Professional Documents
Culture Documents
SECOND DIVISION On May 28, 2001, Go pleaded not guilty to the offense charged.
QUISUMBING, J., Chairperson, Before the trial could commence, however, Go filed on February 26, 2003[7] a
- versus - *
CARPIO, motion to quash the Information, which motion Go amended on March 1,
CARPIO MORALES, 2003.[8]Go claimed that the Information was defective, as the facts
BRION, and charged therein do not constitute an offense under Section 83 of RA
ABAD, JJ. 337 which states:
The Court does not find the petition meritorious and accordingly denies The language of the law is broad enough to encompass either
it. act of borrowing or guaranteeing, or both. While the first paragraph of Section
83 is penal in nature, and by principle should be strictly construed in favor of
The Accuseds Right to be Informed the accused, the Court is unwilling to adopt a liberal construction that would
defeat the legislatures intent in enacting the statute. The objective of the law
Under the Constitution, a person who stands charged of a should allow for a reasonable flexibility in its construction. Section 83 of RA
criminal offense has the right to be informed of the nature and cause of the 337, as well as other banking laws adopting the same prohibition, [17] was
accusation against him.[12]The Rules of Court, in implementing the right, enacted to ensure that loans by banks and similar financial institutions to
specifically require that the acts or omissions complained of as constituting their own directors, officers, and stockholders are above board. [18] Banks
the offense, including the qualifying and aggravating circumstances, must be were not created for the benefit of their directors and officers; they cannot
stated in ordinary and concise language, not necessarily in the language use the assets of the bank for their own benefit, except as may be permitted
used in the statute, but in terms sufficient to enable a person of common by law. Congress has thus deemed it essential to impose restrictions on
understanding to know what offense is being charged and the attendant borrowings by bank directors and officers in order to protect the public,
especially the depositors.[19] Hence, when the law prohibits directors and strengthens our conclusion that this criminal case should be resolved through
officers of banking institutions from becoming in any manner an obligor of the full-blown trial on the merits.
bank (unless with the approval of the board), the terms of the prohibition shall
be the standards to be applied to directors transactions such as those WHEREFORE, we DENY the petitioners petition for review
involved in the present case. on certiorari and AFFIRM the decision of the Court of Appeals in CA-G.R.
SP No. 79149, promulgated on October 26, 2006, as well as its resolution
Credit accommodation limit is not an of June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed
exception nor is it an element of the to PROCEED with the hearing of Criminal Case No. 99-178551. Costs
offense against the petitioner.
SO ORDERED.
Contrary to Gos claims, the second paragraph of Section 83, RA
337 does not provide for an exception to a violation of the first paragraph
thereof, nor does it constitute as an element of the offense charged. Section
83 of RA 337 actually imposes three restrictions: approval, reportorial, and
ceiling requirements.
CONTRARY TO LAW.[16]
A bank officer violates the DOSRI[2] law when he acquires bank funds for his personal The other Information[17] dated November 10, 2000 and docketed as Criminal Case No.
benefit, even if such acquisition was facilitated by a fraudulent loan application. Directors, 238-M-2001, was for violation of Section 83 of RA 337, as amended by PD 1795. The
officers, stockholders, and their related interests cannot be allowed to interpose the said provision refers to the prohibition against the so-called DOSRI loans. The
fraudulent nature of the loan as a defense to escape culpability for their circumvention information alleged that, in his capacity as President of RBSM, petitioner indirectly
of Section 83 of Republic Act (RA) No. 337.[3] secured an P8 million loan with RBSM, for his personal use and benefit, without the
Before us is a Petition for Review on Certiorari[4] under Rule 45 of the Rules written consent and approval of the bank's Board of Directors, without entering the said
of Court, assailing the September 26, 2003 Decision[5] and the February 5, transaction in the bank's records, and without transmitting a copy of the transaction to
2004Resolution[6] of the Court of Appeals (CA) in CA-G.R. SP No. 67657. The the supervising department of the bank. His ruse was facilitated by placing the loan in
challenged Decision disposed as follows: the name of an unsuspecting RBSM depositor, one Enrico Carlos.[18] The information
WHEREFORE, premises considered, the reads:
instant petition for certiorari is hereby DENIED.[7]
That in or about the month of April, 1997, and
Factual Antecedents thereafter, and within the jurisdiction of this Honorable Court,
the said accused, in his capacity as President of the Rural
Sometime in 2000, the Office of Special Investigation (OSI) of the Bangko Sentral ng Bank of San Miguel (Bulacan), Inc., did then and there,
Pilipinas (BSP), through its officers,[8] transmitted a letter[9] dated March 27, 2000 to willfully and feloniously indirectly borrow or secure a loan with
Jovencito Zuo, Chief State Prosecutor of the Department of Justice (DOJ). The letter the Rural Bank of San Miguel San Ildefonso branch, a
attached as annexes five affidavits,[10] which would allegedly serve as bases for filing domestic rural banking institution created, organized and
criminal charges for Estafa thru Falsification of Commercial Documents, in relation to existing under Philippine laws, amounting to eight million
Presidential Decree (PD) No. 1689,[11] and for Violation of Section 83 of RA 337, as pesos (PhP8,000,000.00), knowing fully well that the same
amended by PD 1795,[12] against, inter alia, petitioner herein Hilario P. Soriano. These has been done by him without the written consent and
five affidavits, along with other documents, stated that spouses Enrico and Amalia approval of the majority of the board of directors of the said
Carlos appeared to have an outstanding loan of P8 million with the Rural Bank of San bank, and which consent and approval the said accused
Miguel (Bulacan), Inc. (RBSM), but had never applied for nor received such loan; that it deliberately failed to obtain and enter the same upon the
was petitioner, who was then president of RBSM, who had ordered, facilitated, and records of said banking institution and to transmit a copy
received the proceeds of the loan; and that the P8 million loan had never been thereof to the supervising department of the said bank, as
authorized by RBSM's Board of Directors and no report thereof had ever been required by the General Banking Act, by using the name of
submitted to the Department of Rural Banks, Supervision and Examination Sector of one depositor Enrico Carlos of San Miguel, Bulacan, the
the BSP. The letter of the OSI, which was not subscribed under oath, ended with a latter having no knowledge of the said loan, and one in
request that a preliminary investigation be conducted and the corresponding criminal possession of the said amount of eight million pesos
charges be filed against petitioner at his last known address. (PhP8,000,000.00), accused converted the same to his own
personal use and benefit, in flagrant violation of the said law.
Acting on the letter-request and its annexes, State Prosecutor Albert R. Fonacier
proceeded with the preliminary investigation. He issued a subpoena with the witnesses CONTRARY TO LAW.[19]
affidavits and supporting documents attached, and required petitioner to file his counter-
affidavit. In due course, the investigating officer issued a Resolution finding probable Both cases were raffled to Branch 79 of the RTC of Malolos, Bulacan.[20]
cause and correspondingly filed two separate informations against petitioner before the
Regional Trial Court (RTC) of Malolos, Bulacan.[13] On June 8, 2001, petitioner moved to quash[21] these informations on two grounds: that
the court had no jurisdiction over the offense charged, and that the facts charged do not
The first Information,[14] dated November 14, 2000 and docketed as Criminal Case No. constitute an offense.
237-M-2001, was for estafa through falsification of commercial documents, under Article
315, paragraph 1(b), of the Revised Penal Code (RPC), in relation to Article 172 of the On the first ground, petitioner argued that the letter transmitted by the BSP to the DOJ
RPC and PD 1689. It basically alleged that petitioner and his co-accused, in abuse of constituted the complaint and hence was defective for failure to comply with the
the confidence reposed in them as RBSM officers, caused the falsification of a number mandatory requirements of Section 3(a), Rule 112 of the Rules of Court, such as the
of loan documents, making it appear that one Enrico Carlos filled up the same, and statement of address of petitioner and oath and subscription.[22] Moreover, petitioner
thereby succeeded in securing a loan and converting the loan proceeds for their argued that the officers of OSI, who were the signatories to the letter-complaint, were
personal gain and benefit.[15] The information reads: not authorized by the BSP Governor, much less by the Monetary Board, to file the
complaint.According to petitioner, this alleged fatal oversight violated Section 18, pars.
