governed by Section

7 of Act No. 3135 (AN ACT TO REGULATE THE SALE OF PROPERTY

UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL
ESTATE MORTGAGES), as amended:
Sec. 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province
or place where the property or any part thereof is situated, to give
him possession thereof during the redemption period, furnishing
bond in an amount equivalent to the use of the property for a
period of twelve months, to indemnify the debtor in case it be
shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such petition
shall be made under oath and filed in form of an ex parte motion
in the registration or cadastral proceedings if the property is
registered, or in special proceedings in the case of property
registered under the Mortgage Law or under section one hundred
and ninety-four of the Administrative Code, or of any other real
property encumbered with a mortgage duly registered in the office
of any register of deeds in accordance with any existing law, and
in each case the clerk of the court shall, upon the filing of such
petition, collect the fees specified in paragraph eleven of section
one hundred and fourteen of Act Numbered Four hundred and
ninety-six, as amended by Act Numbered Twenty-eight hundred
and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of
the province in which the property is situated, who shall execute
said order immediately.

That petitioners purchased their properties from MICC in good faith is

of no moment. The purchases took place after MICC's mortgage to Banco
Filipino had been registered in accordance with Article 2125[20] of the Civil
Code and the provisions of P.D. 1529 (PROPERTY REGISTRY
DECREE).[21] As such, under Articles 1312[22] and 2126[23] of the Civil
Code, a real right or lien in favor of Banco Filipino had already been
established, subsisting over the properties until the discharge of the
principal obligation, whoever the possessor(s) of the land might be.

In rejecting a similar argument, this Court, in Philippine National Bank

v. Mallorca,[24] ratiocinated:
1. Appellant's stand is that her undivided interest consisting of
20,000 square meters of the mortgaged lot, remained unaffected
by the foreclosure and subsequent sale to PNB, and she 'neither
secured nor contracted a loan with said bank. What PNB
foreclosed, she maintains, 'was that portion belonging to Ruperta
Lavilles only, not the part belonging to her.
Appellant's position clashes with precepts well-entrenched in law.
By Article 2126 of the Civil Code, a 'mortgage directly and
immediately subjects the property on which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted. Sale or transfer cannot
affect or release the mortgage. A purchaser is necessarily
bound to acknowledge and respect the encumbrance to
which is subjected the purchased thing and which is at the
disposal of the creditor 'in order that he, under the terms of
the contract, may recover the amount of his credit therefrom.
For, a recorded real estate mortgage is a right in rem, a lien
on the property whoever its owner may be. Because the
personality of the owner is disregarded; the mortgage
subsists notwithstanding changes of ownership; the last
transferee is just as much of a debtor as the first one; and
this, independent of whether the transferee knows or not the
person of the mortgagee. So it is, that a mortgage lien is
inseperable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the
transfer to them be with or without the consent of the
mortgagee. For, the mortgage, until discharge, follows the
property.[25] (Emphasis and underscoring supplied; italics in the
original; citations omitted)

And in Roxas v. Buan[26] this Court held:

Contending that petitioner Roxas is a party actually holding the
property adversely to the debtor, Arcadio Valentin, petitioners
argue that under the provisions of Act No. 3135 they cannot be
ordered to vacate the property. Hence, the question of whether,
under the circumstances, petitioner Roxas indeed is a party
actually holding the property adversely to Valentin.
It will be recalled that Roxas' possession of the property was
premised on its alleged sale to him by Valentin for the
amount of P100,000.00. Assuming this to be true, it is readily
apparent that Roxas holds title to and possesses the
property as Valentin's transferee. Any right he has to the
property is necessarily derived from that of Valentin. As
transferee, he steps into the latter's shoes. Thus, in the instant
case, considering that the property had already been sold at
public auction pursuant to an extrajudicial foreclosure, the only
interest that may be transferred by Valentin to Roxas is the right
to redeem it within the period prescribed by law. Roxas is
therefore the successor-in-interest of Valentin, to whom the
latter had conveyed his interest in the property for the
purpose of redemption [Rule 39, Sec. 29 (a) of the Revised
Rules of Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v.
Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently,
Roxas' occupancy of the property cannot be considered
adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held
that where the purchaser in an execution sale has already
received the definitive deed of sale, he becomes the owner of the
property bought and, as absolute owner, he is entitled to its
possession and cannot be excluded therefrom by one who
merely claims to be a successor-in-interest of the judgment
debtor, unless it is adjudged that the alleged successor has a
better right to the property than the purchaser at the execution
sale. Stated differently, the purchaser's right of possession is
recognized only as against the judgment debtor and his
successor-in-interest but not against persons whose right of

possession is adverse to the latter. The rule was reiterated in

Guevara v. Ramos [G.R. No. L-24358, March 31, 1971, 38 SCRA
194].
The rule in Belleza, although relating to the possession of
property sold in execution sales under what is now Sec. 35, Rule
39 of the Revised Rules of Court, is also applicable to the
possession of property sold at extrajudicial foreclosure sales
pursuant to Sec. 6 of Act No. 3135 [see IFC Service Leasing and
Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is
not a party holding the property adversely to Valentin, being
the latter's successor-in-interest, there was no bar to the
respondent trial court's issuance of a writ of possession
upon private respondent Buan's application.
It does not matter that petitioner Roxas was not specifically
named in the writ of possession, as he merely stepped into the
shoes of Valentin, being the latter's successor-in-interest. On the
other hand, petitioner de Guia was occupying the house as
Roxas' alleged tenant [Rollo, p. 24]. Moreover, respondent court's
decision granting private respondent Buan's petition for the
issuance of a writ of possession ordered the Provincial Sheriff of
Zambales or any of his deputies to remove Valentin 'or any
person claiming interest under him from the property [Rollo, p.
16]. Undeniably, petitioners fell under this category.[27]
(Emphasis supplied)

As transferees of mortgagor MICC, petitioners merely stepped into its

shoes and are necessarily bound to acknowledge and respect the mortgage
it had earlier executed in favor of Banco Filipino.

As for petitioners' argument that they are still entitled to redeem the
foreclosed properties, it must be rejected too.

The debtor in extra-judicial foreclosures under Act No. 3135, or his

successor-in-interest, has, one year from the date of registration of the
Certificate of Sale with the Registry of Deeds, a right to redeem the
foreclosed mortgage,[28] hence, petitioners, as MICC's successors-ininterest, had one year from the registration of the Certificate of Sale on July
29, 1985 or until July 29, 1986 for the purpose.

Petitioners, however, failed to do so. Ownership of the subject

properties was thus consolidated in favor of Banco Filipino,[29] and TCT
Nos. 112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No.
61062) were issued in its name.

As this Court held in F. David Enterprises v. Insular Bank of Asia and

America:[30]
It is settled that the buyer in a foreclosure sale becomes the
absolute owner of the property purchased if it is not
redeemed during the period of one year after the registration
of the sale. As such, he is entitled to the possession of the
said property and can demand it at any time following the
consolidation of ownership in his name and the issuance to
him of a new transfer certificate of title. The buyer can in fact
demand possession of the land even during the redemption
period except that he has to post a bond in accordance with
Section 7 of Act No. 3135 as amended. No such bond is required
after the redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of
the purchaser as confirmed owner. Upon proper application
and proof of title, the issuance of the writ of possession
becomes a ministerial duty of the court.[31] (Emphasis
supplied)

Petitioners assert, however, that a binding agreement for the

repurchase of the subject properties was reached with Banco Filipino as, so
they claim, reflected in the following exchange of communications:
October 17, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City
Dear Madam:
I am writing to you, on behalf of spouses Sonia and Rodrigo
Paderes re: TCT No. 61078 formerly owned by Manila
International Construction Corporation (MICC for short) now TCT
No. 112352, registered in the name of Banco Filipino Savings and
Mortgage Bank in July 30, 1996 at the Register of Deeds of
Paraaque, Metro Manila. Incidentally, the property is
denominated as Block 48, Lot 5 located at Leon Florentino St.,
BF Executive , Paraaque, Metro Manila.
The background facts of TCT No. 61078 are as follows:
In August 1983, the MICC executed a Deed of Absolute Sale of
that lot covered by TCT No. 61078 in favor of spouses Sonia and
Rodrigo Paderes which was acknowledged before a Notary
Public on October 1, 1983. The value of the lot was P115,720.00.
In the same year, the parties executed an addendum to the said
deed of absolute sale which covered a house valued at
P242,874.45. The net package price of the house and lot was
fixed at P329,405.75. From this amount, the spouses Sonia and
Rodrigo Paderes paid MICC inclusive of equity the amount of
P125,437.35 leaving a balance of P212,985.60. The spouses
moved in the house in November 1983.

Unknown to the spouses, MICC mortgaged TCT No. 61078 in

favor of Banco Filipino Savings and Mortgage Bank for P1,885.00
duly inscribed in TCT No. 112352 on December 12, 1982. It was
foreclosed by the bank for P3,092,547.82 pursuant to the
certificate of sale executed by the sheriff as inscribed on TCT No.
112352 [should be TCT No. 61078] on July 29, 1985 . . .
Then came the news that Banco Filipino Savings and Mortgage
Bank was under conservatorship by the Board of Liquidators. On
the other hand, MICC became bankrupt and closed shop. The
spouses were [sic] nowhere to go to then at the time to get the
title of the property they purchased from MICC.
Until, the spouses received a letter dated April 6, 1987 from the
Board of Liquidators via Alberto Reyes, Deputy Liquidator,
informing the spouses that the property they purchased from
MICC was already foreclosed by the bank. The spouses
answered the letter and disclaimed any knowledge of the
foreclosure. In their answer to the said letter, they emphasized
that their unpaid balance with MICC was P188,985.60.
We are addressing your goodself [sic] to inform the bank that the
spouses Sonia and Rodrigo Paderes are exercising their
right of redemption as subrogees of the defunct MICC under
special laws.
From reliable information, the bank had already made
appraisal of the property and from that end, may we be
informed [at] the soonest possible time the value of the
property to enable the spouses to prepare for such
eventuality. And, upon receipt of the said appraisal value we
shall immediately inform you [of] our position on the matter.
Thank you very much.
Very truly yours,

[SGD.]

LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[32]
x x x (Emphasis supplied).

October 25, 1996

Mr. Luciano D. Valencia
Counsel for Sps. Paderes
JPA Subdivision, Muntinlupa
Dear Sir:
This is with regard to your letter dated October 17, 1996
concerning the property formerly owned by Manila International
Construction Corporation (MICC) foreclosed by the Bank.
Please inform Sps. Rodrigo and Sonia Paderes to come to
the bank to discuss said foreclosed property directly with
the bank.
Thank you.
Very truly yours,
[SGD.]
LUZ B. DACASIN
Assistant Vice-President
Real Estate Department[33]
x x x (Emphasis supplied; italics in the original).

November 4, 1996

Mrs. Luz B. Dacasin

Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City
Dear Madam:
Thank you very much for your letter dated October 25, 1996,
which was received on October 31, 1996, the contents of which
had been duly noted. Pursuant thereto I advised my clients '
spouses Rodrigo and Sonia Paderes to see [you].
With your indulgence, I also advised my other clients ' spouses
Isabelo and Juana Herminia Bergado to go along with the
spouses Paderes, who are similarly situated with spouses
Paderes property.
Incidentally, on October 28, 1996, I also wrote your goodself
another letter at the behest of spouses Isabelo and Juana
Herminia Bergado whose property is equally footed with spouses
Paderes.
It is hoped that, out of that conference per your invitation my
clients above-named be informed formally the total amounts due
the bank as a consequence of the right of redemption extended to
them. Of course, whatever appraised value arrived at by the
bank on the properties subject of redemption the same shall
not be construed as my clients' committed liability.
Thank you very much.
Very truly yours,

[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[34]

x x x (Emphasis supplied).

November 8, 1996
Mrs. LUZ B. DACASIN
Asst. Vice-President
Real Estate Department
Banco Filipino Savings & Mortgage Bank
Makati City
Re: Lot 18, Block 48 Gamboa St.
BF Homes, Paraaque, MM (264 SQ.M.)
Occupied by Sps. Isabelo Bergado &
Juana Herminia Bergado
Lot 5, Block 48, L. Florentino St.
BF Homes, Paraaque, MM (263 SQ.M.)
Occupied by Sps. Rodrigo Paderes &
Sonia Paderes
Dear Madam Asst. Vice-President:
Pursuant to our conference this morning November 8, 1996,
regarding our desire to redeem the properties above-captioned,
which your good office accommodated, and per your advi[c]e, we
submit the following facts taken out and our proposals:
1. Regarding the lot, you mentioned that, the cost per square
meter was P7,500.00. To this price we are no-committal for
the said price is high. Although, we are still to have the
amount re-negotiated.
2. We appreciate very much your having excluded the house built
in the said lot for purposes of fixing the redemption price.
3. Your advi[c]e to subject the properties (house and lot) to a
real-estate mortgage with the bank so that the amount to be

loaned will be used as payment of the properties to be

redeemed is accepted, and we are committed to it.
Thank you very much
Very truly yours,
[SGD.]
SPS. SONIA &
RODRIGO PADERES
[SGD.]
SPS. ISABELO &
JUANA HERMINIA BERGADO[35]
(Emphasis supplied).

Petitioners' assertion does not pass muster.

Under Article 1318 of the Civil Code, there are three essential
requisites which must concur in order to give rise to a binding contract: (1)
consent of the contracting parties; (2) object certain which is the subject
matter of the contract; and (3) cause of the obligation which is established.
'Consent is further defined in Article 1319 of the Code as follows:
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the offerer
except from the time it came to his knowledge. The contract, in
such a case, is presumed to have been entered into in the place
where the offer was made. (Emphasis supplied)

By 'offer is meant a unilateral proposition which one party makes to the

other for the celebration of the contract. There is an 'offer in the context of
Article 1319 only if the contract can come into existence by the mere
acceptance of the offeree, without any further act on the part of the offeror.
Hence, the 'offer must be definite, complete and intentional.[36]

With regard to the 'acceptance, a learned authority notes that:

To produce a contract, the acceptance must not qualify the
terms of the offer. There is no acceptance sufficient to produce
consent, when a condition in the offer is removed, or a pure offer
is accepted with a condition, or when a term is established, or
changed, in the acceptance, or when a simple obligation is
converted by the acceptance into an alternative one; in other
words, when something is desired which is not exactly what is
proposed in the offer. It is necessary that the acceptance be
unequivocal and unconditional, and the acceptance and the
proposition shall be without any variation whatsoever; and
any modification or variation from the terms of the offer
annuls the latter and frees the offeror.[37] (Emphasis supplied)

A reading of the above-quoted correspondence reveals the absence of

both a definite offer and an absolute acceptance of any definite offer by any
of the parties.

The letters dated October 17, 1996 and November 4, 1996, signed by
petitioners' counsel, while ostensibly proposing to redeem the foreclosed
properties and requesting Banco Filipino to suggest a price for their
repurchase, made it clear that any proposal by the bank would be subject to
further action on the part of petitioners.

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant
Vice-President of Banco Filipino, merely invited petitioners to engage in
further negotiations and does not contain a recognition of petitioners'
claimed right of redemption or a definite offer to sell the subject properties
back to them.

Petitioners emphasize that in item no. 3 of their letter dated November

8, 1996 they committed to 'subject the properties (house and lot) to a realestate mortgage with the bank so that the amount to be loaned will be used
as payment of the properties to be redeemed. It is clear from item no. 1 of
the same letter, however, that petitioners did not accept Banco Filipino's
valuation of the properties at P7,500.00 per square meter and intended to
'have the amount [renegotiated].

Moreover, while purporting to be a memorandum of the matters taken

up in the conference between petitioners and Banco Filipino Vice-President
Dacasin, petitioners' letter of November 8, 1996 does not contain the
concurrence of Ms. Dacasin or any other authorized agent of Banco Filipino.
Where the alleged contract document was signed by only one party and the
record shows that the other party did not execute or sign the same, there is
no perfected contract.[38]

The Court of Appeals, therefore, committed no error in concluding that

nothing concrete came out of the meeting between petitioners and Banco
Filipino.

Respecting petitioners' claim that their houses should have been

excluded from the auction sale of the mortgaged properties, it does not lie.
The provision of Article 448[39] of the Civil Code, cited by petitioners, which
pertain to those who, in good faith, mistakenly build, plant or sow on the
land of another, has no application to the case at bar.

Here, the record clearly shows that petitioners purchased their

respective houses from MICC, as evidenced by the Addendum to Deed of
Sale dated October 1, 1983 and the Deed of Absolute Sale dated January
9, 1984.

Being improvements on the subject properties constructed by

mortgagor MICC, there is no question that they were also covered by
MICC's real estate mortgage following the terms of its contract with Banco
Filipino and Article 2127 of the Civil Code:

Art. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet
received when the obligation becomes due, and to the amount of
the indemnity granted or owing to the proprietor from the insurers
of the property mortgaged, or in virtue of expropriation for public
use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession
of the mortgagor, or it passes into the hands of a third person.
(Underscoring supplied).

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is

illustrative. In that case, this Court held:
. . . (1) That a mortgage constituted on a sugar central includes
not only the land on which it is built but also the buildings,
machinery, and accessories installed at the time the
mortgage was constituted as well as all the buildings,
machinery and accessories belonging to the mortgagor,
installed after the constitution thereof (Bischoff vs. Pomar and
Compaia General de Tabacos, 12 Phil. 690); (2) that the notice
announcing the sale at public auction of all the properties of a
sugar central extends to the machinery and accessories acquired
and installed in its mill after the constitution of the mortgage; (3)

that the court, that has ordered the placing of the mortgaged
properties in the hands of a receiver in a foreclosure suit, has
jurisdiction to order the sale at public auction of the said
mortgaged properties even before the termination of the
receivership; and (4) that the fact that the price at which the
mortgaged properties were sold at public auction is inadequate, is
not in itself sufficient to justify the annulment of the sale.[41]
(Emphasis supplied)

Petitioners finally proffer that the issuance, on Banco Filipino's mere

motion, of the Writ of Possession on November 5, 1996, more than 8 years
since the promulgation of the RTC Order granting its petition on September
8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:

Sec. 6. Execution by motion or by independent action. ' A final

and executory judgment or order may be executed on motion
within five (5) years from the date of its entry. After the lapse of
such time, and before it is barred by the statute of limitations, a
judgment may be enforced by action. The revived judgment may
also be enforced by motion within five (5) years from the date of
its entry and thereafter by action before it is barred by the statute
of limitations.

Hence, petitioners argue, the writ of possession had lost its validity and
efficacy and should therefore be declared null and void.

Petitioners' ultimate argument fails too. In Rodil vs. Benedicto,[42] this Court
categorically held that the right of the applicant or a subsequent purchaser
to request for the issuance of a writ of possession of the land never
prescribes:

The respondents claim that the petition for the issuance of a writ
of possession was filed out of time, the said petition having been
filed more than five years after the issuance of the final decree of
registration. In support of their contention, the respondents cite
the case of Sorogon vs. Makalintal [80 Phil. 259 (1948)], wherein
the following was stated:
"It is the law and well settled doctrine in this jurisdiction that
a writ of possession must be issued within the same period
of time in which a judgment in ordinary civil actions may be
summarily executed (section 17, Act 496, as amended),
upon the petition of the registered owner or his successors in
interest and against all parties who claim a right to or interest
in the land registered prior to the registration proceeding."
The better rule, however, is that enunciated in the case of
Manlapas and Tolentino vs. Lorente [48 Phil. 298 (1925)], which
has not yet been abandoned, that the right of the applicant or a
subsequent purchaser to ask for the issuance of a writ of
possession of the land never prescribes. . .
xxx
In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the
Court also ruled that the provision in the Rules of Court to the
effect that judgment may be enforced within five years by
motion, and after five years but within ten years by an action
(Section 6, Rule 39) refers to civil actions and is not
applicable to special proceedings, such as land registration
cases. The Court said:
"The second assignment of error is as follows:
'That the lower court erred in ordering that the decision
rendered in this land registration case on November 28,
1931 or twenty six years ago, has not yet become final
and unenforceable.
We fail to understand the arguments of the appellant in
support of the above assignment, except in so far as it
supports his theory that after a decision in a land registration

case has become final, it may not be enforced after the

lapse of a period of 10 years, except by another proceeding
to enforce the judgment or decision. Authority for this theory
is the provision in the Rules of Court to the effect that
judgment may be enforced within 5 years by motion, and
after five years but within 10 years, by an action (Sec. 6,
Rule 39). This provision of the Rules refers to civil
actions and is not applicable to special proceedings,
such as a land registration case. This is so because a
party in a civil action must immediately enforce a
judgment that is secured as against the adverse party,
and his failure to act to enforce the same within a
reasonable time as provided in the Rules makes the
decision unenforceable against the losing party. In
special proceedings the purpose is to establish a status,
condition or fact; in land registration proceedings, the
ownership by a person or a parcel of land is sought to
be established. After the ownership has been proved
and confirmed by judicial declaration, no further
proceeding to enforce said ownership is necessary,
except when the adverse or losing party had been in
possession of the land and the winning party desires to
oust him therefrom.[43] (Emphasis and underscoring
supplied)

Petitioners have not supplied any cogent reason for this Court to deviate
from the foregoing ruling.

