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CASES ON CREDIT TRANSACTIONS

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TITLE XII- DEPOSIT

EFFECT IF BALANCE OF COMMISSION RETAINED BY AGENT


US v. IGPUARA
The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio
Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to be at the latter's
disposal. The document setting forth the obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos
(P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose Igpuara, for Ramirez and
Co.
The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana
Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day,
not to exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate
of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and
(3) classifying the facts in the case as the crime of estafa.
A deposit is constituted from the time a person receives a thing belonging to another with the
obligation of keeping and returning it. (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they
remained in his possession, which he could not have said had he not received them. They remained in his
possession, surely in no other sense than to take care of them, for they remained has no other purpose. They
remained in the defendant's possession at the disposal of Veraguth; but on August 23 of the same year
Veraguth demanded for him through a notarial instrument restitution of them, and to date he has not
restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable
on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it
like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it
was because at that time he agreed with the defendant to consider the operation of sale on commission
closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation
of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was
settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in
the possession of the defendant, who drew up an instrument payable on demand, he has drawn two
conclusions, both erroneous: One, that the instrument drawn up in the form of a deposit certificate could be
indorsed or negotiated like any other commercial instrument; and the other, that the sum of P2,498 remained
in defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial
instrument: First, because every commercial instrument is not negotiable; and second, because only
instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is not
negotiable.

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It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the
defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent,
while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safekeeping.
In order that the depositary may use or dispose oft he things deposited, the depositor's consent is required,
and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules and
provisions applicable to commercial loans, commission, or contract which took the place of the
deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing
of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert
the deposit into a loan, commission, or other contract.
That demand was not made for restitution of the sum deposited, which could have been claimed on the same
or the next day after the certificate was signed, does not operate against the depositor, or signify anything
except the intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of
the things deposited, which was immediately due, does not imply such permission to use the thing deposited
as would convert the deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be
responsible for all damages that may accrue and shall respond to the depositor for the legal interest
on the amount.
Whereupon the commentators say:
In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses
the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into
speculations that may be disastrous to the depositor, who is much better secured while the deposit
exists when he only has a personal action for recovery.
According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate
or abstract for their own use money, goods, or other personal property which they may have
received as a deposit, on commission, or for administration, or for any other purpose which produces
the obligation of delivering it or returning it, and deny having received it, shall suffer the penalty of
the preceding article," which punishes such act as the crime of estafa. The corresponding article of
the Penal Code of the Philippines in 535, No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime
ofestafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or
abstracts money or goods received on commission for delivery, the court rightly applied this article to the
appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored
them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them
from the purpose to which he was charged to devote them."
It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the
detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant.

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Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme
Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying
that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In the
first of said cases there was no evidence that the defendant had appropriated the grain deposited in his
possession.
On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on
September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was
seized by the revolutionalists and appropriated to their own uses.
In this connection it was held that failure to return the thing deposited was not sufficient, but that it was
necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or
another's benefit. He was accused or refusing to restore, and it was held that the code does not penalize
refusal to restore but denial of having received. So much for the crime of omission; now with reference to the
crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited
would not constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were,
he turned over to the owner;" and there being no proof of the appropriation, the agent could not be found
guilty of the crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.

EFFECT IF FOREIGN CURRENCY DEPOSITED IS SOLD BY THE BANK


BPI v. IAC
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of
the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter
referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal
Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of
action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which
modified the CFI decision absolving the bank from liability on the fourth cause of action. The pertinent
portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff
(No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together
with the remaining balance of the said account at the rate fixed by the bank for dollar
deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00
immediately upon the finality of this decision, without interest for the reason that the said
amount was merely held in custody for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it cannot by law be deposited with
plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff
upon demand;

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5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in
the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the
failure of the defendant bank to restore to his (plaintiffs) account the amount of U.S.
$1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack.
The latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the
bank's liability with regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current
account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In
the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the
savings account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling
P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks.
There was no indication of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New
York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from
the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto
Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial
court and the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized
withdrawal of US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has
adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given
to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the
bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized
the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be
needed to fund his peso current account. If indeed the peso equivalent of the amount withdrawn from the
dollar account was credited to the peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier's check is related to the transaction involving the dollar
draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear
entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and
separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.

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As to the second explanation, even if we assume that there was such an agreement, the evidence do not show
that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was
used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the
Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with
the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 254109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks)
forsafekeeping, and that the agreement was embodied in a document, a copy of which was attached to and
made part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
D
e
c
e
m
b
e
r
8
,
1
9
7
5
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US
DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Receive
d by:

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(Sgd.)
VIRGILI
O V.
GARCIA

It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at
prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due
execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000
for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the
sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds
amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by
Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to
P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the
contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code),
which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the
transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely
personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the pleadings,
must be considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the second cause of action was based on an actionable
document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind
the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International
Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in
question, or questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into
the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also
the bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a corporation with the external
indicia of authority, any person, not having notice of want of authority, may usually rely
upon those appearances; and if it be found that the directors had permitted the agent to
exercise that authority and thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained the benefit supposed to have been
conferred by it, the corporation will be bound, notwithstanding the actual authority may
never have been granted