(c) and (d) of the New Central Bank Act (RA 7653).
On the second ground, petitioner contended that the commission of estafa under III
paragraph 1(b) of Article 315 of the RPC is inherently incompatible with the violation of Is a petition for certiorari under Rule 65 the proper remedy
DOSRI law (as set out in Section 83[23] of RA 337, as amended by PD 1795),[24] hence against an Order denying a Motion to Quash?
a person cannot be charged for both offenses. He argued that a violation of DOSRI law
requires the offender to obtain a loan from his bank, without complying with procedural, IV
reportorial, or ceiling requirements. On the other hand, estafa under par. 1(b), Article 315 Whether petitioner is entitled to a writ of injunction.
of the RPC requires the offender to misappropriate or convert something that he holds
in trust, or on commission, or for administration, or under any other obligation
involving the duty to return the same.[25] Our Ruling
The petition lacks merit.
Essentially, the petitioner theorized that the characterization of possession
is different in the two offenses. If petitioner acquired the loan as DOSRI, he owned the First Issue:
loaned money and therefore, cannot misappropriate or convert it as contemplated in the
offense of estafa. Conversely, if petitioner committed estafa, then he merely held the Whether the complaint complied with the mandatory
money in trust for someone else and therefore, did not acquire a loan in violation of requirements provided under Section 3(a), Rule 112 of
DOSRI rules. the Rules of Court and Section 18, paragraphs (c) and
(d) of
Ruling of the Regional Trial Court Republic Act No. 7653
In an Order[26] dated August 8, 2001, the trial court denied petitioner's Motion to Quash Petitioner moved to withdraw the first issue from the
for lack of merit. The lower court agreed with the prosecution that the assailed OSI letter instant petition
was not the complaint-affidavit itself; thus, it need not comply with the requirements
under the Rules of Court. The trial court held that the affidavits, which were attached to On March 5, 2007, the Court noted[35] petitioner's Manifestation and Motion for Partial
the OSI letter, comprised the complaint-affidavit in the case. Since these affidavits were Withdrawal of the Petition[36] dated February 7, 2007. In the said motion, petitioner
duly subscribed and sworn to before a notary public, there was adequate compliance informed the Court of the promulgation of a Decision entitled Soriano v. Hon.
with the Rules. The trial court further held that the two offenses were separate and Casanova,[37] which also involved petitioner and similar BSP letters to the
distinct violations, hence the prosecution of one did not pose a bar to the other.[27] DOJ. According to petitioner, the said Decision allegedly ruled squarely on the nature of
the BSP letters and the validity of the sworn affidavits attached thereto. For this reason,
Petitioners Motion for Reconsideration was likewise denied in an Order petitioner moved for the partial withdrawal of the instant petition insofar as it involved the
dated September 5, 2001.[28] issue of whether or not a court can legally acquire jurisdiction over a complaint which
failed to comply with the mandatory requirements provided under Section 3(a), Rule 112
Aggrieved, petitioner filed a Petition for Certiorari[29] with the CA, reiterating his of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.[38]
arguments before the trial court.
Given that the case had already been submitted for resolution of the Court when
Ruling of the Court of Appeals petitioner filed his latest motion, and that all respondents had presented their positions
and arguments on the first issue, the Court deems it proper to rule on the same.
The CA denied the petition on both issues presented by petitioner.
In Soriano v. Hon. Casanova, the Court held that the
On the first issue, the CA determined that the BSP letter, which petitioner characterized affidavits attached to the BSP transmittal letter complied
to be a fatally infirm complaint, was not actually a complaint, but a transmittal or cover with the mandatory requirements under the Rules of Court.
letter only. This transmittal letter merely contained a summary of the affidavits which
were attached to it. It did not contain any averment of personal knowledge of the events To be sure, the BSP letters involved in Soriano v. Hon. Casanova[39] are not the same
and transactions that constitute the elements of the offenses charged. Being a mere as the BSP letter involved in the instant case. However, the BSP letters in Soriano v.
transmittal letter, it need not comply with the requirements of Section 3(a) of Rule 112 of Hon. Casanova and the BSP letter subject of this case are similar in the sense that they
the Rules of Court.[30] are all signed by the OSI officers of the BSP, they were not sworn to by the said officers,
they all contained summaries of their attached affidavits, and they all requested the
The CA further determined that the five affidavits attached to the transmittal letter should conduct of a preliminary investigation and the filing of corresponding criminal charges
be considered as the complaint-affidavits that charged petitioner with violation of Section against petitioner Soriano. Thus, the principle of stare decisis dictates that the ruling
83 of RA 337 and for Estafa thru Falsification of Commercial Documents. These in Soriano v. Hon. Casanova be applied in the instant case once a question of law has
complaint-affidavits complied with the mandatory requirements set out in the Rules of been examined and decided, it should be deemed settled and closed to further
Court they were subscribed and sworn to before a notary public and subsequently argument.[40]
certified by State Prosecutor Fonacier, who personally examined the affiants and was
convinced that the affiants fully understood their sworn statements.[31] We held in Soriano v. Hon. Casanova, after a close scrutiny of the letters
transmitted by the BSP to the DOJ, that these were not intended to be the complaint, as
Anent the second ground, the CA found no merit in petitioner's argument that the envisioned under the Rules. They did not contain averments of personal knowledge of
violation of the DOSRI law and the commission of estafa thru falsification of commercial the events and transactions constitutive of any offense. The letters merely transmitted
documents are inherently inconsistent with each other. It explained that the test in for preliminary investigation the affidavits of people who had personal knowledge of the
considering a motion to quash on the ground that the facts charged do not constitute an acts of petitioner. We ruled that these affidavits, not the letters transmitting them, initiated
offense, is whether the facts alleged, when hypothetically admitted, constitute the the preliminary investigation. Since these affidavits were subscribed under oath by the
elements of the offense charged. The appellate court held that this test was sufficiently witnesses who executed them before a notary public, then there was substantial
met because the allegations in the assailed informations, when hypothetically admitted, compliance with Section 3(a), Rule 112 of the Rules of Court.
clearly constitute the elements of Estafa thru Falsification of Commercial Documents
and Violation of DOSRI law.[32] Anent the contention that there was no authority from the BSP Governor or the
Monetary Board to file a criminal case against Soriano, we held that the requirements of
[33]
Petitioners Motion for Reconsideration was likewise denied for lack of merit. Section 18, paragraphs (c) and (d) of RA 7653 did not apply because the BSP did not
institute the complaint but merely transmitted the affidavits of the complainants to the
Hence, this petition. DOJ.
Issues We further held that since the offenses for which Soriano was charged were public
Restated, petitioner raises the following issues[34] for our consideration: crimes, authority holds that it can be initiated by any competent person with personal
knowledge of the acts committed by the offender. Thus, the witnesses who executed
I the affidavits clearly fell within the purview of any competent person who may institute
Whether the complaint complied with the mandatory the complaint for a public crime.
requirements provided under Section 3(a), Rule 112 of the The ruling in Soriano v. Hon. Casanova has been adopted and elaborated
Rules of Court and Section 18, paragraphs (c) and (d) of RA upon in the recent case of Santos-Concio v. Department of Justice.[41] Instead of a
7653. transmittal letter from the BSP, the Court in Santos-Concio was faced with an NBI-NCR
Report, likewise with affidavits of witnesses as attachments. Ruling on the validity of the
II witnesses sworn affidavits as bases for a preliminary investigation, we held:
Whether a loan transaction within the ambit of the DOSRI law
(violation of Section 83 of RA 337, as amended) could also The Court is not unaware of the practice of
be the subject of Estafa under Article 315 (1) (b) of the incorporating all allegations in one document denominated
Revised Penal Code. as complaint-affidavit. It does not pronounce strict adherence
to only one approach, however, for there are cases where sufficient evidence has been gathered and evaluated which
the extent of ones personal knowledge may not cover the may warrant the eventual prosecution of the case in court.[42]
entire gamut of details material to the alleged offense. The
private offended party or relative of the deceased may not Following the foregoing rulings in Soriano v. Hon. Casanova and Santos-Concio v.