The established doctrine that the issuance of a writ of possession is a

ministerial function whereby the issuing court exercises neither discretion
nor judgment bears reiterating. The writ issues as a matter of course upon
the filing of the proper motion and, if filed before the lapse of the redemption
period, the approval of the corresponding bond.[44]
Petitioners, however, are not without remedy. As reflected in the challenged
Court of Appeals decision, under Section 8[45] of Act No. 3135, as

amended, petitioners, as successors-in-interest of mortgagor MICC, have

30 days from the time Banco Filipino is given possession of the subject
properties to question the validity of the auction sale under any of the two
grounds therein stated by filing a petition to set aside the same and cancel
the writ of possession.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.

Banco Filipino Savings and Mortgage Bank vs. Court of

Appeals, 463 SCRA 64 (2005)
SECOND DIVISION
[G.R. No. 143896. July 8, 2005]
BANCO FILIPINO SSAVINGS AND MORTGAGE BANK, Petitioner, vs.
COURT OF APPEALS and SANTIAGO (Isabela) MEMORIAL PARK, INC.,
Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari filed by petitioner seeking to
annul the Decision[1] of the Court of Appeals (CA) dated March 31, 2000 in
CA-G.R. CV No. 47044, which reversed the Order of the trial court dated
May 10, 1994, dismissing private respondent's complaint for failure to state
a cause of action; and the Resolution dated July 3, 2000[2]
denying petitioner's motion for reconsideration.
On December 20, 1993, private respondent Santiago (Isabela) Memorial
Park, Inc. filed a complaint for redemption and specific performance with the
Regional Trial Court of Santiago, Isabela, Branch 21, against herein
petitioner Banco Filipino Savings & Mortgage Bank, the material and
relevant allegations of which read as follows:
COMPLAINT
Plaintiff, by counsel, to this Honorable Court most respectfully alleges:
1. .
2. .
3. That in February 1981, plaintiff mortgaged the above described property
in favor of defendant to secure a loan of P500,000.00 obtained by plaintiff
from defendant;

4. That due to the failure of plaintiff to pay the aforementioned loan,

defendant foreclosed the mortgage and in consequence thereof Sheriff
David R. Medina of this Honorable Court issued a SHERIFF'S
CERTIFICATE OF SALE in favor of defendant which is dated October 9,
1990 and which instrument was inscribed at the back of TCT T-128647 of
Isabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff
made manifest its interest to exercise its right of redemption and made an
offer of P700,000.00 as redemption to defendant through the then Deputy
Liquidator, ROSAURO NAPA; this started the negotiation for the redemption
of the above described property;
6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff
was given up to the end of March 1992 to negotiate and make special
arrangement for any satisfactory plan of payment for the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff
was directed to remit at least P50,000.00 to defendant which would manifest
the interest and willingness of plaintiff to redeem the property, and forthwith
on March 24, 1992, plaintiff remitted the sum of P50,000.00 to defendant
which was duly receipted by the latter under Official Receipt No. 279968 A
dated March 24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993,
plaintiff amended its first offer and made an offer of P1,000,000.00 as
redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted
earnest efforts in order to finally effect the redemption, but defendant dilly
dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President
of defendant, dated November 5, 1993, there is a turn-around by defendant
and is now demanding P5,830,000.00 as purchase price of the property,
instead of the original agreed redemption;
11. That the delay of the defendant in the finalization of the terms of
redemption did not in any manner alter the right of plaintiff to redeem the
property from defendant;

12. That plaintiff is still in actual possession of the property and intend to
remain in actual possession of the property, while defendant was never in
actual possession of said property;
13. That plaintiff is ready and willing to pay the redemption money, which is
the total bank claim of P925,448.17 plus lawful interest and other allowable
expenses incident to the foreclosure proceedings:
14. That the latest actuations of defendant are indicative of the refusal of
defendant to allow the exercise of redemption by herein plaintiff, reason for
which there is a need for judicial determination of the rights and obligations
of the parties to this case;
15. That on account of the unlawful actuations of defendant in refusing the
redemption of the property by plaintiff, the latter engaged the services of
counsel for a fee of P30,000.00 which defendant should pay to plaintiff.
WHEREFORE, it is respectfully prayed of this Honorable Court that, after
due hearing, judgment be rendered:
a. ordering defendant to accept from plaintiff the lawful redemption
amount which shall be determined by this Honorable Court;
b. ordering defendant to execute the necessary instrument in order to
effect the redemption of the property;
c. ordering defendant to pay to plaintiff the sum of P30,000.00 by way
of attorney's fees;
AND PLAINTIFF PRAYS for further reliefs just and equitable under the
premises.
Petitioner filed a motion to dismiss on the ground that the complaint does
not state a cause of action. It alleges that assuming that the allegations in
the complaint are true and correct, still there was no redemption effected
within one year from the date of registration of the sheriff's certificate of sale
with the Register of Deeds on January 21, 1991, thus private respondent
had lost its right to redeem the subject land. Petitioner claimed that the letter
cited in paragraph 5 of the complaint was a mere offer to redeem the
property which was promptly answered by a letter dated August 28, 1991,
which categorically denied private respondent's offer and stated that when it

comes to redemption, the basis of payment is the total claim of the bank at
the time the property was foreclosed plus 12% thereof and all litigation
expenses attached thereto or its present appraised value whichever is
higher; that the letter mentioned in paragraph 6 of the complaint dated
January 23, 1992 of the Deputy Liquidator was about negotiation and
special arrangement and not redemption for at that stage the period of
redemption had already expired; that the letter mentioned in paragraph 7
dated March 12, 1992 was of the postponement of the consolidation of the
subject property and not of any extension for the period of redemption; that
the amount of P50,000.00 remitted by private respondent was in
consideration of the postponement of the consolidation of the property in
petitioner's name and as manifestation of private respondent's sincerity to
repurchase the foreclosed property; that when private respondent remitted
P50,000.00, the Deputy Liquidator of petitioner bank requested the legal
counsel of petitioner to defer consolidation of property in petitioner's name;
that in a letter dated November 5, 1993, petitioner's Senior Vice President
declared that the subject property is available for repurchase in the amount
of P5,830,600.00 to which private respondent in another letter asked for an
extension of 30 days to make an offer.
Private respondent filed its opposition to the motion to dismiss alleging
among others that the complaint states a cause of action; that the annexes
of the motion to dismiss should not be considered in the resolution of such
motion.
On May 10, 1994, the trial court rendered an Order[3] dismissing the
complaint. It ratiocinated that (1) the letter dated August 6, 1991 was an
offer to redeem for P700,000.00 without any tender of the money; (2) the
reply letter of petitioner dated August 28, 1991 stated that the redemption
price is P1,146,837.81 representing the bank's claim of P925,448.17 plus
12% interest and expenses of foreclosure or the appraised value which was
P1,457,650.00; (3) the March 12, 1992 letter of the petitioner categorically
informed private respondent that the period for redemption had expired,
however, the bank agreed to postpone the consolidation of title of the land
in the bank's name up to the end of March 1992 if the plaintiff shall deposit
P50,000.00 in order to avoid consolidation. Under Section 6 of Act 3135, on
redemption of foreclosed property, it is provided that a debtor may redeem
the property at anytime within one year from and after the date of sale, i.e.,
one year period to be reckoned from the registration of the sheriff's

certificate of sale. The registration of sheriff's sale was on January 21, 1991
so that the redemption period was until January 21, 1992; that although
there was an offer to redeem the property for P700,000.00 on August 6,
1991, which was within the redemption period, there was no tender of
redemption price and the P700,000.00 offered was not the correct
redemption price. It found that the complaint did not state that private
respondent tendered the correct redemption price within the redemption
period as required under Section 30 of Rule 39 of the Rules of Court.
Private respondent's motion for reconsideration was denied in an Order
dated July 25, 1994.[4]
Private respondent filed its appeal with the CA which reversed the trial court
in its assailed decision, the dispositive portion of which reads:
WHEREFORE, the Orders of the respondent trial court dated May 10, 1994,
and July 25, 1994 are hereby REVERSED and SET ASIDE. The appellants
are declared entitled to repurchase the property in question within THIRTY
(30) days from notice hereof which shall be effected upon payment of the
repurchase price of P925,448.17 less P50,000.00, which is the deposit on
the redemption price, with legal interest from March 24, 1992, the time the
contract extending the period of redemption of the property took effect until
it is fully paid.[5]
The CA ruled that:
A perusal of the allegations in the complaint shows that there was sufficient
basis to make out a case against Banco Filipino. The complaint alleged that
as early as August 6, 1991 or about six (6) months before the statutory
period for redemption would expire, the appellant had exerted earnest
efforts to effect the redemption of the property in question and that after an
agreement had been reached by the parties, with the corresponding deposit
on the redemption price had been given by the appellant, the appellee bank
led the appellant to believe that the appellee was negotiating with the former
in good faith. However, the true intention of the appellee bank was to refuse
the redemption of the property as manifested by its act of increasing the
amount of the redemption price after the period for redemption had expired
and after a deposit on the redemption price had been duly accepted by it as
evidenced by a receipt issued by the appellee.

Even assuming however that the appellant is now barred from exercising its
right of redemption, yet it can still repurchase the property in question based
on a new contract entered into between the parties extending the period
within which to purchase the property as evidenced by the appellee's
Deputy Liquidator Rosauro Napa's letter to Belen Jocson dated March 12,
1992 and the letter addressed to Atty. German M. Balot, Legal Counsel,
Banco Filipino ' Santiago, Isabela dated April 7, 1992.
...
In the case of Philippine National Bank vs. Court of Appeals, the Court held:
Indeed under Article 1482 of the Civil Code, earnest money given in a sale
transaction is considered part of the purchase price and proof of the
perfection of the sale. This provision, however, gives no more than a
disputable presumption that prevails in the absence of contrary or rebuttal
evidence. In the instant case, the letter-agreements themselves are the
evidence of an intention on the part of herein private parties to enter into
negotiations leading to a contract of sale that is mutually acceptable as to
absolutely bind them to the performance of their obligations thereunder. The
letter-agreements are replete with substantial condition precedents,
acceptance of which on the part of private respondent must first be made in
order for petitioner to proceed to the next step in the negotiations.
. . . [6]
In compliance with the CA decision, private respondent on April 27, 2000,
made a tender of payment and consignation with the CA in the amount of
P1,300,987.96 through a Philippine National Bank check which was duly
receipted by the appellate court. [7]
Hence, the herein petition for review on certiorari filed by petitioner alleging
that the appellate court erred in holding that (1) the allegations in the
complaint of private respondent against petitioner are sufficient to constitute
a cause of action for redemption and specific performance; and (2)
respondent was entitled to repurchase back from petitioner it's foreclosed
property for only P925,448.17.
The basic issue is whether private respondent's complaint for redemption
and specific performance states a cause of action against petitioner.

It is a well-settled rule that the existence of a cause of action is determined

by the allegations in the complaint.[8] In resolving a motion to dismiss based
on the failure to state a cause of action, only the facts alleged in the
complaint must be considered. The test is whether the court can render a
valid judgment on the complaint based on the facts alleged and the prayer
asked for.[9] Indeed, the elementary test for failure to state a cause of action
is whether the complaint alleges facts which if true would justify the relief
demanded. Only ultimate facts and not legal conclusions or evidentiary
facts, which should not be alleged in the complaint in the first place, are
considered for purposes of applying the test.[10]
Based on the allegations in the complaint, we find that private respondent
has no cause of action for redemption against petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned loan,
defendant foreclosed the mortgage and in consequence thereof Sheriff
David R. Medina of this Honorable Court issued a SHERIFF'S
CERTIFICATE OF SALE in favor of defendant which is dated October 9,
1990 and which instrument was inscribed at the back of TCT T-128647 of
Isabela on January 21, 1991;
The sheriff's certificate of sale was registered on January 21, 1991. Section
6 of Act 3135 provides for the requisites for a valid redemption, thus:
SEC. 6. In all cases in which an extrajudicial sale is made under the special
power hereinbefore referred to, the debtor, his successors in interest or any
judicial creditor or judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time within the term
of one year from and after the date of sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil Procedure,[11] insofar
as these are not inconsistent with the provisions of this Act.
However, considering that petitioner is a banking institution, the
determination of the redemption price is governed by Section 78 of the
General Banking Act which provides:

In the event of foreclosure, whether judicially or extrajudicially, of any

mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or
debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying
the amount fixed by the court in the order of execution, or the amount due
under the mortgage deed, as the case may be, with interest thereon at the
rate specified in the mortgage, and all the costs, and judicial and other
expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the
income received from the property.
Clearly, the right of redemption should be exercised within the specified time
limit, which is one year from the date of registration of the certificate of sale.
The redemptioner should make an actual tender in good faith of the full
amount of the purchase price as provided above, i.e., the amount fixed by
the court in the order of execution or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the
mortgage, and all the costs, and judicial and other expenses incurred by the
bank or institution concerned by reason of the execution and sale and as a
result of the custody of said property less the income received from the
property.
In case of disagreement over the redemption price, the redemptioner may
preserve his right of redemption through judicial action which in every case
must be filed within the one-year period of redemption.[12] The filing of the
court action to enforce redemption, being equivalent to a formal offer to
redeem, would have the effect of preserving his redemptive rights and
'freezing the expiration of the one-year period. In this case, the period of
redemption expired on January 21, 1992. The complaint was filed on
December 20, 1992.
Moreover, while the complaint alleges that private respondent made an offer
to redeem the subject property on August 6, 1991, which was within the
period of redemption, it is not alleged in the complaint that there was an
actual tender of payment of the redemption price as required by the rules. It

was alleged that private respondent merely made an offer of P700,000.00

as redemption price, which however, as stated under paragraph 13 of the
same complaint, the redemption money was the total bank claim of
P925,448.17 plus lawful interest and other allowable expenses incident to
the foreclosure proceedings. Thus, the offer was even very much lower than
the price paid by petitioner as the highest bidder in the auction sale.
In BPI Family Savings Bank, Inc. vs. Veloso,[13] we held:
The general rule in redemption is that it is not sufficient that a person
offering to redeem manifests his desire to do so. The statement of intention
must be accompanied by an actual and simultaneous tender of payment.
This constitutes the exercise of the right to repurchase.
...
Whether or not respondents were diligent in asserting their willingness to
pay is irrelevant. Redemption within the period allowed by law is not a
matter of intent but a question of payment or valid tender of the full
redemption price within said period.
Although the letter dated January 23, 1992 gave private respondent up to
the end of March 1992, to negotiate and make special arrangement for a
satisfactory plan of payment for the redemption, there was no categorical
allegation in the complaint that the original period of redemption had been
extended. Assuming arguendo that the period for redemption had been
extended, i.e., up to end of March 1992, still private respondent failed to
exercise its right within said period. This is shown by private respondent's
allegation under paragraph 8 of its complaint that in a letter dated January
20, 1993, private respondent's President amended his first offer and made
an offer of P1 million as redemption price. Notably, such offer was made
beyond the end of the March 1992 alleged extended period. Thus, private
respondent has no more right to seek redemption by force of law which
petitioner was bound to accept.
We find that the CA also erred in stating that assuming appellant is now
barred from exercising its right of redemption, it can still repurchase the
property in question based on a new contract entered into between the
parties extending the period within which to purchase the property.

The allegations in the complaint do not show that a new contract was
entered into between the parties. The March 12, 1992 letter referred to by
the CA as well as in the complaint only directed private respondent to remit
at least P50,000.00 to petitioner as a manifestation of the former's interest
and willingness to redeem the property. Thus, the P50,000.00 remitted by
private respondent was only the first step to show its interest in redeeming
the property. In no way did it establish that a contract of sale, as found by
the CA, had been perfected and that the P50,000.00 remitted by private
respondent is considered as earnest money.
Article 1475 of the Civil Code provides:
The contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
There was no showing in the complaint that private respondent and
petitioner had already agreed on the purchase price of the foreclosed
property. In fact, the allegations in paragraphs 8 to 10 of the complaint show
otherwise, thus:
8. That in a letter of the President of plaintiff dated January 20, 1993,
plaintiff amended its first offer and made an offer of P1,000,000.00 as
redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted
earnest efforts in order to finally effect the redemption, but defendant
dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice
President of defendant, dated November 5, 1993, there is a turn-around
by defendant and is now demanding P5,830,000.00 as purchase price
of the property, instead of the original agreed redemption;
The complaint does not allege that there was already a meeting of the
minds of the parties.
Based on the foregoing, there is no basis for the order of the CA to allow
private respondent to repurchase the foreclosed property in the amount of

P925,448.17 plus the expenses incurred in the sale of the property,

including the necessary and useful expenses made on the thing sold.
WHEREFORE, the decision of the Court of Appeals dated March 31, 2000
is hereby REVERSED and SET ASIDE. The Order of the Regional Trial
Court of Santiago, Isabela, Branch 21, dated May 10, 1994 in Civil Case No.
2036 dismissing the complaint for redemption and specific performance is
REINSTATED and AFFIRMED.
SO ORDERED.

Bukidnon Doctors' Hospital, Inc. vs. Metropolitan Bank & Trust

Co., 463 SCRA 222 (2005)
FIRST DIVISION

BUKIDNON DOCTORS' HOSPITAL, INC., Petitioner, - versus METROPOLITAN BANK & TRUST CO., Respondent. G.R. No. 161882
July 8, 2005

DECISION

DAVIDE, JR., C.J.:

At issue in this petition for review on certiorari is whether a writ of
possession is the proper remedy for evicting a mortgagor who became a
lessee of the mortgaged properties after the mortgagee has consolidated
ownership over the properties and was issued new certificates of title.

The facts are as follows:

Sometime in 1995, petitioner Bukidnon Doctors' Hospital, Inc., obtained a

loan of P25 million from respondent Metropolitan Bank and Trust Company
to be used for the construction of its hospital. To secure this loan, the
petitioner mortgaged six parcels of land located in Valencia, Bukidnon,
covered by TCT Nos. T-52197, T-52198, T-52199, T-52200, T-52201, and
T-52202 and registered in the name of Dr. Rene Sison and Rory P. Roque,
President and Administrator, respectively, of the petitioner. Upon petitioner's
default in the payment of the loan, the mortgage was extrajudicially

foreclosed and the mortgaged lots were sold in a public auction to

respondent bank, being the sole and highest bidder. The petitioner failed to
redeem the properties within the period of redemption. Forthwith, the
respondent consolidated its ownership over the properties and was issued
new certificates of title on 1 October 2001.[1]

Earlier, in a letter received by the respondent on 7 July 2001, the petitioner

expressed its desire to continue staying in the subject premises so that the
operation of the hospital erected thereon would not be disrupted. For that
purpose, the petitioner proposed to pay rent in the amount of P100,000 per
month for a period of, but not limited to, three years.[2] On 17 December
2001, the respondent agreed to lease the properties but subject to the
following terms: (1) the monthly rental would be P200,000 with a one month
advance rental and a deposit equivalent to three months rental; (2) the
effectivity of the lease contract would be from June 2001; and (3) the
contract would be subject to review every six months.[3] The terms finally
agreed upon by the parties, as culled from respondent's letter to the
petitioner of 30 May 2002, were (1) a monthly rental of P150,000, and (2)
the effectivity of the lease contract in November 2001.[4]

In its letter of 16 July 2003, or approximately a year and eight months after
the agreed effectivity date of the lease contract, the respondent asked the
petitioner to vacate the leased premises within fifteen days. The petitioner
refused, invoking the subsisting lease agreement.

On 21 August 2003, the respondent filed with the Regional Trial Court
(RTC) of MalaybalayCity, Bukidnon, an Ex Parte Motion for a Writ of
Possession. The case was docketed as Misc. Case No. 735-03 and raffled
to Branch 9 of that court.

On 17 November 2003, the trial court issued an order granting respondent's

ex parte motion for a writ of possession. The pertinent portion of the order
reads as follows:

Since all the requirements or requisites for the issuance are

present in this case, the court finds that it has no choice or other
alternative but to issue the same, the duty of the Court being
ministerial in character. The respondent can ventilate all its
defenses in a separate case that the respondent may file for that
purpose.
...

After the expiration of the period of redemption, a writ of

possession can be demanded by a purchaser of the foreclosed
property as a matter of right. Even during the period of
redemption, possession can be demanded provided a bond is
posted in accordance with Section 7, Act No. 3135 (Vda. De
Zaballero vs. CA, 229 SCRA 810).[5]

Its motion for reconsideration having been denied by the trial court in the
Order of 23 January 2004,[6] the petitioner filed on 29 January 2004 (the
day it received the denial order) a Notice of Appeal stating that it was
appealing to the Court of Appeals on both questions of fact and law.[7]
Earlier, or on 27 November 2003, the petitioner filed with the trial court an
action for specific performance, injunction, and damages, docketed as Civil
Case No. 3312-03.[8] Also, on 30 January 2004, the petitioner filed a
petition for rehabilitation before the RTC of Cagayan de Oro City, Branch
18, docketed as Spec. Pro. Case No. 2004-019.

