You are on page 1of 63

HAHN VS CA, G.R. NO.

113074, JANUARY 22, 1997
Facts: Petitioner Alfred Hahn is a Filipino citizen doing business under the name and
style "Hahn-Manila." On the other hand, private respondent Bayerische Motoren
Werke Aktiengesellschaft (BMW) is a nonresident foreign corporation existing under
the laws of the former Federal Republic of Germany, with principal office at Munich,
Germany.
Petitioner executed in favor of private respondent a "Deed of Assignment with
Special Power of Attorney,” which reads in full as follows:
WHEREAS, the ASSIGNOR is the present owner and holder of the BMW trademark
and device in the Philippines which ASSIGNOR uses and has been using on the
products manufactured by ASSIGNEE, and for which ASSIGNOR is the authorized
exclusive Dealer of the ASSIGNEE in the Philippines, the same being evidenced
by certificate of registration issued by the Director of Patents on 12 December
1963 and is referred to as Trademark No. 10625;
WHEREAS, the ASSIGNOR has agreed to transfer and consequently record said
transfer of the said BMW trademark and device in favor of the ASSIGNEE herein
with the Philippines Patent Office; xx
Per the agreement, the parties "continue[d] business relations as has been usual in
the past without a formal contract." But on February 16, 1993, in a meeting with a
BMW representative and the president of Columbia Motors Corporation (CMC), Jose
Alvarez, petitioner was informed that BMW was arranging to grant the
exclusive dealership of BMW cars and products to CMC, which had expressed
interest in acquiring the same. On February 24, 1993, petitioner received
confirmation of the information from BMW which, in a letter, expressed dissatisfaction
with various aspects of petitioner's business, mentioning among other things, decline
in sales, deteriorating services, and inadequate showroom and warehouse facilities,
and petitioner's alleged failure to comply with the standards for an exclusive BMW
dealer. Nonetheless, BMW expressed willingness to continue business relations with
the petitioner on the basis of a "standard BMW importer" contract, otherwise, it
said, if this was not acceptable to petitioner, BMW would have no alternative but to
terminate petitioner's exclusive dealership effective June 30, 1993.
Petitioner protested, claiming that the termination of his exclusive
dealership would be a breach of the Deed of Assignment. Hahn insisted that
as long as the assignment of its trademark and device subsisted, he remained BMW's
exclusive dealer in the Philippines because the assignment was made in
consideration of the exclusive dealership. In the same letter petitioner explained that
the decline in sales was due to lower prices offered for BMW cars in the United States
and the fact that few customers returned for repairs and servicing because of the
durability of BMW parts and the efficiency of petitioner's service.
Because of Hahn's insistence on the former business relation, BMW withdrew on
March 26, 1993 its offer of a "standard importer contract" and terminated
the exclusive dealer relationship effective June 30, 1993. At a conference of
BMW Regional Importers held on April 26, 1993 in Singapore, Hahn was surprised to
find Alvarez among those invited from the Asian region. On April 29, 1993, BMW
proposed that Hahn and CMC jointly import and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for
specific performance and damages against BMW to compel it to continue the
exclusive dealership. Later he filed an amended complaint to include an application
for temporary restraining order and for writs of preliminary, mandatory and

prohibitory injunction to enjoin BMW from terminating his exclusive dealership.
Hahn's amended complaint alleged in pertinent parts:xx
Without proof of service on BMW, the hearing on application for writ of preliminary
injunction proceeded ex parte. The trial court issued an order granting the writ of
preliminary injunction upon the filing of the bond. BWM moved to dismiss the case,
contending that the trial court did not acquire jurisdiction over it through the
service of summons on the DTI, because BWM was a foreign corporation
and it was not doing business in the Philippines. It contended that the
execution of the Deed of Assignment was an isolated transaction; that Hahn was not
its agent because the latter undertook to assemble and sell BMW cars and products
without the participation of BMW and sold other products; and that Hahn was an
indentor or middleman transacting business in his own name and for his own
account.
Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing business
in the Philippines through him as its agent, as shown by the fact that BMW invoices
and order forms were used to document his transactions; that he gave warranties as
exclusive BMW dealer; that BMW officials periodically inspected standards of service
rendered by him; and that he was described in service booklets and international
publications of BMW as a "BMW Importer" or "BMW Trading Company" in the
Philippines.
The CA found the trial court guilty of grave abuse of discretion in deferring resolution
of the motion to dismiss filed by BMW. It ruled that BMW was not doing business in
the country, and, therefore, jurisdiction over it could not be acquired through the
service of summons in the DTI pursuant to Rule 14 section 14; that Hahn acted in his
own name and for his own account independently of BMW, based on Alfred Hahn's
allegations that he had invested his own money and resources in establishing BMW's
goodwill in the Philippines and on BMW's claim that Hahn sold products other than
those of BMW. It held that petitioner was a mere indentor or broker and not an
agent through whom private respondent BMW transacted business in the Philippines.
Consequently, the Court of Appeals dismissed petitioner's complaint against BMW.
Issue: WON BMW is not doing business in the Philippines — No, they are
Held: Petitioner's appeal is well taken. Rule 14, §14 provides: §14. Service upon
private foreign corporations. — If the defendant is a foreign corporation, or a
nonresident joint stock company or association, doing business in the Philippines,
service may be made on its resident agent designated in accordance with law for that
purpose, or, if there be no such agent, on the government official designated by law
to that effect, or on any of its officers or agents within the Philippines. (Emphasis
added).
What acts are considered "doing business in the Philippines" are enumerated in
§3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) as follows: d) the
phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and

object of the business organization: Provided, however, That the phrase "doing
business" shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own
name and for its own account. (Emphasis supplied)
Thus, the phrase includes "appointing representatives or distributors in the
Philippines" but not when the representative or distributor " transacts business in
its name and for its own account." In addition, §1(f)(1) of the Rules and
Regulations implementing (IRR) the Omnibus Investment Code of 1987 (E.O. No. 226)
provided:
(f) "Doing business" shall be any act or combination of acts, enumerated in
Article 44 of the Code. In particular, "doing business" includes: (1) . . . A foreign
firm which does business through middlemen acting in their own names, such as
indentors, commercial brokers or commission merchants, shall not be deemed
doing business in the Philippines. But such indentors, commercial brokers or
commission merchants shall be the ones deemed to be doing business in the
Philippines.
The question is whether petitioner Alfred Hahn is the agent or distributor in the
Philippines of private respondent BMW. If he is, BMW may be considered doing
business in the Philippines and the trial court acquired jurisdiction over it (BMW) by
virtue of the service of summons on the Department of Trade and Industry.
Otherwise, if Hahn is not the agent of BMW but an independent dealer, albeit of BMW
cars and products, BMW, a foreign corporation, is not considered doing business in
the Philippines within the meaning of the Foreign Investments Act of 1991 and the
IRR, and the trial court did not acquire jurisdiction over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for
his own account and not as agent or distributor in the Philippines of BMW on the
ground that "he alone had contacts with individuals or entities interested in acquiring
BMW vehicles. Independence characterizes Hahn's undertakings, for which reason he
is to be considered, under governing statutes, as doing business."
As the above quoted allegations of the amended complaint show, however, there is
nothing to support the appellate court's finding that Hahn solicited orders
alone and for his own account and without "interference from, let alone
direction of, BMW." (p. 13) To the contrary, Hahn claimed he took orders for BMW
cars and transmitted them to BMW. Upon receipt of the orders, BMW fixed the
downpayment and pricing charges, notified Hahn of the scheduled production month
for the orders, and reconfirmed the orders by signing and returning to Hahn the
acceptance sheets. Payment was made by the buyer directly to BMW. Title to cars
purchased passed directly to the buyer and Hahn never paid for the purchase price of
BMW cars sold in the Philippines. Hahn was credited with a commission equal to 14%
of the purchase price upon the invoicing of a vehicle order by BMW. Upon
confirmation in writing that the vehicles had been registered in the Philippines and
serviced by him, Hahn received an additional 3% of the full purchase price. Hahn
performed after-sale services, including warranty services, for which he received
reimbursement from BMW. All orders were on invoices and forms of BMW.
These allegations were substantially admitted by BMW which, in its petition for
certiorari before the Court of Appeals, stated.

An agent receives a commission upon the successful conclusion of a sale. On the other hand. Hahn said that he had to follow BMW specifications as exclusive dealer of BMW in the Philippines. by virtue of which the latter was appointed "exclusive representative" in the Philippines for a stipulated commission. But this allegation was denied by Hahn and therefore the Court of Appeals should not have cited it as if it were the fact. this arrangement shows an agency. v. BMW was holding Hahn accountable to it under the 1967 Agreement. In effect. According to Hahn. ruled that Hahn was not an agent of BMW. It is now settled that. in which the foreign corporation entered into a "Representative Agreement" and a "Licensing Agreement" with a domestic corporation. This Court held that these acts constituted doing business in the Philippines. Court of Appeals. there are facts in the record which suggest that BMW exercised control over Hahn's activities as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW standards and specifications. The Court of Appeals also found that petitioner Alfred Hahn dealt in other products. on this basis. for purposes of having summons served on a foreign corporation in accordance with Rule 14.Contrary to the appellate court's conclusion. the domestic corporation sold products exported by the foreign corporation and put up a service center for the products sold locally. The fact that Hahn invested his own money to put up these service centers and showrooms does not necessarily prove that he is not an agent of BMW. In addition. This case fits into the mould of Communications Materials. and not exclusively in BMW products. Pursuant to these contracts. The court need not go beyond the allegations of the complaint in order to determine whether it has Jurisdiction. For as already noted. A determination that the foreign corporation is doing business is only tentative and is made only for the purpose of enabling the local court to acquire jurisdiction over the foreign corporation through service of summons pursuant to Rule . even if no sale is eventually made. it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership. For example. (p. BMW held out private respondent Hahn as its exclusive distributor in the Philippines. As to the service centers and showrooms which he said he had put up at his own expense. BMW periodically inspected the service centers to see to it that BMW standards were maintained. it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines . BMW stated: In the last years we have pointed out to you in several discussions and letters that we have to tackle the Philippine market more professionally and that we are through your present activities not adequately prepared to cope with the forthcoming challenges. even as it announced in the Asian region that Hahn was the "official BMW agent" in the Philippines. Anyway. §14. private respondent need not apprehend that by responding to the summons it would be waiving its objection to the trial court's jurisdiction. 14) This finding is based entirely on allegations of BMW in its motion to dismiss filed in the trial court and in its petition for certiorari before the Court of Appeals. Indeed. and. a broker earns his pay merely by bringing the buyer and the seller together. 1996. Inc. in its letter to Hahn dated February 23. The arrangement showed that the foreign corporation's purpose was to penetrate the Philippine market and establish its presence in the Philippines.

On 14 February 2007.47 %. entered into a Conditional Sale and Purchase Agreement of the 111. Prime Holdings.7% to 37%. submitted their bids.125% of PTIC shares is actually an indirect sale of 12 million shares or about 6. or 46. With the sale.14. through its subsidiary. Such determination does not foreclose a contrary finding should evidence later show that it is not transacting business in the country. the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the 111. Thereafter.125% of the outstanding capital stock of PTIC. 3436 which granted PLDT a franchise and the right to engage in telecommunications business. were later declared by this Court to be owned by the Republic of the Philippines.6 billion or US$510 million. Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 %. the Philippine Legislature enacted Act No. In 1999. First Pacific.189. In 1986. In 1969. the decision of the Court of Appeals is REVERSED and the case is REMANDED to the trial court for further proceedings. are as follows: On 28 November 1928.415 PTIC shares. and only two bidders. including Roland Gapud and Jose Campos. the sale by the Philippine Government of 46. In 1977. Parallax won with a bid of P25. (PHI) was incorporated by several persons.415 shares of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). with the Philippine Government for the price of P25. First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead. The 111. a Bermuda-registered.415 PTIC shares. §14. WHEREFORE. Gamboa.217. 176579. sold 26% of the outstanding common shares of PLDT to PTIC (Philippine Telecommunications Investment Corporation).125 % of the outstanding capital stock of PTIC. or 46. acquired the remaining 54% of the outstanding capital stock of PTIC. First Pacific’s common shareholdings in PLDT increased from 30. yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. 2011 Facts: The facts.415 PTIC shares by matching the bid price of Parallax.556. General Telephone and Electronics Corporation (GTE). Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital. Subsequently. The sale was completed on 28 February 2007. the 111. Jr. This violates Section 11. Subsequently. through a public bidding to be conducted on 4 December 2006. GAMBOA VS TEVES G. . an American company and a major PLDT stockholder.000 or US$510. JUNE 28.415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla.415 PTIC shares. First Pacific. according to petitioner Wilson P. thereby increasing the common shareholdings of foreigners in PLDT to about 81.125 % of the outstanding capital stock of PTIC. On 20 November 2006.R. Hong Kong-based investment firm. On the other hand. MPAH. Since PTIC is a stockholder of PLDT. Teves. public respondents Finance Secretary Margarito B. However.3% of the outstanding common shares of PLDT. the public bidding was reset to 8 December 2006.580. a stockholder of Philippine Long Distance Telephone Company (PLDT). First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the 111. Inc. which represent about 46. PHI became the owner of 111.

2270 concluded that: (a) the auction of the governments 111. under the corporate set-up of PLDT. No franchise. The State shall encourage equity participation in public utilities by the general public. would result to a total foreign common shareholdings in PLDT of 51.415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the 40% constitutional limit on foreign ownership of a public utility since PTIC holds only 13. Petitioner filed the instant petition for prohibition.Undersecretary John P. The crux of the controversy is the definition of the term capital. combined with Japanese NTT DoCoMos common shareholdings in PLDT. can vote and elect members of the board of directors.415 PTIC shares. It is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino citizens.56 % which is over the 40 % constitutional limit. This arose from Presidential Decree No. or authorization be exclusive in character or for a longer period than fifty years. at least sixty per centum of whose capital is owned by such citizens. and PCGG Commissioner Ricardo Abcede allege the following relevant facts: (same) xxx On 31 January 2007. Article XII of the Constitution refers to the ownership of common capital stock subscribed and outstanding. Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities. declaratory relief. or repeal by the Congress when the common good so requires. injunction. to wit: Section 11.847% of the total outstanding common shares of PLDT. Petitioner posits that the term capital in Section 11. Issue: Whether the term capital in Section 11 of Article XII of the constitution refers to the total commons shares only or to the outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT. certificate.7% to 37%.415 PTIC shares would result in an increase in First Pacifics common shareholdings in PLDT from 30. .415 shares of stock of PTIC. Does the term capital in Section 11.415 PTIC shares bore due diligence. which class of shares alone. On 28 February 2007. alteration. The HR Committee Report No. Petitioner claims. the House of Representatives (HR) Committee on Good Government conducted a public hearing on the particulars of the then impending sale of the 111. transparency and conformity with existing legal procedures. and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Section 11. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment. that the sale of the 111. among others. nor shall such franchise. and declaration of nullity of sale of the 111. and this. and (b) First Pacific’s intended acquisition of the governments 111. Sevilla. First Pacific completed the acquisition of the 111. certificate. Respondents Teves and Sevilla were among those who attended the public hearing. a public utility Held: The petition is partly meritorious. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital. 217.415 PTIC shares. or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines. Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-voting preferred shares)? Petitioner submits that the 40% foreign equity limitation in domestic public utilities refers only to common shares because such shares are entitled to vote and it is through voting that control over a corporation is exercised.

do not offer any definition of the term capital in Section 11. however. on the other hand. and not to the total outstanding capital stock comprising both common and nonvoting preferred shares. 6. The Corporation Code of the Philippines classifies shares as common or preferred. requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing the telephone line. or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided. We agree with petitioner and petitioners-in-intervention. further. unless otherwise provided in this Code: Provided. Article XII of the Constitution. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided. may fix the terms and conditions of preferred shares of stock or any series thereof: Provided. . That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. . any of which classes or series of shares may have such rights. The Board of Directors. Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors. and thus in the present case only to common shares.54% of the total outstanding common stock. That shares without par value may not be issued for a consideration less than the value of five (P5. public utilities. further. That no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided. privileges or restrictions as may be stated in the articles of incorporation: Provided.issued on 16 June 1973 by then President Ferdinand Marcos. Classification of shares. That banks. Respondents. Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of the term capital. More importantly. private respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40 % of the common shares of PLDT are held by foreigners. That there shall always be a class or series of shares which have complete voting rights. Petitioners-in-intervention allege that the approximate foreign ownership of common capital stock of PLDT x x x already amounts to at least 63. and building and loan associations shall not be permitted to issue no-par value shares of stock. trust companies. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends.The shares of stock of stock corporations may be divided into classes or series of shares. thus: Sec. which means that foreigners exercise significant control over PLDT. insurance companies. That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. or both. That preferred shares of stock may be issued only with a stated par value. where authorized in the articles of incorporation. The term capital in Section 11.00) pesos per share: Provided. patently violating the 40 % foreign equity limitation in public utilities prescribed by the Constitution.