even have witnessed the fatality,in which case the peace Department of Justice, we hold that the BSP letter, taken together with the affidavits
officer or law enforcer has to rely chiefly on affidavits of attached thereto, comply with the requirements provided under Section 3(a), Rule 112
witnesses. The Rules do not in fact preclude the attachment of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.
of a referral or transmittal letter similar to that of the NBI- Second Issue:
NCR. Thus, in Soriano v. Casanova, the Court held:
Whether a loan transaction within the ambit of the
A close scrutiny of DOSRI law (violation of Section 83 of RA 337, as
the letters transmitted by the BSP amended) could be the subject of Estafa under Article
and PDIC to the DOJ shows that 315 (1) (b) of the
these were not intended to Revised Penal Code
be the complaint envisioned
under the Rules. It may be clearly The second issue was raised by petitioner in the context of his Motion to
inferred from the tenor of the Quash Information on the ground that the facts charged do not constitute an offense.[43] It
letters that the officers merely is settled that in considering a motion to quash on such ground, the test is whether the
intended to transmit the affidavits facts alleged, if hypothetically admitted, would establish the essential elements of the
of the bank employees to the offense charged as defined by law. The trial court may not consider a situation contrary
DOJ. Nowhere in the transmittal to that set forth in the criminal complaint or information. Facts that constitute the defense
letters is there any averment on of the petitioner[s] against the charge under the information must be proved by [him]
the part of the BSP and PDIC during trial. Such facts or circumstances do not constitute proper grounds for a motion
officers of personal knowledge of to quash the information on the ground that the material averments do not constitute the
the events and transactions offense.[44]
constitutive of the criminal We have examined the two informations against petitioner and we find that they contain
violations alleged to have been allegations which, if hypothetically admitted, would establish the essential elements of
made by the accused.In fact, the the crime of DOSRI violation and estafa thru falsification of commercial documents.
letters clearly stated that what the
OSI of the BSP and the LIS of the In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the information alleged
PDIC did was to respectfully that petitioner Soriano was the president of RBSM; that he was able to indirectly obtain
transmit to the DOJ for a loan from RBSM by putting the loan in the name of depositor Enrico Carlos; and that
preliminary investigation the he did this without complying with the requisite board approval, reportorial, and ceiling
affidavits and personal requirements.
knowledge of the acts of the
petitioner. These affidavits were In Criminal Case No. 237-M-2001 for estafa thru falsification of commercial documents,
subscribed under oath by the the information alleged that petitioner, by taking advantage of his position as president
witnesses who executed them of RBSM, falsified various loan documents to make it appear that an Enrico Carlos
before a notary public. Since secured a loan of P8 million from RBSM; that petitioner succeeded in obtaining the loan
the affidavits, not the letters tr proceeds; that he later converted the loan proceeds to his own personal gain and
ansmitting them, were intended benefit; and that his action caused damage and prejudice to RBSM, its creditors, the
to initiate the preliminary BSP, and the PDIC.
investigation, we hold that Section
3(a), Rule 112 of the Rules of Significantly, this is not the first occasion that we adjudge the sufficiency of similarly
Court was substantially complied worded informations. In Soriano v. People,[45] involving the same petitioner in this case
with. (but different transactions), we also reviewed the sufficiency of informations for DOSRI
violation and estafa thru falsification of commercial documents, which were almost
Citing the ruling of this identical, mutatis mutandis, with the subject informations herein. We held in Soriano v.
Court in Ebarle v. Sucaldito, the People that there is no basis for the quashal of the informations as they contain material
Court of Appeals correctly held allegations charging Soriano with violation of DOSRI rules and estafa thru falsification of
that a complaint for purposes of commercial documents.
preliminary investigation by the
fiscal need not be filed by the Petitioner raises the theory that he could not possibly be held liable for
offended party. The rule has estafa in concurrence with the charge for DOSRI violation. According to him, the DOSRI
been that, unless the offense charge presupposes that he acquired a loan, which would make the loan proceeds
subject thereof is one that his own money and which he could neither possibly misappropriate nor convert to the
cannot be prosecuted de prejudice of another, as required by the statutory definition of estafa.[46] On the other
oficio, the same may be filed, for hand, if petitioner did not acquire any loan, there can be no DOSRI violation to speak
preliminary investigation of. Thus, petitioner posits that the two offenses cannot co-exist. This theory does not
purposes, by any competent persuade us.
person. The crime of estafa is a
public crime which can be initiated Petitioners theory is based on the false premises that the loan was
by any competent person. The extended to him by the bank in his own name, and that he became the owner of the
witnesses who executed the loan proceeds. Both premises are wrong.
affidavits based on their personal
knowledge of the acts committed The bank money (amounting to P8 million) which came to the possession
by the petitioner fall within the of petitioner was money held in trust or administration by him for the bank, in his
purview of any competent person
who may institute the complaint fiduciary capacity as the President of said bank.[47] It is not accurate to say that petitioner
for a public crime. x x x (Emphasis became the owner of the P8 million because it was the proceeds of a loan. That would
and italics supplied) have been correct if the bank knowingly extended the loan to petitioner himself. But that
is not the case here. According to the information for estafa, the loan was supposed to
A preliminary investigation can thus validly proceed be for another person, a certain Enrico Carlos; petitioner, through falsification, made it
on the basis of an affidavit of any competent person, without appear that said Enrico Carlos applied for the loan when in fact he (Enrico Carlos) did
the referral document, like the NBI-NCR Report, having been not.Through such fraudulent device, petitioner obtained the loan proceeds and
sworn to by the law enforcer as the nominal complainant. To converted the same. Under these circumstances, it cannot be said that petitioner
require otherwise is a needless exercise. The cited case became the legal owner of the P8 million. Thus, petitioner remained the banks fiduciary
of Oporto, Jr. v. Judge Monserate does not appear to dent with respect to that money, which makes it capable of misappropriation or conversion in
this proposition. After all, what is required is to reduce the his hands.
evidence into affidavits, for while reports and even raw
information may justify the initiation of an investigation, the The next question is whether there can also be, at the same time, a charge
preliminary investigation stage can be held only after for DOSRI violation in such a situation wherein the accused bank officer did not secure
a loan in his own name, but was alleged to have used the name of another person in
order to indirectly secure a loan from the bank. We answer this in the affirmative. Section special defenses he had invoked in his motion to quash and
83 of RA 337 reads: if after trial on the merits, an adverse decision is rendered, to
appeal therefrom in the manner authorized by law. Thus,
Section 83. No director or officer of any banking petitioners should not have forthwith filed a special civil action
institution shall, either directly or indirectly, for himself or as for certiorari with the CA and instead, they should have gone
the representative or agent of others, borrow any of the to trial and reiterated the special defenses contained in their
deposits of funds of such bank, nor shall he become a motion to quash. There are no special or exceptional
guarantor, indorser, or surety for loans from such bank to circumstances in the present case that would justify
others, or in any manner be an obligor for moneys borrowed immediate resort to a filing of a petition for certiorari. Clearly,
from the bank or loaned by it, except with the written approval the CA did not commit any reversible error, much less, grave
of the majority of the directors of the bank, excluding the abuse of discretion in dismissing the petition.[56]
director concerned. Any such approval shall be entered upon
the records of the corporation and a copy of such entry shall Fourth Issue:
be transmitted forthwith to the Superintendent of Banks. The
office of any director or officer of a bank who violates the Whether petitioner is entitled to a writ of injunction
provisions of this section shall immediately become vacant The requisites to justify an injunctive relief are: (1) the right of the complainant is clear
and the director or officer shall be punished by imprisonment and unmistakable; (2) the invasion of the right sought to be protected is material and
of not less than one year nor more than ten years and by a substantial; and (3) there is an urgent and paramount necessity for the writ to prevent
fine of not less than one thousand nor more than ten serious damage. A clear legal right means one clearly founded in or granted by law or
thousand pesos. x x x is enforceable as a matter of law. Absent any clear and unquestioned legal right, the
issuance of an injunctive writ would constitute grave abuse of discretion.[57] Caution and
The prohibition in Section 83 is broad enough to cover various modes of borrowing.[48] prudence must, at all times, attend the issuance of an injunctive writ because it effectively
It covers loans by a bank director or officer (like herein petitioner) which are made either: disposes of the main case without trial and/or due process.[58] In Olalia v. Hizon,[59] the
(1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. It Court held as follows:
applies even if the director or officer is a mere guarantor, indorser or surety for someone
else's loan or is in any manner an obligor for money borrowed from the bank or loaned It has been consistently held that there is no
by it. The covered transactions are prohibited unless the approval, reportorial and ceiling power the exercise of which is more delicate, which requires
requirements under Section 83 are complied with. The prohibition is intended to protect greater caution, deliberation and sound discretion, or more
the public, especially the depositors,[49] from the overborrowing of bank funds by bank dangerous in a doubtful case, than the issuance of an
officers, directors, stockholders and related interests, as such overborrowing may lead injunction. It is the strong arm of equity that should never be
to bank failures.[50] It has been said that banking institutions are not created for the benefit extended unless to cases of great injury, where courts of law
of the directors [or officers]. While directors have great powers as directors, they have cannot afford an adequate or commensurate remedy in
no special privileges as individuals. They cannot use the assets of the bank for their own damages.