On 11 February 2004, before its Notice of Appeal could be acted upon by

the trial court, the petitioner filed a Manifestation and Motion stating that due
to the nature of the appeal that it intended to file, it was withdrawing the
Notice of Appeal.[9] Two days thereafter, or on 13 February 2004, which
was the last day within which to appeal the 29 January 2004 Order, it filed
with us a motion for extension of thirty days from the expiration of the

reglementary period to file a petition for review on certiorari or until 14

March 2004. We granted this motion for extension in our Resolution of 3
March 2004. Then, on 4 March 2004, the petitioner instituted the instant
petition for review on certiorari under Rule 45, in relation to Section 2(c) of
Rule 41, of the Rules of Court, raising a single issue for our consideration,
to wit:

WHETHER [OR] NOT THE COURT A QUO CORRECTLY RULED THAT

RESPONDENT, A FORMER MORTGAGEE-BUYER, WAS STILL
ENTITLED TO A WRIT OF POSSESSION AS A MATTER OF RIGHT AS
PROVIDED UNDER ACT 3135, AS AMENDED, DESPITE A LEASE
AGREEMENT BETWEEN ITSELF AND THE FORMER MORTGAGORSELLER EXECUTED AFTER RESPONDENT BECAME THE ABSOLUTE
OWNER OF THE FORECLOSED PROPERTIES.[10]

In its Comment,[11] the respondent asserts that the petitioner is guilty of

forum-shopping for having gone to four different courts for the same
relief. Besides, by filing an ordinary appeal under Rule 41 of the Rules
of Court, the petitioner had already waived its right to file a petition for
review on certiorari under Rule 45, since the two modes of appeal are
mutually exclusive and governed by different rules. Pursuant to the
principle of hierarchy of courts, the petitioner should have first filed the
instant petition with the Court of Appeals, which has concurrent
jurisdiction with the Supreme Court to resolve cases involving only
questions of law. As to the main issue, the respondent argues that as a
purchaser in a valid extrajudicial foreclosure sale under Act No. 3135
and as the absolute owner of the subject parcels of land, it was entitled
as a matter of right to the issuance of a writ of possession. The
subsequent 'agreement to stay between the parties did not negate
respondent's right to take possession of the subject properties through a
writ of possession. In any event, the 'agreement to stay on the subject
properties was deemed to be on a month-to-month basis, since the
period therefor was not fixed.

The petitioner rebuts, in its Reply, respondent's arguments, contending that

it did not shop for a favorable forum, since the three cases where it is either
a defendant/oppositor or plaintiff/petitioner do not involve the same subject
matter, causes of action, and parties. Contrary to the claim of the
respondent, it immediately withdrew by proper motion its notice of appeal in
the trial court after realizing that the proper remedy was a petition for review
on certiorari under Rule 45 of the Rules of Court, not a petition for review
under Rule 42. Rule 42 is not applicable to the case at bar because it is the
Supreme Court that has jurisdiction over the petition as it involves a pure
question of law pursuant to Section 2(c) of Rule 41 and Section 1 of Rule 45
of the Rules of Court. Lastly, the trial court clearly erred in granting
respondent's ex parte motion for a writ of possession because of the
existence of a lease agreement between the parties, which was executed
after the respondent consolidated its title to the subject properties.

In our Resolution of 2 August 2004, we gave due course to the petition and
resolved to decide the case based on the pleadings already filed.[12]

On 17 December 2004, the respondent filed a Manifestation and Motion to

Dismiss Petition.[13] It brings to our attention petitioner's letter dated 3
November 2004 informing it that the petitioner had decided to close its
hospital operations and to turn over the premises to the respondent on 30
November 2004 in view of the expiration of the lease agreement. According
to the respondent, petitioner's express and unequivocal recognition of the
expiration of the alleged lease agreement and its act of turning over the
possession of the subject property to the respondent had rendered the
instant petition moot and academic. The petitioner countered that the legal
issue of whether a writ of possession may be issued despite the existence
of a lease agreement must be resolved by this Court, since this issue may
again arise as 'banks continue to foreclose, seek possession and/or lease
out the foreclosed premises to previous mortgagors.

Indeed, because of petitioner's act of surrendering the possession of the

subject properties owing to the expiration of the lease agreement, the

instant petition praying (1) for the reversal of the order for the issuance of a
writ of possession and (2) for full possession by the petitioner of the subject
properties was rendered moot and academic. Nonetheless, for the guidance
of the bench and the bar, we shall proceed to resolve the important issue of
whether a writ of possession will lie to recover the material possession of
previously mortgaged properties that have been leased to the mortgagor
after the mortgagee consolidated its ownership over the properties.

However, we shall first take up the procedural issues raised by the

respondent.

We are not convinced that the petitioner is guilty of forum- shopping.

Forum-shopping is an act of a party against whom an adverse judgment or

order has been rendered in one forum of seeking and possibly getting a
favorable opinion in another forum, other than by appeal or special civil
action for certiorari. It may also be the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or
the other court would make a favorable disposition. The elements are as
follows: (1) identity of parties, or at least such parties as would represent the
same interest in both actions; (2) identity of rights asserted and relief prayed
for, the relief being founded on the same facts; and (3) identity of the two
preceding particulars such that any judgment in the other action, regardless
of which party is successful, will amount to res judicata in the action under
consideration.[14]

Before filing on 4 March 2004 the petition in this case, the petitioner had
filed two other cases, namely, (1) an Action for Specific Performance,
Injunction, and Damages with the RTC of Malaybalay City, docketed as Civil
Case No. 3312-03 and (2) a Petition for Corporate Rehabilitation with the
RTC of Cagayan de Oro City, docketed therein as S.P. Case No. 2004-019.
However, these two cases involve causes of action different from the one at
bar. In Civil Case No. 3312-03, the petitioner sought the enforcement of the

lease contract between it and the respondent, with prayer for damages for
the latter's breach of its contractual obligation. In S.P. Case No. 2004-019,
the petitioner prayed for rehabilitation pursuant to the Interim Rules on
Corporation Rehabilitation.

Upon the other hand, in this case, the ex parte motion for a writ of
possession was filed at the instance of the respondent. When the motion
was granted, the petitioner filed a notice of appeal to the Court of Appeals,
which it later withdrew. Thereafter, it appealed to us via Rule 45 of the Rules
of Court questioning the propriety of the issuance of a writ of possession for
the purpose of evicting the petitioner despite the lease agreement
subsequently entered into by the parties after the expiration of the
redemption period. As can be clearly seen, the two cases and the appeal
filed by the petitioner involved different causes of action. Thus, the petitioner
cannot be said to have engaged in forum-shopping.

Neither can the petitioner be deemed to have waived its right to file this
petition. Realizing that the remaining issue was a pure question of law, it
withdrew its Notice of Appeal stating that it was appealing the 28 January
2002 Order on both questions of law and fact. Section 9 of Rule 41 of the
Rules of Court provides that prior to the transmittal of the original record, the
court may allow withdrawal of the appeal.

Nothing in the Rules prevents a party from filing a petition under Rule 45 of
the Rules of Court after seasonably withdrawing the Notice of Appeal as
long as it is done within the reglementary period and the issue involved is
purely one of law. In this case it was before the lapse of the reglementary
period to appeal that the petitioner withdrew its Notice of Appeal to the
Court of Appeals and filed with us a motion for extension of time to file a
petition under Rule 45 of the Rules of Court. And the petition was filed within
the extended period we granted, raising only one question of law.

Nor is there a violation of the doctrine of hierarchy of courts. Section 2(c),

Rule 41 of the Rules of Court categorically provides that in all cases where
only questions of law are raised, the appeal from a decision or order of the
Regional Trial Court shall be to the Supreme Court by petition for review on
certiorari in accordance with Rule 45. Section 2(c) of Rule 41 of the Rules of
Court reads:

SEC. 2. Modes of appeal. '

(a)
Ordinary appeal. ' The appeal to the Court of Appeals
in cases decided by the Regional Trial Court in the exercise of its
original jurisdiction shall be taken by filing a notice of appeal with
the court which rendered the judgment or final order appealed
from and serving a copy thereof upon the adverse party. No
record on appeal shall be required except in special proceedings
and other cases of multiple or separate appeals where the law or
these Rules so require. In such cases, the record on appeal shall
be filed and served in like manner.

(b) Petition for review. ' The appeal to the Court of Appeals in
cases decided by the Regional Trial Court in the exercise of its
appellate jurisdiction shall be by petition for review in accordance
with Rule 42.

(c) Appeal by certiorari. ' In all cases where only questions of law
are raised or involved, the appeal shall be to the Supreme Court
by petition for review on certiorari in accordance with Rule 45.

Section 1 of Rule 45 provides:

SECTION 1. Filing of petition with Supreme Court. ' A party desiring to

appeal by certiorari from a judgment or final order or resolution of the Court
of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified
petition for review on certiorari. The petition shall raise only questions of law
which must be distinctly set forth.

A question of law exists when the doubt or controversy concerns the correct
application of law or jurisprudence to a certain set of facts; or when the
issue does not call for an examination of the probative value of the evidence
presented, the truth or falsehood of facts being admitted. A question of fact
exists when the doubt or difference arises as to the truth or falsehood of
facts or when the query invites calibration of the whole evidence considering
mainly the credibility of the witnesses, the existence and relevancy of
specific surrounding circumstances, as well as their relation to each other
and to the whole, and the probability of the situation.[15]

As earlier stated, the only issue raised in this petition is' 'whether [or] not the
court a quo correctly ruled that respondent, a former mortgagee-buyer, was
still entitled to a writ of possession as a matter of right as provided under act
3135, as amended, despite a lease agreement between itself and the
former mortgagor-seller executed after respondent became the absolute
owner of the foreclosed properties.

This question is undoubtedly one of law. The existence of a lease

agreement between the parties, which is a question of fact, ceased to be an
issue in view of the admission thereof by both the petitioner and the
respondent.[16] Thus, with only a question of law raised in this petition,
direct resort to this Court is proper.

In sum, the petition at bar is not tainted with any of the procedural errors
attributed to it by the respondent.

We shall now consider the issue of the propriety of the issuance of a writ of
possession in favor of the respondent.

The law[17] and jurisprudence[18] are clear that in extrajudicial foreclosure

proceedings, an order for a writ of possession issues as a matter of course,
upon proper motion, after the expiration of the redemption period without the
mortgagor exercising the right of redemption, or even during the redemption
period provided a bond is posted to indemnify the debtor in case the
foreclosure sale is shown to have been conducted without complying with
the requirements of the law or without the debtor violating the mortgage
contract.[19] The rationale for the ministerial issuance of a writ of
possession is to put the foreclosure buyer in possession of the property sold
without delay, since the right to possession is founded on ownership of the
property.[20]

However, in the instant case, a writ of possession was not the correct
remedy for the purpose of ousting the petitioner from the subject premises.
It must be noted that possession is the holding of a thing or the enjoyment
of a right.[21] It is acquired by the material occupation of a thing or the
exercise of a right, or by the fact that a thing or right is subject to the action
of one's will, or by the proper acts and legal formalities established for
acquiring such right.[22] 'By material occupation of a thing, it is not
necessary that the person in possession should be the occupant of the
property; the occupancy can be held by another in his name.[23] Thus
Articles 524 and 525 of the Civil Code provide:

Art. 524. Possession may be exercised in one's own name or in

that of another.

Art. 525. The possession of things or rights may be had in one of

two concepts: either in the concept of owner, or in that of the
holder of the thing or right to keep or enjoy it, the ownership
pertaining to another person.

In other words, an owner of a real estate has possession, either when he

himself is physically occupying the property, or when another person who
recognizes his rights as owner is occupying it.

In the case at bar, it is not disputed that after the foreclosure of the property
in question and the issuance of new certificates of title in favor of the
respondent, the petitioner and the respondent entered into a contract of
lease of the subject properties. This new contractual relation presupposed
that the petitioner recognized that possession of the properties had been
legally placed in the hands of the respondent, and that the latter had taken
such possession but delivered it to the former as lessee of the property. By
paying the monthly rentals, the petitioner also recognized the superior right
of the respondent to the possession of the property as owner thereof. And
by accepting the monthly rentals, the respondent enjoyed the fruits of its
possession over the subject property.[24] Clearly, the respondent is in
material possession of the subject premises. Thus, the trial court's issuance
of a writ of possession is not only superfluous, but improper under the law.
Moreover, as a lessee, the petitioner was a legitimate possessor of the
subject properties under Article 525 of the Civil Code. Thus, it could not be
deprived of its lawful possession by a mere ex parte motion for a writ of
possession.

Apropos to this case is Banco de Oro Savings and Mortgage Bank v. Court
of Appeals.[25] There, the spouses Nery were not able to redeem the
property they mortgaged to the bank; hence, the latter was able to
consolidate the title to the property in its name. The Nerys requested the
bank for more time to repurchase the subject property, obligating
themselves to pay monthly rentals or reasonable compensation for the
continued occupation of the premises on the ground that they had leased

portions of the building to tenants. Since neither the Nerys nor their tenants
vacated the subject premises nor paid reasonable compensation for the use
thereof, the bank instituted three separate ejectment suits against them
before the Metropolitan Trial Court of Paraaque. The Nerys argued that the
proper remedy that should have been taken by the bank as mortgagee was
to obtain a writ of possession and not an action for ejectment. We rejected
Nerys' argument and ruled that it was proper for the bank to sue for
ejectment. Thus:

The Nerys forget, however, that they had asked the Bank for a
grace period within which to repurchase the mortgaged property
and to be allowed to pay monthly rentals or reasonable
compensation for the use of the premises. In fact, they did pay
rentals for several months. Their continued stay in the property
was thereby converted to one by tolerance or permission. 'A
person who occupies the land of another at the latter's tolerance
or permission, without any contract between them, is necessarily
bound by an implied promise that he will vacate upon demand,
failing which, a summary action for ejectment is proper against
him (Dakudao v. Consolacion, L-54573, 24 June 1983, 112 SCRA
877). The Nerys refused to vacate upon demand, the last of which
was made by letter, dated 25 July 1984, as found by the Trial
Court, and not 9 September 1983 as the Nerys allege. An
ejectment suit, therefore, was proper, with the legally prescribed
period to institute the same having been complied with.

Significantly, too, with the consolidation of title in the Bank, it had

become the owner of the subject premises. As such, it could bring
an action for ejectment to obtain possession and occupation.
Thus, Section 1, Rule 70 provides 'an action for unlawful detainer
may be brought by a landlord, vendor, vendee, or other person
against whom the possession of any land or building is unlawfully
withheld after the expiration or termination of the right to hold
possession xxx.

It is indeed, correct that in ordinary extra-judicial foreclosure

cases, the mortgagee's remedy is to apply for a Writ of
Possession. As already intimated, however, the stay of the Nerys
in the premises had been converted to one by permission with a
corresponding commitment to pay rentals. An implied lease was
thereby treated between the parties. 'Where the question relates
to the relation between landlord and tenant, the nature of the
lease premises involved, the reasonableness of the rentals
demanded, the right or lack of right of the tenant to continue
occupying the premises against the will of the landlord, the
applicability of the rental law, etc., a case for ejectment is proper.
(Commander Realty, Inc., vs. Court of Appeals, L-77227, 9 May
1988, 161 SCRA 264). Notably, too, there were other tenants in
the premises who were not privy to the foreclosure proceedings
but had to be rejected as well. (emphasis ours)[26]

In a nutshell, where a lease agreement, whether express or implied, is

subsequently entered into by the mortgagor and the mortgagee after the
expiration of the redemption period and the consolidation of title in the name
of the latter, a case for ejectment or unlawful detainer, not a motion for a writ
of possession, is the proper remedy in order to evict from the questioned
premises a mortgagor-turned-lessee. The rationale for this rule is that a new
relationship between the parties has been created. What applies is no
longer the law on extrajudicial foreclosure, but the law on lease. And when
an issue arises, as in the case at bar, regarding the right of the lessee to
continue occupying the leased premises, the rights of the parties must be
heard and resolved in a case for ejectment or unlawful detainer under Rule
70 of the Rules of Court.

WHEREFORE, the petition is hereby GRANTED. The Orders of the

RegionalTrialCourtofMalaybalayCity, Bukidnon, Branch 9, in Misc. Case.
No. 735-03 dated 17 November 2003 and 23 January 2004, are hereby
REVERSED and SET ASIDE.

No pronouncement as to costs.

SO ORDERED.

Tanchan vs. Allied Banking Corporation, 571 SCRA 512 (2008)

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 164510

November 25, 2005

SPOUSES
SANTIAGO
and
RUFINA
TANCHAN,
vs.
ALLIED BANKING CORPORATION, respondent.

petitioners

DECISION
AUSTRIA-MARTINEZ, J.:
By way of Petition for Review under Rule 45 of the Rules of Court, spouses
Santiago and Rufina Tanchan (petitioners) seek the modification of the June
15, 2004 Decision1of the Court of Appeals (CA) which affirmed the August
3, 2001 Decision2 and August 8, 2002 Order3 of Branch 137, Regional Trial
Court (RTC), Makati in Civil Case No. 98-2468.4
The relevant facts are of record.
For value received, Cebu Foremost Construction, Inc. (Foremost), through
its Chairman and President Henry Tanchan (Henry) and his spouse, VicePresident and Treasurer Ma. Julie Ann Tanchan (Ma. Julie Ann) executed
and delivered to Allied Banking Corporation (respondent) seven US$
promissory notes,5 including Promissory Note No. 0051-97-036966 (Exhibit
"G") for US$379,000.00, at 9.50% interest rate per annum, due on February
9, 1998.
Foremost also issued to respondent several Philippine peso promissory
notes7 covering various loans in the aggregate amount of
Php28,900,000.00, including Promissory Note No. 0051-97-03688 (Exhibit
"H") for PhpP16,500,000.00, at an interest rate of 14.5% per annum, due
on February 9, 1998.8

All the foregoing promissory notes are secured by two Continuing Guaranty/
Comprehensive Surety Agreements (CG/CSA) executed in the personal
capacities of spouses Henry and Ma. Julie Ann (Spouses Tanchan) and
Henry's brother, herein petitioner Santiago Tanchan (Santiago),9for himself
and as attorney-in-fact of his wife and co-petitioner Rufina Tanchan (Rufina)
under a Special Power of Attorney, dated April 30, 1993, which grants
Santiago authority to:
x x x borrow and/or contract debts and obligations involving, affecting
or creating a charge or liability on, or which may involve, affect or
create a liability on the Property and/or my interest therein, whether or
not such debt/s or obligation/s contracted or to be contracted will
benefit me or the family, and to sign, execute and deliver in my name
to or in favor of any party, under such terms and conditions as my
attorney-in-fact may deem necessary, appropriate or convenient, any
and all documents instruments or contract/s (including without
limitations, promissory notes, loan agreements, assignments, surety or
guaranty undertakings, security agreements) involving, affecting or
creating a charge or liability on the Property."10
The liability of the
Php150,000,000.00.11

sureties

under

both

CG/CSAs

is

limited

to

Exhibit "G" and all the Philippine peso promissory notes, including Exhibit
"H", are secured not only by the two CG/CSAs but also by a Real Estate
Mortgage executed on February 14, 1997 by Henry, for himself and as the
legal guardian of the minors Henry Paul L. Tanchan and Don Henry L.
Tanchan; his wife Ma. Julie Ann; and Spouses Pablo and Milagros Lim, over
real properties registered in their names under Transfer Certificates of Title
No. 115804, No. 111149, No. 110672 and No. 3815, all located in Cebu
City.12
In separate final demand letters, both dated May 14, 1998, respondent
sought from Foremost payment of US$1,054,000.00, as the outstanding
principal balance, exclusive of interest and charges, of its obligations under
the seven US$ promissory notes,and PhP28,900,000.00 under its Philippine
peso promissory notes.13 Separate demands for payment were also made
upon Spouses Tanchan14 and the petitioners15 as sureties.