Sale. the term capital in Section 11. Incurring. 5. and 8. classify its shares for the purpose of insuring compliance with constitutional or legal requirements. the term capital in Section 11. Adoption and amendment of by-laws. Amendment of the articles of incorporation. Common shares cannot be deprived of the right to vote in any corporate meeting. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. Considering that common shares have voting rights which translate to control. As revealed in the deliberations of the Constitutional Commission. Article XII of the Constitution refers only to common shares. 6. deprived of the right to vote in the election of directors and on other matters. on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders. preferred shares have the same voting rights as common shares. if the preferred shares also have the right to vote in the election of directors. to wit: . Merger or consolidation of the corporation with another corporation or other corporations. the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. as referring to controlling interest or shares entitled to vote. 4. controlling interest in the corporation. Except as provided in the immediately preceding paragraph. Indisputably. Investment of corporate funds in another corporation or business in accordance with this Code. or should result in. one of the rights of a stockholder is the right to participate in the control or management of the corporation. However. to wit: Thus. mortgage. the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. lease. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code. This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities . that is. capital refers to the voting stock or controlling interest of a corporation. 2. In the absence of provisions in the articles of incorporation denying voting rights to preferred shares. and any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid. exchange. as opposed to preferred shares which usually have no voting rights. creating or increasing bonded indebtedness. 7. 60% of the capital assumes. Dissolution of the corporation. In fact. furthermore. preferred shareholders are often excluded from any control.A corporation may. 3. However. Reinforcing this interpretation of the term capital. Article XII of the Constitution refers only to shares of stock that can vote in the election of directors. is the definition of a Philippine national in the Foreign Investments Act of 1991. then the term capital shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote. In short. pledge or other disposition of all or substantially all of the corporate property. each share shall be equal in all respects to every other share. Increase or decrease of capital stock.

the Implementing Rules and Regulations of the Foreign Investments Act of 1991 provide: b. coupled with 60% of the voting rights. at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines. the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise. mere legal title is not enough to meet the required Filipino equity. where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided. (Emphasis supplied) Mere legal title is insufficient to meet the 60% Filipino-owned capital required in the Constitution. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines. 3. or a trustee of funds for pension or other employee retirement or separation benefits. at least sixty % [60%] of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty % [60%] of the members of the Board of Directors of each of both corporation must be citizens of the Philippines.As used in this Act: a. or a corporation organized under the laws of the Philippines of which at least sixty % [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. The control test shall be applied for this purpose. Full beneficial ownership of 60 % of the outstanding capital stock. Definitions. Full beneficial ownership of the stocks. that where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered enterprise. or a domestic partnership or association wholly owned by citizens of the Philippines. coupled with appropriate voting rights is essential. or a corporation organized under the laws of the Philippines of which at least sixty % (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. is . For stocks to be deemed owned and held by Philippine citizens or Philippine nationals. stocks.SEC. Thus. or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits. Individuals or juridical entities not meeting the aforementioned qualifications are considered as nonPhilippine nationals. in order that the corporation shall be considered a Philippine national. Provided. . but only such stocks which are generally entitled to vote are considered. shall be considered a Philippine national. Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not. The term Philippine national shall mean a citizen of the Philippines. (Emphasis supplied) In explaining the definition of a Philippine national. where the trustee is a Philippine national and at least sixty % [60%] of the fund will accrue to the benefit of the Philippine nationals. in order that the corporation.

which necessarily equates to control of the public utility. Let us assume that a corporation has 100 common shares owned by foreigners and 1. (6) Philippine Technology Transfer Act of 2009 or R.A. 10055. In the example given. including both common and non-voting preferred shares. even if they hold only 100 shares. This is obviously absurd.A. Hence. 1521. .001%. The legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.999% of the equity. Article XII of the Constitution. cannot vote in the election of directors and hence.A. the corporation is considered as non-Philippine national[s]. Congress may reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens. 7471. Article XII of the Constitution is also used in the same context in numerous laws reserving certain areas of investments to Filipino citizens. the term capital in Section 11. or such higher %age as Congress may prescribe. have no control over the public utility. (2) Philippine Inventors Incentives Act or R. in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty % of the capital of which is owned by Filipino citizens. On the other hand. A broad definition unjustifiably disregards who owns the all-important voting stock. (5) Domestic Shipping Development Act of 2004 or R. No. 5183. or more than 99. We shall illustrate the glaring anomaly in giving a broad definition to the term capital. The foreigners. No.required. of the total outstanding capital stock is Filipino owned. No. to place the control of public utilities in the hands of Filipinos. 6977. No. This starkly circumvents the intent of the framers of the Constitution.A. No. Thus.000 non-voting preferred shares owned by Filipinos. as well as the clear language of the Constitution.D. such corporation would be considered compliant with the 40% constitutional limit on foreign equity of public utilities since the overwhelming majority. The example given is not theoretical but can be found in the real world. certain areas of investments. Under Section 10. holding more than 99.999%. with both classes of share having a par value of one peso (P1. Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. and in fact exists in the present case. Small and Medium Enterprises or R. (3) Magna Carta for Micro. the Filipinos. only the foreigners holding the common shares have voting rights in the election of directors. Under the broad definition of the term capital.00) per share.A. To construe broadly the term capital as the total outstanding capital stock.000. exercise control over the public utility. PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its stockholders. or to receive notice of any meeting of stockholders. Some of these laws are: (1) Regulation of Award of Government Contracts or R. Otherwise. 9295. and (7) Ship Mortgage Decree or P. 3850. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos. grossly contravenes the intent and letter of the Constitution that the State shall develop a self-reliant and independent national economy effectively controlled by Filipinos. with a minuscule equity of less than 0. No.A. (4) Philippine Overseas Shipping Development Act or R. No.

Article XII of the Constitution. Moreover.046. Such amount of control unmistakably exceeds the allowable 40 % limit on foreign ownership of public utilities expressly mandated in Section 11.00 per share. Conversely. PLDT declared dividends for the common shares at P70. they also have very little and obviously negligible dividend earning capacity compared to common shares. 99. while Filipinos hold only 35. Moreover. while holders of preferred shares have no voting right for any purpose whatsoever. only holders of common shares can vote in the election of directors.00 per share. do not have any control over PLDT.15%.On the other hand. as submitted to the SEC. PLDTs Articles of Incorporation state that each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders. while the declared dividends for the preferred shares amounted to a measly P1. foreigners hold 120. as long as 60% of the voting/controlling interest + outstanding capital stock lies with Filipinos. But later on. as submitted to the SEC. the par value of PLDT common shares is P5. holders of common shares are granted the exclusive right to vote in the election of directors. that foreigners hold a majority of the common shares of PLDT. who have no voting rights in the election of directors. and respondents do not dispute. holders of preferred shares. Worse. meaning only common shareholders exercise control over PLDT. In other words. blatantly violating the constitutional requirement of 60 % Filipino control and Filipino beneficial ownership in a public utility. Since holding a majority of the common shares equates to control. So the preferred shares not only cannot vote in the election of directors. and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes. it does not violate the constitution.56% of the preferred shares.622 common shares.750. under PLDTs Articles of Incorporation. 60% of BOTH voting and non-voting should be owned by Filipinos The legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipinos in accordance with the constitutional mandate. preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Never mind if the Filipinos don’t own 60% of the non-voting shares. is constitutionally required for the . In fact.73%. —> what they’re doing in this case is. coupled with 60% of the voting rights. whereas the par value of preferred shares is P10. In short.00 per share.85% of the authorized capital stock of PLDT while common shares constitute only 22. In fact.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0. It must be stressed.00 per share. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares. it is clear that foreigners exercise control over PLDT. preferred shares constitute 77. foreigners hold 64. Full beneficial ownership of 60% of the outstanding capital stock. based on PLDTs 2010 General Information Sheet (GIS). in the case.27% of the total number of PLDTs common shares. the Dividend Declarations of PLDT for 2009. which is a document required to be submitted annually to the Securities and Exchange Commission. As shown in PLDTs 2010 GIS. In other words.690 common shares of PLDT whereas Filipinos hold only 66. shows that per share the SIP preferred shares earn a pittance in dividends compared to the common shares. holders of common shares have voting rights for all purposes.

44% owned by Filipinos. grossly violates the constitutional requirement of 60 % Filipino control and Filipino beneficial ownership of a public utility. or any other form of authorization for the operation of a public utility shall be granted except to x x x corporations x x x organized under the laws of the Philippines. Article XII of the Constitution.00 have a current stock market value of P2. Article XII of the Constitution to include both voting and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners. educational institutions and advertising business. There is no need for legislation to implement these selfexecuting provisions of the Constitution. of PLDT. construing the term capital in Section 11. was . such as the exploitation of natural resources as well as the ownership of land. 99. The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. This kind of ownership and control of a public utility is a mockery of the Constitution. Incidentally. (3) preferred shares. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens. and earn less than 60% of the dividends. not one of the constitutional provisions expressly reserving specific areas of investments to corporations.00 per share. or over the last 75 years. Indisputably. (1) foreigners own 64. like other provisions of the Constitution expressly reserving to Filipinos specific areas of investment. To treat Section 11.73% of PLDTs common shares.06 per share. at least 60 % of the capital of which is owned by Filipinos. while PLDT preferred shares with a par value of P10. certificate. (4) preferred shares earn only 1/70 of the dividends that common shares earn. not with the preferred shares. have no voting rights. Article XII of the Constitution that [n]o franchise. The undisputed fact that the PLDT preferred shares. Section 11. and thus do not exercise control over PLDT. educational institutions and advertising businesses. amounting to a clear abdication of the States constitutional duty to limit control of public utilities to Filipino citizens.328. which class of shares exercises the sole right to vote in the election of directors. In short. The Court must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure.27% of the common shares of PLDT. Filipinos hold less than 60 % of the voting stock. 99. Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution. (5) preferred shares have twice the par value of common shares. and thus exercise control over PLDT. and (6) preferred shares constitute 77. a selfreliant and independent national economy effectively controlled by Filipinos. To repeat.85% of the authorized capital stock of PLDT and common shares only 22.15%.92 to P11. are non-voting and earn only 1/70 of the dividends that PLDT common shares earn. This directly contravenes the express command in Section 11. (2) Filipinos own only 35. is self-executing. the fact that PLDT common shares with a par value of P5. is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares. such as the development of natural resources and ownership of land.States grant of authority to operate a public utility. at least 60% of whose capital is owned by such citizens x x x. in the words of the Constitution.44% owned by Filipinos.00 per share have a current stock market value ranging from only P10. constituting a minority of the voting stock.

The opinions of the SEC. Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors. and thus in the present case only to common shares. and not to the total outstanding capital stock (common and non-voting preferred shares). reversed. Movants point out that with the 28 June 2011 Decision. There has never been a judicial precedent interpreting the term "capital" in the 1935. and if there is a violation of Section 11. 176579. we PARTLY GRANT the petition and rule that the term capital in Section 11. until now. whether voting or non-voting. This is egregious error. the Court has not interpreted or defined the term "capital" found in various economic provisions of the 1935. you must apply the VOTING CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST— Full beneficial ownership of the stocks. Article XII of the Constitution. the framers of the 1935.enforceable. until the present case there has never been a Court ruling categorically defining the term "capital" found in the various economic provisions of the 1935. they’re saying that capital under the constitution should refer to capital which has voting rights or controlling interest. Article XII of the Constitution. This Court cannot allow such an absurd interpretation of the Constitution. the court here emphasized that to be a Philippine national. For more than 75 years since the 1935 Constitution. to impose the appropriate sanctions under the law. To repeat. 1973 and 1987 Philippine Constitutions. which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes. it is patently wrong and utterly baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified. 1973 and 1987 Constitutions. ◆In this case. OCTOBER 9. whether voting or non-voting. or set aside the purported long-standing definition of the term "capital. WHEREFORE. coupled with appropriate voting rights. In fact. has consistently adopted this particular definition in its numerous opinions. Held: Movants contend that the term "capital" in Section 11. the exploitation by corporations of mineral resources. Article XII of the Constitution has long been settled and defined to refer to the total outstanding shares of stock. 2012 Motion for recon was denied." which supposedly refers to the total outstanding shares of stock. as well as of the Department of Justice (DOJ). Filipinos or foreigners. the ownership by corporations of real estate. All the legislatures that convened since 1935 also miserably failed to enact legislations to implement these vital constitutional provisions that determine who will effectively control the national economy. the Court in effect introduced a "new" definition or "midstream redefinition” of the term "capital" in Section 11. in the first place. Hence. movants claim that the SEC.R. and the ownership of educational institutions. It touched the “beneficial ownership test” but did not really emphasize it as a test as to whether you are a philippine national ◆But in this case. on the definition of the term "capital" as referring to both voting and non-voting shares (combined total of common and preferred shares) are. Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company. 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment. like the operation by corporations of public utilities. 1973 and 1987 Constitutions. is essential. conflicting . In short.”—> 60% of outstanding capital (meaning all shares) + 60% voting rights GAMBOA VS TEVES G.

dated 7 October 1985. and inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic provisions of the Constitution. This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution to engage in . any opinion of individual Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC. At the same time.” On the other hand.. 1985. which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC. Then Minister of Justice Estelito P. these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. v.1(g) of the Code. McArthur Mining. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the primordial consideration is situs of control.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt rules or regulations. using only the voting stock to a corporation is a Philippine national. the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or regulations is ultra vires. Thus. 23-10 dated 18 August 2010. addressed to Castillo & San Jose. whether the term "capital" includes "both preferred and common stocks. Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would own only 40% of the voting stock. the scope of the term "capital" in Section 9. then SEC General Counsel Vernette G. Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class of shares regardless of differences in voting rights and privileges. There is no basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.6 and 5. Filipinos would own 60% of the combined voting and non-voting stock. both stockholders of a domestic corporation that owned lands in the Philippines. that is. although when the non-voting stock is added. Minister Mendoza categorically rejected the theory that the term "capital" in Section 9. This prevailing SEC ruling. contradictory. Inc. s. Corp." is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines. in Laman Tan Pantaleon applied the Voting determine whether Opinion No. Significantly. et al. In short. these opinions highlight the conflicting. that is. only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations.and inconsistent. Under Sections 4. which the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and control. the SEC en banc. Section 4. has adopted even the Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. Article XIV of the 1973 Constitution was raised. Clearly. In DOJ Opinion No. In short. 130. Umali-Paco Control Test. This ownership structure is remarkably similar to the current ownership structure of PLDT." The issue was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation.

certain economic activities applies not only to voting control of the corporation. Article II of the 1987 Constitution declares as State policy the development of a national economy "effectively controlled" by Filipinos: Section 19. the PSE President cites the cases of National Telecommunications Commission v. Article XII of the Constitution. Court of Appeals and Philippine Long Distance Telephone Company v.” The interpretation by legal officers of the SEC of the term "capital. Article XII of the 1987 Constitution. Thus. lies with this Court. never conclusive on the Court. any such opinion does not constitute an SEC rule or regulation. Article XII of the 1987 Constitution. In both cases of National Telecommunications v. coupled with 60% of the voting rights. upon recommendation of the economic and ." (Emphasis supplied) Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national. Article XII of the 1987 Constitution. Section 19. The PSE President is grossly mistaken. the Court did not define the term "capital" as found in Section 11. Likewise. The Congress shall. discussed or cited Section 11. is merely preliminary and an opinion only of such officers. the Constitution decrees: Section 10. in our 28 June 2011 Decision we stated: Mere legal title is insufficient to meet the 60% Filipinoowned "capital" required in the Constitution. National Telecommunications Commission. Otherwise. the corporation is "considered as non-Philippine national[s]. interpreting the law are neither conclusive nor controlling and thus. These two cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act. In fact. but also to the beneficial ownership of the corporation. not with any other government entity.” Thus. Consistent with these ideals. III. The power to make a final interpretation of the law. Article XII of the Constitution or any of its economic provisions. and thus cannot serve as precedent in the interpretation of Section 11. Filipinization of Public Utilities. is required. as well as of the DOJ. in this case the term "capital" in Section 11. In fact. In his motion for reconsideration. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only preliminary. many of these opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances. To repeat. Full beneficial ownership of 60% of the outstanding capital stock. these two cases never mentioned. Court of Appeals and Philippine Long Distance Telephone Company v. National Telecommunications Commission in arguing that the Court has already defined the term "capital" in Section 11. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos. the opinions of the SEC en banc. Fortifying the State policy of a Filipino-controlled economy. not even on the SEC itself. the opinions clearly make a caveat that they do not constitute binding precedents on any one. The legal and beneficial ownership of 60 % of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate." embodied in various opinions which respondents relied upon. do not bind the Court.