benefit except as permitted by law. Stringent restrictions are placed about them so that Every court should remember that an injunction
when acting both for the bank and for one of themselves at the same time, they must is a limitation upon the freedom of action of the [complainant]
keep within certain prescribed lines regarded by the legislature as essential to safety in and should not be granted lightly or precipitately. It should be
the banking business.[51] granted only when the court is fully satisfied that the law
permits it and the emergency demands it.
A direct borrowing is obviously one that is made in the name of the DOSRI
himself or where the DOSRI is a named party, while an indirect borrowing includes one Given this Court's findings in the earlier issues of the instant case, we find no compelling
that is made by a third party, but the DOSRI has a stake in the transaction.[52] The latter reason to grant the injunctive relief sought by petitioner.
type indirect borrowing applies here. The information in Criminal Case 238-M-2001
alleges that petitioner in his capacity as President of Rural Bank of San Miguel San WHEREFORE, the petition is DENIED. The assailed September 26, 2003 Decision as
Ildefonso branch x x x indirectly borrow[ed] or secure[d] a loan with [RBSM] x x well as the February 5, 2004 Resolution of the Court of Appeals in CA-G.R. SP No.
x knowing fully well that the same has been done by him without the written consent and 67657 are AFFIRMED. Costs against petitioner.
approval of the majority of the board of directors x x x, and which consent and approval
the said accused deliberately failed to obtain and enter the same upon the records of SO ORDERED.
said banking institution and to transmit a copy thereof to the supervising department of
the said bank x x x by using the name of one depositor Enrico Carlos x x x, the latter
having no knowledge of the said loan, and once in possession of the said amount of
eight million pesos (P8 million), [petitioner] converted the same to his own personal use
and benefit.[53]
Third Issue:
EN BANC In this connection it appears that in the year 1920 El Hogar Filipino was the
holder of a recorded mortgage upon a tract of land in the municipality of San
Clemente, Province of Tarlac, as security for a loan of P24,000 to the
G.R. No. L-26649 July 13, 1927 shareholders of El Hogar Filipino who were the owners of said property. The
borrowers having defaulted in their payments, El Hogar Filipino foreclosed
the mortgage and purchased the land at the foreclosure sale for the net
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the
amount of the indebtedness, namely, the sum of P23,744.18. The auction
Attorney-General), plaintiff,
sale of the mortgaged property took place November 18, 1920, and the deed
vs.
conveying the property to El Hogar Filipino was executed and delivered
EL HOGAR FILIPINO, defendant.
December 22, 1920. On December 27, 1920, the deed conveying the
property to El Hogar Filipino was sent to the register of deeds of the Province
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff. of Tarlac, with the request that the certificate of title then standing in the name
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and of the former owners be cancelled and that a new certificate of title be issued
Antonio Sanz for defendant. in the name of El Hogar Filipino. Said deed was received in the office of the
Wm. J. Rohde as amicus curiae. register of deeds of Tarlac on December 28, 1920, together with the old
certificate of title, and thereupon the register made upon the said deed the
following annotation:
STREET, J.:
After issue had been thus joined upon the merits, the attorneys entered into On March 10, 1921, the board of directors of El Hogar Filipino adopted a
an elaborate agreement as to the fact, thereby removing from the field of resolution authorizing Vicente Bengzon, an agent of the corporation, to
dispute such matters of fact as are necessary to the solution of the endeavor to find a buyer for the San Clemente land. On July 27, 1921, El
controversy. It follows that we are here confronted only with the legal Hogar Filipino authorized one Jose Laguardia to endeavor to find a
questions arising upon the agreed statement. purchaser for the San Clemente land for the sum of P23,000 undertaking to
pay the said Laguardia a commission of 5 per centum of the selling price for
his services, but no offers to purchase were obtained through this agent or
On March 1, 1906, the Philippine Commission enacted what is known as the through the agent Bengzon. In July, 1923, plans of the San Clemente land
Corporation Law (Act No. 1459) effective upon April 1 of the same year. were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi,
Section 171 to 190, inclusive, of this Act are devoted to the subject of building as prospective purchasers, but no offers were received from them. In
and loan associations, defining their objects making various provisions January, 1926, the agent not having succeeded in finding a buyer, the San
governing their organization and administration, and providing for the Clemente land was advertised for sale by El Hogar Filipino in El Debate, La
supervision to be exercised over them. These provisions appear to be Vanguardia and Taliba, three newspapers of general circulation in the
adopted from American statutes governing building and loan associations Philippine Islands published in the City of Manila. On March 16, 1926, the
and they of course reflect the ideals and principles found in American law first offer for the purchase of the San Clemente land was received by El
relative to such associations. The respondent, El Hogar Filipino, was Hogar Filipino. This offer was made to it in writing by one Alcantara, who
apparently the first corporation organized in the Philippine Islands under the offered to buy it for the sum of P4,000, Philippine currency, payable P500 in
provisions cited, and the association has been favored with extraordinary cash, and the remainder within thirty days. Alcantara's offer having been
success. The articles of incorporation bear the date of December 28, 1910, reported by the manager of El Hogar Filipino to its board of directors, it was
at which time capital stock in the association had been subscribed to the decided, by a resolution adopted at a meeting of the board held on March
amount of P150,000 of which the sum of P10,620 had been paid in. Under 25, 1926, to accept the offer, and this acceptance was communicated to the
the law as it then stood, the capital of the Association was not permitted to prospective buyer. Alcantara was given successive extensions of the time,
exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the the last of which expired April 30, 1926, within which to make the payment
statute was so amended as to permit the capitalization of building and loan agreed upon; and upon his failure to do so El Hogar Filipino treated the
associations to the amount of ten millions. Soon thereafter the association contract with him as rescinded, and efforts were made at once to find another
took advantage of this enactment by amending its articles so as to provide buyer. Finally the land was sold to Doña Felipa Alberto for P6,000 by a public
that the capital should be in an amount not exceeding the then lawful limit. instrument executed before a notary public at Manila, P. I., on July 30, 1926.
