11.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK

v.
THE MONETARY BOARD, CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ,
CARLOTA P. VALENZUELA, ARNULFO B. AURELLANO and RAMON V. TIAOQUIG

G.R. No. 70054; December 11, 1991

The test of insolvency laid down in Section 29 of the Central Bank Act is measured by determining whether the
realizable assets of a bank are leas than its liabilities. Hence, a bank is solvent if the fair cash value of all its
assets, realizable within a reasonable time by a reasonable prudent person, would equal or exceed its total
liabilities exclusive of stock liability; but if such fair cash value so realizable is not sufficient to pay such liabilities
within a reasonable time, the bank is insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated in other
words, the insolvency of a bank occurs when the actual cash market value of its assets is insufficient to pay its
liabilities, not considering capital stock and surplus which are not liabilities for such purpose (Exley v. Harris, 267
p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n 115,117).

Facts:

This refers to nine (9) consolidated cases concerning the legality of the closure and receivership of petitioner
Banco Filipino Savings and Mortgage Bank (Banco Filipino for brevity) pursuant to the order of respondent
Monetary Board. Six (6) of these cases, namely, G.R. Nos. 68878, 77255-68, 78766, 81303, 81304 and 90473
involve the common issue of whether or not the liquidator appointed by the respondent Central Bank (CB for
brevity) has the authority to prosecute as well as to defend suits, and to foreclose mortgages for and in behalf of the
bank while the issue on the validity of the receivership and liquidation of the latter is pending resolution in G.R.
No. 7004. Corollary to this issue is whether the CB can be sued to fulfill financial commitments of a closed bank
pursuant to Section 29 of the Central Bank Act. On the other hand, the other three (3) cases, namely, G.R. Nos.
70054, which is the main case, 78767 and 78894 all seek to annul and set aside M.B. Resolution No. 75 issued by
respondents Monetary Board and Central Bank on January 25, 1985.

Banco Filipino Savings and Mortgage Bank commenced operations on July 9, 1964. It has 89 operating
branches with more than 3 million depositors. It has an approved emergency advance of P119.7 million. The
Monetary Board placed Banco Filipino Savings and Mortgage Bank under conservatorship of Basilio Estanislao.
He was later replaced by Gilberto Teodoro as conservator on August 10, 1984. Gilberto Teodoro submitted a report
dated January 8, 1985 to respondent The Monetary Board on the conservatorship of the bank. Subsequently,
another report dated January 23, 1985 was submitted to the Monetary Board by Ramon Tiaoqui regarding the
major findings of examination on the financial condition of Banco Filipino Savings and Mortgage Bank as of July
31, 1984, finding the bank one of insolvency and illiquidity and provides sufficient justification for forbidding the
bank from engaging in banking. The Monetary Board ordered the closure of Banco Filipino and designated Mrs.
Carlota P. Valenzuela as Receiver.

Banco Filipino filed a complaint with the RTC to set aside the action of the Monetary Board placing the bank
under receivership and filed with the SC the petition for certiorari and mandamus. Carlota Valenzuela, as Receiver
and Arnulfo Aurellano and Ramon Tiaoqui as Deputy Receivers of Banco Filipino submitted their report on the
receivership of the bank to the Monetary Board, finding that the condition of the banking institution continues to be
one of insolvency, i.e., its realizable assets are insufficient to meet all its liabilities and that the bank cannot resume
business with safety to its depositors, other creditors and the general public, and recommends the liquidation of the
bank.

Banco Filipino filed a motion before the SC praying that a restraining order or a writ of preliminary injunction
be issued to enjoin respondents from causing the dismantling of Banco Filipino signs in its main office and 89
branches. The SC ordered the issuance of the temporary restraining order. The SC directed the Monetary Board and
Central Bank hold hearings at which the Banco Filipino should be heard.

Issue:

DId the Central Bank and the Monetary Board acted arbitrarily and in bad faith in finding and thereafter
concluding that Banco Filipino Savings and Mortgage Bank is insolvent, and in ordering its closure?

Held:

YES.

The closure and receivership of Banco Filipino Savings and Mortgage Bank, which was ordered by the
Monetary Board on is null and void.

The Monetary Board may order the cessation of operations of a bank in the Philippine and place it under
receivership upon a finding of insolvency or when its continuance in business would involve probable loss its
depositors or creditors. If the Monetary Board shall determine and confirm within 60 days that the bank is
insolvent or can no longer resume business with safety to its depositors, creditors and the general public, it shall, if
public interest will be served, order its liquidation.

Under Section 29 of the Central Bank Act, the following are the mandatory requirements to be complied with
before a bank found to be insolvent is ordered closed and forbidden to do business in the Philippines: (1)an
examination shall be conducted by the head of the appropriate supervising or examining department or his
examiners or agents into the condition of the bank; (2) it shall be disclosed in the examination that the condition of
the bank is one of insolvency, or that its continuance in business would involve probable loss to its depositors or
creditors; (3) the department head concerned shall inform the Monetary Board in writing, of the facts; and (4) the
Monetary Board shall find the statements of the department head to be true.

Clearly, Tiaoqui based his report on an incomplete examination of the bank and outrightly concluded that the
latter's financial status was one of insolvency or illiquidity. He arrived at the conclusion: that as of July 31, 1984,
total capital accounts consisting of paid-in capital and other capital accounts such as surplus, surplus reserves and
undivided profits aggregated ₱351.8 million; that capital adjustments, however, wiped out the capital accounts and
placed the bank with a capital deficiency amounting to ₱334.956 million; that the biggest adjustment which
contributed to the deficit is the provision for estimated losses on accounts classified as doubtful and loss which was
computed at ₱600.4 million pursuant to the examination. The valuation which was set up or deducted against the
capital accounts of the bank in arriving at the latter's financial condition. Tiaoqui admits the insufficiency and
unreliability of the findings of the examiner as to the setting up of recommended valuation reserves from the assets
of the bank.
 The examination contemplated in Sec. 29 of the CB Act as a mandatory requirement was not completely and
fully complied with. Despite the existence of the partial list of findings in the examination of the bank, there were
still highly significant items to be weighed and determined such as the matter of valuation reserves, before these
can be considered in the financial condition of the bank. It would be a drastic move to conclude prematurely that a
bank is insolvent if the basis for such conclusion is lacking and insufficient, especially if doubt exists as to whether
such bases or findings faithfully represent the real financial status of the bank.

In arriving at the computation of realizable assets of Banco Filipino, respondents used its books which
undoubtedly are not reflective of the actual cash or fair market value of its assets which is not the proper procedure
contemplated in Sec. 29 of the Central Bank Act. The receivership of Banco Filipino, indicates that total liabilities
of ₱4,540.84 million does not exceed the total assets of ₱4,981.53 million. Likewise, the consolidated statement of
condition of the bank prepared by the Central Bank Authorized Deputy Receiver Artemio Cruz shows that total
assets amounting to ₱4,981,522,996.22 even exceeds total liabilities amounting to ₱4,540,836,834.15. Based on the
foregoing, there was no valid reason for the Valenzuela, Aurellano and Tiaoqui report to finally recommend the
liquidation of Banco Filipino instead of its rehabilitation.