” The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens.A. 5183. No. In the grant of rights. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital. in the case of individuals. Hence. nor shall such franchise. Under Section 10. which mandates the Filipinization of public utilities. to own and operate a public utility a corporation’s capital must at least be 60 % owned by Philippine nationals.A.planning agency. at least sixty per centum of whose capital is owned by such citizens. With respect to public utilities. the State shall give preference to qualified Filipinos. when the national interest dictates. 10055.A. or repeal by the Congress when the common good so requires. Article XII of the 1987 Constitution. 7471. or (2) corporations or associations at least 60 % of whose "capital" is owned by Filipino citizens. (6) Philippine Technology Transfer Act of 2009 or R. Congress may "reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens. No franchise.A. at least 60 % of their "capital" must be owned by Filipino citizens.A. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities. the 1987 Constitution specifically ordains: Section 11. requires that any form of authorization for the operation of public utilities shall be granted only to "citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. under Section 11. certificate. only Filipino citizens can validly own and operate a public utility. The State shall encourage equity participation in public utilities by the general public. (5) Domestic Shipping Development Act of 2004 or R. Some of these laws are: (1) Regulation of Award of Government Contracts or R. Article XII of the 1987 Constitution. (3) Magna Carta for Micro. (2) Philippine Inventors Incentives Act or R. No. certain areas of investments. alteration. In other words. and (7) Ship Mortgage Decree or P. No. reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens. No. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment. (4) Philippine Overseas Shipping Development Act or R. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. and concessions covering the national economy and patrimony. No. certain areas of investments. or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines. 6977. or such higher %age as Congress may prescribe. (Emphasis supplied) This provision. No. or authorization be exclusive in character or for a longer period than fifty years.A. or such higher %age as Congress may prescribe. No. 9295. in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least 60% of the "capital" of which is owned by Filipino citizens." Thus. privileges. certificate. Small and Medium Enterprises or R. and all the executive and managing officers of such corporation or association must be citizens of the Philippines. 1521. 3850." "The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for national security. . In the case of corporations or associations.D.

or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by Philippine citizens. or a trustee of funds for pension or other employee retirement or separation benefits. where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided. 3. This means. of course. where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided. That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise. (Boldfacing. italicization and underscoring supplied) Thus. or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. The term "Philippine national" shall mean a citizen of the Philippines.As used in this Act: a. or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. that only a "Philippine national" can own and operate a public utility. Article XII of the 1987 Constitution. . That where a corporation and its non-Filipino stockholders own stock in a registered enterprise. at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. Definition of "Philippine National” — Pursuant to the express mandate of Section 11. That where a corporation and its non-Filipino stockholders own stock in a registered enterprise. where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided. italicization and underscoring supplied) Under Article 48(3)of the Omnibus Investments Code of 1987. or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits. the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981. which was issued by then President Corazon C. or a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines . to wit: Article 14. Article 15 of this Code states: Article 15. or a domestic partnership or association wholly owned by citizens of the Philippines. or a trustee of funds for pension or other employee retirement or separation benefits. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by citizens of the Philippines. shall be considered a "Philippine national." (Boldfacing."Thus. at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation . a " non-Philippine national" cannot own and operate a reserved economic activity like a public utility. which defined a "Philippine national" as follows: SEC.IV. 7042 or the Foreign Investments Act of 1991 (FIA). Aquino. The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute. in order that the corporation. 226 or the Omnibus Investments Code of 1987. Congress enacted Republic Act No. Definitions. as amended. "no corporation x x x which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines. or a domestic partnership or association wholly owned by citizens of the Philippines. Executive Order No. "Philippine national" shall mean a citizen of the Philippines. the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen. In turn. at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines.

or a partnership or association wholly owned by citizens of the Philippines. which took effect on 16 September 1967. italicization and underscoring supplied) Under Article 69(3) of the Omnibus Investments Code of 1981. The FIA. which took effect on 30 September 1968. Again. at least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine National. italicization and underscoring supplied) Under Section 3 of Republic Act No. repair. clearly defines a "Philippine national" as a Filipino citizen. (Boldfacing. contained a similar definition of a "Philippine national. Section 8 of the law states: SEC. Among the key features of this law is the concept of a negative list or the Foreign Investments Negative List. 5186 or the Investment Incentives Act. 8. b. explosives.” A "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. The FIA is the basic law governing foreign investments in the Philippines. which are defense-related activities. unless such manufacturing or repair activity is specifically authorized.The Foreign Investment Negative List shall have two component lists: A and B: a. The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines. irrespective of the nature of business and area of investment. Article XII of the 1987 Constitution. Republic Act No. which limits the ownership and operation of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned. requiring prior clearance and authorization from the Department of National Defense [DND] to engage in such activity. to a non-Philippine national by the Secretary of National Defense. pyrotechnics and similar materials. A domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. such enterprise must obtain prior approval from the Board of Investments before accepting such investment. Such approval shall not be granted if the investment "would conflict with existing constitutional provisions and laws regulating the degree of required ownership by Philippine nationals in the enterprise. like all its predecessor statutes.shall be considered a Philippine national. with a substantial export component." to wit: (f) "Philippine National" shall mean a citizen of the Philippines. "no corporation x x x which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a written certificate from the Board of Investments to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines. This definition of a "Philippine national" is crucial in the present case because the FIA reiterates and clarifies Section 11. or a trustee of funds for pension or other employee retirement or separation benefits. or a corporation organized under the laws of the Philippines of which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. a "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. ammunition. if the investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock. List B shall contain the areas of activities and enterprises regulated pursuant to law: 1. 5455 or the Foreign Business Regulations Act. such as the manufacture. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws. or . where the trustee is a Philippine National and at least sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided. Again."Thus. lethal weapons. storage and/or distribution of firearms. or a domestic corporation "at least sixty% (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino citizens. That where a corporation and its non-Filipino stockholders own stock in a registered enterprise. this means that only a "Philippine national" can own and operate a public utility. military ordinance. Prior to the Omnibus Investments Code of 1981. . this means that only a "Philippine national" can own and operate a public utility. (Boldfacing.

Occasional opinions of SEC legal officers that obviously contradict the FIA should . sauna and steam bathhouses and massage clinics. or for more than four decades. Negative List A of the FIA reserves the ownership and operation of public utilities only to "Philippine nationals.2." Clearly. In other words." Foreign Investment Negative List A consists of "areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws . as well as counsels of foreign investors. In short. where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals. or a domestic corporation at least 60% of the voting stock is owned by Filipinos." defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines. such as the manufacture and distribution of dangerous drugs. underscoring and italicization supplied) Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals. from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code of 1981. (Boldfacing. to own and operate a public utility in the Philippines one must be a "Philippine national" as defined in the FIA." Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the Constitution and specific laws. like the ownership and operation of public utilities." The FIA is the basic statute regulating foreign investments in the Philippines. Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that certain economic activities. beer houses. Foreign investors and their counsels who ignore the FIA do so at their own peril. are reserved to corporations "at least (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. nightclubs. The FIA is abundant notice to foreign investors to what extent they can invest in public utilities in the Philippines. bars. these same statutes have uniformly and consistently required that only "Philippine nationals" could own and operate public utilities in the Philippines. which the Constitution expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. Government agencies tasked with regulating or monitoring foreign investments." where foreign equity participation in any enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution and other specific laws. To repeat. or (4) a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits. should start with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines. all forms of gambling. x x x or (3) a corporation organized under the laws of the Philippines of which at least sixty % (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. dance halls. Foreign investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril. the statutory definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen. and to the passage of the present Foreign Investments Act of 1991. among the areas of investment covered by the Foreign Investment Negative List A is the ownership and operation of public utilities. to the enactment of the Omnibus Investments Code of 1987. Likewise. which have implications on public health and morals.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11. This shows that SEC legal officers are not only aware of. which articles previously regulated foreign investments in nationalized or partially nationalized industries. we held: Mere legal title is insufficient to meet the 60% Filipino-owned "capital" required in the Constitution. coupled with beneficial ownership. not under the FIA. the provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries. To repeat. The FIA does not grant tax or fiscal incentives to any enterprise. The reason is quite obvious – mere non-availment of tax and fiscal incentives by a nonPhilippine national cannot exempt it from Section 11. There is nothing in the FIA. The FIA and its predecessor statutes apply to investments in all domestic enterprises. The legal and beneficial ownership of 60 % of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. There are already numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified to own and operate a nationalized or partially nationalized business in the Philippines. translates to effective control. — The 28 June 2011 Decision declares that the 60% Filipino ownership required by the Constitution to engage in certain economic activities applies not only to voting control of the corporation. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to "companies which have not registered and obtained special incentives under the schemes established by those laws. but also rely on and invoke." (Emphasis supplied) This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for pension or other employee retirement or separation benefits. The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. that states. coupled with 60% of the voting rights. but also to the beneficial ownership of the corporation . Article XII of the 1987 Constitution. or even in the Omnibus Investments Code of 1987 or its predecessor statutes. that the FIA or its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987. the corporation is "considered as non-Philippine national[s]." the trustee is a Philippine national if "at least sixty % (60%) . The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be equated with the term "capital" in Section 11." Both are desperately grasping at straws. Right to elect directors. Otherwise. Full beneficial ownership of 60% of the outstanding capital stock. whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes. expressly or impliedly. V. Article XII of the Constitution.immediately raise a red flag. In fact. Tax and fiscal incentives to investments are granted separately under the Omnibus Investments Code of 1987. Article XII of the Constitution regulating foreign investments in public utilities. is required.

Moreover. Under the Corporation Code. mortgage or other disposition of substantially all corporate assets. (3) incurring. engaged in a partially nationalized industry. Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Thus. whether common. and (8) dissolution of corporation. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares. even if denied the right to vote in the election of directors. at least 60 % of the common shares and at least 60 % of the preferred non-voting shares must be owned by Filipinos. The Corporation Code allows denial of the right to vote to preferred and redeemable shares. In short. preferred shares. Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation. regardless of differences in voting rights. Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine nationals. privileges or restrictions as stated in the articles of incorporation. as mandated by the Constitution. mere legal title is not enough to meet the required Filipino equity. that is. at least 60 % of such shares must necessarily be owned by Filipinos. the 60-40 ownership requirement in favor of Filipino citizens in Section 11. Of course. Full beneficial ownership of the stocks. are anyway still entitled to vote on the eight specific corporate matters mentioned above. the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares. common shares have the right to vote in the election of directors. such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that . regardless of nomenclature and category. Nonetheless. which may have different rights. amendment and repeal of by-laws. (2) increase and decrease of capital stock. privileges and restrictions.of the fund will accrue to the benefit of Philippine nationals." Since the constitutional requirement of at least 60% Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation. comprising the capital of a corporation. preferred voting or any other class of shares. capital stock consists of all classes of shares issued to stockholders. Preferred shares. creating or increasing bonded indebtedness. preferred non-voting." Likewise. is essential. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60% of whose capital is Filipino-owned. denied the right to vote in the election of directors. (6) adoption. are entitled to vote on the following corporate matters: (1) amendment of articles of incorporation. guarantees effective Filipino control of public utilities. it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares. while preferred shares may be denied such right. (7) merger and consolidation. if a corporation. (4) sale. common shares as well as preferred shares. (5) investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized. lease. but disallows denial of the right to vote in specific corporate matters. coupled with appropriate voting rights. if a corporation issues only a single class of shares. Thus. issues a mixture of common and preferred non-voting shares.

Article XII of the Constitution contravenes the letter and intent of the Constitution. could not control similar corporations in these countries. and in the ownership and control of public utilities. coupled with full beneficial ownership of stocks. in the United States of America. Full beneficial ownership of the stocks. The FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals. No economic suicide happened when control of public utilities and mining corporations passed to Filipinos’ hands upon expiration of the Parity Amendment. PLDT was one of the American-controlled public utilities that became Filipinocontrolled when the controlling American stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974. the FIA clarifies. At least the Parity Amendment. as well as with full beneficial ownership. owning most of the non-voting shares. or corporations or associations at least 60% of whose capital with voting rights belongs to Filipinos. Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity Amendment. and to own and control public utilities. be they Indonesians. which contained the same 60 % Filipino ownership and control requirement as the present 1987 Constitution. . respondents’ interpretation will ultimately result in handing over effective control of our national economy to foreigners in patent violation of the Constitution. Final Word The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. There was bitter opposition to the Parity Amendment and many Filipinos eagerly awaited its expiration. Article XII of the 1987 Constitution refers to shares with voting rights. who are defined in the Foreign Investments Act of 1991 as Filipino citizens. translates to effective control of a corporation. gave the capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources. mere legal title is not enough to meet the required Filipino equity. Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment. had to be amended to give Americans parity rights with Filipinos. Here. effectively giving foreigners parity rights with Filipinos. movants’ interpretation opens up our national economy to effective control not only by Americans but also by all foreigners. in the Philippines. which gave Americans the same rights as Filipinos in the exploitation of natural resources. reiterates and confirms the interpretation that the term "capital" in Section 11. even in the absence of reciprocal treaty arrangements." In effect. Therefore. even if they have the capital. In late 1968. Malaysians and Chinese nationals could effectively control our mining companies and public utilities while Filipinos. without any reciprocal arrangements. Any other construction of the term "capital" in Section 11. movants’ interpretation would effectively mean a unilateral opening up of our national economy to all foreigners. Any other meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to Philippine nationals. This is precisely because the right to vote in the election of directors. making Filipinos second-class citizens in their own country. but this time even without any amendment to the present Constitution. coupled with appropriate voting rights is essential. will exercise greater control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders. That would mean that Indonesians.foreigners. Consistent with such State policy. the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals. To do this the 1935 Constitution. Worse. as implemented by the Laurel-Langley Agreement. Malaysians or Chinese.

This Court has no power to amend the Constitution for its power and duty is only to faithfully apply and interpret the Constitution. 2007. 1973 and 1987 Constitutions have the same 60% Filipino ownership and control requirement for public utilities like PLOT. On January 2. Inc. WHEREFORE. Any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment. took interest in mining and exploring certain areas of the province of Palawan. Region IV-B. it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. . 2006. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI. Nevertheless.The 1935. Tesoro and McArthur. assigned to petitioner McArthur. a domestic corporation organized and existing under Philippine laws. Tesoro and Narra are owned and controlled by MBMI Resources. which are reserved only for Filipino citizens. Additionally. Petitioners averred that they were qualified persons under the Philippine Mining Act. Redmont alleged that at least 60% of the capital stock of McArthur. ◆ This case talks about the Grandfather rule NARRA NICKEL MINING AND DEVELOPMENT CORP VS REDMONT CONSOLIDATED MINES. (Redmont). In the petitions. They asserted that though MBMI owns 40% of the shares of PLMC (which owns 5. Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB. SMMI was issued the permits applies for. we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained. After inquiring with the Department of Environment and Natural Resources (DENR). through its predecessor-in-interest Sara Marie Mining. Inc.997 shares of Narra).40% of the shares of MMC (which owns 5. a 100% Canadian corporation. SMMI subsequently conveyed. respondent Redmont Consolidated Mines Corp.997 shares of McArthur) and 40% of the shares of SLMC (which. 21 APRIL 2014 Facts: Sometime in December 2006. (SMMI) filed an application for an MPSA and Exploration permit with the Mines and Geo-Sciences Bureau (MGB). Redmont reasoned that since MBMI is a considerable stockholder of petitioners. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and. they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical Assistance Agreements (FTAA) which are granted to foreign-owned corporations. transferred and assigned its rights and interest over the said MPSA application to Tesoro.R NO. they were likewise disqualified from engaging in mining activities through MPSAs. DENR on January 6. Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners’ applications for MPSA. in turn. it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra. (MBMI). 195580. Another MPSA application of SMMI was filed with the DENR. they claimed that the issue on nationality should not be raised since McArthur. G. Petitioner McArthur. 1992. Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. on November 6.

50% of the capital stock or capital of the corporation or partnership." Thus. 2012 where they . a corporation composed of 100% Canadians. MBMI. Thus.000 shares shall be recorded as belonging to aliens. but if the percentage of Filipino ownership in the corporation or partnership is less than 60%. 3 of RA 7042 or the Foreign Investments Act of 1991. Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. POA issued a resolution disqualifying petitioners from gaining MSPAs. all of the shares shall be recorded as owned by Filipinos.owns 5. if 100. it is clear that one common controlling investor in all mining corporations involved x x x is MBMI. Issue: WON the CA erred in applying the Grandfather test in determining the nationality of the petitioners Held: Grandfather test — The main issue in this case is centered on the issue of petitioners’ nationality. whether Filipino or foreign.000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital.997 shares of Tesoro). The CA found that there was doubt as to the nationality of petitioners when it realized that petitioners had a common major investor." embodied in Sec. Thereafter. In the same Resolution. the CA looked into their corporate structures and their corresponding common shareholders. 77 of RA 7942. it recommended the rejection of petitioners’ MPSA applications by the Secretary of the DENR. belongs to Filipino citizens. or say. it gave due course to Redmont’s EPAs. only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. or privies-in-interest of. 020. 2008. of which belong to Filipino citizens. the CA discovered that MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint venture agreements. the CA used the "grandfather rule" to determine the nationality of petitioners. they stressed that Redmont has no personality to sue them because it has no pending claim or application over the areas applied for by petitioners. (emphasis supplied) In determining the nationality of petitioners. they had been adamant in insisting that they were Filipino corporations. Using the grandfather rule. adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation of natural resources. the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and. It provided: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. respectively. Furthermore. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not enumerated in Sec. Series of 2005. Tesoro and Narra are also in partnership with. MBMI. The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI. on February 7. until they submitted their Manifestation and Submission dated October 19. respectively. a 100% Canadian company and declared their MPSAs null and void. the POA issued an Order denying the Motion for Reconsideration filed by petitioners. only 50. as a consequence. The CA found that through a "web of corporate layering. Finally. But if less than 60%. it concluded that petitioners McArthur. In their previous petitions. the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the nationality of a corporation is the "control test.

provides: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. 50% of the capital stock or capital of the corporation or partnership. there is a need to determine the nationality of petitioner corporations. all of the shares shall be recorded as owned by Filipinos. adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens. They further claim that the grandfather rule "has been abandoned and is no longer the applicable rule. or a domestic partnership or association wholly owned by the citizens of the Philippines. The first part of paragraph 7. otherwise known as the Foreign Investments Act (FIA). a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits. 3 of the FIA does not provide for it. On the other hand. Prior to this recent change of events.000 shares shall be counted as owned by Filipinos and the other 50. at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the Board of Directors. Thus. as amended by RA 8179. has no leg to stand on in the instant case since the definition of a "Philippine National" under Sec. more stringent grandfather rule." pertains to the stricter. 020. respectively.000 shall be recorded as belonging to aliens. the second part of the DOJ Opinion which provides. "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%.) The term Philippine national shall mean a citizen of the Philippines. only the number of shares corresponding to such percentage shall be counted as Philippine nationality. belongs to Filipino citizens. petitioners were constant in advocating the application of the "control test" under RA 7042. Thus. The pertinent provision under Sec. only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." pertains to the control test or the liberal rule.As used in this Act: a. rather than using the stricter grandfather rule. DOJ Opinion No. but if the percentage of Filipino ownership in the corporation or partnership is less than 60%. Paragraph 7 of DOJ Opinion No. 3 of the FIA provides: SECTION 3.” They also opined that the last portion of Sec.000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital. Definitions. petitioners reasoned. where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided. Petitioners claim that the clear and unambiguous wordings of the statute preclude . Basically. stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. But if less than 60%. 3 of the FIA admits the application of a "corporate layering" scheme of corporations. 020.stated the alleged change of corporate ownership to reflect their Filipino ownership. there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. or say. (emphasis supplied) *The grandfather rule. only 50. if 100. Series of 2005. . respectively. That were a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise. in order that the corporation shall be considered a Philippine national. of which belong to Filipino citizens.