From the time of its first organization the number of shareholders has
constantly increased, with the result that on December 31, 1925, the
association had 5,826 shareholders holding 125,750 shares, with a total Upon consideration of the facts above set forth it is evident that the strict
paid-up value of P8,703,602.25. During the period of its existence prior to the letter of the law was violated by the respondent; but it is equally obvious that
date last above-mentioned the association paid to withdrawing stockholders its conduct has not been characterized by obduracy or pertinacity in
the amount of P7,618,257,.72; and in the same period it distributed in the contempt of the law. Moreover, several facts connected with the incident tend
form of dividends among its stockholders the sum of P7,621,565.81. to mitigate the offense. The Attorney-General points out that the respondent
acquired title on December 22, 1920, when the deed was executed and
delivered, by which the property was conveyed to it as purchaser at its
First cause of action. — The first cause of action is based upon the alleged foreclosure sale, and this title remained in it until July 30, 1926, when the
illegal holding by the respondent of the title to real property for a period in property was finally sold to Felipa Alberto. The interval between these two
excess of five years after the property had been bought in by the respondent conveyances is thus more than five years; and it is contended that the five
at one of its own foreclosure sales. The provision of law relevant to the matter year period did not begin to run against the respondent until May 7, 1921,
is found in section 75 of Act of Congress of July 1, 1902 (repeated in when the register of deeds of Tarlac delivered the new certificate of title to
subsection 5 of section 13 of the Corporation Law.) In both of these the respondent pursuant to the deed by which the property was acquired. As
provisions it is in substance declared that while corporations may loan funds an equitable consideration affecting the case this contention, though not
decisive, is in our opinion more than respectable. It has been held by this institution of this action. It is evident from this that the dissolution of the
court that a purchaser of land registered under the Torrens system cannot respondent would not be an appropriate remedy in this case. We do not of
acquire the status of an innocent purchaser for value unless his vendor is course undertake to say that a corporation might not be dissolved for
able to place in his hands an owner's duplicate showing the title of such land offenses of this nature perpetrated in the past, especially if its conduct had
to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; exhibited a willful obduracy and contempt of law. We content ourselves with
Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, holding that upon the facts here before us the penalty of dissolution would
El Hogar Filipino was not really in a position to pass an indefeasible title to be excessively severe and fraught with consequences altogether
any purchaser. In this connection it will be noted that section 75 of the Act of disproportionate to the offense committed.
Congress of July 1, 1902, and the similar provision in section 13 of the
Corporation Law, allow the corporation "five years after receiving the title,"
within which to dispose of the property. A fair interpretation of these The evident purpose behind the law restricting the rights of corporations with
provisions would seem to indicate that the date of the receiving of the title in respect to the tenure of land was to prevent the revival of the entail
this case was the date when the respondent received the owner's certificate, (mayorazgo) or other similar institution by which land could be fettered and
or May 7, 1921, for it was only after that date that the respondent had an its alienation hampered over long periods of time. In the case before us the
unequivocal and unquestionable power to pass a complete title. The failure respondent corporation has in good faith disposed of the piece of property
of the respondent to receive the certificate sooner was not due in any wise which appears to have been in its hands at the expiration of the period fixed
to its fault, but to unexplained delay on the part of the register of deeds. For by law, and a fair explanation is given of its failure to dispose of it sooner.
this delay the respondent cannot be held accountable. Under these circumstances the destruction of the corporation would bring
irreparable loss upon the thousand of innocent shareholders of the
corporation without any corresponding benefit to the public. The discretion
Again, it is urged for the respondent that the period between March 25, 1926, permitted to this court in the application of the remedy of quo
and April 30, 1926, should not be counted as part of the five-year period. This warranto forbids so radical a use of the remedy.
was the period during which the respondent was under obligation to sell the
property to Alcantara, prior to the rescission of the contract by reason of
Alcantara's failure to make the stipulated first payment. Upon this point the But the case for the plaintiff supposes that the discretion of this court in
contention of the respondent is, in our opinion, well founded. The acceptance matters like that now before us has been expressly taken away by the third
by it of Alcantara's offer obligated the respondent to Alcantara; and if it had section of Act No. 2792, and that the dissolution of the corporation is
not been for the default of Alcantara, the effective sale of the property would obligatory upon the court a mere finding that the respondent has violated the
have resulted. The respondent was not at all chargeable with the collapse of provision of the Corporation Law in any respect. This makes necessary to
these negotiations; and hence in any equitable application of the law this examine the Act last above-mentioned with some care. Upon referring
period should be deducted from the five-year period within which the thereto, we find that it consists of three sections under the following style:
respondent ought to have made the sale. Another circumstance explanatory
of the respondent's delay in selling the property is found in the fact that it
No. 2792. — An Act to amend certain sections of the Corporation
purchased the property for the full amount of the indebtedness due to it from
Law, Act Numbered Fourteen hundred and fifty-nine, providing
the former owner, which was nearly P24,000. It was subsequently found that
for the publication of the assets and liabilities of corporations
the property was not salable for anything like that amount and in the end it
registering in the Bureau of Commerce and Industry, determining
had to be sold for P6,000, notwithstanding energetic efforts on the part of the
the liability of the officers of corporations with regard to the
respondent to find a purchaser upon better terms.
issuance of stock or bonus, establishing penalties for certain
things, and for other purposes.
The question then arises whether the failure of the respondent to get rid of
the San Clemente property within five years after it first acquired the deed
The first two section contain amendments to the Corporation Law with
thereto, even supposing the five-year period to be properly counted from that
respect to matters with which we are not here concurred. The third section
date, is such a violation of law as should work a forfeiture of its franchise and
contains anew enactment to be inserted as section 190 (A) in the corporation
require a judgment to be entered for its dissolution in this action of quo
Law immediately following section 190. This new section reads as follows:
warranto. Upon this point we do not hesitate to say that in our opinion the
corporation has not been shown to have offended against the law in a
manner that should entail a forfeiture of its charter. Certainly no court with SEC. 190. (A). Penalties. — The violation of any of the provisions
any discretion to use in the matter would visit upon the respondent and its of this Act and its amendments not otherwise penalized therein,
thousands of shareholders the extreme penalty of the law as a consequence shall be punished by a fine of not more than one thousand pesos,
of the delinquency here shown to have been committed. or by imprisonment for not more than five years, or both, in the
discretion of the court. If the violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General
The law applicable to the case is in our opinion found in section 212 of the
or by any provincial fiscal, by order of said Attorney-General:
Code of Civil Procedure, as applied by this court in Government of the
Provided, That nothing in this section provided shall be construed
Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil.,
to repeal the other causes for the dissolution of corporation
15). This section (212), in prescribing the judgment to be rendered against a
prescribed by existing law, and the remedy provided for in this
corporation in an action of quo warranto, among other things says:
section shall be considered as additional to the remedies already
existing.
. . . When it is found and adjudged that a corporation has
offended in any matter or manner which does not by law work as
The contention for the plaintiff is to the effect that the second sentence in this
a surrender or forfeiture, or has misused a franchise or exercised
enactment has entirely abrogated the discretion of this court with respect to
a power not conferred by law, but not of such a character as to
the application of the remedy of qou warranto, as expressed in section 212
work a surrender or forfeiture of its franchise, judgment shall be
of the Code of Civil Procedure, and that it is now mandatory upon us to
rendered that it be outset from the continuance of such offense
dissolved any corporation whenever we find that it has committed any
or the exercise of such power.