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... Whether a particular officer actually possesses the authority which he assumes to exercise
is frequently known to very few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the ostensible authority exercised by
some of the corporate officers. It is therefore reasonable, in a case where an officer of a
corporation has made a contract in its name, that the corporation should be required, if it
denies his authority, to state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested; and he is given an opportunity to
adduce evidence showing either that the authority existed or that the contract was ratified
and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation
from liability every time an officer enters into a contract which is beyond corporate powers, even without the
proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast
corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible
[Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do
unauthorized acts is only to put forth a very plain truism but to say that such bodies have no power or
capacity to err is to impute to them an excellence which does not belong to any created existence with which
we are acquainted. The distinction between power and right is no more to be lost sight of in respect to
artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine
the correct nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for
safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank
to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return
of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract, there is no deposit but
some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the
transaction involved in this case. The circular provides:
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2. Transactions in the assets described below and all dealings in them of whatever nature,
including, where applicable their exportation and importation, shall NOT be effected, except
with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph,
when such deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or
banking institutions located in the Philippines, including money, checks,
drafts, bullions bank drafts, deposit accounts (demand, time and savings),
all debts, indebtedness or obligations, financial brokers and investment
houses, notes, debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security, expressed

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in foreign currencies, or if payable abroad, irrespective of the currency in


which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in
subparagraph (a) above, whether or not held through, in, or with banks or
banking institutions, and existent within the Philippines, which belong to
any person, firm, partnership, association, branch office, agency, company
or other unincorporated body or corporation not residing or located within
the Philippines;
(c) Any and all assets existent within the Philippines including money,
checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations,
financial securities commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security expressed
in foreign currencies, or if payable abroad, irrespective of the currency in
which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
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4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those
authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or
corporation shall be sold to the authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange. Any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or
corporation, residing or located within the Philippines, who acquires on and after the date of
this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided, further, That within one day
upon taking ownership, or receiving payment, of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to designated agents of the Central
Bank.
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8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or
corporation, foreign or domestic, who being bound to the observance thereof, or of such
other rules, regulations or directives as may hereafter be issued in implementation of this
Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall
be subject to the penal sanctions provided in the Central Bank Act.
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Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:

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SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation
shall be sold to authorized agents of the Central Bank by the recipients within one business
day following the receipt of such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires foreign exchange shall
not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking ownership thereof except as such
delay is customary; Provided, That, within one business day upon taking ownership or
receiving payment of foreign exchange the aforementioned persons and entities shall sell
such foreign exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to
safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business
day from receipt. Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business
day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one
which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it
is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it
affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality
of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy
is one on behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses
and attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at
the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent
the amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.

NATURE OF RENTAL OF SAFETY DEPOSIT BOX


CA AGRO-INDUSTRIAL DEVT CORP v. CA
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety
deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and
lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was
covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited
in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a

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representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through
Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank
and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this
purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The
safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the
said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed
of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety
deposit box and get the certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs.
Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly
failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial
Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because
of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles
contained in the box could not give rise to an action against it. It then interposed a counterclaim for
exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an
answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro
Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's
complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay
defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the
contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the
said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the

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respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the
respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law,
public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the
Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on
the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit
box and its contents while the Bank retained no right to open the said box because it had neither the
possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil
Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control
over the property leased during the period of the contract and Article 1975 of the Civil Code which
provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as
may be necessary in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the
contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance
with the nature of the contract of lease and cannot be regarded as contrary to law, public order and
public policy." 12 The appellate court was quick to add, however, that under the contract of lease of
the safety deposit box, respondent Bank is not completely free from liability as it may still be made
answerable in case unauthorized persons enter into the vault area or when the rented box is forced
open. Thus, as expressly provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August
1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside
the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not
properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of
jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from
precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence
adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial
court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's
decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the
safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code
of the

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dennisaranabriljdii 12

Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of
title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required,
to the depositor, or to his heirs and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the safekeeping and the loss of
the thing, shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of
care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on
the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit
box or safe and the lessee takes possession of the box or safe and places therein his
securities or other valuables, the relation of bailee and bail or is created between the parties
to the transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the
character or description of the property which is deposited in such safe-deposit box or safe
does not change that relation. That access to the contents of the safe-deposit box can be had
only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in
connection with one retained by the lessor) does not operate to alter the foregoing rule. The
argument that there is not, in such a case, a delivery of exclusive possession and control to
the deposit company, and that therefore the situation is entirely different from that of
ordinary bailment, has been generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the company is, by the nature of
the contract, given absolute control of access to the property, and the depositor cannot gain
access thereto without the consent and active participation of the company. . . . (citations
omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety
deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public
policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which
provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the
parties to simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to
its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code
on deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and absolute possession and control of the
safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the
box remained with the respondent Bank; without this key, neither of the renters could open the box. On the