but if it is used to circumvent the Constitution and pertinent laws. flora and fauna. 020. Series of 2005 provides: The abovequoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes. DOJ Opinion No. development. x x x x The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for large-scale exploration. 3 of the FIA will have no place of application. 2 of the Constitution provides: Sec. Elementary in statutory construction is when there is conflict between the Constitution and a statute. the Constitution will prevail. wildlife. waters. (emphasis supplied) The emphasized portion of Sec. based on real contributions to the economic growth and general welfare of the country.the court from construing it and prevent the court’s use of discretion in applying the law. such agreements are only allowed corporations or associations "at least 60% of such capital is owned by such citizens. and utilization of minerals. Sec. We disagree. development. specifically pertaining to the provisions under Art. fisheries. minerals. All lands of the public domain. The State may directly undertake such activities." It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present. Likewise. there is a need to ascertain the nationality of petitioners since. and utilization of natural resources with entities who are deemed Filipino due to 60 % ownership of capital is pertinent to this case. Further. and other natural resources are owned by the State. and other mineral oils according to the general terms and conditions provided by law. In such agreements. renewable for not more than twenty-five years. Sec. all forces of potential energy. As decreed by the honorable framers of our Constitution. or it may enter into coproduction. petroleum. "Corporate layering" is admittedly allowed by the FIA. They said that the plain. XII of the Constitution on National Economy and Patrimony. The exploration. the pronouncement of petitioners that the grandfather rule has already been abandoned must be discredited for lack of basis. With the exception of agricultural lands. Such agreements may be for a period not exceeding twenty-five years. development. among others. joint venture or production-sharing agreements with Filipino citizens. as the Constitution so provides. 2. then it becomes illegal. forests or timber. 2 which focuses on the State entering into different types of agreements for the exploration. Art. The said rules thus provide for the determination of nationality . literal meaning of the statute meant the application of the control test is obligatory. or corporations or associations at least sixty per centum of whose capital is owned by such citizens. XII. In this instance. petroleum and other mineral oils. since the issues are centered on the utilization of our country’s natural resources or specifically. mining. coal. of determining compliance with nationality requirements (the ‘Investee Corporation’). the grandfather rule prevails and must be applied. all other natural resources shall not be alienated. and under such terms and conditions as may be provided by law. the State shall promote the development and use of local scientific and technical resources. Thus. paragraph 7. and utilization of natural resources shall be under the full control and supervision of the State. Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’).

the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipinoforeign equity ownership is in doubt (i. (emphasis supplied) After a scrutiny of the evidence extant on record. 20. as ruled by the POA and affirmed by the OP.. "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%.foreign equity ownership is not in doubt. doubt prevails and persists in the corporate ownership of petitioners.. and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states. McArthur and Tesoro. where the 60-40 Filipino. "grandfathered") to determine the total percentage of Filipino ownership.depending on the ownership of the Investee Corporation and. The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. doubt is present in the 60-40 Filipino equity ownership of petitioners Narra. It would be senseless for these applying corporations to state in their respective articles of incorporation that they ." Under the Strict Rule or Grandfather Rule Proper. as found by the CA. the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation x x x. there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. later coined by the SEC as the Control Test in its 30 May 1990 Opinion. there are two cases in determining the nationality of the Investee Corporation.’ Under the liberal Control Test. ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. funded them. in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 6040% Filipino-alien or the 59% less Filipino). However. the combined totals in the Investing Corporation and the Investee Corporation must be traced (i. Stated differently. only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. the Court finds that this case calls for the application of the grandfather rule since.e. since their common investor. based on the said SEC Rule and DOJ Opinion. Under the above-quoted SEC Rules.e. Also. the Grandfather Rule will not apply. the Investing Corporation. xxxx In other words. Moreover. DOJ Opinion No. petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%. The first case is the ‘liberal rule’. which petitioners quoted in their petition. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. only made an example of an instance where "doubt" as to the ownership of the corporation exists. the 100% Canadian corporation––MBMI. in certain instances. The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court.

the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2. Agcaoili.900).e." "Amount Subscribed. when it is "grandfathered. Oddly. down to the last centavo. McArthur acquired its MPSA application from MMC. the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law.809. McArthur. Esguerra (Esguerra). Michael T. it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Fernando B." "Number of Shares. Again. direct or indirect. MBMI. Lauro L. — To establish the actual ownership. Mason (Mason) and Kenneth Cawkell (Cawkell): Noticeably. Inc." company layering was utilized by MBMI to gain control over McArthur. It states that Olympic entered into joint venture agreements with several Philippine companies. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. Salazar.000 per share." As previously discussed. of MBMI. the presence of identical stockholders. Salazar (Salazar). To determine. Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares they subscribed to in the corporation. we take note that it has a similar structure and composition as McArthur. Hernando. as demonstrated below: xx Except for the name "Sara Marie Mining." the table above shows exactly the same figures as the corporate structure of petitioner McArthur. All the other shareholders are the same: MBMI. It is apparent that MBMI has more than 60% or more equity interest in McArthur. creating a cloud of doubt in the Court’s mind. Accordingly. therefore.000) divided into ten thousand (10. which acquired its MPSA application from SMMI.000) divided into 10. has a capital stock of ten million pesos (PhP 10. making the latter a foreign corporation.. The figures under "Nationality.794. Esguerra. After subsequently studying SMMI’s corporate structure. after "grandfathering" petitioner Tesoro and factoring in . — Tesoro. Esguerra. various corporate schemes and layerings are utilized to circumvent the application of the Constitution. the actual participation. Inc. McArthur Mining. as demonstrated in this first corporation. subscribed to by the following: xx. The figures under the headings "Nationality. similar nominal shareholders were present. In fact." "Number of Shares. it would seem that MBMI is also a major investor and “controls" MBMI and also. Thus. Mason and Cawkell. namely: Olympic. Interestingly. Tesoro Mining and Development. Amanti Limson (Limson). the grandfather rule must be used. wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties. Inc. interest or participation of MBMI in each of petitioners’ corporate structure. which acquired its application from SMMI. Obviously. they have to be “grandfathered." "Amount Subscribed. McArthur has a capital stock of ten million pesos (PhP 10.000).have less than 60% Filipino stockholders since the applications will be denied instantly." and "Amount Paid" are exactly the same. Salazar. Mason and Cawkell. which is quite absurd since Olympic is the major stockholder in MMC.000 common shares at one thousand pesos (PhP 1." and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2.000) per share.000.000) common shares at PhP 1.000. Thus. i. looking at the corporate structure of MMC.

28 JANUARY 2015 Facts: Before the Court is the Motion for Reconsideration of its April 21. 2014 Decision. . 109703. whether looking at the capital structure or the underlying relationships between and among the corporations. Very simply. the ownership of the "layered" corporations boils down to MBMI. the usual players in petitioners’ corporate structures are present. Narra Nickel Mining and Development Corporation— Moving on to the last petitioner. SP No. Studying MBMI’s Summary of Significant Accounting Policies dated October 31.e. petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.Olympic’s participation in SMMI’s corporate structure. Inc. this Court upheld with approval the appellate court’s finding that there was doubt as to petitioners’ nationality since a 100% Canadian-owned firm. whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. i. thus. the amount of money paid by the 2nd tier majority stock holder. it is quite safe to say that petitioners McArthur. Tesoro Mining and Development. (McArthur). it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro . This makes petitioner Tesoro a non-Filipino corporation and. which denied the Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining Development Corp. we further look and examine PLMDC’s corporate structure: Yet again. owns 60% or more of their equity interests. being foreign corporations. which is the transferee and assignee of PLMDC’s MPSA application. utilization and development of our natural resources. Tesoro. the challenged Decision sustained the appellate court’s ruling that petitioners. is present in this corporate structure. Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with. Inc. SMMI and PLMDC. (MBMI). Narra. a 100% Canadian corporation. Mason. MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI. effectively owns 60% of the common stocks of the petitioners by owning equity interest of petitioners’ other majority corporate shareholders. Such conclusion is derived from grandfathering petitioners’ corporate owners. 2005 explains the reason behind the intricate corporate layering that MBMI immersed itself in: xx Concluding from the above-stated facts. NARRA NICKEL MINING AND DEVELOPMENT CORP VS REDMONT CONSOLIDATED MINES. 2011 Resolution of the Court of Appeals (CA) in CA-G.R. MBMI. (PASRDC).are not entitled to Mineral Production Sharing Agreements (MPSAs). along with other nominal stockholders. 2010 Decision and February 15. In effect. Again. PLMDC and Narra. Noticeably. Agcaoili and Esguerra. (Tesoro). G. Tesoro and Narra are not Filipino since MBMI. is zero.R NO. and affirmed the October 1. 195580. (Narra). Palawan Alpha South Resources and Development Corp. disqualifies it to participate in the exploitation. Going further and adding to the picture. and McArthur Mining Inc. MBMI Resources. in this case. Patricia Louise Mining & Development Corporation — Using the grandfather method. practically exercising majority control over the corporations mentioned. namely: MMC.. In reaching its conclusion. Similarly.

— To petitioners.”(emphasis supplied) With that. in cases where corporate shareholders are present. therefore. It cannot. is computed. The application of the Grandfather Rule in the present case does not eschew the Control Test. Art. the use of the Grandfather Rule as a “supplement” to the Control Test is not proscribed by the Constitution or the Philippine Mining Act of 1995. the Foreign Investments Act of 1991 (FIA). 2014 Decision. like the exploration and development of natural resources. When in the mind of the Court. development. Consistent with this objective. Art. 2. petitioners have misread. in the 60-40 Filipino equity ownership in the corporation. These laws and rules supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of determining compliance with Sec. development and utilization of the natural resources of the Philippines. the Court’s April 21. then it may apply the “grandfather rule. the Philippine Mining Act of 1995.” Similarly. — To reiterate. 2. — Clearly. XII of the Constitution be given effect. by attributing the nationality of the second or even subsequent tier of ownership to . 2. As further defined by Dean Cesar Villanueva. Art. to borrow Justice Leonen’s term. The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution. the Court used the Grandfather Rule as a “supplement” to the Control Test so that the intent underlying the averted Sec. be denied that the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly nationalized activities. and the Rules issued by the Securities and Exchange Commission (SEC).2. Art. Sec. and failed to appreciate the clear import of. the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution. The following excerpts of the April 21. within the ambit of Sec. based on the attendant facts and circumstances of the case. XII of the 1987 Constitution. XII of the Constitution that only “corporations or associations at least sixty per centum of whose capital is owned by such [Filipino] citizens” may enjoy certain rights and privileges. and utilization of natural resources to Filipino citizens and “corporations or associations at least sixty per centum of whose capital is owned by such citizens. XII of the Constitution reserves the exploration. provided for under the Constitution and other nationalization laws. the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino corporation. 2014 Decision cannot be clearer: In ending. Nowhere in that disposition did the Court foreclose the application of the Control Test in determining which corporations may be considered as Philippine nationals. the Grandfather Rule was originally conceived to look into the citizenship of the individuals who ultimately own and control the shares of stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership. Section 3(aq) of the Philippine Mining Act of 1995 considers a “corporation xxx registered in accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines” as a person qualified to undertake a mining operation. the Grandfather Rule is “the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities.Held: The application of the Grandfather Rule is justified by the circumstances of the case to determine the nationality of petitioners. Instead. there is doubt. entitled to undertake the exploration.

(3) Lastly. for purposes of the Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources. xxxx Accordingly. which the Commission has been consistently applying prior to the 1990s. the constitutional requirement of 60% ownership by Philippine citizens is violated.” Thus. the joint mining venture is 87. Indeed. 2010 (SEC Opinion 10-31).]. of that investor-corporation in order to determine if the Constitutional and statutory restrictions are complied with. Thus.” Article III. i. 10-31 dated December 9. natural persons. only natural persons are susceptible of citizenship. Palting. (2) MEDC.96% owned by Philippine citizens. In other words. In SEC-OGC Opinion No. Section 1 of the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. If the shares of stock of the immediate investor corporation is in turn held and controlled by another corporation. the framers of the Constitution intended for the “grandfather rule” to apply in case a 60%-40% Filipino-Foreign equity corporation invests in another corporation engaging in an activity where the Constitution restricts foreign participation. in turn. while it is only 12. we opine that we must look into the citizenship of the individual stockholders. while MML owns the remaining 40%. MOHC owns 60% of PHILSAGA.owns 60% equity in MOHC. while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s controlled nominees. San Jose Petroleum [Inc. there can be no other Philippine citizens other than those falling within the enumeration provided by the Constitution. (emphasis supplied) . both the direct and indirect shareholdings in the corporation are determined. we must delve into the citizenship of the individual stockholders of each corporation. The Court held that a corporation investing in another corporation engaged in a nationalized activity cannot beconsidered as a citizen for purposes of the Constitutional provision restricting foreign exploitation of natural resources: xxx Accordingly. Thus.the SEC applied the Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement of the Control Test.e. to arrive at the actual Filipino ownership and control in a corporation.determine the nationality of the corporate shareholder. while MML owns the remaining 40%. viz: You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in MEDC. This is the strict application of the grandfather rule. under the structure you represented. You provide the following figure to illustrate this structure: xxxx We note that the Constitution and the statute use the concept “Philippine citizens. if there are layers of intervening corporations investing in a mining joint venture. The Supreme Court En Banc confirms this [in]… Pedro R. then we must look into the citizenship of the individual stockholders of the latter corporation. In other words. vs. Obviously. a corporation investing in a mining joint venture can never be considered as a Philippine citizen.04 % foreign owned.

000.00 out of its total subscription cost of P3. out of the authorized capital stock of Patricia Louise.00 out of its total subscription cost of P3.996. But the constitutional provision. out of the authorized capital stock of Madridejos. (3) OMDC and MBMI subscribed to 6.000. and MBMI subscribed to 6. et al. S. one should not stop where the percentage of the capital stock is 60%.900. the Department of Justice (DOJ). provided practically all the funds of the remaining appellee-corporations.00. Palawan Alpha paid nothing for this subscription while MBMI paid P2.00 out of its total subscription cost of P3.000. xxxx The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Thus. has favored foreigners contrary to the command of the Constitution. of foreigners in a corporation engaged in a nationalized activity or business.996 shares. OMDC paid nothing for this subscription while MBMI paid P2. therefore. Falcon Ridge paid nothing for this subscription while MBMI paid P2.500.331. (“Falcon Ridge”). This confusion springs from the erroneous assumption that the use of one . in the eponymous Redmont Consolidated Mines Corporation v. respectively. and (4) Falcon Ridge Resources Management Corp. an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino equity requirement vis-à-vis the Control Test. exists in the instant case because the foreign investor. as interpreted and practiced via the 1967 SEC Rules. The SEC en banc held that to attain the Constitutional objective of reserving to Filipinos the utilization of natural resources. 144. out of the authorized capital stock of Sara Marie. (“Palawan Alpha”).663 and 3. MBMI. even if the 60-40 Filipino equity requirement appears to have been satisfied.331 shares. the SEC en banc applied the Grandfather Rule despite the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino equity requirement. Thus: [D]oubt. in its Opinion No.331 shares..796. Thus.596 and 3. however.000.000. another domestic corporation.998. however.663 and 3. respectively. of 1977. respectively.331. both direct and indirect. The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second or even the subsequent tier of ownership hews with the rule that the “beneficial ownership” of corporations engaged in nationalized activities must reside in the hands of Filipino citizens. respectively. and MBMI subscribed to 5. The records disclose that: (1) Olympic Mines and Development Corporation (“OMDC”).998 shares. however. pursuant to the afore-quoted DOJ Opinion.00. the Grandfather Rule must be applied to accurately determine the actual participation.794. Hence. the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. Necessarily. a domestic corporation.Similarly. — Admittedly..000. stated that an agreement that may distort the actual economic or beneficial ownership of a mining corporation may be struck down as violative of the constitutional requirement. we believe. also a domestic corporation.997 and 3. OMDC paid nothing for this subscription while MBMI paid P2.00. viz: xxx Application of the Grandfather Rule with the Control Test. McArthur Mining Inc. the Grandfather Rule must be used.00 out of its total subscription cost of P3.000.803. and MBMI subscribed to 6. out of the authorized capital stock of San Juanico.00. however. (2) Palawan Alpha South Resource Development Corp.

That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner. In that instance. a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. opinions. it is only when the Control Test is first complied with that the Grandfather Rule may be applied. As exemplified by the above rulings. as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Thus. Series of 1984. as it has been. Hence. 165. while being minority stockholders. That the foreign investors. That the foreign investors undertake to provide practically all the technological support for the joint venture. the corporation is immediately considered foreign-owned. or more bluntly. as the mining operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.method forecloses the use of the other. 2012 Decision. The Control Test and the Grandfather Rule are not. applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. 3. should not be used to determine the Filipino ownership and control in a corporation. even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation. As provided in DOJ Opinion No. a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary. does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee corporation or the application of the Grandfather Rule. Rather. these methods can. as it were. The Grandfather Rule. if the subject corporation’s Filipino equity falls below the threshold 60%. “doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. standing alone. As explained in the April 21.cha 2. Put in another manner. be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities. Rather. a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control. incompatible ownership-determinant methods that can only be applied alternative to each other. in which case. which applied the pertinent provisions of the Anti-Dummy Law in relation to the minimum Filipino equity requirement in the Constitution. the “doubt” that demands the application of the Grandfather Rule in addition to or in tandem with the Control Test is not confined to. These indicators are: 1. if appropriate. manage the company and prepare all economic viability studies. On the other hand.” In this case. 2014 Decision. the Control Test can be. the need to resort to the Grandfather Rule disappears. “significant indicators of the dummy status” have been recognized in view of reports “that some Filipino investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by foreign investors” specifically in joint ventures for national resource exploitation. As a corollary rule. decisions and this Court’s April 21. In the Matter of the Petition for Revocation of the Certificate of Registration of .