violation of the Corporation Law, however trivial. In our opinion in this radical
view of the meaning of the enactment is untenable. When the statute says,
This provision clearly shows that the court has a discretion with respect to "If the violation is committed by a corporation, the same shall, upon such
the infliction of capital punishment upon corporation and that there are certain violation being proved, be dissolved by quo warranto proceedings . . .," the
misdemeanors and misuses of franchises which should not be recognized intention was to indicate that the remedy against the corporation shall be by
as requiring their dissolution. In Government of the Philippine Islands vs. action of quo warranto. There was no intention to define the principles
Philippine Sugar Estates Development Co.(38 Phil., 15), it was found that the governing said remedy, and it must be understood that in applying the
offending corporation had been largely (though indirectly) engaged in the remedy the court is still controlled by the principles established in immemorial
buying and holding or real property for speculative purposes in contravention jurisprudence. The interpretation placed upon this language in the brief of the
of its charter and contrary to the express provisions of law. Moreover, in that Attorney-General would be dangerous in the extreme, since it would actually
case the offending corporation was found to be still interested in the place the life of all corporate investments in the official. No corporate
properties so purchased for speculative at the time the action was brought. enterprise of any moment can be conducted perpetually without some trivial
Nevertheless, instead of making an absolute and unconditional order for the misdemeanor against corporate law being committed by some one or other
dissolution of the corporation, the judgment of ouster was made conditional of its numerous employees. As illustrations of the preposterous effects of the
upon the failure of the corporation to discontinue its unlawful conduct within provision, in the sense contended for by the Attorney-General, the attorneys
six months after final decision. In the case before us the respondent appears for the respondent have called attention to the fact that under section 52 of
to have rid itself of the San Clemente property many months prior to the the Corporation Law, a business corporation is required to keep a stock book
and a transfer book in which the names of stockholders shall kept in
alphabetical order. Again, under section 94, railroad corporations are as to what the Legislature is about while bills are in process of passage. The
required to cause all employees working on passenger trains or at a station expression "establishing penalties for certain things" would give no definite
for passengers to wear a badge on his cap or hat which will indicate his office. information to anybody as to the project of legislation intended under this
Can it be supposed that the Legislature intended to penalize the violation of expression. An examination of the decided cases shows that courts have
such provisions as these by dissolution of the corporation involved? Evidently always been indulgent of the practices of the Legislature with respect to the
such could not have been the intention; and the only way to avoid the form and generality of title, for if extreme refinements were indulged by the
consequence suggested is to hold, as we now hold, that the provision now courts, the work of legislation would be unnecessarily hampered. But, as has
under consideration has not impaired the discretion of this court in applying been observed by the California court, there must be some reasonable limit
the writ of quo warranto. to the generality of titles that will be allowed. The measure of legality is
whether the title is sufficient to give notice of the general subject of the
proposed legislation to the persons and interests likely to be affected.
Another way to put the same conclusion is to say that the expression "shall
be dissolved by quo warrantoproceedings" means in effect, "may be
dissolved by quo warranto proceedings in the discretion of the court." The In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled
proposition that the word "shall" may be construed as "may", when "An Act to revise the Code of Civil Procedure of the State of California, by
addressed by the Legislature to the courts, is well supported in jurisprudence. amending certain sections, repealing others, and adding certain new
In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the sections." This title was held to embrace more than one subject, which were
Supreme Court of Pennsylvania had under consideration a statute providing not sufficiently expressed in the title. In discussing the question the court
as follows: said:
It shall be the duty of the court . . . to examine, inquire and * * * It is apparent that the language of the title of the act in
ascertain whether such corporation does in fact posses the right question, in and of itself, express no subject whatever. No one
or franchise to do the act from which such alleged injury to private could tell from the title alone what subject of legislation was dealt
rights or to the rights and franchises of other corporations results; with in the body of the act; such subject so far as the title of the
and if such rights or franchises have not been conferred upon act informs us, might have been entirely different from anything
such corporations, such courts, it exercising equitable to be found in the act itself.
power, shall, by injunction, at suit of the private parties or other
corporations, restrain such injurious acts.
We cannot agree with the contention of some of respondent's
counsel — apparently to some extent countenanced by a few
In an action based on this statute the plaintiff claimed injunctive relief as a authorities — that the provision of the constitution in question can
matter of right. But this was denied the court saying: be entirely avoided by the simple device of putting into the title of
an act words which denote a subject "broad" enough to cover
everything. Under that view, the title, "An act concerning the laws
Notwithstanding, therefore, the use of the imperative "shall" the of the state," would be good, and the convention and people who
injunction is not to be granted unless a proper case for injunction framed and adopted the constitution would be convicted of the
be made out, in accordance with the principles and practice of folly of elaborately constructing a grave constitutional limitation
equity. The word "shall" when used by the legislature to a court, of legislative power upon a most important subject, which the
is usually a grant of authority and means "may", and even if it be legislature could at once circumvent by a mere verbal trick. The
intended to be mandatory it must be subject to the necessary word "subject" is used in the constitution embrace but "one
limitation that a proper case has been made out for the exercise subject" it necessarily implies — what everybody knows — that
of the power. there are numerous subjects of the legislation, and declares that
only one of these subjects shall embraced in any one act. All
subjects cannot be conjured into one subject by the mere magic
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y.
of a word in a title.
Supp., 129, 133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24
Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572; In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court
16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], of New Jersey made the following observation:
387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506;
Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 * * * It is true, that it may be difficult to indicate, by a formula, how
N. W., 776). specialized the title of a statute must be; but it is not difficult to
conclude that it must mean something in the way of being a
notice of what is doing. Unless it does not enough that it
But section 3 of Act No. 2792 is challenged by the respondent on the ground embraces the legislative purpose — it must express it; and where
that the subject-matter of this section is not expressed in the title of the Act, the language is too general, it will accomplish the former, but not
with the result that the section is invalid. This criticism is in our opinion well the latter. Thus, a law entitled "An act for a certain purpose,"
founded. Section 3 of our organic law (Jones Bill) declares, among other would embrace any subject, but would express none, and,
things, that "No bill which may be enacted into law shall embrace more than consequently, it would not stand the constitutional test.
one subject, and that subject shall be expressed in the title of the bill." Any
law or part of a law passed by the Philippine Legislature since this provision
went into effect and offending against its requirement is necessarily void. The doctrine properly applicable in matters of this kind is, we think, fairly
summed up in a current repository of jurisprudence in the following language:
Upon examining the entire Act (No. 2792), we find that it is directed to three
ends which are successively dealt with in the first three sections of the Act. * * * While it may be difficult to formulate a rule by which to
But it will be noted that these three matters all relate to the Corporation Law; determine the extent to which the title of a bill must specialize its
and it is at once apparent that they might properly have been embodied in a object, it may be safely assumed that the title must not only
single Act if a title of sufficient unity and generality had been prefixed thereto. embrace the subject of proposed legislation, but also express it
Furthermore, it is obvious, even upon casual inspection, that the subject- clearly and fully enough to give notice of the legislative purpose.
matter of each of the first two sections is expressed and defined with (25 R. C. L., p. 853.)
sufficient precision in the title. With respect to the subject-matter of section 3
the only words in the title which can be taken to refer to the subject-matter of
said section are these, "An Act . . . establishing penalties for certain things, In dealing with the problem now before us the words "and for other purposes
and for other purposes." These words undoubtedly have sufficient generality "found at the end of the caption of Act No. 2792, must be laid completely out
to cover the subject-matter of section 3 of the Act. But this is not enough. The of consideration. They express nothing, and amount to nothing as a
Jones Law requires that the subject-matter of the bill "shall be expressed in compliance with the constitutional requirement to which attention has been
the title of the bill." directed. This expression "(for other purposes") is frequently found in the title
of acts adopted by the Philippine Legislature; and its presence in our laws is
due to the adoption by our Legislature of the style used in Congression
When reference is had to the expression "establishing penalties for certain allegation. But it must be remembered that the legislation of Congress is
things," it is obvious that these words express nothing. The constitutional subject to no constitutional restriction with respect to the title of bills.
provision was undoubtedly adopted in order that the public might be informed Consequently, in Congressional legislation the words "and for other
purposes" at least serve the purpose of admonishing the public that the bill cannot be fairly said that the area of the lot — 1,413 square meters — was
whose heading contains these words contains legislation upon other in excess of its reasonable requirements. The law expressly declares that
subjects than that expressed in the title. Now, so long as the Philippine corporations may acquire such real estate as is reasonably necessary to
Legislature was subject to no restriction with respect to the title of bills enable them to carry out the purposes for which they were created; and we
intended for enactment into general laws, the expression "for other purposes" are of the opinion that the owning of a business lot upon which to construct
could be appropriately used in titles, not precisely for the purpose of and maintain its offices is reasonably necessary to a building and loan
conveying information as to the matter legislated upon, but for the purpose association such as the respondent was at the time this property was
ad admonishing the public that any bill containing such words in the title acquired. A different ruling on this point would compel important enterprises
might contain other subjects than that expressed in the definitive part of the to conduct their business exclusively in leased offices — a result which could
title. But, when congress adopted the Jones Law, the restriction with which serve no useful end but would retard industrial growth and be inimical to the
we are now dealing became effective here and the words "for other best interests of society.
purposes" could no longer be appropriately used in the title of legislative bills.