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dennisaranabriljdii 13

other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the
said key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975,
also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously,
the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or
instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the
relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the
box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing
view because:
There is, however, some support for the view that the relationship in question might be
more properly characterized as that of landlord and tenant, or lessor and lessee. It has also
been suggested that it should be characterized as that of licensor and licensee. The relation
between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit
box therein, is often described as contractual, express or implied, oral or written, in whole or
in part. But there is apparently no jurisdiction in which any rule other than that applicable to
bailments governs questions of the liability and rights of the parties in respect of loss of the
contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that
in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General
Banking Act23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this
section asdepositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this principal function. A contract of
deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's
responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of
the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account
of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box,
which read:

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dennisaranabriljdii 14

13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as
a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence
only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the
Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of
the box since in fact, the safety deposit box itself is located in its premises and is under its absolute
control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public policy. It must clearly
appear that there actually was such a special contract, however, in order to vary the ordinary
obligations implied by law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful meaning. The company, in
renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own
fraud or negligence or that of its agents or servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held ineffective for the purpose. Although it has
been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken that such a lessor may limits its
liability to some extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case,
the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or
proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no
competent proof was presented to show that respondent Bank was aware of the agreement between the
petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit
box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the
certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this
Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos
agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.

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dennisaranabriljdii 15

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had
been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's
fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be
modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the
4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to
the pronouncement We made above on the nature of the relationship between the parties in a contract of
lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant
Petition for Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.

NATURE OF AGREEMENT TO EXTEND PAYMENT OF MONEY DEPOSITED AND TO PAY INTEREST


JAVELLANA v. LIM
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of
First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to
jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum
from the 20th of January, 1898, until full payment should be made, deducting from the amount of interest due
the sum of P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended on the 10th of
January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a
document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred
and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the
20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the
payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their
indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of
interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been
subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants
answered the original complaint before its amendment, setting forth that they acknowledged the facts stated
in Nos. 1 and 2 of the complaint; that they admitted the statements of the plaintiff relative to the payment of
1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on the amount
stated in the foregoing document, but on account of the principal, and denied that there had been any
agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent
per annum as alleged in paragraph 3 of the complaint, and also denied all the other statements contained
therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the
P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting
therefrom the total sum of P2,686.58 stated in the document transcribed in the complaint, the plaintiff still

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dennisaranabriljdii 16

owed the defendants P2,915.58; therefore, they asked that judgment be entered absolving them, and
sentencing the plaintiff to pay them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together with an account book having been
made of record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for
the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was
also excepted to by them; the bill of exceptions presented by the appellants having been approved, the same
was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the
defendants a given sum of money which they were jointly and severally obliged to return on a certain date
fixed in the document; but that, nevertheless, when the document appearing as Exhibits 2, written in the
Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date
thereof, the 15th of November, 1902, that the amount deposited had not yet been returned to the creditor,
whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898,
when the return was again stipulated with the further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos
paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would
be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is
called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum
equal to the one received by them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as subsequent shown when asking
for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the
letter, their creditor, to losses and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that they received apparently as a
deposit, they engaged to pay interest to the creditor from the date named until the time when the refund
should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction
entered into between the interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without the express permission of the
depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that
When the depository has permission to make use of the thing deposited, the contract loses the
character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an
extension of one year, in view of the fact the money was scare, and because neither himself nor the other
defendant were able to return the amount deposited, for which reason he agreed to pay interest at the rate of
15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount
deposited, he having made use of the same in his business and for his own profit; and the creditor, by granting
them the extension, evidently confirmed the express permission previously given to use and dispose of the
amount stated as having bee deposited, which, in accordance with the loan, to all intents and purposes
gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until

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dennisaranabriljdii 17

its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the
presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself
and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a
civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who
attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the
said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the interest, to pay the
sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the
original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had
ever paid the whole or any part of the capital stated in the original document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established,
such is not the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of
said indebtedness imputed to the plaintiff has not been proven, and the defendants, who call themselves
creditors for the said amount have not proven in a satisfactory manner that the plaintiff had received partial
payments on account of the same; the latter alleges with good reason, that they should produce the receipts
which he may have issued, and which he did issue whenever they paid him any money on account. The
plaintiffs allegation that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C" and
"D" offered in evidence by the defendants, had been received from Ceferino Domingo Lim on account of other
debts of his, has not been contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos,
was expressed in lieu of 1,000 pesos, the only payment made on account of interest on the amount deposited
according to documents No. 2 and letter "B" above referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal
of the contract deposited converted into a loan, because, as has already been stated, the defendants received
said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were
forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or
proven in the proceedings that the creditor had released Joe Lim from complying with his obligation in order
that he should not be sued for or sentenced to pay the amount of capital and interest together with his
codebtor, Ceferino Domingo Lim, because the record offers satisfactory evidence against the pretension of
Jose Lim, and it further appears that document No. 2 was executed by the other debtor, Ceferino Domingo
Lim, for himself and on behalf of Jose Lim; and it has also been proven that Jose Lim, being fully aware that his
debt had not yet been settled, took steps to secure an extension of the time for payment, and consented to pay
interest in return for the concession requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the
same should be and is hereby affirmed with the costs of this instance against the appellant, provided that the
interest agreed upon shall be paid until the complete liquidation of the debt. So ordered.