01% Filipino ownership in petitioner McArthur. a further investigation and dissection of the extent of the ownership of the corporate shareholders through the Grandfather Rule is justified. that the application of the Grandfather Rule cannot go beyond the level of what is reasonable. as compared to 59. the Filipinos’ control and economic benefits in petitioner Tesoro (through Sara Marie) fall below the threshold 60%. 000 common shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos). Again. the SEC suggested applying the Grandfather Rule on two (2) levels of corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges. “a reasonable investor would expect to have greater control and economic rights than other investors who invested less capital than him. McArthur — Petitioner McArthur follows the corporate layering structure of Tesoro. The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie and Tesoro since. with only 40.” The application of the Grandfather Rule is clearly called for. Parenthetically. as 59. breached the maximum limit of 40% ownership in petitioner McArthur. while 39.98% belonged to the Canadian MBMI. — In the Decision subject of this recourse. MBMI. the SEC had already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate shareholders may be applied. the SEC held that when foreigners contribute more capital to an enterprise. doubt exists as to the actual control and ownership of the subject corporation even if the 60% Filipino equity threshold is met. and as will be shown below.Linear Works Realty Development Corporation. A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their investing corporate stockholders. the Court applied the Grandfather Rule to determine the matter of true ownership and control over the petitioners as doubt exists as to the actual extent of the participation of MBMI in the equity of the petitioners and their investing corporations. and as shown below. even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio. In a 1977 internal memorandum. it is clear that petitioner . as observed by the SEC. the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and McArthur. doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in petitioners Narra. As with petitioner Tesoro. it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings to the point when natural persons hold rights to the stocks may very well lead to an investigation ad infinitum. Inc. and to three (3) levels for closely held corporations or the shares of which are not traded in the stock exchanges. The application of the Grandfather Rule is clearly called for. Tesoro.99% foreign ownership of its shares. viz. Suffice it to say in this regard that. rendering the petitioner disqualified to an MPSA.97% of its 10. San Jose Petroleum . while the Grandfather Rule was originally intended to trace the shareholdings to the point where natural persons hold the shares. and McArthur. Hence.along with the other foreign shareholders. As will be discussed. These limits comply with the requirement in Palting v.

(SEC Memo No. as Justice Leonen puts it. PASRDC did not pay for any of its subscribed shares.000 common shares of each of the petitioners. WESTMONT BANK. In the course of their acquaintance. it is clear that the Filipino ownership in petitioner Narrafalls below the limit prescribed in both the Constitution and the Philippine Mining Act of 1995. Dela Rosa-Ramos got acquainted with its Signature Verifier. Art. Tan offered Dela Rosa-Ramos a "special arrangement" wherein he would finance or place sufficient funds in her checking/current account whenever there would be an overdraft or when the amount . Cristo Branch. at all times. Article XII of the Constitution. It must be noted that the foregoing determination and computation of petitioners’ Filipino equity composition was based on their common shareholdings. [thus] it must be assumed that all such shares have voting rights.75% of PLMDC’s paid-up capital. DOMINGO TAN AND WILLIAM CO. AND (b) the total number of outstanding shares of stock. items a) and b) in SEC Memo No. the required percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the election of directors. NOW UNITED OVERSEAS BANK PHILIPPINES VS MYRNA DELA ROSA-RAMOS. All covered corporations shall. the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.64% Filipino ownership of its shares. 8 both refer to the 10. 8. 8) Section 2 of which states: Section 2. In fact. Manila. Binondo.R. for purposes of this case.” It cannot therefore be gainsaid that the foregoing computation hewed with the pronouncements of Gamboa. not preferred or redeemable shares. Series of 2013. whether or not entitled to vote in the election of directors. the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA. Yet again. as compared to only 39.” Thus. 59. In her several transactions with the Bank.36% foreign ownership in petitioner Narra. And as will be shown. G.000 common shares. Section 6 of the Corporation Code of the Philippines explicitly provides that “no share may be deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares. XII of the Constitution. there is no indication that herein petitioners issued any other class of shares besides the 10.97% of its shares belonged to Patricia Louise Mining & Development Corporation (PLMDC).98% of its shares. respondent Domingo Tan. Neither is it suggested that the common shares were further divided into voting or non-voting common shares. For purposes of determining compliance therewith. and there is no need to separately apply the 60-40 ratio to any segment or part of the said common shares. as implemented by SEC Memorandum Circular No. NO 160260 Facts: From 1986. With 60. 2. Hence.” Further. the application of the Grandfather Rule is justified. there is “no indication that any of the shares x x x do not have voting rights. while MBMI contributed 99. Thus. Narra — As for petitioner Narra. it is clear that petitioner Narra does not comply with the minimum Filipino equity requirement imposed in Section 2. while Canadian MBMI held 39. observe the constitutional or statutory requirement.McArthur does not comply with the minimum Filipino equity requirement imposed in Sec. respondent Myrna Dela Rosa-Ramos (Dela Rosa-Ramos) maintained a checking/current account with the United Overseas Bank Philippines (Bank) at the latter's Sto. This fact creates serious doubt as to the true extent of MBMI’s control and ownership over both PLMDC and Narra since “a reasonable investor would expect to have greater control and economic rights than other investors who invested less capital than him. Hence.

with a threat to expose her relationship with a married man. Later. despite the obvious superimposed date. 1988. It was their arrangement to make sure that the checks she would issue would not be dishonored. he "redeposited" it in Co's account. was issued in payment of cigarettes that Dela Rosa-Ramos bought from Co. did not return the bounced check to her. As a result.500.00 he would finance. Check No. deposited in her checking account. to recover from the Bank the sum of P754.66 balance. 613306 for P290. 1988.00 was a "stale" guarantee check. Dela Rosa-Ramos instituted a complaint against Tan and the Bank before the RTC seeking. Check No. This financier-debtor relationship started in 1987 and lasted until 1998. Dela Rosa-Ramos pointed out that as of July 5. 613306 and withdrew her P121.000. was another guarantee check that was also "undated. the latter disclosed that her two checks were deposited in his account to cover for his P432. dated June 10. 613307 for P200. —not proved that there amount deposited in her account was simulated (she said that there was no money deposited so what was withdrawn was her own money and not the one deposited because of check from Lee See Bin) Claiming that the four checks mentioned were deposited by Tan without her consent.989. Dela .00 was. 1988.00. Dela Rosa-Ramos issued postdated checks covering the principal amount plus interest as computed by Tan on specified date.000. was also undated when delivered to Tan who later placed the date. The latter.of said checks would exceed the balance of her current account.00. 7 Relative to their said agreement.00. This check was not returned to her either and. In order to guarantee payment for such funding. There were also times when she just paid in cash. Tan and Co were able to coerce her to replace the two above-mentioned checks with Check No. Tan offered the service for a fee of P50. July 4. Expectedly. Instead. Tan then deposited the check in the account of the other respondent. the amount of P200.66 representing the total amount charged or withdrawn from her current account. 598648 in the amount of P432. 510290 for P232. 1988.00 cash which was taken by Tan.66 which was insufficient to answer for the value of said check. an order to stop payment was issued because of insufficient funds. Tan was able to encash Check No.00 which was equivalent to the total amount of the two dishonored checks.000. Check Nos.689.595. 1987 but was altered to make it appear that it was dated May 8. A check of a certain Lee See Bin in the amount of P170." Dela Rosa-Ramos claimed that it was Tan who placed the date "June 14. William Co (Co).989. 467322 for P200. This check allegedly "bounced" so she replaced it with her "good customer's check and cash" and gave it to Tan.500.000. The check was originally dated August 28. Check No.500. Dela Rosa-Ramos issued and delivered to Tan the following Associated Bank checks 8 drawn against her current account and payable to "cash. the words "PAYMENT STOPPED" were stamped on both sides of the check.00 or the value indicated in the check was eventually charged against her checking account." to wit: According to Dela Rosa-Ramos. Then. 1988. however. among other things.000. When Dela Rosa-Ramos got the opportunity to confront Co regarding their deposit of the two checks. As a result. Check No.00 a day for every P40. 510290 and 613307 were both dishonored for insufficient funds. it was "redeposited" in Co's account." For this check. instead. however. Dela Rosa-Ramos found out that the Lee See Bin Check was not funded because the Bank's bookkeeper demanded from her the return of the deficiency. her checking account had P121.

Considering that banks can only act through their officers and employees. who have come to regard them with respect and even gratitude and most of all. given the fiduciary nature of its relationship with Dela Rosa-Ramos. Ignacio. Held: It must be remembered that public interest is intimately carved into the banking industry because the primordial concern here is the trust and confidence of the public. required to treat the accounts and deposits of these individuals with meticulous care. The rationale behind this is well-expressed in Sandejas v.Domingo tan and William Co.Rosa-Ramos subsequently amended her complaint to include Co. The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society — banks have attained a ubiquitous presence among the people. That they were the ones who gained at the expense of Dela Rosa-Ramos will not excuse it of its fundamental responsibility to her. it was the employees who directly dealt with Dela Rosa-Ramos. That matter being settled. definitely more than that of a reasonable man or a good father of a family. banks must ensure that their employees observe the same high level of integrity and performance for it is only through this that banks may meet and comply with their own fiduciary duty. the Bank. As stated by the RTC. It has been repeatedly held that "a bank's liability as an obligor is not merely vicarious. It is. not only in the selection. the next matter to be determined is the amount of liability . The CA affirmed this ruling. As found by both the RTC and the CA. Having a number of employees commit mistake or gross negligence at the same situation is so puzzling and obviates the appellant bank's laxity in hiring and supervising its employees. The factual circumstances attending the repeated irregular entries and transactions involving the current account of the plaintiff-appellee is evidently due to. Thus. This fiduciary nature of every bank's relationship with its clients/depositors impels it to exercise the highest degree of care. if not connivance. Hence. The RTC sentenced Associated bank. but also in the supervision of its employees. this Court is of the opinion that the appellant bank should be held liable for the damages suffered by the plaintiff-appellee in the case at bench. now Westmont bank and defendants . banks should guard against injury attributable to negligence or bad faith on its part. gross negligence of other bank officers since the repeated assailed transactions could not possibly be committed by defendant Tan alone considering the fact that the processing of the questioned checks would pass the hands of various bank officers who positively identified their initials therein. Thus. Indeed. even if it is their employees who are negligent. confidence. Guided by the following standard. the fiduciary obligation laid down for these institutions necessarily extends to their employees. Ramos was defrauded and she lost her money because of the negligence attributable to the Bank and its employees. and it is for this reason. should have exerted every effort to safeguard and protect her money which was deposited and entrusted with it. but the Bank cannot distance itself from them. but primary" since they are expected to observe an equally high degree of diligence. to pay Dela Rosa-Ramos. the bank's responsibility to its client remains paramount making its liability to the same to be a direct one. therefore.

did not stop. . avoid its unwarranted deposit in defendant-Co's account and its corollary loss from plaintiff's deposit. 1988 in accordance with Section 125 of the Negotiable Instruments Law. it hastened to add: A careful scrutiny of the evidence shows that indeed the date of Check No. On matter. even excepting TAN. that no manifest irregularity exist as shown from the Statement of Accounts for the month of July 1988 that as of July 4. 613307. was deposited on the account of the plaintiff-appellee and on the very same day Check No. . 613306. and is considered as good as cash if funded.00-check. Indeed. In the first place. the more paramount issue is why the Bank through its several competent employees and officers. The replacement check is. 467322 had been materially altered from August 1987 to May 8. double check and ascertain the genuineness of the date of the check which displayed an obvious alteration. 1988. the plaintiffappellee had an outstanding deposit of P121. thus. As the RTC held: . This means that the check was not charged against her account. It is worthy to take note of the fact that such alteration was not countersigned by the drawer to make it a valid correction of its date as consented by its drawer as the standard operating procedure of the appellant bank in such situation as admitted by its Sto. with respect to Check No. Lastly.595. Cristo Branch. the Court agrees with the CA when it found: . It was also cleared therein that. through the check of Lee See Bin with the same UNITED OVERSEAS BANK-Sto. 613307 as well as for Check No. may be withdrawn on the very same day it was deposited. had its other employees. It argues that her continued acts of dealing and transacting with the Bank like subsequently issuing checks despite her experience with this check only shows her acquiescence which is tantamount to giving her consent.of the Bank. the admission made by Dela Rosa-Ramos that she had to issue a replacement check for Check No.00. the Court agrees with the Bank. Cristo Branch manager. 510290 only proves that these checks were never paid and charged or debited against her account.000. performed their duties efficiently and well… The glaring error did not escape the observation of the CA either.66. Mil(l)an… On Check No. In this regard. This failure on the part of the Bank makes it liable for that loss. P170. . 613306 in the amount of P290. Mabini Z. . on July 5. the Bank argues that the CA erred in considering that the said check was debited against the account of Dela Rosa-Ramos when the fact was that it was dishonored for having been drawn against insufficient funds. the Bank avers that Dela Rosa-Ramos' acquiesced to the change of the date in the said check. *As regards Cheek No. Rather than ask and wonder why there were indeed subsequent transactions.000. hence. Obviously. defendant-bank is not faultless in the irregularities of its signatureverifier. 1988. 467322. it should have readily rejected the obviously altered plaintiff's P200. the Bank has not taken to heart its fiduciary responsibility to its clients. of course. a totally different matter and is not covered as an issue in this case.00 was approved and processed and its equivalent was debited from the account of the plaintiff-appellee since the check is an 'on-us' check which is deposited to an account of another with the same branch as that of the drawer of the said check.989.

588. (ASELCO) for the amount of P6. the electric power supply for the two mini-sawmills owned and operated by respondent. While the Bank reneged on its responsibility to Dela Rosa-Ramos. exemplary damages. 275080. . respondent issued three checks from May 9 to May 16. 15. EQUITABLE PCI BANK VS ARCELITO TAN. (ANECO) for the amount of P6.000. As a result of the dishonor of Check Nos. Carbon Branch..68. 1992. Considering that Tan was primarily responsible for the damages caused to Dela Rosa-Ramos.00. 275100 was a postdated check in payment of Bills of Lading Nos. was cut off on June 1.427. specifically. After clearing. the Bank should only pay 50% of the actual damages awarded while Dela Rosa-Ramos should have to shoulder the remaining 50%. When presented for payment. 1992 in the amount of P34. the Bank can seek compensation from his estate. 1992. She unfortunately failed to discharge this burden. AUGUST 23.00. and in Golden Ribbon. He also prayed for payment of moral damages.864. This must be further tempered down for there is no denying that it was Dela Rosa-Ramos who exposed herself to risk when she entered into that "special arrangement" with Tan. she is nevertheless equally guilty of contributory negligence. 275097 and 314014 were dishonored for being drawn against insufficient funds. Withal. 275100. the amount of the check was immediately debited by petitioner from respondent's account thereby leaving him with a balance of only P558. 275080 dated May 9. PCIB Check Nos. Butuan City. the Bank should only be made to answer the value of Check No. 165339. respectively.472.00 plus the legal rate of interest. Inc. Tan maintained a current and savings account with Philippine Commercial International Bank (PCIB). Inc.000. located in Talacogon. 1992. 275100 postdated May 30. 1992. It has been held that where the bank and a depositor are equally negligent. Meanwhile. Agusan del Sur. 314104 dated May 16. and it was restored only on July 20 and August 24. respondent's balance with petitioner was P35. payable to Agusan del Sur Electric Cooperative. 1992.72 in favor of Sulpicio Lines. they should equally suffer the loss. respondent filed with the Regional Trial Court (RTC) of Cebu City a complaint against petitioner. attorney's fees and litigation expenses. The two must both bear the consequences of their mistakes.01. subject to the applicable laws and rules. 1992.500. now petitioner Equitable PCI Bank. 467322 in the amount of P200.R.59. 275097 dated May 10. Inc. respectively. respondent issued PCIB Check No. Sulpicio Lines. Due to the foregoing. PCIB Check No. praying for payment of losses consisting of unrealized income in the amount of P1. 275080 and 275097 which were payable to ASELCO and ANECO.147. respectively. and PCIB Check No. and that his account with petitioner would have had sufficient funds to cover payment of the three other checks were it not for the negligence of petitioner in immediately debiting from his account Check No. deposited the aforesaid check to its account with Solid Bank. 1992 payable in cash for the amount of P10. 1992 and May 28. Thus. On May 14. 16 and 17. PCIB Check No. The burden of proof was on Dela Rosa-Ramos to establish that Lee See Bin was fictitious and that the money which purportedly came from him was merely simulated. On May 13. Inc. 2010 Facts: Respondent Arcelito B.The Court has reviewed the findings of the RTC on the matter and agrees with the CA that there was no irregularity.8. Cebu City. 1992. As of May 14. 1992 payable to Agusan del Norte Electric Cooperative. G. Respondent claimed that Check No.