In a letter dated April 6, 1998, Foremost offered to cede to respondent, by

way of dacion en pago, the mortgaged real properties in full payment of its
loan obligations.16
On August 3, 1998, respondent instituted the extra-judicial foreclosure of the
real estate mortgage to satisfy its claim against Foremost in the aggregate
"amount of Php55,578,826.77, inclusive of interest, other charges and
attorney's fees, equivalent to 10% of the total amount due as of May 3,
1998, plus the costs and expenses of foreclosure."17At the public auction
sale, respondent's bid of only Php37,745,283.67 for all the mortgaged
properties, including the buildings and improvements thereon,18 was
adjudged the sole and highest bid.
On October 13, 1998, respondent filed with the RTC a Complaint for
Collection of Sum of Money with Petition for Issuance of Writ of Preliminary
Injunction against Foremost, Spouses Tanchan and herein petitioners
(collectively referred to as Foremost, et al.), praying that they be ordered to
pay, jointly and severally, the following amounts:19
Promissory Amount
Note
0051-96- US$ 80,000.00 plus interest at the rate of
09495
11.4% per annum from December 29, 1997
until fully paid and a penalty charge on the
unpaid interest at the rate of 1% per month
reckoned from December 29, 1997 until fully
paid and a penalty charge on the unpaid
principal reckoned from May 28, 1998 until fully
paid.
0051-96- US$110,000.00 plus interest at the rate of
17617
11.4% per annum and a penalty charge at the
rate of 1% per month, all reckoned from
December 29, 1997 until fully paid.
0051-96- US$250,000.00 plus interest at the rate of
19008
11.4% per annum and a penalty charge at the
rate of 1% per month all reckoned from
November 30, 1997 until fully paid.
0051-96- US$115,000.00 plus interest at the rate of
24801
11.4% per annum and a penalty charge at the

0051-9600603

0051-9702444

0051-9703696
(Exhibit
"G")
0051-9703688
(Exhibit
"H")

rate of 1% per month all reckoned from

December 29, 1997 until fully paid.
US$75,000.00 plus interest at the rate of 11.4%
per annum and a penalty charge at the rate of
1% per month all reckoned from December 29,
1997 until fully paid.
US$45,000.00 plus interest at the rate of 11.4%
per annum and a penalty charge at the rate of
1% per month all reckoned from December 29,
1997 until fully paid.
US$379,000.00 plus interest at the rate of
11.4% per annum reckoned from January 8,
1998 until fully paid and a penalty charge at the
rate of 1% per month from February 9, 1998
until fully paid.
PhpP7,466,795.67 plus interest at the rate of
20% per annum and a penalty charge at the
rate of 3% per month from August 10, 1998.
(Emphasis supplied)

Respondent also prayed for payment of attorney's fees equivalent to 25% of

the total amount due, expenses and costs of suit,
In support of its application for issuance of a writ of preliminary attachment,
respondent submitted an Affidavit executed by Elmer Elumbaring
(Elumbaring), Branch Cashier/Loans Supervisor, Cebu, Jakosalem Branch,
stating that:
4. Defendants [Foremost, et al.] committed fraud in contracting the
obligations upon which the action is brought in that: a) to induce
plaintiff [respondent] to grant the credit accommodation they
represented to the plaintiff [respondent] that they were in a financial
position to pay their obligations on maturity date in consideration of
which plaintiff [respondent] granted the credit accommodations. It
turned out, however, that they were not in such financial position when
they failed to pay their obligations on maturity date; b) they falsely
represented that the proceeds of the Loan would be used as additional
working capital in consideration of which, plaintiff [respondent] granted
the loans but when defendants [Foremost, et al.] received the said

proceeds, they diverted the same to a purpose other than that for
which they were intended as shown by the fact that defendants
[Foremost, et al.] were not able to fully pay the obligations at its
maturity date;
5. There is no security whatsoever for the claim plaintiff [respondent]
seeks to enforce by this action, and only by the issuance of a writ of
preliminary attachment can its interest be protected.20
The application for writ of preliminary attachment was granted by the RTC in
an Order dated November 3, 1998, to wit:
WHEREFORE, finding plaintiff's [respondent's] application for the
issuance of a writ of preliminary attachment sufficient in form and
substance, and the ground set forth therein being among those
allowed by the Rules (Rule 57, Sec. 1 [e]), let a Writ of Preliminary
Attachment issue against the properties of defendants Cebu Foremost
Construction, Incorporated, Santiago Tanchan, Jr., Rufina C. Tanchan,
Henry Tanchan and Ma. Julie Ann T. Tanchan, upon plaintiff's
[respondent's] filing of a bond in the amount of FIFTY-FOUR MILLION
(P54,000,000.00) PESOS, conditioned to answer for whatever damage
that the said defendants [Foremost, et al.] may suffer by reason of the
issuance of said writ should the Court finally adjudge that plaintiff
[respondent] was not entitled thereto.
SO ORDERED.21
Thus, armed with a writ of attachment,22 the sheriff levied several parcels of
land registered in the name of Foremost, et al.23
In their Amended Answer with Counterclaim,24 Foremost, et al.
acknowledged the authenticity and due execution of the promissory notes
but denied liability for the amounts alleged in the Complaint, the
computation of which they dispute due to the arbitrariness of the imposition
of new interest rates. They impugned the cause of action of respondent to
collect the amount due under Exhibit "G" and Exhibit "H" in view of the
bank's prior extra-judicial foreclosure of the securities thereon, which
recourse bars collection of the amounts due on the same promissory
notes.25

Foremost, et al. questioned the inclusion of Rufina as a party-defendant

even when she was not bound by the CG/CSAs which her husband
Santiago signed in excess of his authority under the special power of
attorney to contract loans for the family but not to guarantee loans obtained
by third persons.26
The issuance of the writ of preliminary attachment was likewise objected to
by Foremost on the ground that it contracted the loans in good faith but was
prevented from paying the same only because of the economic crisis that
beset the country. On the part of Spouses Tanchan and herein petitioners,
they claim that they had no personal participation or influence in the loan
transactions except to ensure its payment; hence, they could not have
practiced fraud upon respondent because they did not personally contract
the loans with it.27 Thus, each sought payment of Php100,000,000.00 as
moral damages for the emotional and mental vexation visited upon them by
respondent in causing the unwarranted preliminary attachment of their
properties.28
At the pre-trial, respondent submitted an Amended Pre-trial Brief where it
admitted that Foremost's Exhibit "G" and Exhibit "H" were among those
secured by the real estate mortgage29that it earlierforeclosed, but the
proceeds of the foreclosure sale satisfied only part of the amounts due on
said promissory notes and left a deficiency which is now the subject of their
complaint.30
The RTC issued a Pre-trial Order which limited the issues to be resolved to
the following:
1. Does the [respondent] have a cause of action with respect to the
promissory notes marked as [Exhibits] G31 and H32?
2. Is [petitioner] Rufina C. Tanchan liable on the basis of the
Continuing Guaranty/Comprehensive Surety Agreements because of
her authority from [sic] Santiago Tanchan, Jr. was limited to borrow
money only for the benefit of the family?
3. Is the unilateral increase of the interest rate of [respondent] valid?
4. What is the amount and nature of the damages that should be
adjudged against the losing party in favor of the prevailing party?33

As directed by the RTC in its Pre-trial Order, both parties presented

affidavits in lieu of direct examination of their witnesses.
For respondent, Fresnido Bandilla (Bandilla), Manager, Legal Department,
testified that the obligations of Foremost which were secured by the real
estate mortgage had amounted to Php61,155,339.36 as of the date of the
foreclosure sale, and that with respondent's bid of only Php37,745,283.67
being adjudged the lone and highest bid, there remained an unpaid balance
of Php23,415,115.69.34 Elumbaring corroborated Bandilla's testimony.35
On the other hand, Henry averred that even in the wake of the Asian
financial crisis, Foremost struggled to meet interest payments on its loan
obligations with respondent, but the point came when there were no more
construction jobs to be had, and Foremost was constrained to default on its
obligations.36
Santiago testified that he and his spouse could not have defrauded
respondent because they did not directly contract the loans with it but
merely acted as sureties. Thus, the issuance of the writ of attachment
against their properties was arbitrary, and brought upon them social
humiliation and emotional torment.37
After the parties submitted their respective memoranda,38the RTC rendered
its August 31, 2001 Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants
Cebu Foremost Construction, Inc., Santiago Tanchan, Jr., Rufina C.
Tanchan, Henry Tanchan and Ma. Julie Ann Tanchan, solidarily, [to]
pay plaintiff Allied Banking Corporation the following amounts: (1) US
$80,000.00, plus 8.75 % interest per annum from 7 June 1996 to 6
May 1997, 9.5% interest per annum from 7 May 1997 until fully paid,
and 1% penalty per month on the amount due from maturity date and
until fully paid; (2) US $110,00.00, plus 8.75% interest per annum from
24 September to 29 May 1997, 9.5% interest per annum from 30 May
1997 until fully paid, and 1% penalty per month on the amount due
from maturity date until fully paid; (3) US $570,000.00, plus 8.75%
interest per annum from 8 October 1996 to 29 May 1997, 9.5% interest
per annum from 30 May 1997 until fully paid, and 1% penalty per
month on the amount due from maturity date until fully paid; (4) US
$115,000.00 plus 9.5% interest per month from 12 December 1996

until fully paid, and 1% penalty per month on the amount due from
maturity date until fully paid; (5) US $75,000.00, plus 9.5% interest per
annum from 7 January 1997 until fully paid, and 1% penalty per month
on the amount due from maturity date until fully paid; (7) US
$379,000.00, plus 9.5% interest per annum from 12 February 1997 to
8 December 1997, 11.4% interest per annum from 9 December 1997
until fully paid, and 1% penalty per month on the amount due from
maturity date until fully paid; (8) P7,582,945.85, plus 28.5% interest per
annum, and 3% penalty per month, from the foreclosure sale on 10
August 1998 until fully paid; (9) attorney's fees equivalent to 10% of the
amount due plaintiff. However, the liability of defendants' Santiago
Tanchan, Jr., Rufina C. Tanchan, Henry Tanchan and Ma. Julie Ann T.
Tanchan is limited to P150,00,000.00 only.
Defendants' counterclaims are dismissed for lack of sufficient merit.
SO ORDERED.39
Foremost, et al. filed a Motion for Partial Reconsideration of Decision on the
ground that respondent failed to state a cause of action for the payment of
any deficiency account under Exhibit "G" and Exhibit "H". Its Complaint
does not contain any allegation regarding a deficiency account; nor even an
allusion to the foreclosure sale conducted in partial satisfaction of said
promissory notes. Although in its Amended Pre-trial Brief, respondent
mentioned that a deficiency account remained after the foreclosure of the
real estate mortgage, such statement did not have the effect of amending
the Complaint itself. Neither did the testimonies of Bandilla and Elumbaring
about a deficiency account take the place of a specific allegation of such
cause of action in the Complaint. Thus, in the absence of an allegation in
the Complaint of a cause of action for the payment of a deficiency account,
the RTC had no factual or legal basis to grant such claim.40
Spouses Tanchan and herein petitioners also filed a Motion to Lift the Writ
of Preliminary Attachment.41
The RTC denied the Motion to Lift the Writ of Attachment in an Order42
dated September 25, 2001, and the Motion for Partial Reconsideration, in
an Order43dated August 8, 2002.

Foremost, et al. appealedto the CA under the following assignment of

errors:
1. The lower court erred in not holding that having opted to extrajudicially foreclose the real estate mortgage which was executed to
secure the promissory notes marked as Exhibits "G" and "H", the
[respondent] is barred from filing an action for collection of the same;
2. The lower court erred in not holding that Rufina Tanchan did not
authorize her husband, Santiago J. Tanchan, Jr. to sign the Continuing
Guaranty/ Comprehensive Surety Agreement marked as Exhibit "I";
and
3. The lower court erred in not lifting the writ of preliminary attachment
and granting the claim for damages of the individual defendants by
virtue of the wrongful issuance of the writ of preliminary attachment.44
The CA dismissed the appeal in the June 15, 2004 Decision assailed
herein.
Only petitioners took the present recourse to raise the following issues:
I. Whether or not the petitioners as mere sureties of the loans obtained
by Cebu Foremost Construction, Inc. were guilty of fraud in incurring
the obligations so that a writ of preliminary attachment may be issued
against them?
II. Whether or not the respondent may claim for deficiency judgment on
its seventh and eight causes of action, not having alleged in its
complaint that said loans were secured by a real estate mortgage and
after the foreclosure there was a deficiency as in fact in its complaint,
the respondent sought full recovery of the promissory notes subject of
its seventh and eighth cause of action?
III. Whether or not the lower court and the Court of Appeals erred in
not awarding petitioners damages for the wrongful issuance of a writ of
preliminary attachment against them?45
Being interrelated, the first and third issues will be resolved jointly.

The issues involve the validity of the writ of preliminary attachment as

against the properties of petitioners only, but not as against the
properties of Foremost and Spouses Tanchan, neither of whom
appealed before the Court. The discussion that follows, therefore,
shall pertain only to the effect of the writ on petitioners.
One of the grounds cited by the CA in refusing to discharge the writ of
attachment is that "it is now too late for [petitioners] to question the validity
of the writ" because they waited three long years to have it lifted or
discharged.46
Under Section 13, Rule 57 of the Rules of Court, a party whose property
has been ordered attached may file a motion "with the court in which the
action is pending" for the discharge of the attachment on the ground that it
has been improperly issued or enforced. In addition, said party may file,
under Section 20, Rule 57, a claim for damages on account of improper
attachment within the following periods:
Sec. 20. Claim for damages on account of improper, irregular or
excessive attachment. - An application for damages on account of
improper, irregular or excessive attachment must be filed before the
trial or before appeal is perfected or before the judgment
becomes executory, with due notice to the attaching obligee or his
surety or sureties, setting forth the facts showing his right to damages
and the amount thereof. Such damages may be awarded only after
proper hearing and shall be included in the judgment on the main case.
If the judgment of the appellate court be favorable to the party against
whom the attachment was issued, he must claim damages sustained
during the pendency of the appeal by filing an application in the
appellate court with notice to the party in whose favor the attachment
was issued or his surety or sureties, before the judgment of the
appellate court becomes executory. The appellate court may allow the
application to be heard and decided by the trial court.47 (Emphasis
supplied)
Records reveal that the RTC issued the writ of preliminary attachment on
November 3, 1998,48 and as early as March 23, 1999, in their Amended
Answer with Counterclaim, petitioners already sought the discharge of the
writ.49 Moreover, after the RTC rendered its Decision on August 3, 2001 but

before appeal therefrom was perfected, petitioners filed on August 23, 2001
a Motion to Lift the Writ of Preliminary Attachment, reiterating their objection
to the writ and seeking payment of damages for its wrongful issuance.50
Clearly, petitioners' opposition to the writ was timely.
The question now is whether petitioner has a valid reason to have the writ
discharged and to claim damages.
It should be borne in mind that the questioned writ of preliminary attachment
was issued by the RTC under Section 1(d), Rule 57 of the Rules of Court, to
wit Sec. 1. Grounds upon which attachment may issue. - A plaintiff or any
proper party may, at the commencement of the action or at any time
thereafter, have the property of the adverse party attached as security
for the satisfaction of any judgment that may be recovered in the
following cases:
xxxx
(d) In an action against a party who has been guilty of a fraud in
contracting the debt or incurring the obligation upon which the action is
brought, or in concealing or disposing of the property for the taking,
detention or conversion of which the action is brought;
x x x x.
and on the basis solely of respondent's allegations in its Complaint "that
defendants [Foremost, et al.] failed to pay their obligations on maturity
dates, with the amount of US$1,054,000.00 and Php7,466795.69 remaining
unpaid; that defendants are disposing/concealing their properties with intent
to defraud the plaintiff and/or are guilty of fraud in the performance of their
obligations; and that there is no security whatsoever for the claim sought to
be enforced."51
Petitioners argue that the foregoing allegations are not sufficient to justify
issuance of the writ, especially in the absence of findings that they, as
sureties, participated in specific fraudulent acts in the execution and
performance of the loan agreements with respondent. 52

In refusing to lift the writ, the RTC held that the lack of a specific factual
finding of fraud in its decision is not among the grounds provided under
Sections 12 and 13, Rule 57 of the Rules of Court for the discharge of the
writ.53 The CA agreed for the reason that the RTC's affirmative action on the
complaint filed by respondent signifies its agreement with the allegations
found therein that Foremost, et al., including herein petitioners, committed
fraudulent acts in procuring loans from respondent.54
Both courts are in error.
The present case fits perfectly into the mold of Allied Banking Corporation v.
South Pacific Sugar Corporation,55where a writ of preliminary attachment
issued in favor of Allied Banking Corporation was discharged by the lower
courts for lack of evidence of fraud. In sustaining the discharge of the writ,
the Court held:
Moreover, even a cursory examination of the bank's complaint will
reveal that it cited no factual circumstance to show fraud on the part of
respondents. The complaint only had a general statement in the Prayer
for the Issuance of a Writ of Preliminary Attachment, reproduced in the
attached affidavit of petitioner's witness Go who stated as follows:
xxxx
4. Defendants committed fraud in contracting the obligations upon
which the present action is based and in the performance thereof.
Among others, defendants induced plaintiff to grant the subject
loans to defendant corporation by willfully and deliberately
misrepresenting that, one, the proceeds of the loans would be
used as additional working capital and, two, they would be in a
financial position to pay, and would most certainly pay, the loan
obligations on their maturity dates. In truth, defendants had no
intention of honoring their commitments as shown by the fact that
upon their receipt of the proceeds of the loans, they diverted the
same to illegitimate purposes and then brazenly ignored and
resisted plaintiff's lawful demands for them to settle their past due
loan obligations
xxxx

Such general averment will not suffice to support the issuance of

the writ of preliminary attachment. It is necessary to recite in what
particular manner an applicant for the writ of attachment was
defrauded x x x.
Likewise, written contracts are presumed to have been entered into
voluntarily and for a sufficient consideration. Section 1, Rule 131 of the
Rules of Court instructs that each party must prove his own affirmative
allegations. To repeat, in this jurisdiction, fraud is never presumed.
Moreover, written contracts such as the documents executed by the
parties in the present case, are presumed to have been entered into
for a sufficient consideration. (Citations omitted)
In the aforecited case -- as in the present case -- the bank presented the
testimony of its account officer who processed the loan application, but the
Court discarded her testimony for it did not detail how the corporation
induced or deceived the bank into granting the loans.56
Also apropos is Ng Wee v. Tankiansee57 where the appellate court was
questioned for discharging a writ of preliminary attachment to the extent that
it affected the properties of respondent Tankiansee, a corporate officer of
Wincorp, both defendants in the complaint for damages which petitioner Ng
Wee had filed with the trial court. In holding that the appellate court correctly
spared respondent Tankiansee from the writ of preliminary attachment, the
Court cited the following basis:
In the instant case, petitioner's October 12, 2000 Affidavit is bereft of
any factual statement that respondent committed a fraud. The affidavit
narrated only the alleged fraudulent transaction between Wincorp and
Virata and/or Power Merge, which, by the way, explains why this
Court, in G.R. No. 162928, affirmed the writ of attachment issued
against the latter. As to the participation of respondent in the said
transaction, the affidavit merely states that respondent, an officer
and director of Wincorp, connived with the other defendants in
the civil case to defraud petitioner of his money placements. No
other factual averment or circumstance details how respondent
committed a fraud or how he connived with the other defendants
to commit a fraud in the transaction sued upon. In other words,
petitioner has not shown any specific act or deed to support the
allegation that respondent is guilty of fraud.

The affidavit, being the foundation of the writ, must contain such
particulars as to how the fraud imputed to respondent was committed
for the court to decide whether or not to issue the writ. Absent any
statement of other factual circumstances to show that respondent, at
the time of contracting the obligation, had a preconceived plan or
intention not to pay, or without any showing of how respondent
committed the alleged fraud, the general averment in the affidavit that
respondent is an officer and director of Wincorp who allegedly
connived with the other defendants to commit a fraud, is insufficient to
support the issuance of a writ of preliminary attachment x x x. Verily,
the mere fact that respondent is an officer and director of the
company does not necessarily give rise to the inference that he
committed a fraud or that he connived with the other defendants
to commit a fraud. While under certain circumstances, courts may
treat a corporation as a mere aggroupment of persons, to whom
liability will directly attach, this is only done when the wrongdoing
has been clearly and convincingly established. (Emphasis
supplied)
Indeed, a writ of preliminary attachment is too harsh a provisional remedy to
be issued based on mere abstractions of fraud.58 Rather, the rules require
that for the writ to issue, there must be a recitation of clear and concrete
factual circumstances manifesting that the debtor practiced fraud upon the
creditor at the time of the execution of their agreement in that said debtor
had a pre-conceived plan or intention not to pay the creditor.59Being a state
of mind, fraud cannot be merely inferred from a bare allegation of nonpayment of debt or non-performance of obligation.60
As shown in Ng Wee, the requirement becomes all the more stringent when
the application for preliminary attachment is directed against a defendant
officer of a defendant corporation, for it will not be inferred from the affiliation
of one to the other that the officer participated in or facilitated in any
fraudulent practice attributed to the corporation. There must be evidence
clear and convincing that the officer committed a fraud or connived with the
corporation to commit a fraud; only then may the properties of said officer,
along with those of the corporation, be held under a writ of preliminary
attachment.