Nevertheless, the custom of using these words has still been followed,
although they can no longer serve to cover matter not germane to the bill in We are furthermore of the opinion that, inasmuch as the lot referred to was
the title of which they are used. But the futility of adding these words to the lawfully acquired by the respondent, it is entitled to the full beneficial use
style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302) thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between
In the brief for the plaintiff it is intimated that the constitutional restriction owners in this respect is not lightly to be imputed to the Legislature. The point
which we have been discussing is more or less of a dead letter in this here involved has been the subject of consideration in many decisions of
jurisdiction; and it seems to be taken for granted that no court would ever American courts under statutes even more restrictive than that which prevails
presume to hold a legislative act or part of a legislative act invalid for non- in this jurisdiction; and the conclusion has uniformly been that a corporations
compliance with the requirement. This is a mistake; and no utterance of this whose business may properly be conducted in a populous center may
court can be cited as giving currency to any such notion. On the contrary the acquire an appropriate lot and construct thereon an edifice with facilities in
discussion contained in Central Capiz vs. Ramirez (40 Phil., 883), shows that excess of its own immediate requirements.
when a case arises where a violation of the restriction is apparent, the court
has no alternative but to declare the legislation affected thereby to be invalid.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366),
it appeared that the respondent corporation owned and controlled a large
Second cause of action. — The second cause of action is based upon a ten-story business block in the City of Chicago, worth $2,000,000, and that it
charge that the respondent is owning and holding a business lot, with the occupied only about one-fourth thereof for its own purposes, leasing the
structure thereon, in the financial district of the City of Manila is excess of its remainder to others at heavy rentals. The corporate charter merely permitted
reasonable requirements and in contravention of subsection 5 of section 13 the holding of such real estate by the respondent as might be necessary for
of the corporation Law. The facts on which this charge is based appear to be the successful prosecution of its business. An attempt was made to obtain
these: the dissolution of the corporation in a quo warranto proceeding similar to that
now before us, but the remedy was denied.
On August 28, 1913, the respondent purchased 1,413 square meters of land
at the corner of Juan Luna Street and the Muelle de la Industria, in the City In Rector vs. Hartford Deposit Co., a question was raised as to the power of
of Manila, immediately adjacent to the building then occupied by the the Deposit Company to erect and own a fourteen-story building —
Hongkong and Shanghai Banking Corporation. At the time the respondent containing eight storerooms, one hundred suites of offices, and one safety
acquired this lot there stood upon it a building, then nearly fifty years old, deposit vault, under a statute authorizing the corporation to possess so much
which was occupied in part by the offices of an importing firm and in part by real estate "as shall be necessary for the transaction of their business." The
warehouses of the same firm. The material used in the construction was court said:
Guadalupe stone and hewn timber, and the building contained none of the
facilities usually found in a modern office building.
That the appellee company possessed ample power to acquire
real property and construct a building thereon for the purpose of
In purchase of a design which had been formed prior to the purchase of the transacting therein the legitimate business of the corporation is
property, the directors of the El Hogar Filipino caused the old building to be beyond the range of debate. Nor is the contrary contended, but
demolished; and they erected thereon a modern reinforced concrete office the insistence is that, under the guise of erecting a building for
building. As at first constructed the new building was three stories high in the corporate purposes, the appellee company purposely
main, but in 1920, in order to obtain greater advantage from the use of the constructed a much larger building than its business required,
land, an additional story was added to the building, making a structure of four containing many rooms intended to be rented to others for offices
stories except in one corner where an additional story was place, making it and business purposes, — among them, the basement rooms
five stories high over an area of 117.52 square meters. It is admitted in the contracted to be leased to the appellant, — and that in so doing
plaintiffs brief that this "noble and imposing structure" — to use the words of it designedly exceeded its corporate powers. The position off
the Attorney-General — "has greatly improved the aspect of the banking and appellant therefore is that the appellee corporation has flagrantly
commercial district of Manila and has greatly contributed to the movement abused its general power to acquire real estate and construct a
and campaign for the Manila Beautiful." It is also admitted that the competed building thereon . . . It was within the general scope of the
building is reasonably proportionate in value and revenue producing capacity express powers of the appellee corporation to own and possess
to the value of the land upon which it stands. The total outlay of the a building necessary for its proper corporate purposes. In
respondent for the land and the improvements thereon was P690,000 and at planning and constructing such a building, as was said in People
this valuation the property is carried on the books of the company, while the vs. Pullman's Palace Car Co., supra, the corporation should not
assessed valuation of the land and improvements is at P786,478. necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more,
but that the future probable growth and volume of its business
Since the new building was completed the respondent has used about 324 might be considered and anticipated, and a larger building, and
square meters of floor space for its own offices and has rented the remainder one containing more rooms than the present volume of business
of the office space in said building, consisting of about 3,175 square meters, required be erected, and the rooms not needed might be rented
to other persons and entities. In the second cause of action of the complaint by the corporation, — provided, of course, such course should
it is supposed that the acquisition of this lot, the construction of the new office be taken in good faith, and not as a mere evasion of the public
building thereon, and the subsequent renting of the same in great part to third law and the policy of the state relative to the ownership of real
persons, are ultra vires acts on the part of the corporation, and that the estate by corporations. In such state of case the question is
proper penalty to be enforced against it in this action is that if dissolution. whether the corporation has abused or excessively and
unjustifiably used the power and authority granted it by the state
to construct buildings and own real estate necessary for its
With this contention we are unable to agree. Under subsection 5 of section
corporate purposes.
13 of the Corporation Law, every corporation has the power to purchase,
hold and lease such real property as the transaction of the lawful business
of the corporation may reasonably and necessarily require. When this In Home savings building Association vs. Driver (129 Ky., 754), one of the
property was acquired in 1916, the business of El Hogar Filipino had questions before the court was precisely the same as that now before us.
developed to such an extent, and its prospects for the future were such as to Upon this the Supreme Court of Kentucky said:
justify its directors in acquiring a lot in the financial district of the City of Manila
and in constructing thereon a suitable building as the site of its offices; and it
The third question is, has the association the right to erect, law forbids the bank constructing such a building as was
remodel, or own a building of more than sufficient capacity to contemplated.
accommodate its own business and to rent out the excess?
There is nothing in the Constitution, charter of the association, or
statutes placing any limitation upon the character of a building 'The reply was follows: "Your letter of the 9th instant received,
which a corporation may erect as a home in which to conduct its stating that the directors contemplate making improvements in
business. A corporation conducting a business of the character the bank building and inquiring if there is anything in the national
of that in which appellant is engaged naturally expects its banking laws prohibiting the construction of a building which will
business to grow and expand from time to time, and, in building contain floors for offices to be rented out by the bank as well as
a home it would be exercising but a short-sighted judgment if it the banking room. Your attention is called to the case of Brown
did not make provision for the future by building a home large vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court
enough to take care of its expanding business, and hence, even held that: 'If the land which a national bank purchases or leases
if it should build a house larger and roomier than its present for the accommodation of its business is very valuable it may
needs or interests require, it would be acting clearly with the exercise the same rights that belong to other landowners of
exercise of its corporate right and power. The limitation which the improving it in a way that will yield the largest income, lessen its
statute imposes is that proper conduct of its business, but it does own rent, and render that part of its funds which are invested in
not attempt to place any restriction or limitation upon the right of realty most productive.'" This seems to be the common sense
the corporation or association as to the character of building it interpretation of the act of Congress and is the one which
shall erect on said real estate; and, while the Constitution and the prevails.'
statutes provide that no corporation shall engage in any business
other than that expressly authorized by its charter, we are of
It would seem to be unnecessary to extend the opinion by lengthy citations
opinion that, in renting out the unoccupied and unused portions
upon the point under consideration, butBrown vs. Schleier (118 Fed., 981),
of the building so erected, the association could not be said to
may be cited as being in harmony with the foregoing authorities. In dealing
engaged in any other business than that authorized by its charter.
with the powers of a national bank the court, in this case, said:
The renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not say that
a building association might embark in the business of building When an occasion arises for an investment in real property for
houses and renting or leasing them, but there is quite a difference either of the purposes specified in the statute the national bank
in building or renting a house in which to conduct its own act permits banking associations to act as any prudent person
business and leasing the unused portion thereof for the time would act in making an investment in real estate, and to exercise
being, or until such time as they may be needed by the the same measure of judgment and discretion. The act ought not
association, and in building houses for the purpose of renting or to be construed in such as way as to compel a national bank,
leasing them. The one might properly be said to be the proper when it acquires real property for a legitimate purpose, to deal
exercise of a power incident to the conduct of its legitimate with it otherwise than a prudent land owner would ordinarily deal
business, whereas the other would be a clear violation of that with such property.
provision of the statute which denies to any corporation the right
to conduct any business other than that authorized by its charter.