From the manner by which the date of the check is written. An examination of bill of lading no. As a consequence of petitioner's error. Bill of Lading No. 1992 as claimed by the plaintiff. 15. 275100 was issued in payment of bills of lading nos. 275100 was postdated May 30. not in favor of plaintiff but in favor of Coca Cola Bottlers Philippines. It alleged further that the disconnection of the electric supply to respondent's sawmills was not due to the dishonor of the checks. 16 and 17. even as the said check was postdated to May 30. 275100 is May 3. 15. 1992. We shall re-examine the facts and evidence presented before the lower courts. The RTC ruled that: xxx xxx xxx The issue to be resolved in this case is whether or not the date of PCIB Check No. The CA reversed the decision and directed Equitable to pay Arcelito Tan. petitioner denied that the questioned check was postdated May 30.in the amount of P34. petitioner maintains that the CA erred in reversing the finding of the RTC that Check No. the receipt for the payment of the freight for the shipments reflected in these three bills of lading shows that the freight was paid by Coca Cola Bottlers Philippines. Hence. 1992 and not May 3. and not by plaintiff. the said receipt shows that it was paid in cash and not by check. but for other reasons not attributable to the bank. Furthermore. shows that the same was issued. Moreover. the Court cannot really make a pronouncement as to whether the true date of the check is May 3 or May 30. or May 30. Bill of Lading No. 1992. 16 and 17. unlike the RTC which verified the truth of respondent's testimony relative to the issuance of Check No. the business operations thereof were stopped. Likewise. The date of the check is written as follows — 5/3/0/92.588. 275100 was postdated to May 30. 1992 and claimed that it was a current check dated May 3. the CA just made a visual examination of the check. the check was issued to Sulpicio Lines in payment of bill of lading nos. 1992. 17 shows that it was issued to Jazz Cola and not to plaintiff. without inquiring into the background facts leading to the issuance of said check. 275100 was dated May 3. In its defense. 16 is issued in favor of Suson Lumber and not to plaintiff. According to the plaintiff. Inc. 275100. 1992 and not May 30. 1992. Due to the divergence of the findings of the CA and the RTC. the evidence on record does not support the claim of the plaintiff that Check No. 1992. 15. 1992. which brought about the dishonor of the two checks paid to ASELCO and ANECO. however. Petitioner argued that in arriving at the conclusion that Check No. From the foregoing. the electric supply to his two mini-sawmills was cut off. xxx xxx xxx . 1992.72. Inc. the conclusion of the Court is that the date of the check was May 3. Issue: Held: As to the second issue. Respondent argued that the check was carefully examined by the CA which correctly found that Check No. 1992 as contended by the defendant. and purchase orders were not duly served causing tremendous losses to him.

Although R. A reading of Check No. the RTC concluded that the check was dated May 3. the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive. and the latter would not have suffered losses. 1992 as urged by appellee. We have carefully examined the check in question (Exh. the trial court need not look into the purpose for which the check was issued. we cannot go along with appellee's theory which will lead us to an absurd result. LLLL and GGGG) successively dated May 9. Section 2 of R. 1992 is clearly untenable considering the presence of the figure "0" after "3" and another bar before the year 1992. The purpose for the issuance of the check has no logical connection with the date of the check. On the other hand. DDDD-4).In fine. The presence of the figure "0" after the number "3" is quite significant. 1992. The trial court's conclusion is preposterous and illogical. which is simply absurd. well-defined and bold strokes. 275100 would readily show that it was dated May 30. as respondent claims. Hence.A. And if we were to accept appellee's theory that what we find to be an unintentional mark or line between the figures "3" and "0" is a bar separating the two numbers. would not have been dishonored and the said payees would not have disconnected their supply of electric power to appellant's sawmills. the two other checks (Exhs. It is therefore our conclusion that the check was postdated to May 30. 8791 decrees: Declaration of Policy. because the same check was not issued to pay for Bills of Lading Nos. In fact. The law imposes on banks high standards in view of the fiduciary nature of banking. had not appellee bank prematurely debited the amount of the check from appellant's account before its due date. 1992 and not May 30. 1992 and May 16. 1992 which were paid by appellant to ASELCO and ANECO. 8791 took effect only in the year 2000 . 1992. 1992 and appellee Bank or its personnel erred in debiting the amount of the check from appellant's account even before the check's due date." In other words. respectively. the alleged bar (/) which appellee points out as allegedly separating the numbers "3" and "0. 1992. 16 and 17. The date written on the check clearly appears as "5/30/1992" (Exh." thereby leading it to read the date as May 3. thereby contradicting appellee's theory that the number "3" is separated from the figure "0" by a bar. dynamic and responsive to the demands of a developing economy.A. — The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. Besides. the date of the check would then appear as "5/3/0/1992". a close examination thereof would unerringly show that the said number zero or "0" is connected to the preceding number "3. 1992. we agree with appellant that appellee Bank apparently erred in misappreciating the date of Check No. DDDD) and we are convinced that it was indeed postdated to May 30. 1992 and not May 3. clearly indicating the date of the check as "5/30/1992" which obviously means May 30. the Court had already . As correctly observed by the CA: On the first issue. Besides. 15. appellee's theory that the date of the check is May 3. In furtherance thereof. 275100. The first bar (/) which separates the numbers "5" and "30" and the second bar (/) which further separates the number "30" from the year 1992 appear to have been done in heavy. is not actually a bar or a slant but appears to be more of an unintentional marking or line done with a very light stroke. Undoubtedly. the drawer of the check wrote the figures "30" in one continuous stroke.

payment made before the date specified by the drawer is clearly against the drawee bank's duty to its client. the Court held that as a business affected with public interest and because of the nature of its functions. petitioner submits that respondent's way of writing the date on Check No. petitioner submits that respondent caused confusion on the true date of the check by writing the date of the check as 5/3/0/92. which was decided in 1990. Tradio. the depositor expects the bank to treat his account with the utmost fidelity. In every case. petitioner was confused on whether the check was dated May 3 or May 30 because of the "/" which allegedly separated the number "3" from the "0. is more than that of a good father of a family.A.imposed on banks the same high standard of diligence required under R. always having in mind the fiduciary nature of their relationship. known as the drawee bank. without the counter-signature of its drawer. and without which the result would not have occurred. it is clear that petitioner bank did not exercise the degree of diligence that it ought to have exercised in dealing with its client. instead of proceeding to honor and receive the check." petitioner should have required respondent drawer to countersign the said "/" in order to ascertain the true intent of the drawer before honoring the check. In its memorandum filed before the RTC. whether such account consists only of a few hundred pesos or of millions. indeed. The diligence required of banks. If. confident that the bank will deliver it as and to whomever he directs. 275100 was the proximate cause of the dishonor of his three other checks. 1992. 275097. produces the injury. down to the last centavo. As a matter of practice. the Court finds that its negligence is the proximate cause of respondent's loss. In Simex International (Manila). Further. as it was very clear that he intended Check No. From the foregoing. v. and as promptly as possible. unbroken by any efficient intervening cause. The proximate cause of the loss is not respondent's manner of writing the date of the check. Inc. petitioner's branch manager. 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. Pedro D. Proximate cause is that cause which. Thus: xx . is under strict liability to pay to the order of the payee in accordance with the drawer's instructions as reflected on the face and by the terms of the check. Contrary to petitioner's view. Court of Appeals. bank tellers would not receive nor honor such checks which they believe to be unclear. Thus. explained the circumstances surrounding the dishonor of PCIB Check No. The proximate cause is petitioner's own negligence in debiting the account of the respondent prior to the date as appearing in the check. in a letter addressed to ANECO. in order to settle the confusion. 8791 at the time of the untimely debiting of respondent's account by petitioner in May 1992. With respect to the third issue. 275100 to be dated May 30. The bank must record every single transaction accurately. 1992 and not May 3. therefore. which resulted in the subsequent dishonor of several checks issued by the respondent and the disconnection by ASELCO and ANECO of his electric supply. in a natural and continuous sequence. Petitioner should have exercised the highest degree of diligence required of it by ascertaining from the respondent the accuracy of the entries therein. The bank on which the check is drawn. the bank is under obligation to treat the accounts of its depositors with meticulous care.

respondent Citytrust Banking Corporation (Citytrust). 141835. of a postdated check which . 1977. as he . 1992 with SOLIDBANK . 1992. and was postdated May 30. 625. . v. payable to Citytrust. Petitioner later issued security identification cards to the roving tellers one of whom was "Rounceval Flores" (Flores). Arcelito B. Appellee's attempt to extricate itself from its inadvertence must therefore fail in the face of its Manager's explicit acknowledgment of responsibility for the inadvertent dishonor of the ANECO check. formerly Feati Bank.000. As correctly found by the CA: In the aforequoted letter of its Manager. the Court finds that petitioner was evidently referring to no other than Check No. Flores presented for payment to petitioner's Senior Teller Iluminada dela Cruz (Iluminada) two Citytrust checks of even date. maintained a demand deposit account with petitioner Central Bank of the Philippines. In Citibank. FEBRUARY 4. G. both of which were signed and indorsed by Citytrust's authorized signatory-drawers. Petitioner was negligent in the selection and supervision of its employees. Iluminada verified them. 275100 which was deposited to Solidbank. 2009 Facts: Pursuant to Republic Act No.000 and the other in the amount of P900. . the old Central Bank Law. care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. now Bangko Sentral ng Pilipinas. Citytrust furnished petitioner with the names and corresponding signatures of five of its officers authorized to sign checks and serve as drawers and indorsers for its account." which passed undetected from the eyes of the payee down to the petitioner drawee bank. On July 15. sign receipts and perform other transactions on its behalf. appellee Bank expressly acknowledged that Check No. NO. . prepared the cash transfer slip on which she affixed her signature. one in the amount of P850. Evidently.A. stamped the checks with the notation "Received Payment" and asked Flores to. As required. .Although petitioner failed to specify in the letter the other details of this "postdated check." but it was dishonored as a "result of an earlier negotiation to PCIB-Mandaue Branch through a deposit made on May 14. After the checks were certified by petitioner's Accounting Department. 275097 (Exh. Tan was in no way responsible for the dishonor of said PCIB Check No. By the very nature of their works the degree of responsibility. since appellee's Manager has cleared appellant of any fault in the dishonor of the ANECO check. passed undetected. N. GGGG) which appellant paid to ANECO "was sufficiently funded at the time it was negotiated. And it provided petitioner with the list and corresponding signatures of its roving tellers authorized to withdraw. the bank's negligence was the result of lack of due care required of its managers and employees in handling the accounts of its clients. it [necessarily] follows that responsibility therefor or fault for the dishonor of the check should fall on appellee bank. Banks handle daily transactions involving millions of pesos. . the Court ruled: . Cabamongan. .R." He further admitted that "Mr." Needless to state. 275097. CENTRAL BANK OF THE PHILIPPINES VS CITY TRSUT BANKING CORPORATION.

was the proximate cause of the loss or fraud. Cayabyab”. petitioner harps on Citytrust's allowing Flores to steal the checks and failing to timely cancel them. the appellate court noted that while "Citytrust failed to take adequate precautionary measures to prevent the fraudulent encashment of its checks". and failing to explain the circumstances surrounding the supposed theft and cancellation of the checks. demanded petitioner to restore the amounts covered thereby to its demand deposit account. which preceded that committed by the teller. Petitioner then debited the amount of the checks totaling P1.did. Citytrust's negligence. Attributing negligence solely to Citytrust. and finding the same in order. assuming arguendo that its teller was negligent. Petitioner did not heed the demand. Flores was convicted. Drawing attention to Citytrust's considerable delay in demanding the restoration of the proceeds of the checks. In arriving at its Decision. Also maintaining that it was not negligent in releasing the proceeds of the checks to Flores. Cayabyab" — a fact Iluminada failed to notice. The RTC found both Citytrust and petitioner negligent and accordingly held the equally liable for the loss. The CA affirmed the court’s decision. Petitioner maintaining that Flores having been an authorized roving teller. with reservation on the filing of a separate civil action. despite the lack of authority of "Rosauro C. failing to report Flores' absence from work on the day of the incident. petitioner was not entirely blame-free in light of its failure to verify the signature of Citytrust's agent authorized to receive payment. More than a year and nine months later. Citytrust is bound by his acts. the failure of its teller to properly verify his signature notwithstanding. Citytrust later filed a complaint for estafa. they should equally share the loss in consonance with article 2179 vis a vis article 1172 of the civil code. Instead of signing his name.750. Citytrust thereafter filed before the Regional Trial Court (RTC) of Manila a complaint for recovery of sum of money with damages against petitioner which it alleged erred in encashing the checks and in charging the proceeds thereof to its account. approved the cash transfer slip and paid the corresponding amounts to Flores. it holding that both parties contributed equally to the fraudulent encashment of the checks. allowing Flores to wear the issued identification card issued by it (petitioner). Held: The petition is bereft of merit. alleging that the checks were already cancelled because they were stolen. Flores signed as "Rosauro C. hence. petitioner contends that verification could be dispensed with. sign on the space above such notation. however.000 from Citytrust's demand deposit account. by letter dated April 23. Petitioner's teller Iluminada did not verify Flores' signature on the flimsy excuse that . 1979. Citytrust. Flores having been known to be an authorized roving teller of Citytrust who had had numerous transactions with it (petitioner) on its (Citytrust's) behalf for five years prior to the questioned transaction. however. Iluminada thereupon sent the cash transfer slip and checks to petitioner's Cash Department where an officer verified and compared the drawers' signatures on the checks against their specimen signatures provided by Citytrust. against Flores. petitioners argue that.

.000 from L.C. savings . Court of Appeals illumines: The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. jurisprudence at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. introduced in 2000. she would have readily been put on notice that Flores was affixing. the immediate and proximate cause of the injury being the defendant's lack of due care. The bank is the debtor and the depositor is the creditor." This new provision in the general banking law. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract. starting with the 1990 case of Simex International v." There is a debtor-creditor relationship between the bank and its depositor. Diaz's savings account. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties. For had Citytrust timely discovered the loss/theft and/or subsequent encashment. is a statutory affirmation of Supreme Court decisions. That circumstance did not excuse the teller from focusing attention to or at least glancing at Flores as he was signing.Flores had had previous transactions with it for a number of years. Article 1980 of the Civil Code expressly provides that ". . The law imposes on banks high standards in view of the fiduciary nature of banking. (Emphasis supplied) Citytrust’s failure to timely examine its account. . holding that "the bank is under obligation to treat the accounts of its depositors with meticulous care. The depositor lends the bank money and the bank agrees to pay the depositor on demand. cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner's liability. .” This fiduciary relationship means that the bank's obligation to observe "high standards of integrity and performance" is deemed written into every deposit agreement between a bank and its depositor. 8791 ("RA 8791"). Given that petitioner is the government body mandated to supervise and regulate banking and other financial institutions. the plaintiff may recover damages. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Section 2 of Republic Act No. and to satisfy herself that the signature he had just affixed matched that of his specimen signature. their proceeds or part thereof could have been recovered. . which took effect on 13 June 2000. Court of Appeals. in accordance with Article 2179 of the Civil Code which provides that if the plaintiff's negligence was only contributory. but the courts shall mitigate the damages to be awarded. deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. 8791. declares that the State recognizes the "fiduciary nature of banking that requires high standards of integrity and performance. Had she done that. always having in mind the fiduciary nature of their relationship. and absent such stipulation then the diligence of a good father of a family. not his but a fictitious signature. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300. 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. this Court's ruling in Consolidated Bank and Trust Corporation v.

00) Pesos was presented on April 25.00 against petitioner's account since under Resolution No. when he received the bank's debit memo. alleging to have suffered humiliation and loss of face in the business sector due to the bounced checks. RCBC maintained. specifically on March 16. RCBC further asseverated it was merely acting as petitioner's collecting agent and it assumed no responsibility beyond care in selecting correspondents under the theory that where a check is deposited with a collecting bank the relationship created is that .70 since they were drawn against insufficient funds. 1979 of the Monetary Board. 040719 in the name of Go Lac for Five Thousand Five Hundred (P5. instead of a regional check deposit slip. it would take at least twenty (20) working days for the cashier's check to be cleared and it would take the same length of time to clear the two (2) personal checks of Tan. Respondent bank at this time had not informed the petitioner of its action which the latter claims he learned of only 42 days after. Puerto Princesa branch. it is a matter of policy to prohibit the drawing against uncollected deposits (DAUDS) except when the drawings are made against uncollected deposits representing bank manager's/cashier's/treasurer's checks.5000.88) Eighty-Eight Centavos.R. 108555. postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank.000."The next day. petitioner issued two (2) personal checks both dated March 18. treasury warrants.RAMON TAN VS THE HONORABLE CA AND RIZAL COMMERCIAL BANKING CORPROATION. to avoid carrying cash while enroute to Manila.70) was returned twice on March 24. G.000. he secured a Cashier's Check No. more than 30 days from petitioner's deposit date of the cashier's check. Petitioner. payable to his order.00) Pesos. Thus. petitioner's balance before and after was Two Thousand Seven Hundred Ninety-Two Pesos and the (P2. it dishonored the two (2) checks amounting to P11. triggered the "misrouting" by RCBC of the cashier's check to the Central Bank and it was petitioner's negligent "misuse" of a local deposit slip which was the proximate cause of the "misrouting". 13 Without crediting the P30.000. On the same day. RCBC erroneously sent the same cashier's check for clearing to the Central Bank which was returned for having been "missent" or "misrouted. 1994 Facts: Petitioner Ramon Tan. DECEMBER 20. that the usual banking practice that local checks are cleared within three (3) working days and regional checks within seven (7) working days. RCBC debited the amount covered by the same cashier's check from the account of the petitioner. Check No. He deposited the check in his account with RCBC Binondo on March 15. had maintained since 1976 Current Account No.053.553. Relying on the common knowledge that a cashier's check was as good as cash. disowning any negligence. L 406000126 from the Philippine Commercial Industrial Bank (PCIB). 040718 in the name of MS Development Trading Corporation for Six Thousand Fifty-Three Pesos and Seventy Centavos (P6. RCBC. On March 11. It insisted that the misuse of a local check deposit slip. RCBC alleged that it complied strictly with accepted banking practice when it debited the amount of P30. NO. Check No.00 deposit. put the blame for the “misrouting’ on the petitioner for using the wrong check deposit slip. RCBC added that petitioner had no bills purchase (BP) line which allows a depositor to receive or draw from proceeds of a check without waiting it to be cleared. nine (9) days from his deposits date and again on April 26. Palawan.792. twenty-two days after the day the cashier's check was deposited for insufficiency of funds. 2202 dated December 21. and the fact that the cashier's check was accepted. in the amount of Thirty Thousand (P30. Besides. 109058068 with respondent bank's Binondo branch. 1988. had it forwarded the Cashier's Check to PCIB Puerto Princesa. thus he should bear the consequence. filed a complaint against RCBC for damages. a trader-businessman and community leader in Puerto Princesa. March 16.