There is every reason to extend the foregoing rule, by analogy, to a mere

surety of the defendant. A surety's involvement is marginal to the principal
agreement between the defendant and the plaintiff; hence, in order for the
surety to be subject to a proceeding for issuance of a writ of preliminary
attachment, it must be shown that said surety participated in or facilitated
the fraudulent practice of the defendant, such as by offering a security solely
to induce the plaintiff to enter into the agreement with the defendant.
There is neither allegation nor innuendo in the Complaint of respondent or
the Affidavit of Elumbaring that petitioners as sureties or officers of
Foremost participated in or facilitated the commission of fraud by Foremost,
et al. against respondent. In fact, there is no mention of petitioners, much
less a recital of their role or influence in the execution of the loan
agreements. The RTC cited an allegation that petitioners are
disposing/concealing their properties with intent to defraud respondent, but
there is no hint of such scheme in the five paragraphs of the Complaint61 or
in the four corners of the Affidavit of Elumbaring.62 All that is alleged is that
Foremost obtained loans from respondent but failed to pay the same, but as
the Court has repeatedly held, no fraud can be inferred from a mere failure
to pay a loan.63
In fine, there was no factual basis for the issuance of a writ of preliminary
attachment against the properties of petitioners. The immediate dissolution
of the writ is called for.
In so ruling, however, the Court does not go so far as to grant petitioners'
claim for moral damages. A wrongful attachment may give rise to liability for
moral damages but evidence must be adduced not only of the torment and
humiliation brought upon the defendant by the attaching party but also of the
latter's bad faith or malice in causing the wrongful attachment,64 such as
evidence that the latter deliberately made false statements in its application
for attachment.65Absent such evidence of malice, the attaching party cannot
be held liable for moral damages.66
In the present case, petitioners cite the allegations made by respondent in
its application for attachment as evidence of bad faith. However, the
allegations in question contain nothing but the stark truth that Foremost
obtained loans and that it failed to pay. The Court fails to see any malice in
such bare allegations as would make respondent liable to petitioners for
moral damages.

To recapitulate, the Court partly dissolves the writ of preliminary attachment

for having wrongfully issued against the properties of petitioners who were
not shown to have committed fraud in the execution of the loan agreements
between Foremost and respondent, but declines to award moral damages
to petitioners in the absence of evidence that respondent acted with malice
in causing the wrongful issuance of the writ.
The second issue involves that portion of the August 3, 2001 RTC Decision
awarding respondent "(7) US $379,000.00, plus 9.5% interest per annum
from 12 February 1997 to 8 December 1997, 11.4% interest per annum
from 9 December 1997 until fully paid, and 1% penalty per month on the
amount due from maturity date until fully paid" under Promissory Note No.
0051-97-03696, and "(8) P7,582,945.85, plus 28.5% interest per annum,
and 3% penalty per month, from the foreclosure sale on 10 August 1998
until fully paid" under Promissory Note No. 0051-97-03688.
Petitioners argue that respondent is barred from claiming any amount under
the Promissory Notes, Exhibits "G" and "H", because it had already elected
to foreclose on the mortgage security, and it failed to allege in its pleadings
that a deficiency remained after the public auction sale of the securities and
that what it is seeking is the payment of such deficiency.67
There is no question that a mortgage creditor has a single cause of action
against a mortgagor debtor, which is to recover the debt; but it has the
option of either filing a personal action for collection of sum of money or
instituting a real action to foreclose on the mortgage security.68An election of
the first bars recourse to the second; otherwise, there would be multiplicity
of suits in which the debtor would be tossed from one venue to another,
depending on the location of the mortgaged properties and the residence of
the parties.69On the other hand, a creditor who elects to foreclose on the
mortgage may yet file an independent civil action for recovery of whatever
deficiency may remain in the outstanding obligation of the debtor, after
deducting the price obtained in the sale of the mortgaged properties at
public auction.70 The complaint, though, must specifically allege that what is
being sought is the recovery of the deficiency,71 or that in the pre-trial, such
claim be raised as an issue.72
Contrary to petitioners' argument, it is clear from the allegations in the
Complaint that what respondent sought was the payment of the deficiency
amount under the subject promissory notes. In particular, while the

Promissory Note, Exhibit "H", is for the amount of Php16,500,000.00, what

respondent sought to recover was only Php7,582,945.85, consistent with
the fact that part of said promissory note has been satisfied from the
proceeds of the extra-judicial foreclosure. While the exact phrase
"deficiency account" is not employed in the Complaint, the intention of
respondent to recover the same is borne out by its allegations.
More importantly, in the Pre-trial Order issued by the RTC, the right of
respondent to recover the deficiency account under the subject promissory
notes was raised as a specific issue.
WHEREFORE, the petition is PARTLY GRANTED. The June 15, 2004
Decisionof the Court of Appeals is MODIFIED to the effect that the
November 3, 1998 Writ of Preliminary Attachment is LIFTED and
DISSOLVED insofar as it affects the properties of petitioners Spouses
Santiago and Rufina Tanchan.
No costs.
SO ORDERED.

Onapal Philippines Commodities, Inc. vs. Court of Appeals,

218 SCRA 281 (1993)
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION

G.R. No. 90707 February 1, 1993

ONAPAL
PHILIPPINES
COMMODITIES,
INC.,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SUSAN CHUA,
respondents.
Zosa & Quijano Law Offices for private respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Certiorari under Rule 45 of the
Rules of Court to annul and set aside the following actions of the Court of
Appeals:
a) Decision * in Case CA-G.R. CV No. 08924; and
b) Resolution ** denying a Motion for Reconsideration
on the ground of grave abuse of discretion amounting to lack or excess
of jurisdiction and further ground that the decision is contrary to law
and evidence. The questioned decision upheld the trial court's findings
that the Trading Contract 1 on "futures" is a specie of gambling and
therefore null and void. Accordingly, the petitioner (as defendant in
lower court) was ordered to refund to the private respondent (as
plaintiff) the losses incurred in the trading transactions.
In support of the petition, the grounds alleged are:

1) Article 2018 of the New Civil Code is inapplicable to the factual milieu of
the instant case considering that in a commodity futures transaction the
broker is not the direct participant and cannot be considered as winner or
loser and the contract itself, from its very nature, cannot be considered as
gambling.
2) A commodity futures contract, being a specie of securities, is valid and
enforceable as its terms are governed by special laws, notably the Revised
Securities Act and the Revised Rules and Regulations on Commodity
Futures Trading issued by the Securities and Exchange Commission (SEC)
and approved by the Monetary Board of the Central Bank; hence, the Civil
Code is not the controlling piece of legislation.
From the records, We gather the following antecedent facts and
proceedings.
The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly
organized and existing corporation, was licensed as commission
merchant/broker by the SEC, to engage in commodity futures trading in
Cebu City under Certificate of Registration No. CEB-182. On April 27, 1983,
petitioner and private respondent concluded a "Trading Contract". Like all
customers of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of
commodity futures traded and of market reports indicating the volume of
trade in different future exchanges in Hongkong, Tokyo and other centers.
Every time a customer enters into a trading transaction with petitioner as
broker, the trading order is communicated by telex to its principal, Frankwell
Enterprises of Hongkong. If the transaction, either buying or selling
commodity futures, is consummated by the principal, the petitioner issues a
document known as "Confirmation of Contract and Balance Sheet" to the
customer. An order of a customer of the petitioner is supposed to be
transmitted from Cebu to petitioner's office in Manila. From Manila, it should
be forwarded to Hongkong and from there, transmitted to the Commodity
Futures Exchange in Japan.
There were only two parties involved as far as the transactions covered by
the Trading Contract are concerned the petitioner and the private
respondents. We quote hereunder the respondent Court's detailed findings
of the transactions between the parties:

It appears from plaintiff's testimony that sometime in April of 1983,

she was invited by defendant's Account Executive Elizabeth Diaz
to invest in the commodity futures trading by depositing the
amount of P500,000.00 (Exh. "A"); She was further told that the
business is "profitable" and that she could withdraw her money
anytime; she was furthermore instructed to go to the Onapal
Office where she met the Manager, Mr. Ciam, and the Account
Executive Elizabeth Diaz who told her that they would take care of
how to trade business and her account. She was then made to
sign the Trading Contract and other documents without making
her aware/understand the risks involved; that at the time they let
her sign "those papers" they were telling her that those papers
were for "formality sake"; that when she was told later on that she
made a profit of P20,480.00 in a span of three days in the first
transaction, they told her that the business is "very profitable"
(tsn, Francisco, March 14, 1985, p. 11).
On June 2, 1983, plaintiff was informed by Miss Diaz that she had
to deposit an additional amount of P300,000.00 "to pay the
difference" in prices, otherwise she will lose her original deposit of
P500,000.00; Fearing the loss of her original deposit, plaintiff was
constrained to deposit an additional amount of P300,000.00 (Exh.
"B"); Since she was made to understand that she could withdraw
her deposit/investment anytime, she not knowing how the
business is operated/managed as she was not made to
understand what the business was all about, she wanted to
withdraw her investment; but Elizabeth Diaz, defendant's Account
Executive, told her she could not get out because there are some
accounts hanging on the transactions.
Plaintiff further testified that she understood the transaction of
buying and selling as speculating in prices, and her paying the
difference between gains and losses without actual delivery of the
goods to be gambling, and she would like to withdraw from this
kind of business, the risk of which she was not made aware of.
Plaintiff further testified that she stopped trading in commodity
futures in September, 1983 when she realized she was engaged
in gambling. She was able to get only P470,000.00 out of her total
deposit of P800,000.00. In order to recover the loss of

P330,000.00, she filed this case and engaged the services of

counsel for P40,000.00 and expects to incur expenses of litigation
in the sum of P20,000.00." 2
A commodity futures contract is a specie of securities included in the broad
definition of what constitutes securities under Section 2 of the Revised
Securities Act. 3
Sec. 2 . . .:
(a) Securities shall include bonds, . . ., commodity futures
contracts, . . . .
The Revised Rules and Regulations on Commodity Futures Trading
issued by the SEC and approved by the Monetary Board of the Central
bank defines such contracts as follows:
"Commodity Futures Contract" shall refer to an agreement to buy
or sell a specified quantity and grade of a commodity at a future
date at a price established at the floor of the exchange.
The petitioner is a duly licensed commodity futures broker as defined
under the Revised Rules and Regulations on Commodity Futures
Trading as follows:
"Futures Commission Merchant/Broker" shall refer to a
corporation or partnership, which must be registered and licensed
as a Futures Commission Merchant/Broker and is engaged in
soliciting or in accepting orders for the purchase or sale of any
commodity for future delivery on or subject to the rules of the
contract market and that, in connection with such solicitation or
acceptance of orders, accepts any money, securities or property
(or extends credit in lieu thereof) to margin, guarantee or secure
any trade or contract that results or may result therefrom.
At the time private respondent entered into the transaction with the
petitioner, she signed a document denominated as "Trading Contract"
in printed form as prepared by the petitioner represented by its Branch
Manager, Albert Chiam, incorporating the Rules for Commodity
Trading. A copy of said contract was furnished to the private
respondent but the contents thereof were not explained to the former,

beyond what was told her by the petitioner's Account Executive

Elizabeth Diaz. Private respondent was also told that the petitioner's
principal was Frankwell Enterprises with offices in Hongkong but the
private respondent's money which was supposed to have been
transmitted to Hongkong, was kept by petitioner in a separate account
in a local bank.
Petitioner now contends that commodity futures trading is a legitimate
business practiced in the United States, recognized by the SEC and
permitted under the Civil Code, specifically Article 1462 thereof, quoted as
follows:
The goods which form the subject of a contract of sale may be
either existing goods, owned or possessed by the seller, or goods
to be manufactured, raised or acquired by the seller after the
perfection of the contract of sale, in this Title called "future
goods".
There may be a contract of sale of goods, whose acquisition by
the seller depends upon a contingency which may or may not
happen.
Petitioner further argues that the SEC, in the exercise of its powers,
authorized the operation of commodity exchanges to supervise and regulate
commodity futures trading. 4
The contract between the parties falls under the kind commonly called
"futures". In the late 1880's, trading in futures became rampant in the
purchase and sale of cotton and grain in the United States, giving rise to
unregulated trading exchanges known as "bucket shops". These were
common in Chicago and New York City where cotton from the South and
grain from the Mid-west were constantly traded in. The name of the party to
whom the seller was to make delivery when the future contract of sale was
closed or from whom he was to receive delivery in case of purchase is not
given the memorandum (contract). The business dealings between the
parties were terminated by the closing of the transaction of purchase and
sale of commodities without directions of the buyer because his margins
were exhausted. 5 Under the rules of the trading exchanges, weekly
settlements were required if there was any difference in the prices of the
cotton between those obtaining at the time of the contract and at the date of

delivery so that under the contract made by the purchaser, if the price of
cotton had advanced, he would have received in cash from the seller each
week the advance (increase) in price and if cotton prices declined, the
purchaser had to make like payments to the seller. In the terminology of the
exchange, these payments are called "margins". 6 Either the seller or the
buyer may elect to make or demand delivery of the cotton agreed to be sold
and bought, but in general, it seems practically a uniform custom that
settlements are made by payments and receipts of difference in prices at
the time of delivery from that prevailing at the time of payment of the past
weekly "margins". These settlements are made by "closing out" the
contracts. 7 Where the broker represented the buyer in buying and selling
cotton for future delivery with himself extending credit margins, and some of
the transactions were closed at a profit while the others at a loss, payments
being made of the difference in prices arising out of their rise or fall above or
below the contract price, and the facts showed that no actual delivery of
cotton was contemplated, such contracts are of the kind commonly called
"futures". 8 Making contracts for the purchase and sale of commodities for
future delivery, the parties not intending an actual delivery, or contracts of
the kind commonly called futures, are unenforceable. 9
The term "futures" has grown out of those purely speculative transactions in
which there are nominal contracts to sell for future delivery, but where in fact
no delivery is intended or executed. The nominal seller does not have or
expect to have a stock of merchandise he purports to sell nor does the
nominal buyer expect to receive it or to pay for the price. Instead of that, a
percentage or margin is paid, which is increased or diminished as the
market rates go up and down, and accounted for to the buyer. This is simple
speculation, gambling or wagering on prices within a given time; it is not
buying and selling and is illegal as against public policy. 10
The facts as disclosed by the evidence on record show that private
respondent made arrangements with Elizabeth Diaz, Account Executive of
petitioner for her to see Mr. Albert Chiam, petitioner's Branch Manager. The
contract signed by private respondent purports to be for the delivery of
goods with the intention that the difference between the price stipulated and
the exchange or market price at the time of the pretended delivery shall be
paid by the loser to the winner. We quote with approval the following
findings of the trial court as cited in the Court of Appeals decision:

The evidence of the plaintiff tend to show that in her transactions

with the defendant, the parties never intended to make or accept
delivery of any particular commodity but the parties merely made
a speculation on the rise or fall in the market of the contract price
of the commodity, subject of the transaction, on the pretended
date of delivery so that if the forecast was correct, one party
would make a profit, but if the forecast was wrong, one party
would lose money. Under this scheme, plaintiff was only able to
recover P470,000.00 out of her original and "additional" deposit of
P800,000.00 with the defendant.
The defendant admits that in all the transactions that it had with
the plaintiff, there was (sic) no actual deliveries and that it has
made no arrangement with the Central Bank for the remittance of
its customer's money abroad but defendant contends in its
defense that the mere fact that there were no actual deliveries
made in the transactions which plaintiff had with the defendant,
did not mean that no such actual deliveries were intended by the
parties since paragraph 10 of the rules for commodity trading,
attached to the trading contract which plaintiff signed before she
traded with the defendant, amply provides for actual delivery of
the commodity subject of the transaction.
The court has, therefore, to find out from all the facts and
circumstances of this case, whether the parties really intended to
make or accept deliveries of the commodities traded or whether
the defendant merely placed a provision for delivery in its rules for
commodity futures trading so as to escape from being called a
bucket shop, . . .
xxx xxx xxx
. . . the court is convinced that the parties never really intended to
make or accept delivery of any commodity being trade as, in fact,
the unrebutted testimony of Mr. Go is to the effect that all the
defendant's customers were mere speculators who merely
forecast the rise or fall in the market of the commodity, subject of
the transaction, below or above the contract price on the
pretended date of delivery and, in fact, the defendant even
discourages its customers from taking or accepting delivery of any

commodity by making it hard, if not impossible, for them to make

or accept delivery of any commodity. Proof of this is paragraph
10(d) of defendant's rules for commodity trading which provides
that the customer shall apply for the necessary licenses and
documents with the proper government agency for the importation
and exportation of any particular commodity. 11
The trading contract signed by private respondent and Albert Chiam,
representing petitioner, is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand
delivery of goods agreed to be bought and sold, but where no such delivery
is actually made. By delivery is meant the act by which the res or subject is
placed in the actual or constructive possession or control of another. It may
be actual as when physical possession is given to the vendee or his
representative; or constructive which takes place without actual transfer of
goods, but includes symbolic delivery or substituted delivery as when the
evidence of title to the goods, the key to the warehouse or bill of
lading/warehouse receipt is delivered. 12 As a contract in printed form,
prepared by petitioner and served on private respondent, for the latter's
signature, the trading contract bears all the indicia of a valid trading contract
because it complies with the Rules and Regulations on Commodity Futures
Trading as prescribed by the SEC. But when the transaction which was
carried out to implement the written contract deviates from the true import of
the agreement as when no such delivery, actual or constructive, of the
commodity or goods is made, and final settlement is made by payment and
receipt of only the difference in prices at the time of delivery from that
prevailing at the time the sale is made, the dealings in futures become mere
speculative contracts in which the parties merely gamble on the rise or fall in
prices. A contract for the sale or purchase of goods/commodity to be
delivered at future time, if entered into without the intention of having any
goods/commodity pass from one party to another, but with an understanding
that at the appointed time, the purchaser is merely to receive or pay the
difference between the contract and the market prices, is a transaction
which the law will not sanction, for being illegal. 13
The written trading contract in question is not illegal but the transaction
between the petitioner and the private respondent purportedly to implement
the contract is in the nature of a gambling agreement and falls within the
ambit of Article 2018 of the New Civil Code, which is quoted hereunder:

If a contract which purports to be for the delivery of goods,

securities or shares of stock is entered into with the intention that
the difference between the price stipulated and the exchange or
market price at the time of the pretended delivery shall be paid by
the loser to the winner, the transaction is null and void. The loser
may recover what he has paid.
The facts clearly establish that the petitioner is a direct participant in the
transaction, acting through its authorized agents. It received the customer's
orders and private respondent's money. As per terms of the trading
contract, customer's orders shall be directly transmitted by the petitioner as
broker to its principal, Frankwell Enterprises Ltd. of Hongkong, being a
registered member of the International Commodity Clearing House, which in
turn must place the customer's orders with the Tokyo Exchange. There is no
evidence that the orders and money were transmitted to its principal
Frankwell Enterprises Ltd. in Hongkong nor were the orders forwarded to
the Tokyo Exchange. We draw the conclusion that no actual delivery of
goods and commodity was intended and ever made by the parties. In the
realities of the transaction, the parties merely speculated on the rise and fall
in the price of the goods/commodity subject matter of the transaction. If
private respondent's speculation was correct, she would be the winner and
the petitioner, the loser, so petitioner would have to pay private respondent
the "margin". But if private respondent was wrong in her speculation then
she would emerge as the loser and the petitioner, the winner. The petitioner
would keep the money or collect the difference from the private respondent.
This is clearly a form of gambling provided for with unmistakeable certainty
under Article 2018 abovestated. It would thus be governed by the New Civil
Code and not by the Revised Securities Act nor the Rules and Regulations
on Commodity Futures Trading laid down by the SEC.
Article 1462 of the New Civil Code does not govern this case because the
said provision contemplates a contract of sale of specific goods where one
of the contracting parties binds himself to transfer the ownership of and
deliver a determinate thing and the other to pay therefore a price certain in
money or its equivalent. 14 The said article requires that there be delivery of
goods, actual or constructive, to be applicable. In the transaction in
question, there was no such delivery; neither was there any intention to
deliver a determinate thing.

The transaction is not what the parties call it but what the law defines it to
be. 15
After considering all the evidence in this case, it appears that petitioner and
private respondent did not intend, in the deals of purchasing and selling for
future delivery, the actual or constructive delivery of the goods/commodity,
despite the payment of the full price therefor. The contract between them
falls under the definition of what is called "futures". The payments made
under said contract were payments of difference in prices arising out of the
rise or fall in the market price above or below the contract price thus making
it purely gambling and declared null and void by law. 16
In England and America where contracts commonly called futures
originated, such contracts were at first held valid and could be enforced by
resort to courts. Later these contracts were held invalid for being
speculative, and in some states in America, it was unlawful to make
contracts commonly called "futures". Such contracts were found to be mere
gambling or wagering agreements covered and protected by the rules and
regulations of exchange in which they were transacted under devices which
rendered it impossible for the courts to discover their true character. 17 The
evil sought to be suppressed by legislation is the speculative dealings by
means of such trading contracts, which degenerated into mere gambling in
the future price of goods/commodities ostensibly but not actually, bought or
sold. 18
Under Article 2018, the private respondent is entitled to refund from the
petitioner what she paid. There is no evidence that the orders of private
respondent were actually transmitted to the petitioner's principal in
Hongkong and Tokyo. There was no arrangement made by petitioner with
the Central Bank for the purpose of remitting the money of its customers
abroad. The money which was supposed to be remitted to Frankwell
Enterprises of Hongkong was kept by petitioner in a separate account in a
local bank. Having received the money and orders of private respondent
under the trading contract, petitioner has the burden of proving that said
orders and money of private respondent had been transmitted. But
petitioner failed to prove this point.
For reasons indicated and construed in the light of the applicable rules and
under the plain language of the statute, We find no reversible error
committed by the respondent Court that would justify the setting aside of the

questioned decision and resolution. For lack of merit, the petition is

DISMISSED and the judgment sought to be reversed is hereby AFFIRMED.
With costs against petitioner.
SO ORDERED.