thus it cannot be liable. as well as to itself. RCBC promptly debited the amount of P30.000. By its very nature. Now. In Pilipinas Bank. We observe. 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. the officials and employees tasked to do that did not perform their duties with due care. A cashier's check is a primary obligation of the issuing bank and accepted in advance by its mere issuance. This gave RCBC more than ample time to have cleared the cashier's check had it corrected its "missending" the same upon return from Central Bank using the correct slip this time so it can be cleared properly. 040718 were presented for payment more than 45 days from the day the cashier's check was deposited.of agency and not creditor-debtor. as it is rooted in practice. The Trial court ordered defendant bank to pay Ramon tan damages but the CA reversed the ruling. Held: We do not subscribe to RCBC's assertion that petitioner's use of the wrong deposit slip was the proximate cause of the clearing fiasco and so. CA. v. . So it is in the instance case. Instead. what was presented for deposit in the instant cases was not just an ordinary check but a cashier's check payable to the account of the depositor himself. this Court said: The bank is not expected to be infallible but. PCIB by issuing the check created an unconditional credit in favor of any collecting bank. Check No. Any practice that destroys that confidence will impair the usefulness of the check as a currency substitute and create havoc in trade circles and the banking community. A cashier's check by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. We draw attention to the fact that the two dishonored checks issued by petitioner. 040719 and Check No. . petitioner's reliance on the layman's perception that a cashier's check is as good as cash is not entirely misplaced. . In this case. its refusal to immediately pay the cashier's check in this case is not to be equated with negligence on its part. petitioner must bear the consequence. likewise.00 against petitioner's account and left it at that. therefore. committing in effect its total resources. tradition. that RCBC inquired about an Evelyn Tan but no Evelyn TanBanzon as specifically instructed in the same signature card. integrity and honor behind the check. The basis of the perception being confidence. We find this disturbing and unfortunate. RCBC insists that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check is presented and such being the case. All these considered. a cashier's check is the bank's order to pay drawn upon itself. specially since PCIB and RCBC are members of the . as correctly observed by respondent Appellate Court. where the conclusion is inevitable that respondent RCBC had been remiss in the performance of its duty and obligation to its client. We see no reason thus why this so-called discretion was not exercised in favor of petitioner. There is an element of certainty or assurance that it will be paid upon presentation that is why it is perceived as a convenient substitute for currency in commercial and financial transactions. in this instance. Apparently. An ordinary check is not a mere undertaking to pay an amount of money. and principle.

same clearing house group relying on each other's solvency. RCBC could surely rely
on the solvency of PCIB when the latter issued its cashier's check.
CONSOLIDATED BANK AND TRUST CORPORATION VS CA AND LC DIAZ AND
COMPANY CPA’S
Facts: Solidbank is a domestic banking corporation organized and existing under
Philippine laws. Private respondent L.C. Diaz and Company, CPA's ("L.C. Diaz"), is a
professional partnership engaged in the practice of accounting. Sometime in March
1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya ("Macaraya"),
filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for
P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre ("Calapre"), to
deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank
passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the
passbook. The teller acknowledged receipt of the deposit by returning to Calapre the
duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with
the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE." Since the
transaction took time and Calapre had to make 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. 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." PBC subsequently
dishonored the check because of insufficient funds and because the signature in the
check differed from PBC's 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. 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.

LC Diaz charged its messenger, Emerson Ilagan and one Roscoe Verdazola with
Estafa through falsification of commercial document. The RTC dismissed the criminal
case.
LC diaz demanded the return of its money but Solidbank refused so Diaz filed a case
against Solidbank which the tc absolved Solidbank. The CA reversed the decision.
Held: Solidbank's Fiduciary Duty under the Law — The rulings of the trial court and
the Court of Appeals conflict on the application of the law. The trial court pinned the
liability on L.C. Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter
being a depositor of the former. On the other hand, the Court of Appeals applied the
law on quasi-delict to determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is generally applicable when
there is no pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa
contractual. The contract between the bank and its depositor is governed by
the provisions of the Civil Code on simple loan. Article 1980 of the Civil Code
expressly provides that ". . . savings . . . deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loan." There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The depositor
lends the bank money and the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the depositor is the contract
that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking.
Section 2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." This new provision in the general banking
law, introduced in 2000, is a statutory affirmation of Supreme Court decisions,
starting with the 1990 case of Simex International v. Court of Appeals, holding that
"the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a family. Section 2 of RA 8791
prescribes the statutory diligence required from banks — that banks must observe
"high standards of integrity and performance" in servicing their depositors.
Although RA 8791 took effect almost nine years after the unauthorized withdrawal of
the P300,000 from L.C. Diaz's savings account, jurisprudence at the time of the
withdrawal already imposed on banks the same 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. 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 nonbank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but
to earn money for themselves. The law allows banks to offer the lowest possible
interest rate to depositors while charging the highest possible interest rate on their
own borrowers. The interest spread or differential belongs to the bank and not to the
depositors who are not cestui que trust of banks. If depositors are cestui que trust of
banks, then the interest spread or income belongs to the depositors, a situation that
Congress certainly did not intend in enacting Section 2 of RA 8791.
Solidbank's Breach of its Contractual Obligation - Article 1172 of the Civil Code
provides that "responsibility arising from negligence in the performance of every kind
of obligation is demandable." For breach of the savings deposit agreement due
to negligence, or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the "transaction took time" and he
had to go to Allied Bank for another transaction. The passbook was still in the hands
of the employees of Solidbank for the processing of the deposit when Calapre left
Solidbank. Solidbank's rules on savings account require that the "deposit book should
be carefully guarded by the depositor and kept under lock and key, if possible." When
the passbook is in the possession of Solidbank's tellers during withdrawals, the law
imposes on Solidbank and its tellers an even higher degree of diligence in
safeguarding the passbook.
Likewise, Solidbank's tellers must exercise a high degree of diligence in insuring that
they return the passbook only to the depositor or his authorized representative. The
tellers know, or should know, that the rules on savings account provide that any
person in possession of the passbook is presumptively its owner. If the tellers give the
passbook to the wrong person, they would be clothing that person presumptive
ownership of the passbook, facilitating unauthorized withdrawals by that person. For
failing to return the passbook to Calapre, the authorized representative of
L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such
high degree of diligence in safeguarding the passbook, and in insuring its
return to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a
presumption that the defendant was at fault or negligent. The burden is on the
defendant to prove that he was not at fault or negligent. In contrast, in culpa
aquiliana the plaintiff has the burden of proving that the defendant was negligent. In
the present case, L.C. Diaz has established that Solidbank breached its contractual
obligation to return the passbook only to the authorized representative of L.C. Diaz.
There is thus a presumption that Solidbank was at fault and its teller was negligent in
not returning the passbook to Calapre. The burden was on Solidbank to prove that
there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court
Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to
return the passbook to him. The record does not indicate that Teller No. 6 verified the
identity of the person who retrieved the passbook. Solidbank also failed to adduce in
evidence its standard procedure in verifying the identity of the person retrieving the
passbook, if there is such a procedure, and that Teller No. 6 implemented this
procedure in the present case.

We do not subscribe to the appellate court's theory that the proximate cause of the unauthorized withdrawal was the teller's failure to call up L. Even the agreement between Solidbank and L.C. policy and precedent. 5 who processed the withdrawal could not have been put on guard to verify ." 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. For the appellate court. Solidbank failed to present the teller who had the duty to return to Calapre the passbook. Thus. Proximate Cause of the Unauthorized Withdrawal — Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. Teller No. Had the passbook not fallen into the hands of the impostor. Diaz. There is no arrangement between Solidbank and L.000 by the impostor who took possession of the passbook. Proximate cause is that cause which. Solidbank had the contractual obligation to return the passbook only to Calapre. After completion of the transaction.C.000.C. and thus failed to prove that this teller exercised the "high standards of integrity and performance" required of Solidbank's employees. We do not agree with either court. 6 that gave the impostor presumptive ownership of the passbook. Diaz. Under Solidbank's rules on savings account. It was the negligent act of Solidbank's Teller No. the authorized representative of L.C.C. Solidbank's failure to return the passbook to Calapre made possible the withdrawal of the P300. unbroken by any efficient intervening cause.C. Diaz to confirm the withdrawal. L. the proximate cause was the teller's negligence in processing the withdrawal without first verifying with L. produces the injury and without which the result would not have occurred. mere possession of the passbook raises the presumption of ownership. Diaz to this effect. 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. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person.Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. 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. Diaz failed to do so. Diaz's negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw the P300. L. common sense. the proximate cause of the unauthorized withdrawal was Solidbank's negligence in not returning the passbook to Calapre.C. The trial court believed that 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. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual.C. unlike in culpa aquiliana. The bank must not only exercise "high standards of integrity and performance. Diaz. Solidbank did not have the duty to call up L. Diaz to verify the withdrawal. in natural and continuous sequence. Proximate cause is determined by the facts of each case upon mixed considerations of logic.000 would not have happened. L. the loss of P300.C. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts.

1984 Facts: Clement David and his sister Denise Kuhne during the period from March 20. TEOFISTO GUINGNA.C. HON. 6-632 and 29-740. Diaz.C.the withdrawal.20 as evidenced by seven bankers acceptances and five certificates of time deposits. ASST.000. L. Inc. is chargeable with the loss. The appellate court thus erred when it imposed on Solidbank the duty to call up L. 60033. of which $50. We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300. the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.C. JOSE B. The Court is not a trier of facts. Prior to the withdrawal of P300.C. Solidbank claims that since Ilagan was also a messenger of L. the one who had the last clear opportunity to avoid the loss but failed to do so. Solidbank continues to foist the defense that Ilagan made the withdrawal. would exonerate the defendant from liability. APRIL 4.546.531.R. 6 the P90. or where it is impossible to determine whose fault or negligence caused the loss. Diaz.000 PBC check.145. the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant. 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.000 were not presented during trial to substantiate Solidbank's claim that Ilagan deposited the check and made the questioned withdrawal.94 as shown in Passbooks Nos. Jr. in the total sum of P1. ANTONIO MARTIN AND TERESITA SANTOS VS THE CITY FISCAL OF MANILA. Stated differently. 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. he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip. with the Security Bank and Trust . The tellers who processed the deposit of the P90.000 was a certain Noel Tamayo.000 was deposited in the account of Teofisto Guingona. We do not apply the doctrine of last clear chance to the present case. G. He and his sister Denise also had savings deposits in the Nation Savings in the sum of P13. 1979 to March. This is a case of culpa contractual. which later bounced. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L. Moreover. They also invested in Nation Savings US$75.000 in 1980 as evidenced by receipts. who had the last fair chance to prevent the impending harm by the exercise of due diligence. the impostor deposited with Teller No.000. 1981 made placements with the Nation Savings and Loan Association. 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. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. Diaz refutes Solidbank's contention by pointing out that the person who withdrew the P300. CITY FISCAL FELIZARDO N. LOTA AND CLEMENT DAVID.000 check and the withdrawal of the P300. where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss. FLAMINIANO.

1981. He secured it with the pledge of a ring valued according to him at P560.92 of the placements made by him and his sister were entered in the NSLA records (Annex 4. 1981 until fully paid.307. on the other hand.Company.000 on that note. Antonio I.500 and secured the same by second mortgages on his Quezon City properties (Annex D).000 a year (p.14 and $75. On June 17. On July 22. Rollo). 37. Rollo).S. and the sum of P305. Teresita G. On March 15. Aggregate investments of David and Kuhne in Nation Savings: P1. Martin assumed the other half of the total debt. 82-1655 (p. Rollo). p. 1981.02 and $75. The receivership was challenged by Nation Savings stockholders in Special Proceedings No. p.821. and Guingona was a director.159. At the time the deposits were made. executed an affidavit wherein he bound himself to desist from any prosecution of Guingona without prejudice to the balance of his claim against Nation Savings (Annex M.000 (in addition to the P200. Guingona paid P200.614. David received a report from the Central Bank that only P305. 1981 recommended that the irregularities be brought to the attention of the CB consultant on criminal cases for appropriate investigation of Nation Savings' officials In view of the promissory note and the mortgages.000.078.000 which David paid to Monte de Piedad to redeem the ring. on one hand. The director of the CB Department of Rural Banks and Savings and Loan Associations in a report dated June 23. Rollo). 1981. Rollo).01 and $37.92. 364 and related regulations . 218. 1981. 1982. Issue: Whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No.000 to be paid in installments within 180 days from said date with interest at 16% per annum from July 1.000 but appraised by a jewel appraiser at P280. The promissory note was novated by another note. Rollo). Guingona filed against David Civil Case No. antedated June 17. Proc. Rollo). He prayed for damages of P785. 58. 111. Guingona and Martin executed a promissory note acknowledging a debt of P1.336. Nation Savings allegedly paid David from 1979 to the early part of 1981 interests of P240. 46.078. 1981. He claimed that the difference between his placements of P1. Rollo).000) and to release one of the mortgaged properties (Annex K. On November 19. 125. Santos was its general manager. on July 22. in behalf of the Central Bank. 225. The Solicitor General answered that petition by alleging that Nation Savings was plagued with irregularities (p. 193. Q-33865 in the Quezon City Court of First Instance. David.000. dollars. The foreclosure was restrained by the Quezon City Court of First Instance. 82-7552. No. David filed a complaint for estafa and violation of CB Circular No.14 in local currency and 75. On March 21. Martin was the president of Nation Savings.000 in U. Nation Savings was placed under receivership by the Central Bank because of serious fraud and irregularities committed by its key officers. constitutes the defraudation against him. the Solicitor General. Martin is also indebted to David in the sum of P60. whereby Guingona acknowledged one-half of the obligation as his debt or the sums of P668. the amount entered in Nation Savings' books.821. p.000 against David for his failure to accept payment of a cashier's check for P300. David sought to foreclose extrajudicially the two mortgages (p. p. 1981. filed a petition in the Court of First Instance of Manila for assistance in the liquidation of Nation Savings as an insolvent firm (Spec. 364 and related regulations.159.

14 (pp. and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Fixed. are not preferred credits. Morfe (63 SCRA 114.01 (1/2 of P1.613.500. 1981. It appears further that private respondent David. and current deposits of money in banks and similar institutions are not true deposits. 1981. A casual perusal of the December 23. upon the request of private respondent David. invested with the Nation Savings and Loan Association the sum of P1. assumed the obligation of the bank to private respondent David by executing on June 17.02) and US$37. rec. made investments in the aforesaid bank in the amount of US$75. 1981 prepared by the private respondent (p. 81-31938..159. the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit.546. .00) in favor of private respondent (p.531. or on July 17.00 (p.307. savings. and petitioner Guingona executed another promissory note antedated to June 17. 25. 1981 whereby he personally acknowledged an indebtedness of P668. Article 1980 of the New Civil Code provides that: "Article 1980.614.078.614. The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116.20. together with his sister. Antonio I. 1979 to March. 80. They are considered simple loans and.). 15-16. as such. rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association. the records reveal that when the aforesaid bank was placed under receivership on March 21. Held: There is merit in the contention of the petitioners that their liability is civil in nature and therefore. Denise Kuhne. Furthermore. or a total of P1.00 (1/2 of US$75. 17.” In the case of Central Bank of the Philippines vs. Jr. private respondent David. 119 [1975]. together with one Robert Marshall and the other directors of the Nation Savings and Loan Association.000.00 (p. public respondents have no jurisdiction over the charge of estafa.336. rec. 1981. 1981 affidavit-complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teofisto Guingona.02 and US$75.000. 6-632 and 29-742. Thus. Santos.145.S. petitioners Guingona and Martin. the various pleadings and documents filed by private respondent David before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association. No. It must be pointed out that when private respondent David invested his money on time and savings deposits with the aforesaid bank.). petitioners Guingona and Martin agreed to divide the said indebtedness. This promissory note was based on the statement of account as of June 30. rec. Moreover. We said: "It should be noted that fixed. Martin and Teresita G.regarding foreign exchange transactions) subject matter of I. will show that from March 20.000. 81.).). Thereafter.94 on savings account deposits covered by passbook nos. rec. savings.336.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13. 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of P1. together with his sister.

They are really loans because they earn interest. — By the contract of loan. consequently. Current and savings deposits are loans to a bank because it can use the same. Central Bank of the Philippines (96 SCRA 96. — A person who receives a loan of money or any other fungible thing acquires the ownership thereof. but it will only give rise to civil liability over which the public respondents have no jurisdiction. Gullas vs. This is so because as clearly stated in criminal complaints. i. the borrower . Phil. 62 Phil. 1980. All kinds of bank deposits. the related civil complaints and the supporting sworn statements. ownership passes to the borrower. Civil Code. Commodatum is essentially gratuitous. the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations. par. goods or personal property that he received.e. Simple loan may be gratuitous or with a stipulation to pay interest. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depository's failure to return the subject matter of the deposit" (emphasis supplied). or current are to be treated as loans and are to be covered by the law on loans (Art.This Court also declared in the recent case of Serrano vs. either something not consumable so that the latter may use the same for a certain time and return it. upon the condition that the same amount of the same kind and quality shall be paid in which case the contract is simply called a loan or mutuum. National Bank. in which case the contract is called a commodatum. And. whether fixed. the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor. the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315. the sums of money that petitioners received were loans. and is bound to pay to the creditor an equal amount of the same kind and quality. 1933. it must be proven that he has the obligation to deliver or return the same money. 1(b) of the Revised Penal Code. 102 [1980]) that: "Bank deposits are in the nature of irregular deposits. While the Bank has the obligation to return the amount deposited. the bills or coins. "The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code. it has. such as to pay interests on deposits and to pay withdrawals. one of the parties delivers to another. or money or other consumable thing. while in simple loan. no obligation to return or deliver the same money that was deposited. "'Art.. as contrasted to commodatum. WE have already laid down the rule that: "In order that a person can be convicted under the above-quoted provision. Petitioners had no such obligation to return the same money. savings.’ "It can be readily noted from the above quoted provisions that in simple loan (mutuum). The respondent Bank was in turn a debtor of petitioner. "'Art. In commodatum the bailor retains the ownership of the thing loaned. Hence. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. 519). which they received from private respondents. however. 1953.