First Philippine International Bank vs. Court of Appeals, 252

SCRA 259 (1996)
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 115849

January 24, 1996

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank

of
the
Philippines)
and
MERCURIO
RIVERA,
petitioners,
vs.
COURT OF APPEALS, CARLOS EJERCITO, in substitution of
DEMETRIO DEMETRIA, and JOSE JANOLO, respondents.
DECISION
PANGANIBAN, J.:
In the absence of a formal deed of sale, may commitments given by bank
officers in an exchange of letters and/or in a meeting with the buyers
constitute a perfected and enforceable contract of sale over 101 hectares of
land in Sta. Rosa, Laguna? Does the doctrine of "apparent authority" apply
in this case? If so, may the Central Bank-appointed conservator of
Producers Bank (now First Philippine International Bank) repudiate such
"apparent authority" after said contract has been deemed perfected? During
the pendency of a suit for specific performance, does the filing of a
"derivative suit" by the majority shareholders and directors of the distressed
bank to prevent the enforcement or implementation of the sale violate the
ban against forum-shopping?
Simply stated, these are the major questions brought before this Court in
the instant Petition for review on certiorari under Rule 45 of the Rules of
Court, to set aside the Decision promulgated January 14, 1994 of the
respondent Court of Appeals1 in CA-G.R CV No. 35756 and the Resolution
promulgated June 14, 1994 denying the motion for reconsideration. The
dispositive portion of the said Decision reads:

WHEREFORE, the decision of the lower court is MODIFIED by the

elimination of the damages awarded under paragraphs 3, 4 and 6 of its
dispositive portion and the reduction of the award in paragraph 5
thereof to P75,000.00, to be assessed against defendant bank. In all
other aspects, said decision is hereby AFFIRMED.
All references to the original plaintiffs in the decision and its dispositive
portion are deemed, herein and hereafter, to legally refer to the
plaintiff-appellee Carlos C. Ejercito.
Costs against appellant bank.
The dispositive portion of the trial court's2 decision dated July 10, 1991, on
the other hand, is as follows:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiffs and against the defendants as follows:
1. Declaring the existence of a perfected contract to buy and sell over
the six (6) parcels of land situated at Don Jose, Sta. Rosa, Laguna with
an area of 101 hectares, more or less, covered by and embraced in
Transfer Certificates of Title Nos. T-106932 to T-106937, inclusive, of
the Land Records of Laguna, between the plaintiffs as buyers and the
defendant Producers Bank for an agreed price of Five and One Half
Million (P5,500,000.00) Pesos;
2. Ordering defendant Producers Bank of the Philippines, upon finality
of this decision and receipt from the plaintiffs the amount of P5.5
Million, to execute in favor of said plaintiffs a deed of absolute sale
over the aforementioned six (6) parcels of land, and to immediately
deliver to the plaintiffs the owner's copies of T.C.T. Nos. T-106932 to
T- 106937, inclusive, for purposes of registration of the same deed and
transfer of the six (6) titles in the names of the plaintiffs;
3. Ordering the defendants, jointly and severally, to pay plaintiffs Jose
A. Janolo and Demetrio Demetria the sums of P200,000.00 each in
moral damages;
4. Ordering the defendants, jointly and severally, to pay plaintiffs the
sum of P100,000.00 as exemplary damages ;

5. Ordering the defendants, jointly and severally, to pay the plaintiffs

the amount of P400,000.00 for and by way of attorney's fees;
6. Ordering the defendants to pay the plaintiffs, jointly and severally,
actual and moderate damages in the amount of P20,000.00;
With costs against the defendants.
After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply
to sur-rejoinder, the petition was given due course in a Resolution dated
January 18, 1995. Thence, the parties filed their respective memoranda and
reply memoranda. The First Division transferred this case to the Third
Division per resolution dated October 23, 1995. After carefully deliberating
on the aforesaid submissions, the Court assigned the case to the
undersigned ponente for the writing of this Decision.
The Parties
Petitioner First Philippine International Bank (formerly Producers Bank of
the Philippines; petitioner Bank, for brevity) is a banking institution
organized and existing under the laws of the Republic of the Philippines.
Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal age and
was, at all times material to this case, Head-Manager of the Property
Management Department of the petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age
and is the assignee of original plaintiffs-appellees Demetrio Demetria and
Jose Janolo.
Respondent Court of Appeals is the court which issued the Decision and
Resolution sought to be set aside through this petition.
The Facts
The facts of this case are summarized in the respondent Court's Decision3
as follows:
(1) In the course of its banking operations, the defendant Producer
Bank of the Philippines acquired six parcels of land with a total area of
101 hectares located at Don Jose, Sta. Rose, Laguna, and covered by
Transfer Certificates of Title Nos. T-106932 to T-106937. The property

used to be owned by BYME Investment and Development Corporation

which had them mortgaged with the bank as collateral for a loan. The
original plaintiffs, Demetrio Demetria and Jose O. Janolo, wanted to
purchase the property and thus initiated negotiations for that purpose.
(2) In the early part of August 1987 said plaintiffs, upon the suggestion
of BYME investment's legal counsel, Jose Fajardo, met with defendant
Mercurio Rivera, Manager of the Property Management Department of
the defendant bank. The meeting was held pursuant to plaintiffs' plan
to buy the property (TSN of Jan. 16, 1990, pp. 7-10). After the meeting,
plaintiff Janolo, following the advice of defendant Rivera, made a
formal purchase offer to the bank through a letter dated August 30,
1987 (Exh. "B"), as follows:
August 30, 1987
The
Producers
Makati, Metro Manila

Bank

Attn.
Mr.
Mercurio
Manager, Property Management Dept.

of

the

Philippines

Q.

Rivera

Gentleman:
I have the honor to submit my formal offer to purchase your properties
covered by titles listed hereunder located at Sta. Rosa, Laguna, with a
total area of 101 hectares, more or less.
TCT
NO.
T106932
T106933
T106934
T106935
T-

AREA
113,580
sq. m.
70,899 sq.
m.
52,246 sq.
m.
96,768 sq.
m.
187,114

106936 sq. m.
T481,481
106937 sq. m.
My offer is for PESOS: THREE MILLION FIVE
THOUSAND (P3,500,000.00) PESOS, in cash.

HUNDRED

Kindly contact me at Telephone Number 921-1344.

(3) On September 1, 1987, defendant Rivera made on behalf of the
bank a formal reply by letter which is hereunder quoted (Exh. "C"):
September 1, 1987
JP
M-P
GUTIERREZ
142
Charisma
St.,
Doa
Rosario, Pasig, Metro Manila

ENTERPRISES
Andres
II

Attention: JOSE O. JANOLO

Dear Sir:
Thank you for your letter-offer to buy our six (6) parcels of acquired lots
at Sta. Rosa, Laguna (formerly owned by Byme Industrial Corp.).
Please be informed however that the bank's counter-offer is at P5.5
million for more than 101 hectares on lot basis.
We shall be very glad to hear your position on the on the matter.
Best regards.
(4) On September 17, 1987, plaintiff Janolo, responding to Rivera's
aforequoted reply, wrote (Exh. "D"):
September
1987
Producers
Paseo
Makati, Metro Manila

de

17,
Bank
Roxas

Attention: Mr. Mercurio Rivera

Gentlemen:
In reply to your letter regarding my proposal to purchase your 101hectare lot located at Sta. Rosa, Laguna, I would like to amend my
previous offer and I now propose to buy the said lot at P4.250 million in
CASH..
Hoping that this proposal meets your satisfaction.
(5) There was no reply to Janolo's foregoing letter of September 17,
1987. What took place was a meeting on September 28, 1987 between
the plaintiffs and Luis Co, the Senior Vice-President of defendant bank.
Rivera as well as Fajardo, the BYME lawyer, attended the meeting.
Two days later, or on September 30, 1987, plaintiff Janolo sent to the
bank, through Rivera, the following letter (Exh. "E"):
The
Producers
Paseo
de
Metro Manila

Bank

of
the
Roxas,

Philippines
Makati

Attention: Mr. Mercurio Rivera

Re:
101
in Sta. Rosa, Laguna

Hectares

of

Land

Gentlemen:
Pursuant to our discussion last 28 September 1987, we are pleased to
inform you that we are accepting your offer for us to purchase the
property at Sta. Rosa, Laguna, formerly owned by Byme Investment,
for a total price of PESOS: FIVE MILLION FIVE HUNDRED
THOUSAND (P5,500,000.00).
Thank you.
(6) On October 12, 1987, the conservator of the bank (which has been
placed under conservatorship by the Central Bank since 1984) was
replaced by an Acting Conservator in the person of defendant Leonida

T. Encarnacion. On November 4, 1987, defendant Rivera wrote plaintiff

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

de

Mercurio
Producers
Roxas,

Rivera
Bank
Makati

Dear Mr. Rivera:

This is in connection with the offer of our client, Mr. Jose O. Janolo, to
purchase your 101-hectare lot located in Sta. Rosa, Laguna, and which
are covered by TCT No. T-106932 to 106937.
From the documents at hand, it appears that your counter-offer dated
September 1, 1987 of this same lot in the amount of P5.5 million was

accepted by our client thru a letter dated September 30, 1987 and was
received by you on October 5, 1987.
In view of the above circumstances, we believe that an agreement has
been perfected. We were also informed that despite repeated follow-up
to consummate the purchase, you now refuse to honor your
commitment. Instead, you have advertised for sale the same lot to
others.
In behalf of our client, therefore, we are making this formal demand
upon you to consummate and execute the necessary
actions/documentation within three (3) days from your receipt hereof.
We are ready to remit the agreed amount of P5.5 million at your
advice. Otherwise, we shall be constrained to file the necessary court
action to protect the interest of our client.
We trust that you will be guided accordingly.
(8) Defendant bank, through defendant Rivera, acknowledged receipt
of the foregoing letter and stated, in its communication of December 2,
1987 (Exh. "I"), that said letter has been "referred . . . to the office of
our Conservator for proper disposition" However, no response came
from the Acting Conservator. On December 14, 1987, the plaintiffs
made a second tender of payment (Exh. "L" and "L-1"), this time
through the Acting Conservator, defendant Encarnacion. Plaintiffs'
letter reads:
PRODUCERS
THE
Paseo
Makati, Metro Manila
Attn.:
Atty.
Central Bank Conservator

BANK
de
NIDA

OF
PHILIPPINES
Roxas,
ENCARNACION

We are sending you herewith, in - behalf of our client, Mr. JOSE O.

JANOLO, MBTC Check No. 258387 in the amount of P5.5 million as
our agreed purchase price of the 101-hectare lot covered by TCT Nos.
106932, 106933, 106934, 106935, 106936 and 106937 and registered
under Producers Bank.

This is in connection with the perfected agreement consequent from

your offer of P5.5 Million as the purchase price of the said lots. Please
inform us of the date of documentation of the sale immediately.
Kindly acknowledge receipt of our payment.
(9) The foregoing letter drew no response for more than four months.
Then, on May 3, 1988, plaintiff, through counsel, made a final demand
for compliance by the bank with its obligations under the considered
perfected contract of sale (Exhibit "N"). As recounted by the trial court
(Original Record, p. 656), in a reply letter dated May 12, 1988 (Annex
"4" of defendant's answer to amended complaint), the defendants
through Acting Conservator Encarnacion repudiated the authority of
defendant Rivera and claimed that his dealings with the plaintiffs,
particularly his counter-offer of P5.5 Million are unauthorized or illegal.
On that basis, the defendants justified the refusal of the tenders of
payment and the non-compliance with the obligations under what the
plaintiffs considered to be a perfected contract of sale.
(10) On May 16, 1988, plaintiffs filed a suit for specific performance
with damages against the bank, its Manager Rivers and Acting
Conservator Encarnacion. The basis of the suit was that the
transaction had with the bank resulted in a perfected contract of sale,
The defendants took the position that there was no such perfected sale
because the defendant Rivera is not authorized to sell the property,
and that there was no meeting of the minds as to the price.
On March 14, 1991, Henry L. Co (the brother of Luis Co), through
counsel Sycip Salazar Hernandez and Gatmaitan, filed a motion to
intervene in the trial court, alleging that as owner of 80% of the Bank's
outstanding shares of stock, he had a substantial interest in resisting
the complaint. On July 8, 1991, the trial court issued an order denying
the motion to intervene on the ground that it was filed after trial had
already been concluded. It also denied a motion for reconsideration
filed thereafter. From the trial court's decision, the Bank, petitioner
Rivera and conservator Encarnacion appealed to the Court of Appeals
which subsequently affirmed with modification the said judgment.
Henry Co did not appeal the denial of his motion for intervention.

In the course of the proceedings in the respondent Court, Carlos Ejercito

was substituted in place of Demetria and Janolo, in view of the assignment
of the latters' rights in the matter in litigation to said private respondent.
On July 11, 1992, during the pendency of the proceedings in the Court of
Appeals, Henry Co and several other stockholders of the Bank, through
counsel Angara Abello Concepcion Regala and Cruz, filed an action
(hereafter, the "Second Case") purportedly a "derivative suit" with the
Regional Trial Court of Makati, Branch 134, docketed as Civil Case No. 921606, against Encarnacion, Demetria and Janolo "to declare any perfected
sale of the property as unenforceable and to stop Ejercito from enforcing or
implementing the sale"4 In his answer, Janolo argued that the Second Case
was barred by litis pendentia by virtue of the case then pending in the Court
of Appeals. During the pre-trial conference in the Second Case, plaintiffs
filed a Motion for Leave of Court to Dismiss the Case Without Prejudice.
"Private respondent opposed this motion on the ground, among others, that
plaintiff's act of forum shopping justifies the dismissal of both cases, with
prejudice."5 Private respondent, in his memorandum, averred that this
motion is still pending in the Makati RTC.
In their Petition6 and Memorandum7, petitioners summarized their position
as follows:
I.
The Court of Appeals erred in declaring that a contract of sale was
perfected between Ejercito (in substitution of Demetria and Janolo) and
the bank.
II.
The Court of Appeals erred in declaring the existence of an
enforceable contract of sale between the parties.
III.
The Court of Appeals erred in declaring that the conservator does not
have the power to overrule or revoke acts of previous management.
IV.

The findings and conclusions of the Court of Appeals do not conform to

the evidence on record.
On the other hand, petitioners prayed for dismissal of the instant suit on the
ground8 that:
I.
Petitioners have engaged in forum shopping.
II.
The factual findings and conclusions of the Court of Appeals are
supported by the evidence on record and may no longer be questioned
in this case.
III.
The Court of Appeals correctly held that there was a perfected contract
between Demetria and Janolo (substituted by; respondent Ejercito)
and the bank.
IV.
The Court of Appeals has correctly held that the conservator, apart
from being estopped from repudiating the agency and the contract, has
no authority to revoke the contract of sale.
The Issues
From the foregoing positions of the parties, the issues in this case may be
summed up as follows:
1) Was there forum-shopping on the part of petitioner Bank?
2) Was there a perfected contract of sale between the parties?
3) Assuming there was, was the said contract enforceable under the
statute of frauds?
4) Did the bank conservator have the unilateral power to repudiate the
authority of the bank officers and/or to revoke the said contract?

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

11

that there is no forum-shopping

1) In the earlier or "First Case" from which this proceeding arose, the
Bank was impleaded as a defendant, whereas in the "Second Case"
(assuming the Bank is the real party in interest in a derivative suit), it
was plaintiff;
2) "The derivative suit is not properly a suit for and in behalf of the
corporation under the circumstances";

3) Although the CERTIFICATION/VERIFICATION (supra) signed by

the Bank president and attached to the Petition identifies the action as
a "derivative suit," it "does not mean that it is one" and "(t)hat is a legal
question for the courts to decide";
4) Petitioners did not hide the Second Case at they mentioned it in the
said VERIFICATION/CERTIFICATION.
We rule for private respondent.
To begin with, forum-shopping originated as a concept in private
international law.12, where non-resident litigants are given the option to
choose the forum or place wherein to bring their suit for various reasons or
excuses, including to secure procedural advantages, to annoy and harass
the defendant, to avoid overcrowded dockets, or to select a more friendly
venue. To combat these less than honorable excuses, the principle of forum
non conveniens was developed whereby a court, in conflicts of law cases,
may refuse impositions on its jurisdiction where it is not the most
"convenient" or available forum and the parties are not precluded from
seeking remedies elsewhere.
In this light, Black's Law Dictionary 13 says that forum shopping "occurs
when a party attempts to have his action tried in a particular court or
jurisdiction where he feels he will receive the most favorable judgment or
verdict." Hence, according to Words and Phrases14, "a litigant is open to the
charge of "forum shopping" whenever he chooses a forum with slight
connection to factual circumstances surrounding his suit, and litigants
should be encouraged to attempt to settle their differences without imposing
undue expenses and vexatious situations on the courts".
In the Philippines, forum shopping has acquired a connotation
encompassing not only a choice of venues, as it was originally understood
in conflicts of laws, but also to a choice of remedies. As to the first (choice of
venues), the Rules of Court, for example, allow a plaintiff to commence
personal actions "where the defendant or any of the defendants resides or
may be found, or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff" (Rule 4, Sec, 2 [b]). As to remedies, aggrieved
parties, for example, are given a choice of pursuing civil liabilities
independently of the criminal, arising from the same set of facts. A
passenger of a public utility vehicle involved in a vehicular accident may sue

on culpa contractual, culpa aquiliana or culpa criminal each remedy

being available independently of the others although he cannot recover
more than once.
In either of these situations (choice of venue or choice of remedy), the
litigant actually shops for a forum of his action, This was the original
concept of the term forum shopping.
Eventually, however, instead of actually making a choice of the forum
of their actions, litigants, through the encouragement of their lawyers,
file their actions in all available courts, or invoke all relevant remedies
simultaneously. This practice had not only resulted to (sic) conflicting
adjudications among different courts and consequent confusion
enimical (sic) to an orderly administration of justice. It had created
extreme inconvenience to some of the parties to the action.
Thus, "forum shopping" had acquired a different concept which is
unethical professional legal practice. And this necessitated or had
given rise to the formulation of rules and canons discouraging or
altogether prohibiting the practice. 15
What therefore originally started both in conflicts of laws and in our domestic
law as a legitimate device for solving problems has been abused and misused to assure scheming litigants of dubious reliefs.
To avoid or minimize this unethical practice of subverting justice, the
Supreme Court, as already mentioned, promulgated Circular 28-91. And
even before that, the Court had prescribed it in the Interim Rules and
Guidelines issued on January 11, 1983 and had struck down in several
cases 16 the inveterate use of this insidious malpractice. Forum shopping as
"the filing of repetitious suits in different courts" has been condemned by
Justice Andres R. Narvasa (now Chief Justice) in Minister of Natural
Resources, et al., vs. Heirs of Orval Hughes, et al., "as a reprehensible
manipulation of court processes and proceedings . . ." 17 when does forum
shopping take place?
There is forum-shopping whenever, as a result of an adverse opinion
in one forum, a party seeks a favorable opinion (other than by appeal
or certiorari) in another. The principle applies not only with respect to
suits filed in the courts but also in connection with litigations

commenced in the courts while an administrative proceeding is

pending, as in this case, in order to defeat administrative processes
and in anticipation of an unfavorable administrative ruling and a
favorable court ruling. This is specially so, as in this case, where the
court in which the second suit was brought, has no jurisdiction.18
The test for determining whether a party violated the rule against forum
shopping has been laid dawn in the 1986 case of Buan vs. Lopez 19, also by
Chief Justice Narvasa, and that is, forum shopping exists where the
elements of litis pendentia are present or where a final judgment in one
case will amount to res judicata in the other, as follows:
There thus exists between the action before this Court and RTC Case
No. 86-36563 identity of parties, or at least such parties as represent
the same interests in both actions, as well as identity of rights asserted
and relief prayed for, the relief being founded on the same facts, and
the identity on the two preceding particulars is such that any judgment
rendered in the other action, will, regardless of which party is
successful, amount to res adjudicata in the action under consideration:
all the requisites, in fine, of auter action pendant.
xxx

xxx

xxx

As already observed, there is between the action at bar and RTC Case
No. 86-36563, an identity as regards parties, or interests represented,
rights asserted and relief sought, as well as basis thereof, to a degree
sufficient to give rise to the ground for dismissal known as auter action
pendant or lis pendens. That same identity puts into operation the
sanction of twin dismissals just mentioned. The application of this
sanction will prevent any further delay in the settlement of the
controversy which might ensue from attempts to seek reconsideration
of or to appeal from the Order of the Regional Trial Court in Civil Case
No. 86-36563 promulgated on July 15, 1986, which dismissed the
petition upon grounds which appear persuasive.
Consequently, where a litigant (or one representing the same interest or
person) sues the same party against whom another action or actions for the
alleged violation of the same right and the enforcement of the same relief
is/are still pending, the defense of litis pendencia in one case is bar to the
others; and, a final judgment in one would constitute res judicata and thus

would cause the dismissal of the rest. In either case, forum shopping could
be cited by the other party as a ground to ask for summary dismissal of the
two 20 (or more) complaints or petitions, and for imposition of the other
sanctions, which are direct contempt of court, criminal prosecution, and
disciplinary action against the erring lawyer.
Applying the foregoing principles in the case before us and comparing it with
the Second Case, it is obvious that there exist identity of parties or interests
represented, identity of rights or causes and identity of reliefs sought.
Very simply stated, the original complaint in the court a quo which gave rise
to the instant petition was filed by the buyer (herein private respondent and
his predecessors-in-interest) against the seller (herein petitioners) to
enforce the alleged perfected sale of real estate. On the other hand, the
complaint 21 in the Second Case seeks to declare such purported sale
involving the same real property "as unenforceable as against the Bank",
which is the petitioner herein. In other words, in the Second Case, the
majority stockholders, in representation of the Bank, are seeking to
accomplish what the Bank itself failed to do in the original case in the trial
court. In brief, the objective or the relief being sought, though worded
differently, is the same, namely, to enable the petitioner Bank to escape
from the obligation to sell the property to respondent. In Danville Maritime,
Inc. vs. Commission on Audit. 22, this Court ruled that the filing by a party of
two apparently different actions, but with the same objective, constituted
forum shopping:
In the attempt to make the two actions appear to be different, petitioner
impleaded different respondents therein PNOC in the case before
the lower court and the COA in the case before this Court and sought
what seems to be different reliefs. Petitioner asks this Court to set
aside the questioned letter-directive of the COA dated October 10,
1988 and to direct said body to approve the Memorandum of
Agreement entered into by and between the PNOC and petitioner,
while in the complaint before the lower court petitioner seeks to enjoin
the PNOC from conducting a rebidding and from selling to other parties
the vessel "T/T Andres Bonifacio", and for an extension of time for it to
comply with the paragraph 1 of the memorandum of agreement and
damages. One can see that although the relief prayed for in the two (2)
actions are ostensibly different, the ultimate objective in both actions is

the same, that is, approval of the sale of vessel in favor of petitioner
and to overturn the letter-directive of the COA of October 10, 1988
disapproving the sale. (emphasis supplied).
In an earlier case 23 but with the same logic and vigor, we held:
In other words, the filing by the petitioners of the instant special civil
action for certiorari and prohibition in this Court despite the pendency
of their action in the Makati Regional Trial Court, is a species of forumshopping. Both actions unquestionably involve the same transactions,
the same essential facts and circumstances. The petitioners' claim of
absence of identity simply because the PCGG had not been impleaded
in the RTC suit, and the suit did not involve certain acts which
transpired after its commencement, is specious. In the RTC action, as
in the action before this Court, the validity of the contract to purchase
and sell of September 1, 1986, i.e., whether or not it had been
efficaciously rescinded, and the propriety of implementing the same
(by paying the pledgee banks the amount of their loans, obtaining the
release of the pledged shares, etc.) were the basic issues. So, too, the
relief was the same: the prevention of such implementation and/or the
restoration of the status quo ante. When the acts sought to be
restrained took place anyway despite the issuance by the Trial Court of
a temporary restraining order, the RTC suit did not become functus
oficio. It remained an effective vehicle for obtention of relief; and
petitioners' remedy in the premises was plain and patent: the filing of
an amended and supplemental pleading in the RTC suit, so as to
include the PCGG as defendant and seek nullification of the acts
sought to be enjoined but nonetheless done. The remedy was certainly
not the institution of another action in another forum based on
essentially the same facts, The adoption of this latter recourse renders
the petitioners amenable to disciplinary action and both their actions, in
this Court as well as in the Court a quo, dismissible.
In the instant case before us, there is also identity of parties, or at least, of
interests represented. Although the plaintiffs in the Second Case (Henry L.
Co. et al.) are not name parties in the First Case, they represent the same
interest and entity, namely, petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct
personal interest in the matter in controversy. They are not principally or

even subsidiarily liable; much less are they direct parties in the assailed
contract of sale; and
Secondly, the allegations of the complaint in the Second Case show that the
stockholders are bringing a "derivative suit". In the caption itself, petitioners
claim to have brought suit "for and in behalf of the Producers Bank of the
Philippines" 24. Indeed, this is the very essence of a derivative suit:
An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holdsstock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
(Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; emphasis supplied).
In the face of the damaging admissions taken from the complaint in the
Second Case, petitioners, quite strangely, sought to deny that the Second
Case was a derivative suit, reasoning that it was brought, not by the minority
shareholders, but by Henry Co et al., who not only own, hold or control over
80% of the outstanding capital stock, but also constitute the majority in the
Board of Directors of petitioner Bank. That being so, then they really
represent the Bank. So, whether they sued "derivatively" or directly, there is
undeniably an identity of interests/entity represented.
Petitioner also tried to seek refuge in the corporate fiction that the
personality Of the Bank is separate and distinct from its shareholders. But
the rulings of this Court are consistent: "When the fiction is urged as a
means of perpetrating a fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime,
the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 25
In addition to the many cases 26 where the corporate fiction has been
disregarded, we now add the instant case, and declare herewith that the
corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be

allowed to trifle with court processes, particularly where, as in this case, the
corporation itself has not been remiss in vigorously prosecuting or defending
corporate causes and in using and applying remedies available to it. To rule
otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum
shopping.
Finally, petitioner Bank argued that there cannot be any forum shopping,
even assuming arguendo that there is identity of parties, causes of action
and reliefs sought, "because it (the Bank) was the defendant in the (first)
case while it was the plaintiff in the other (Second Case)",citing as authority
Victronics Computers, Inc., vs. Regional Trial Court, Branch 63, Makati, etc.
et al., 27 where Court held:
The rule has not been extended to a defendant who, for reasons
known only to him, commences a new action against the plaintiff
instead of filing a responsive pleading in the other case setting forth
therein, as causes of action, specific denials, special and affirmative
defenses or even counterclaims, Thus, Velhagen's and King's motion
to dismiss Civil Case No. 91-2069 by no means negates the charge of
forum-shopping as such did not exist in the first place. (emphasis
supplied)
Petitioner pointed out that since it was merely the defendant in the original
case, it could not have chosen the forum in said case.
Respondent, on the other hand, replied that there is a difference in factual
setting between Victronics and the present suit. In the former, as
underscored in the above-quoted Court ruling, the defendants did not file
any responsive pleading in the first case. In other words, they did not make
any denial or raise any defense or counter-claim therein In the case before
us however, petitioners filed a responsive pleading to the complaint as a
result of which, the issues were joined.
Indeed, by praying for affirmative reliefs and interposing counterclaims in
their responsive pleadings, the petitioners became plaintiffs themselves in
the original case, giving unto themselves the very remedies they repeated in
the Second Case.

Ultimately, what is truly important to consider in determining whether forumshopping exists or not is the vexation caused the courts and parties-litigant
by a party who asks different courts and/or administrative agencies to rule
on the same or related causes and/or to grant the same or substantially the
same reliefs, in the process creating the possibility of conflicting decisions
being rendered by the different fora upon the same issue. In this case, this
is exactly the problem: a decision recognizing the perfection and directing
the enforcement of the contract of sale will directly conflict with a possible
decision in the Second Case barring the parties front enforcing or
implementing the said sale. Indeed, a final decision in one would constitute
res judicata in the other 28.
The foregoing conclusion finding the existence of forum-shopping
notwithstanding, the only sanction possible now is the dismissal of both
cases with prejudice, as the other sanctions cannot be imposed because
petitioners' present counsel entered their appearance only during the
proceedings
in
this
Court,
and
the
Petition's
VERIFICATION/CERTIFICATION contained sufficient allegations as to the
pendency of the Second Case to show good faith in observing Circular 2891. The Lawyers who filed the Second Case are not before us; thus the
rudiments of due process prevent us from motu propio imposing disciplinary
measures against them in this Decision. However, petitioners themselves
(and particularly Henry Co, et al.) as litigants are admonished to strictly
follow the rules against forum-shopping and not to trifle with court
proceedings and processes They are warned that a repetition of the same
will be dealt with more severely.
Having said that, let it be emphasized that this petition should be dismissed
not merely because of forum-shopping but also because of the substantive
issues raised, as will be discussed shortly.
The Second Issue: Was The Contract Perfected?
The respondent Court correctly treated the question of whether or not there
was, on the basis of the facts established, a perfected contract of sale as
the ultimate issue. Holding that a valid contract has been established,
respondent Court stated:
There is no dispute that the object of the transaction is that property
owned by the defendant bank as acquired assets consisting of six (6)

parcels of land specifically identified under Transfer Certificates of Title

Nos. T-106932 to T-106937. It is likewise beyond cavil that the bank
intended to sell the property. As testified to by the Bank's Deputy
Conservator, Jose Entereso, the bank was looking for buyers of the
property. It is definite that the plaintiffs wanted to purchase the property
and it was precisely for this purpose that they met with defendant
Rivera, Manager of the Property Management Department of the
defendant bank, in early August 1987. The procedure in the sale of
acquired assets as well as the nature and scope of the authority of
Rivera on the matter is clearly delineated in the testimony of Rivera
himself, which testimony was relied upon by both the bank and by
Rivera in their appeal briefs. Thus (TSN of July 30, 1990. pp. 19-20):
A: The procedure runs this way: Acquired assets was turned over
to me and then I published it in the form of an inter-office
memorandum distributed to all branches that these are acquired
assets for sale. I was instructed to advertise acquired assets for
sale so on that basis, I have to entertain offer; to accept offer,
formal offer and upon having been offered, I present it to the
Committee. I provide the Committee with necessary information
about the property such as original loan of the borrower, bid price
during the foreclosure, total claim of the bank, the appraised value
at the time the property is being offered for sale and then the
information which are relative to the evaluation of the bank to buy
which the Committee considers and it is the Committee that
evaluate as against the exposure of the bank and it is also the
Committee that submit to the Conservator for final approval and
once approved, we have to execute the deed of sale and it is the
Conservator that sign the deed of sale, sir.
The plaintiffs, therefore, at that meeting of August 1987 regarding their
purpose of buying the property, dealt with and talked to the right
person. Necessarily, the agenda was the price of the property, and
plaintiffs were dealing with the bank official authorized to entertain
offers, to accept offers and to present the offer to the Committee
before which the said official is authorized to discuss information
relative to price determination. Necessarily, too, it being inherent in his
authority, Rivera is the officer from whom official information regarding
the price, as determined by the Committee and approved by the

Conservator, can be had. And Rivera confirmed his authority when he

talked with the plaintiff in August 1987. The testimony of plaintiff
Demetria is clear on this point (TSN of May 31,1990, pp. 27-28):
Q: When you went to the Producers Bank and talked with Mr.
Mercurio Rivera, did you ask him point-blank his authority to sell
any property?
A: No, sir. Not point blank although it came from him, (W)hen I
asked him how long it would take because he was saying that the
matter of pricing will be passed upon by the committee. And when
I asked him how long it will take for the committee to decide and
he said the committee meets every week. If I am not mistaken
Wednesday and in about two week's (sic) time, in effect what he
was saying he was not the one who was to decide. But he would
refer it to the committee and he would relay the decision of the
committee to me.
Q Please answer the question.
A He did not say that he had the authority (.) But he said he
would refer the matter to the committee and he would relay the
decision to me and he did just like that.
"Parenthetically, the Committee referred to was the Past Due
Committee of which Luis Co was the Head, with Jose Entereso as one
of the members.
What transpired after the meeting of early August 1987 are consistent
with the authority and the duties of Rivera and the bank's internal
procedure in the matter of the sale of bank's assets. As advised by
Rivera, the plaintiffs made a formal offer by a letter dated August 20,
1987 stating that they would buy at the price of P3.5 Million in cash.
The letter was for the attention of Mercurio Rivera who was tasked to
convey and accept such offers. Considering an aspect of the official
duty of Rivera as some sort of intermediary between the plaintiffsbuyers with their proposed buying price on one hand, and the bank
Committee, the Conservator and ultimately the bank itself with the set
price on the other, and considering further the discussion of price at
the meeting of August resulting in a formal offer of P3.5 Million in cash,

there can be no other logical conclusion than that when, on September

1, 1987, Rivera informed plaintiffs by letter that "the bank's counteroffer is at P5.5 Million for more than 101 hectares on lot basis," such
counter-offer price had been determined by the Past Due Committee
and approved by the Conservator after Rivera had duly presented
plaintiffs' offer for discussion by the Committee of such matters as
original loan of borrower, bid price during foreclosure, total claim of the
bank, and market value. Tersely put, under the established facts, the
price of P5.5 Million was, as clearly worded in Rivera's letter (Exh. "E"),
the official and definitive price at which the bank was selling the
property.
There were averments by defendants below, as well as before this
Court, that the P5.5 Million price was not discussed by the Committee
and that price. As correctly characterized by the trial court, this is not
credible. The testimonies of Luis Co and Jose Entereso on this point
are at best equivocal and considering the gratuitous and self-serving
character of these declarations, the bank's submission on this point
does not inspire belief. Both Co ad Entereso, as members of the Past
Due Committee of the bank, claim that the offer of the plaintiff was
never discussed by the Committee. In the same vein, both Co and
Entereso openly admit that they seldom attend the meetings of the
Committee. It is important to note that negotiations on the price had
started in early August and the plaintiffs had already offered an amount
as purchase price, having been made to understand by Rivera, the
official in charge of the negotiation, that the price will be submitted for
approval by the bank and that the bank's decision will be relayed to
plaintiffs. From the facts, the official bank price. At any rate, the bank
placed its official, Rivera, in a position of authority to accept offers to
buy and negotiate the sale by having the offer officially acted upon by
the bank. The bank cannot turn around and later say, as it now does,
that what Rivera states as the bank's action on the matter is not in fact
so. It is a familiar doctrine, the doctrine of ostensible authority, that if a
corporation knowingly permits one of its officers, or any other agent, to
do acts within the scope of an apparent authority, and thus holds him
out to the public as possessing power to do those acts, the corporation
will, as against any one who has in good faith dealt with the
corporation through such agent, he estopped from denying his
authority (Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of

Appeals, 94 SCRA 357, 369-370; Prudential Bank v. Court of Appeals,

G.R. No. 103957, June 14, 1993). 29
Article 1318 of the Civil Code enumerates the requisites of a valid and
perfected contract as follows: "(1) Consent of the contracting parties; (2)
Object certain which is the subject matter of the contract; (3) Cause of the
obligation which is established."
There is no dispute on requisite no. 2. The object of the questioned contract
consists of the six (6) parcels of land in Sta. Rosa, Laguna with an
aggregate area of about 101 hectares, more or less, and covered by
Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however,
a dispute on the first and third requisites.
Petitioners allege that "there is no counter-offer made by the Bank, and any
supposed counter-offer which Rivera (or Co) may have made is
unauthorized. Since there was no counter-offer by the Bank, there was
nothing for Ejercito (in substitution of Demetria and Janolo) to accept." 30
They disputed the factual basis of the respondent Court's findings that there
was an offer made by Janolo for P3.5 million, to which the Bank counteroffered P5.5 million. We have perused the evidence but cannot find fault
with the said Court's findings of fact. Verily, in a petition under Rule 45 such
as this, errors of fact if there be any - are, as a rule, not reviewable. The
mere fact that respondent Court (and the trial court as well) chose to believe
the evidence presented by respondent more than that presented by
petitioners is not by itself a reversible error. In fact, such findings merit
serious consideration by this Court, particularly where, as in this case, said
courts carefully and meticulously discussed their findings. This is basic.
Be that as it may, and in addition to the foregoing disquisitions by the Court
of Appeals, let us review the question of Rivera's authority to act and
petitioner's allegations that the P5.5 million counter-offer was extinguished
by the P4.25 million revised offer of Janolo. Here, there are questions of law
which could be drawn from the factual findings of the respondent Court.
They also delve into the contractual elements of consent and cause.
The authority of a corporate officer in dealing with third persons may be
actual or apparent. The doctrine of "apparent authority", with special
reference to banks, was laid out in Prudential Bank vs. Court of Appeals31,
where it was held that:

Conformably, we have declared in countless decisions that the

principal is liable for obligations contracted by the agent. The agent's
apparent representation yields to the principal's true representation
and the contract is considered as entered into between the principal
and the third person (citing National Food Authority vs. Intermediate
Appellate Court, 184 SCRA 166).
A bank is liable for wrongful acts of its officers done in the
interests of the bank or in the course of dealings of the officers in
their representative capacity but not for acts outside the scape of
their authority (9 C.J.S., p. 417). A bank holding out its officers
and agents as worthy of confidence will not be permitted to profit
by the frauds they may thus be enabled to perpetrate in the
apparent scope of their employment; nor will it be permitted to
shirk its responsibility for such frauds even though no benefit may
accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly,
a banking corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent
acting within the general scope of his authority even though, in
the particular case, the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other
person, for his own ultimate benefit (McIntosh v. Dakota Trust
Co., 52 ND 752, 204 NW 818, 40 ALR 1021).
Application of these principles is especially necessary because banks
have a fiduciary relationship with the public and their stability depends
on the confidence of the people in their honesty and efficiency. Such
faith will be eroded where banks do not exercise strict care in the
selection and supervision of its employees, resulting in prejudice to
their depositors.
From the evidence found by respondent Court, it is obvious that petitioner
Rivera has apparent or implied authority to act for the Bank in the matter of
selling its acquired assets. This evidence includes the following:
(a) The petition itself in par. II-i (p. 3) states that Rivera was "at all
times material to this case, Manager of the Property Management
Department of the Bank". By his own admission, Rivera was already
the person in charge of the Bank's acquired assets (TSN, August 6,
1990, pp. 8-9);

(b) As observed by respondent Court, the land was definitely being

sold by the Bank. And during the initial meeting between the buyers
and Rivera, the latter suggested that the buyers' offer should be no
less than P3.3 million (TSN, April 26, 1990, pp. 16-17);
(c) Rivera received the buyers' letter dated August 30, 1987 offering
P3.5 million (TSN, 30 July 1990, p.11);
(d) Rivera signed the letter dated September 1, 1987 offering to sell
the property for P5.5 million (TSN, July 30, p. 11);
(e) Rivera received the letter dated September 17, 1987 containing the
buyers' proposal to buy the property for P4.25 million (TSN, July 30,
1990, p. 12);
(f) Rivera, in a telephone conversation, confirmed that the P5.5 million
was the final price of the Bank (TSN, January 16, 1990, p. 18);
(g) Rivera arranged the meeting between the buyers and Luis Co on
September 28, 1994, during which the Bank's offer of P5.5 million was
confirmed by Rivera (TSN, April 26, 1990, pp. 34-35). At said meeting,
Co, a major shareholder and officer of the Bank, confirmed Rivera's
statement as to the finality of the Bank's counter-offer of P5.5 million
(TSN, January 16, 1990, p. 21; TSN, April 26, 1990, p. 35);
(h) In its newspaper advertisements and announcements, the Bank
referred to Rivera as the officer acting for the Bank in relation to parties
interested in buying assets owned/acquired by the Bank. In fact, Rivera
was the officer mentioned in the Bank's advertisements offering for
sale the property in question (cf. Exhs. "S" and "S-1").
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals,
et. al.32, the Court, through Justice Jose A. R. Melo, affirmed the doctrine of
apparent authority as it held that the apparent authority of the officer of the
Bank of P.I. in charge of acquired assets is borne out by similar
circumstances surrounding his dealings with buyers.
To be sure, petitioners attempted to repudiate Rivera's apparent authority
through documents and testimony which seek to establish Rivera's actual
authority. These pieces of evidence, however, are inherently weak as they
consist of Rivera's self-serving testimony and various inter-office

memoranda that purport to show his limited actual authority, of which private
respondent cannot be charged with knowledge. In any event, since the
issue is apparent authority, the existence of which is borne out by the
respondent Court's findings, the evidence of actual authority is immaterial
insofar as the liability of a corporation is concerned 33.
Petitioners also argued that since Demetria and Janolo were experienced
lawyers and their "law firm" had once acted for the Bank in three criminal
cases, they should be charged with actual knowledge of Rivera's limited
authority. But the Court of Appeals in its Decision (p. 12) had already made
a factual finding that the buyers had no notice of Rivera's actual authority
prior to the sale. In fact, the Bank has not shown that they acted as its
counsel in respect to any acquired assets; on the other hand, respondent
has proven that Demetria and Janolo merely associated with a loose
aggrupation of lawyers (not a professional partnership), one of whose
members (Atty. Susana Parker) acted in said criminal cases.
Petitioners also alleged that Demetria's and Janolo's P4.25 million counteroffer in the letter dated September 17, 1987 extinguished the Bank's offer of
P5.5 million 34 .They disputed the respondent Court's finding that "there was
a meeting of minds when on 30 September 1987 Demetria and Janolo
through Annex "L" (letter dated September 30, 1987) "accepted" Rivera's
counter offer of P5.5 million under Annex "J" (letter dated September 17,
1987)", citing the late Justice Paras35, Art. 1319 of the Civil Code 36 and
related Supreme Court rulings starting with Beaumont vs. Prieto 37.
However, the above-cited authorities and precedents cannot apply in the
instant case because, as found by the respondent Court which reviewed the
testimonies on this point, what was "accepted" by Janolo in his letter dated
September 30, 1987 was the Bank's offer of P5.5 million as confirmed and
reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their
meeting on September 28, 1987. Note that the said letter of September 30,
1987 begins with"(p)ursuant to our discussion last 28 September 1987 . . .
Petitioners insist that the respondent Court should have believed the
testimonies of Rivera and Co that the September 28, 1987 meeting "was
meant to have the offerors improve on their position of P5.5. million."38
However, both the trial court and the Court of Appeals found petitioners'
testimonial evidence "not credible", and we find no basis for changing this
finding of fact.