For its part. 94 SCRA 30.acquires ownership of the money. there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17. leaving a balance of P57.R. In the case at bar. ASSOCIATED BANK (NOW WESTMONT BANK) VS VICENTE HENRY TAN. his suppliers and business partners went back to him alleging that the checks he issued bounced for insufficiency of funds. on the same date. emphasis supplied).000.00. G.000. upon advice and instruction of the BANK that the P101.000 issued to him by Willy Cheng from Tarlac. thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. The check was duly entered in his bank record thereby making his balance in the amount of P297. it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal.000. TAN deposited the amount of P50. the BANK did not bother nor offer any apology regarding the incident. Nonetheless.000. 1981 with the Office of the City Fiscal. The bank filed a motion to dismiss alleging that no banking institution would give an assurance to any of its client/depositor that the check deposited by him had already been cleared and backed up by sufficient funds but it could only presume that the same has been honored by the drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. withdrew the sum of P240. while the criminal complaint for estafa was filed on December 23. Allegedly. nevertheless any incipient criminal liability was deemed avoided. from his original deposit of P196. Thereafter. informed the BANK to take positive steps regarding the matter for he has adequate and sufficient funds to pay the amount of the subject checks. any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation. thru his lawyer. 1990. the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. A day after. 34 [1979]. Hence.00 making his existing balance in the amount of P107. Consequently. because when the aforesaid bank was placed under receivership by the Central Bank. TAN. Consequently. DECEMBER 14. petitioners Guingona and Martin assumed the obligation of the bank to private respondent David. 1981 assuming the obligation of the bank to private respondent David. However. TAN.00.000.00 check was already cleared and backed up by sufficient funds. Malik. 156940. the borrower can dispose of the thing borrowed (Article 248. because he has issued several checks to his business partners.45. [petitioner] alleged that on . as aforestated.793. goods or personal property borrowed. He deposited a postdated UCPB check with the said bank in the amount of 101. But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code. 2004 Facts: Vicente Henry Tan is a businessman and a regular depositor-creditor of the associated bank. Civil Code) and his act will not be considered misappropriation thereof" (Yam vs. Being the owner. Tan filed a complaint for damages.00.45. as of October 1.793.

expressly stipulated that the bank was obligating itself merely as the depositor's collecting agent and — until such time as actual payment would be made to it — it was reserving the right to charge against the depositor's account any amount previously credited. savings. the manner in which it exercised such right. on the bank's role and obligations. such right remains immediately enforceable. (5) That over neither of them there be any retention or controversy. legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present. the real issue here is not so much the right of petitioner to debit respondent's account but. and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. The Court has held that even while the right of setoff is conceded. it gave notice to the [respondent] as to the return of his UCPB check deposit in the amount of P101. Issue: WON petitioner. and that he be at the same time a principal creditor of the other.October 2. rather. on even date. (2) That both debts consist in a sum of money. which is acting as collecting agent.000. The court rendered in favor of Tan.00. as respondent's depositary bank. and second. (4) That they be liquidated and demandable. merely as an act of accommodation. Thus. they be of the same kind. in turn. commenced by third persons and communicated in due time to the debtor. as . has the right to debit the amount of its client for a check deposit which was dishonoured by the drawee bank Held: Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated by the CA. Even assuming that it did not give him notice that the check had been dishonored.000. 1990.A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor. first. petitioner argues that the check deposit slip accomplished by respondent on September 17. and also of the same quality if the latter has been stated. The determination thereof hinges. (3) That the two debts be due. [respondent] deposited the amount of P50. Respondent was allowed to withdraw the amount of the check prior to clearing. The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised its right of setoff. Article 1980 of the Civil Code provides that "[f]ixed. Right of Set-off . In particular. 1990.” Nonetheless. it added. It insists that its right to debit the amount of the dishonored check from the account of respondent is clear and unmistakable. separate is the question of whether that remedy has properly been exercised. The CA affirmed and ruled that the bank should not have authorized the withdrawal of the value of the deposited check prior to its clearing. or if the things due are consumable.00 to cover the returned check. hence. To begin with. the relationship between banks and depositors has been held to be that of creditor and debtor." as follows: (1) That each one of the obligors be bound principally.” Hence. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence.

or infuse value to that account only after the drawee bank shall have paid such amount. petitioner took upon itself certain obligations as respondent's agent. Obligation as Collecting Agent . Such a practice is unusual. Jurisprudence has established that the lack of diligence of a servant is imputed to the negligence of the employer. and its value can properly be transferred to a depositor's account only after the check has been cleared by the drawee bank. the . Before the check shall have been cleared for deposit.” Further.” However. petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. this Bank reserves the right to charge back to the Depositor's account any amounts previously credited whether or not the deposited item is returned. because a check is not legal tender or money. in this case. It is indeed arguable that "in signing the deposit slip. Under Article 1909 of the Civil Code. the bank deposit slip expressed this reservation: "In receiving items on deposit. the lower courts correctly appreciated the evidence in his favor. after receiving a check deposit. a bank either immediately credit the amount to a depositor's account. Under ordinary banking practice.793. As a general rule. they allowed respondent to withdraw on October 1. assuming no responsibility beyond carefulness in selecting correspondents. It is undisputed — nay. this Bank obligates itself only as the Depositor's Collecting agent. 1990. by the express terms of the stipulation. The manager of the bank's Cabanatuan branch. as this amount was over and above his outstanding cleared balance of P196. .45. moreover. 1990. dictated that petitioner should not have authorized the withdrawal by respondent of P240. this reservation is not enough to insulate the bank from any liability. Due to the very nature of their business. Did petitioner treat respondent's account with the highest degree of care? From all indications. In the past. a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. the depositor. Consorcia Santiago. .Indeed.000 on October 1. and until such time as actual payments shall have come to its possession. when the negligent or wrongful act of the former proximately results in an injury to a third person. the depositor does so only to identify himself and not to agree to the conditions set forth at the back of the deposit slip. Hence.collecting agent for the check in question. They admittedly breached those policies when. it did not. consonant with the well-settled rule that the relationship between the payee or holder of a commercial paper and the collecting bank is that of principal and agent. even admitted — that purportedly as an act of accommodation to a valued client. banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. but also for negligence. . That act certainly disregarded the clearance requirement of the banking system. Reasonable business practice and prudence. the collecting bank can only "assume" at its own risk — as herein petitioner did — that the check would be cleared and paid out. such bank could be held liable not only for fraud. categorically admitted that she and the employees under her control had breached bank policies. we have expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the consent of the depositor. without clearance from the drawee bank in Baguio.

to pay their time deposits as preferred credits. 1990. and instructed the Central Bank Legal Counsel to take appropriate legal actions. directed the latter. 1990 . CENTRAL BANK VS MORFE. since the board sought the court’s assistance and supervision in the liquidation of the bank. withint the meaning of article 2244(14)(b) of the civil code. “ Being the branch manager. Let us go back to the facts as they unfolded. Santiago clearly acted within the scope of her authority in authorizing the withdrawal and the subsequent debiting without notice. and the subsequent dishonor of his own checks for lack of funds. The Board directed the Superintendent of Banks to take charge of its assets. 1990. The court ordered Fidelity to pay the Elizes. The lower court.000 on October 2. the fall of his account balance to insufficient levels. 1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. Central bank appealed contending that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law. G. Aggravating matters. the spouses Job elites and Marcel elites filed a complaint against Fidelity savings bank for the recovery of the balance of their time deposits. petitioner failed to show that it had immediately and duly informed respondent of the debiting of his account. forbade it to do business. NO. Issue: WON payment of a time deposit in a savings bank.000 on October 2. In another case. which judgment was obtained after the bank was declared insolvent. Nonetheless. evidenced by final judgments. MARCH 12. as liquidator. 1975 Facts: On February 18. to augment his account and allow the debiting. it argues that the giving of notice was discernible from his act of depositing P50. . triggered — in rapid succession and in a natural sequence — the debiting of his account. Prior to the institution of the liquidation proceeding but after the declaration of insolvency.amount of the check deposited. the spouses Agusto and Adelaida Padilla secret a judgment against Fidelity for the balance of their time deposits. and without which the result would not have occurred. L-38427.R. Santiago testified that respondent "was not officially informed about the debiting of the P101. Accordingly. if there are enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil Code. upon motions of the Elizes and Padilla spouses and over the opposition of the Central Bank. This argument deserves short shrift. what remains to be determined is whether her actions proximately caused respondent's injury. Proximate cause is that which — in a natural and continuous sequence. unbroken by any efficient intervening cause — produces the injury. is a preferred claim against the . no final judgment can be validly obtained against an insolvent bank.000 from his existing balance of P170. . was implemented upon such filing. It is undeniable that the bank's premature authorization of the withdrawal by respondent on October 1. The resolution.

Stanton Trust & Savings Bank.bank? Held: The trial court or. and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and. It reasoned out that. "all civil proceedings against the said insolvent shall be stayed”. after the bank is declared insolvent. execution or otherwise" (Rohr vs. 76 Mont. Evidently. and after its insolvency. one purpose in prohibiting the insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent preference over other creditors and depositors. section 18 of the Insolvency Law provides that upon the issuance by the court of an order declaring a person insolvent. as such. 245 Pac. the liquidation court noted that there is no provision in the charter of the Central Bank and in the General Banking Law (Republic Acts Nos. the courts would be swamped with suits of that character. That inequitable . after learning that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business. including the depositors". the Board becomes the trustee of its assets "for the equal benefit of all the creditors. because such actions are not suspended. suits by some depositors could be maintained and judgments would be rendered for the payment of their deposits and then such judgments would be considered preferred credits under article 2244(14)(b) of the Civil Code. judgments against insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations. as in this case. 265 and 337. are not preferred credits. Less alert depositors would be prejudiced. On the other hand. Depositors armed with such judgments would pester the liquidation court with claims for preference on the basis of article 2244(14)(b). It further noted that. 350 dated February 18. 947). 1969 banned the Fidelity Savings Bank from doing business. Some of the judgments would be default judgments. would rush to the courts to secure judgments for the payment of their deposits. to be exact. The Board in its Resolution No. The Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors. in contrast with the Central Bank Act. It took charge of the bank's assets. savings. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks. respectively) which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court. It should be noted that fixed. the Monetary Board shall forbid it to do business and shall take charge of its assets. A contrary rule or practice would be productive of injustice. We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency. one cannot obtain an advantage or a preference over another by an attachment. mischief and confusion. 248. That purpose would be nullified if. In such an eventuality. The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent.

and so conserved that each depositor or other creditor shall receive payment or dividend according to the amount of his debt. execution or otherwise. the Supreme Court of Montana said: "The general principle of equity that the assets of an insolvent are to be distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. The Rohr case (supra) supplies some illumination on the disposition of the instant case. What was directly prohibited should not be encompassed indirectly. as indisputably they were due. were not preferred credits. In affirming the order sustaining the demurrer." (245 Pac. Later." And with respect to a national bank under voluntary liquidation. 1923. The trial court sustained the demurrer. and that none of equal class shall receive any advantage or preference over another. taking advantage of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and supervision. and. Rohr appealed. 249) Considering that the deposits in question. The judicial declaration that the said deposits were payable to the depositors. Broadway Bank & Trust Co. in their inception. It appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July 9.situation could not have been contemplated by the framers of section 29. but those whose claims are recognized and admitted may not successfully maintain action thereon. were able to secure judgments for the payment of their time deposits. So to permit would defeat the very purpose of the liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver. and may be sued. (See Maurello vs. while the bank retains its corporate existence. 114 . the court noted in the Rohr case that the assets of such a bank "become a trust fund. "The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors. having stopped operations since February 19. was forbidden to do business (and that ban would include the payment of time deposits) implies that suits for the payment of such deposits were prohibited. The bank demurred to the complaint. A general depositor of a bank is merely a general creditor. 1924 the bank (then already under liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the bank $1.191. the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. A disputed claim of a creditor may be adjudicated.72 and that he was entitled to dividends thereon. On November 7. xxx xxx xxx "The available assets of such a bank are held in trust. He can acquire no lien which will give him any preference or advantage over other general creditors. 391. as such. 176 Atl. Rohr sued the bank for the payment of his claim. and. The circumstance that the Fidelity Savings Bank. of Paterson. 1969. it does not seem logical and just that they should be raised to the category of preferred credits simply because the depositors. to be administered for the benefit of all creditors pro rata. is not entitled to any preference or priority over other general creditors. and one cannot be permitted to obtain an advantage or preference over another by an attachment. could not have given the Elizes and Padilla spouses a priority over the other depositors whose deposits were likewise indisputably due and owing from the insolvent bank but who did not want to incur litigation expenses in securing a judgment for the payment of the deposits.

1965 Facts: Defendants Emilio Gancayco and Floretino Flor. or in cases of impeachment. notwithstanding any provision of law to the contrary. when their acquisition through legitimate means cannot be satisfactorily shown. produce the records or he would be prosecuted for contempt.R. On the other hand.L.N. its political subdivisions and its instrumentalities. or upon order of a competent court in cases of bribery or dereliction of duty of public officials. by enacting section 8 of the Anti-Graft and Corrupt Practices Act. except upon written permission of the depositor. the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No. Congress clearly intended to provide an additional ground for the examination of bank deposits. Any violation of this law will subject the offender upon conviction. as bank president. Plaintiffs filed an action for declaratory judgment because of the threat of prosecution. Bank deposits shall be taken into consideration in the enforcement of this section.J. Properties in the name of the spouse and unmarried children of such public official may be taken into consideration. that fact shall be a ground for dismissal or removal. Dismissal due to unexplained wealth. the plaintiff bank invoked republic Act No. Romualdez. a public official has been found to have acquired during his incumbency. as bank president. produce the records or he would be prosecuted for contempt. prosecutors would be hampered if not altogether frustrated in the prosecution of those charged with having acquired . 3019) in support of their claim of authority and demanded anew that plaintiff Eduardo Z. who was then under investigation for unexplained wealth. 3019) in support of their claim of authority and demanded anew that plaintiff Eduardo Z. PNB VS GANCAYAO. to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both. The plaintiff bank also called attention to the penal provision of the law which reads: SEC. inquired or looked into by any person. whether in his name or in the name of other persons. in the discretion of the court. are hereby considered as of an absolutely confidential nature and may not be examined. 167). The court rendered judgment sutaining the power of defendants to compel the disclosure of bank accounts of ACCFA administrator. In declining to reveal its records. SEPTEMBER 30. 1405. — If in accordance with the provisions of Republic Act Numbered One thousand three hundred seventynine. as special prosecutors of the DOJ. On the other hand. 1405 which provides: SEC. Romualdez. 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. bureau or office. government official. 5. an amount of property and/or money manifestly out of proportion to his salary and to his other lawful income. or in cases where the money deposited or invested is the subject matter of the litigation. 8. L-18343. The plaintiff bank invoked Republic Act No. The law invoked by the defendant states: SEC. G. the court added. Without such provision. required the plaintiff PNB to produce at hearing at 10 am on 2/20/1961 the records of the bank deposits of Ernesto T. The court said that. Jimenez. former administrator of the Agricultural Credit and Cooperative Administration. the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No.

R. 54 [Rev. No. Election Code] prohibits a classified civil service employee from aiding any candidate. Sec 29 [Civil Service Act of 1959] allows such classified employee to express his views on current political problems or issues. In other words. it is enough to point out that while section 2 of Republic Act No. De Venecia. Thus. (2) In cases of impeachment. the last paragraph of Sec. 29 is an exception to Sec. 1405 provides that bank deposits are "absolutely confidential . the Anti-Graft Law directs in mandatory terms that bank deposits "shall be taken into consideration in the enforcement of this section. either in its entirety or in part. while Republic Act No. 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. notwithstanding any provision of law to the contrary. The recent case of People v. has been repealed by implication is ultimately a matter of legislative intent. 1405 by providing an additional exception to the rule against the disclosure of bank deposits.unexplained wealth while in public office. ." The only conclusion possible is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. There it was held: "The result is that although Sec. and [therefore] may not be examined. 1965 invites comparison with this case. 54. an amendment to Sec. Indeed. Issue: WON a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for unexplained wealth? Held: The truth is that these laws are so repugnant to each other that no reconciliation is possible.” With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential. at most. July 31. . the presumption against the intent to repeal by implication is overthrown because the inconsistency or repugnancy reveals an intent to repeal the existing law. L-20808. 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. 1405 declares bank deposits to be "absolutely confidential" it nevertheless allows such disclosure in the following instances: (1) Upon written permission of the depositor. PNB appealed to this court." except in those cases enumerated therein. The policy as to one cannot be different from the policy as to the other. . or to mention the name of his candidate for public office. even if such expression of views or mention of names may result in aiding one particular candidate. G. inquired or looked into. is open to public scrutiny. And whether a statute. 54. it is said that if the new law is inconsistent with or repugnant to the old law. (4) In cases where the money deposited is the subject of the litigation. (2) Upon order of a competent court in cases of bribery or dereliction of duty of public officials. so far as relevant to his duty.