Indeed, we see no reason to disturb the lower courts' (both the RTC and the
CA) common finding that private respondents' evidence is more in keeping
with truth and logic that during the meeting on September 28, 1987, Luis
Co and Rivera "confirmed that the P5.5 million price has been passed upon
by the Committee and could no longer be lowered (TSN of April 27, 1990,
pp. 34-35)"39. Hence, assuming arguendo that the counter-offer of P4.25
million extinguished the offer of P5.5 million, Luis Co's reiteration of the said
P5.5 million price during the September 28, 1987 meeting revived the said
offer. And by virtue of the September 30, 1987 letter accepting this revived
offer, there was a meeting of the minds, as the acceptance in said letter was
absolute and unqualified.
We note that the Bank's repudiation, through Conservator Encarnacion, of
Rivera's authority and action, particularly the latter's counter-offer of P5.5
million, as being "unauthorized and illegal" came only on May 12, 1988 or
more than seven (7) months after Janolo' acceptance. Such delay, and the
absence of any circumstance which might have justifiably prevented the
Bank from acting earlier, clearly characterizes the repudiation as nothing
more than a last-minute attempt on the Bank's part to get out of a binding
contractual obligation.
Taken together, the factual findings of the respondent Court point to an
implied admission on the part of the petitioners that the written offer made
on September 1, 1987 was carried through during the meeting of
September 28, 1987. This is the conclusion consistent with human
experience, truth and good faith.
It also bears noting that this issue of extinguishment of the Bank's offer of
P5.5 million was raised for the first time on appeal and should thus be
disregarded.
This Court in several decisions has repeatedly adhered to the principle
that points of law, theories, issues of fact and arguments not
adequately brought to the attention of the trial court need not be, and
ordinarily will not be, considered by a reviewing court, as they cannot
be raised for the first time on appeal (Santos vs. IAC, No. 74243,
November 14, 1986, 145 SCRA 592).40
. . . It is settled jurisprudence that an issue which was neither averred
in the complaint nor raised during the trial in the court below cannot be

raised for the first time on appeal as it would be offensive to the basic
rules of fair play, justice and due process (Dihiansan vs. CA, 153
SCRA 713 [1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos
Realty & Development Corp. vs. CA, 157 SCRA 425 [1988]; Ramos vs.
IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029, August 30,
1990).41
Since the issue was not raised in the pleadings as an affirmative defense,
private respondent was not given an opportunity in the trial court to
controvert the same through opposing evidence. Indeed, this is a matter of
due process. But we passed upon the issue anyway, if only to avoid
deciding the case on purely procedural grounds, and we repeat that, on the
basis of the evidence already in the record and as appreciated by the lower
courts, the inevitable conclusion is simply that there was a perfected
contract of sale.
The Third Issue: Is the Contract Enforceable?
The petition alleged42:
Even assuming that Luis Co or Rivera did relay a verbal offer to sell at
P5.5 million during the meeting of 28 September 1987, and it was this
verbal offer that Demetria and Janolo accepted with their letter of 30
September 1987, the contract produced thereby would be
unenforceable by action there being no note, memorandum or
writing subscribed by the Bank to evidence such contract. (Please see
article 1403[2], Civil Code.)
Upon the other hand, the respondent Court in its Decision (p, 14) stated:
. . . Of course, the bank's letter of September 1, 1987 on the official
price and the plaintiffs' acceptance of the price on September 30,
1987, are not, in themselves, formal contracts of sale. They are
however clear embodiments of the fact that a contract of sale was
perfected between the parties, such contract being binding in whatever
form it may have been entered into (case citations omitted). Stated
simply, the banks' letter of September 1, 1987, taken together with
plaintiffs' letter dated September 30, 1987, constitute in law a sufficient
memorandum of a perfected contract of sale.

The respondent Court could have added that the written communications
commenced not only from September 1, 1987 but from Janolo's August 20,
1987 letter. We agree that, taken together, these letters constitute sufficient
memoranda since they include the names of the parties, the terms and
conditions of the contract, the price and a description of the property as the
object of the contract.
But let it be assumed arguendo that the counter-offer during the meeting on
September 28, 1987 did constitute a "new" offer which was accepted by
Janolo on September 30, 1987. Still, the statute of frauds will not apply by
reason of the failure of petitioners to object to oral testimony proving
petitioner Bank's counter-offer of P5.5 million. Hence, petitioners by such
utter failure to object are deemed to have waived any defects of the
contract under the statute of frauds, pursuant to Article 1405 of the Civil
Code:
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No.
2 of article 1403, are ratified by the failure to object to the presentation
of oral evidence to prove the same, or by the acceptance of benefits
under them.
As private respondent pointed out in his Memorandum, oral testimony on
the reaffirmation of the counter-offer of P5.5 million is a plenty and the
silence of petitioners all throughout the presentation makes the evidence
binding on them thus;
A Yes, sir, I think it was September 28, 1987 and I was again present
because Atty. Demetria told me to accompany him we were able to
meet Luis Co at the Bank.
xxx

xxx

xxx

Q Now, what transpired during this meeting with Luis Co of the

Producers Bank?
A Atty. Demetria asked Mr. Luis Co whether the price could be
reduced, sir.
Q What price?

A The 5.5 million pesos and Mr. Luis Co said that the amount cited by
Mr. Mercurio Rivera is the final price and that is the price they intends
(sic) to have, sir.
Q What do you mean?.
A That is the amount they want, sir.
Q What is the reaction of the plaintiff Demetria to Luis Co's statement
(sic) that the defendant Rivera's counter-offer of 5.5 million was the
defendant's bank (sic) final offer?
A He said in a day or two, he will make final acceptance, sir.
Q What is the response of Mr. Luis Co?.
A He said he will wait for the position of Atty. Demetria, sir.
[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 1821.]
Q What transpired during that meeting between you and Mr. Luis Co of
the defendant Bank?
A We went straight to the point because he being a busy person, I told
him if the amount of P5.5 million could still be reduced and he said that
was already passed upon by the committee. What the bank expects
which was contrary to what Mr. Rivera stated. And he told me that is
the final offer of the bank P5.5 million and we should indicate our
position as soon as possible.
Q What was your response to the answer of Mr. Luis Co?
A I said that we are going to give him our answer in a few days and he
said that was it. Atty. Fajardo and I and Mr. Mercurio [Rivera] was with
us at the time at his office.
Q For the record, your Honor please, will you tell this Court who was
with Mr. Co in his Office in Producers Bank Building during this
meeting?
A Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.

Q By Mr. Co you are referring to?

A Mr. Luis Co.
Q After this meeting with Mr. Luis Co, did you and your partner accede
on (sic) the counter offer by the bank?
A Yes, sir, we did.? Two days thereafter we sent our acceptance to the
bank which offer we accepted, the offer of the bank which is P5.5
million.
[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]
Q According to Atty. Demetrio Demetria, the amount of P5.5 million
was reached by the Committee and it is not within his power to reduce
this amount. What can you say to that statement that the amount of
P5.5 million was reached by the Committee?
A It was not discussed by the Committee but it was discussed initially
by Luis Co and the group of Atty. Demetrio Demetria and Atty. Pajardo
(sic) in that September 28, 1987 meeting, sir.
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]
The
Fourth
Issue:
May
the
the Perfected and Enforceable Contract.

Conservator

Revoke

It is not disputed that the petitioner Bank was under a conservator placed by
the Central Bank of the Philippines during the time that the negotiation and
perfection of the contract of sale took place. Petitioners energetically
contended that the conservator has the power to revoke or overrule actions
of the management or the board of directors of a bank, under Section 28-A
of Republic Act No. 265 (otherwise known as the Central Bank Act) as
follows:
Whenever, on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds that a
bank or a non-bank financial intermediary performing quasi-banking
functions is in a state of continuing inability or unwillingness to maintain
a state of liquidity deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may appoint a

conservator to take charge of the assets, liabilities, and the

management of that institution, collect all monies and debts due said
institution and exercise all powers necessary to preserve the assets of
the institution, reorganize the management thereof, and restore its
viability. He shall have the power to overrule or revoke the actions of
the previous management and board of directors of the bank or nonbank financial intermediary performing quasi-banking functions, any
provision of law to the contrary notwithstanding, and such other powers
as the Monetary Board shall deem necessary.
In the first place, this issue of the Conservator's alleged authority to revoke
or repudiate the perfected contract of sale was raised for the first time in this
Petition as this was not litigated in the trial court or Court of Appeals. As
already stated earlier, issues not raised and/or ventilated in the trial court,
let alone in the Court of Appeals, "cannot be raised for the first time on
appeal as it would be offensive to the basic rules of fair play, justice and due
process."43
In the second place, there is absolutely no evidence that the Conservator, at
the time the contract was perfected, actually repudiated or overruled said
contract of sale. The Bank's acting conservator at the time, Rodolfo Romey,
never objected to the sale of the property to Demetria and Janolo. What
petitioners are really referring to is the letter of Conservator Encarnacion,
who took over from Romey after the sale was perfected on September 30,
1987 (Annex V, petition) which unilaterally repudiated not the contract
but the authority of Rivera to make a binding offer and which unarguably
came months after the perfection of the contract. Said letter dated May 12,
1988 is reproduced hereunder:
May 12, 1988
Atty.
Noe
C.
Zarate
Carandang
Perlas
Suite
323
Rufino
Ayala Avenue, Makati, Metro-Manila
Dear Atty. Zarate:

&

Zarate
Ass.
Building

This pertains to your letter dated May 5, 1988 on behalf of Attys.

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

Very truly yours,

(Sgd.)
Leonida
LEONIDA
Acting Conservator

T.
T.

Encarnacion
EDCARNACION

In the third place, while admittedly, the Central Bank law gives vast and farreaching powers to the conservator of a bank, it must be pointed out that
such powers must be related to the "(preservation of) the assets of the
bank, (the reorganization of) the management thereof and (the restoration
of) its viability." Such powers, enormous and extensive as they are, cannot
extend to the post-facto repudiation of perfected transactions, otherwise
they would infringe against the non-impairment clause of the Constitution 44.
If the legislature itself cannot revoke an existing valid contract, how can it
delegate such non-existent powers to the conservator under Section 28-A of
said law?
Obviously, therefore, Section 28-A merely gives the conservator power to
revoke contracts that are, under existing law, deemed to be defective i.e.,
void, voidable, unenforceable or rescissible. Hence, the conservator merely
takes the place of a bank's board of directors. What the said board cannot
do such as repudiating a contract validly entered into under the doctrine
of implied authority the conservator cannot do either. Ineluctably, his
power is not unilateral and he cannot simply repudiate valid obligations of
the Bank. His authority would be only to bring court actions to assail such
contracts as he has already done so in the instant case. A contrary
understanding of the law would simply not be permitted by the Constitution.
Neither by common sense. To rule otherwise would be to enable a failing
bank to become solvent, at the expense of third parties, by simply getting
the conservator to unilaterally revoke all previous dealings which had one
way or another or come to be considered unfavorable to the Bank, yielding
nothing to perfected contractual rights nor vested interests of the third
parties who had dealt with the Bank.
The Fifth Issue: Were There Reversible Errors of Facts?
Basic is the doctrine that in petitions for review under Rule 45 of the Rules
of Court, findings of fact by the Court of Appeals are not reviewable by the
Supreme Court. In Andres vs. Manufacturers Hanover & Trust Corporation,
45
, we held:

. . . The rule regarding questions of fact being raised with this Court in
a petition for certiorari under Rule 45 of the Revised Rules of Court has
been stated in Remalante vs. Tibe, G.R. No. 59514, February 25,
1988, 158 SCRA 138, thus:
The rule in this jurisdiction is that only questions of law may be raised
in a petition for certiorari under Rule 45 of the Revised Rules of Court.
"The jurisdiction of the Supreme Court in cases brought to it from the
Court of Appeals is limited to reviewing and revising the errors of law
imputed to it, its findings of the fact being conclusive " [Chan vs. Court
of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 737,
reiterating a long line of decisions]. This Court has emphatically
declared that "it is not the function of the Supreme Court to analyze or
weigh such evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the lower
court" (Tiongco v. De la Merced, G. R. No. L-24426, July 25, 1974, 58
SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482, April 28,
1983, 121 SCRA 865; Baniqued vs. Court of Appeals, G. R. No. L47531, February 20, 1984, 127 SCRA 596). "Barring, therefore, a
showing that the findings complained of are totally devoid of support in
the record, or that they are so glaringly erroneous as to constitute
serious abuse of discretion, such findings must stand, for this Court is
not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties" [Santa Ana, Jr. vs.
Hernandez, G. R. No. L-16394, December 17, 1966, 18 SCRA 973] [at
pp. 144-145.]
Likewise, in Bernardo vs. Court of Appeals 46, we held:
The resolution of this petition invites us to closely scrutinize the facts of
the case, relating to the sufficiency of evidence and the credibility of
witnesses presented. This Court so held that it is not the function of the
Supreme Court to analyze or weigh such evidence all over again. The
Supreme Court's jurisdiction is limited to reviewing errors of law that
may have been committed by the lower court. The Supreme Court is
not a trier of facts. . . .
As held in the recent case of Chua Tiong Tay vs. Court of Appeals and
Goldrock Construction and Development Corp. 47:

The Court has consistently held that the factual findings of the trial
court, as well as the Court of Appeals, are final and conclusive and
may not be reviewed on appeal. Among the exceptional circumstances
where a reassessment of facts found by the lower courts is allowed are
when the conclusion is a finding grounded entirely on speculation,
surmises or conjectures; when the inference made is manifestly
absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised
on a misapprehension of facts; when the findings went beyond the
issues of the case and the same are contrary to the admissions of both
appellant and appellee. After a careful study of the case at bench, we
find none of the above grounds present to justify the re-evaluation of
the findings of fact made by the courts below.
In the same vein, the ruling of this Court in the recent case of South Sea
Surety and Insurance Company Inc. vs. Hon. Court of Appeals, et al. 48 is
equally applicable to the present case:
We see no valid reason to discard the factual conclusions of the
appellate court, . . . (I)t is not the function of this Court to assess and
evaluate all over again the evidence, testimonial and documentary,
adduced by the parties, particularly where, such as here, the findings
of both the trial court and the appellate court on the matter coincide.
(emphasis supplied)
Petitioners, however, assailed the respondent Court's Decision as "fraught
with findings and conclusions which were not only contrary to the evidence
on record but have no bases at all," specifically the findings that (1) the
"Bank's counter-offer price of P5.5 million had been determined by the past
due committee and approved by conservator Romey, after Rivera presented
the same for discussion" and (2) "the meeting with Co was not to scale
down the price and start negotiations anew, but a meeting on the already
determined price of P5.5 million" Hence, citing Philippine National Bank vs.
Court of Appeals 49, petitioners are asking us to review and reverse such
factual findings.
The first point was clearly passed upon by the Court of Appeals 50, thus:
There can be no other logical conclusion than that when, on
September 1, 1987, Rivera informed plaintiffs by letter that "the bank's

counter-offer is at P5.5 Million for more than 101 hectares on lot basis,
"such counter-offer price had been determined by the Past Due
Committee and approved by the Conservator after Rivera had duly
presented plaintiffs' offer for discussion by the Committee . . . Tersely
put, under the established fact, the price of P5.5 Million was, as clearly
worded in Rivera's letter (Exh. "E"), the official and definitive price at
which the bank was selling the property. (p. 11, CA Decision)
xxx

xxx

xxx

. . . The argument deserves scant consideration. As pointed out by

plaintiff, during the meeting of September 28, 1987 between the
plaintiffs, Rivera and Luis Co, the senior vice-president of the bank,
where the topic was the possible lowering of the price, the bank official
refused it and confirmed that the P5.5 Million price had been passed
upon by the Committee and could no longer be lowered (TSN of April
27, 1990, pp. 34-35) (p. 15, CA Decision).
The respondent Court did not believe the evidence of the petitioners on this
point, characterizing it as "not credible" and "at best equivocal and
considering the gratuitous and self-serving character of these declarations,
the bank's submissions on this point do not inspire belief."
To become credible and unequivocal, petitioners should have presented
then Conservator Rodolfo Romey to testify on their behalf, as he would
have been in the best position to establish their thesis. Under the rules on
evidence 51, such suppression gives rise to the presumption that his
testimony would have been adverse, if produced.
The second point was squarely raised in the Court of Appeals, but
petitioners' evidence was deemed insufficient by both the trial court and the
respondent Court, and instead, it was respondent's submissions that were
believed and became bases of the conclusions arrived at.
In fine, it is quite evident that the legal conclusions arrived at from the
findings of fact by the lower courts are valid and correct. But the petitioners
are now asking this Court to disturb these findings to fit the conclusion they
are espousing, This we cannot do.

To be sure, there are settled exceptions where the Supreme Court may
disregard findings of fact by the Court of Appeals 52. We have studied both
the records and the CA Decision and we find no such exceptions in this
case. On the contrary, the findings of the said Court are supported by a
preponderance of competent and credible evidence. The inferences and
conclusions are seasonably based on evidence duly identified in the
Decision. Indeed, the appellate court patiently traversed and dissected the
issues presented before it, lending credibility and dependability to its
findings. The best that can be said in favor of petitioners on this point is that
the factual findings of respondent Court did not correspond to petitioners'
claims, but were closer to the evidence as presented in the trial court by
private respondent. But this alone is no reason to reverse or ignore such
factual findings, particularly where, as in this case, the trial court and the
appellate court were in common agreement thereon. Indeed, conclusions of
fact of a trial judge as affirmed by the Court of Appeals are conclusive
upon this Court, absent any serious abuse or evident lack of basis or
capriciousness of any kind, because the trial court is in a better position to
observe the demeanor of the witnesses and their courtroom manner as well
as to examine the real evidence presented.
Epilogue.
In summary, there are two procedural issues involved forum-shopping and
the raising of issues for the first time on appeal [viz., the extinguishment of
the Bank's offer of P5.5 million and the conservator's powers to repudiate
contracts entered into by the Bank's officers] which per se could justify
the dismissal of the present case. We did not limit ourselves thereto, but
delved as well into the substantive issues the perfection of the contract of
sale and its enforceability, which required the determination of questions of
fact. While the Supreme Court is not a trier of facts and as a rule we are not
required to look into the factual bases of respondent Court's decisions and
resolutions, we did so just the same, if only to find out whether there is
reason to disturb any of its factual findings, for we are only too aware of the
depth, magnitude and vigor by which the parties through their respective
eloquent counsel, argued their positions before this Court.
We are not unmindful of the tenacious plea that the petitioner Bank is
operating abnormally under a government-appointed conservator and "there
is need to rehabilitate the Bank in order to get it back on its feet . . . as many

people depend on (it) for investments, deposits and well as employment. As

of June 1987, the Bank's overdraft with the Central Bank had already
reached P1.023 billion . . . and there were (other) offers to buy the subject
properties for a substantial amount of money." 53
While we do not deny our sympathy for this distressed bank, at the same
time, the Court cannot emotionally close its eyes to overriding
considerations of substantive and procedural law, like respect for perfected
contracts, non-impairment of obligations and sanctions against forumshopping, which must be upheld under the rule of law and blind justice.
This Court cannot just gloss over private respondent's submission that,
while the subject properties may currently command a much higher price, it
is equally true that at the time of the transaction in 1987, the price agreed
upon of P5.5 million was reasonable, considering that the Bank acquired
these properties at a foreclosure sale for no more than P3.5 million 54. That
the Bank procrastinated and refused to honor its commitment to sell cannot
now be used by it to promote its own advantage, to enable it to escape its
binding obligation and to reap the benefits of the increase in land values. To
rule in favor of the Bank simply because the property in question has
algebraically accelerated in price during the long period of litigation is to
reward lawlessness and delays in the fulfillment of binding contracts.
Certainly, the Court cannot stamp its imprimatur on such outrageous
proposition.
WHEREFORE, finding no reversible error in the questioned Decision and
Resolution, the Court hereby DENIES the petition. The assailed Decision is
AFFIRMED. Moreover, petitioner Bank is REPRIMANDED for engaging in
forum-shopping and WARNED that a repetition of the same or similar acts
will be dealt with more severely. Costs against petitioners.
SO ORDERED.