To hold otherwise would be to charge most of the banking In the brief of the Attorney-General reliance is place almost entirely upon two
institutions, trust companies and other corporations, such as title Illinois cases, namely Africani Home Purchase and Loan Association vs.
guaranty companies, etc., doing with violating the law; for it is Carroll (267 Ill., 380), and First Methodist Episcopal Church of Chicago vs.
known that there are few of such institutions that do not, at times, Dixon (178 Ill., 260). In our opinion these cases are either distinguishable
rent out or lease the unneeded portions of the building occupied from that now before us, or they reflect a view of the law which is incorrect.
by them as homes. We do not think that in so doing they are At any rate the weight of judicial opinion is so overwhelmingly in favor of
violating any provisions of the law, but that the renting out of the sustaining the validity of the acts alleged in the second cause of action to
unused or unoccupied portions of their buildings is but an incident have been done by the respondent in excess of its powers that we refrain
in the conduct of their business. from commenting at any length upon said cases. The ground stated in the
second cause of action is in our opinion without merit.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741),
a stockholder sought to enjoin the bank from building a six-story building Third cause of action. — Under the third cause of action the respondent is
owned by the bank in the commercial district of Hagerstown of which only charged with engaging in activities foreign to the purposes for which the
the first story was to be used by the bank, the remaining stories to be rented corporation was created and not reasonable necessary to its legitimate ends.
out for offices and places of business, on the theory that such action The specifications under this cause of action relate to three different sorts of
was ultra vires and in violation of the provisions of the national banking act activities. The first consist of the administration of the offices in the El Hogar
confining such corporations to the holding, only, of such real estate "as shall building not used by the respondent itself and the renting of such offices to
be necessary for its immediate accommodation in the transaction of its the public. As stated in the discussion connected with the second cause of
business." action, the respondent uses only about ten per cent of the office space in the
El Hogar building for its own purposes, and it leases the remainder to
strangers. In the years 1924 and 1925 the respondent received as rent for
The injunction was denied, the court adopting the opinion of the lower court the leased portions of the building the sums of P75,395.06 and P58,259.27,
in which the following was said: respectively. The activities here criticized clearly fall within the legitimate
powers of the respondent, as shown in what we have said above relative to
the second cause of action. This matter will therefore no longer detain us. If
'The other ground urged by the complainant is that the proposed
the respondent had the power to acquire the lot, construct the edifice and
action is violative of the restriction which permits a national bank
hold it beneficially, as there decided, the beneficial administration by it of
to hold only such real estate as shall be necessary for its
such parts of the building as are let to others must necessarily be lawful.
immediate accommodation in the transaction of its business, and
that, therefore, the erection of a building which will contain offices
not necessary for the business of the bank is not permitted by the The second specification under the third cause of action has reference to the
law, although that method of improving the lot may be the most administration and management of properties belonging to delinquent
beneficial use that can be made of it. It is matter of common shareholders of the association. In this connection it appears that in case of
knowledge that the actual practice of national banks is to the delinquency on the part of its shareholders in the payment of interest,
contrary. Where ground is valuable, it may probably be truly said premium, and dues, the association has been accustomed (pursuant to
that the majority of national bank buildings are built with clause 8 of its standard mortgage) to take over and manage the mortgaged
accommodations in excess of the needs of the bank for the property for the purpose of applying the income to the obligations of the
purpose of lessening the bank's expense by renting out the debtor party. For these services the respondent charges a commission at the
unused portion. If that were not allowable, many smaller banks rate of 2½ per centum on sums collected. The case for the government
in cities would be driven to become tenants as the great cost of supposes that the only remedy which the respondent has in case of default
the lot would be prohibitive of using it exclusively for the banking on the part of its shareholders is to proceed to enforce collection of the whole
accommodation of a single bank. As indicative of the loan in the manner contemplated in section 185 of the Corporation Law. It
interpretation of the law commonly received and acted upon, will be noted, however, that, according to said section, the association may
reference may be made to the reply of the Comptroller of the treat the whole indebtedness as due, "at the option of the board of directors,"
Currency to the injury by the bank in this case asking whether the and this remedy is not made exclusive. We see no reason to doubt the
validity of the clause giving the association the right to take over the property
which constitutes the security for the delinquent debt and to manage it with Fourth cause of action. — It appears that among the by laws of the
a view to the satisfaction of the obligations due to the debtor than the association there is an article (No. 10) which reads as follows:
immediate enforcement of the entire obligation, and the validity of the clause
allowing this course to be taken appears to us to be not open to doubt. The
second specification under this cause of action is therefore without merit, as The board of directors of the association, by the vote of an
was true of the first. absolute majority of its members, is empowered to cancel shares
and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for
The third specification under this cause of action relates to certain activities any other motive, the continuation as members of the owners of
which are described in the following paragraphs contained in the agreed such shares is not desirable.
statements of facts:.
This by-law is of course a patent nullity, since it is in direct conflict with the
El Hogar Filipino has undertaken the management of some latter part of section 187 of the Corporation Law, which expressly declares
parcels of improved real estate situated in Manila not under that the board of directors shall not have the power to force the surrender
mortgage to it, but owned by shareholders, and has held itself and withdrawal of unmatured stock except in case of liquidation of the
out by advertisement as prepared to do so. The number of corporation or of forfeiture of the stock for delinquency. It is agreed that this
properties so managed during the years 1921 to 1925, inclusive, provision of the by-laws has never been enforced, and in fact no attempt has
was as follows: ever been made by the board of directors to make use of the power therein
conferred. In November, 1923, the Acting Insular Treasurer addressed a
letter to El Hogar Filipino, calling attention to article 10 of its by-laws and
1921 eight properties expressing the view that said article was invalid. It was therefore suggested
that the article in question should be eliminated from the by-laws. At the next
meeting of the board of directors the matter was called to their attention and
1922 six properties
it was resolved to recommend to the shareholders that in their next annual
meeting the article in question be abrogated. It appears, however, that no
1923 ten properties annual meeting of the shareholders called since that date has been attended
by a sufficient number of shareholders to constitute a quorum, with the result
that the provision referred to has no been eliminated from the by-laws, and it
1924 fourteen properties still stands among the by-laws of the association, notwithstanding its patent
conflict with the law.
1925 fourteen properties.
It is supposed, in the fourth cause of action, that the existence of this article
among the by-laws of the association is a misdemeanor on the part of the
This service is limited to shareholders; but some of the persons respondent which justifies its dissolution. In this view we are unable to
whose properties are so managed for them became concur. The obnoxious by-law, as it stands, is a mere nullity, and could not
shareholders only to enable them to take advantage thereof. be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid provision
in the by-laws of a corporation; and if there were such, the hazards incident
The services rendered in the management of such improved real
to corporate effort would certainly be largely increased. There is no merit in
estate by El Hogar Filipino consist in the renting of the same, the
payment of real estate taxes and insurance for the account of the this cause of action.
owner, causing the necessary repairs for upkeep to be made,
and collecting rents due from tenants. For the services so Fifth cause of action. — In section 31 of the Corporation Law it is declared
rendered in the management of such properties El Hogar Filipino that, "at all elections of directors there must be present, either in person or
receives compensation in the form of commissions upon the by representative authorized to act by written proxy, the owners of the
gross receipts from such properties at rates varying from two and majority of the subscribed capital stock entitled to vote. . . ." Conformably
one-half per centum to five per centum of the sums so collected, with this requirement it is declared in article 61 of the by-laws of El Hogar
according to the location of the property and the effort involved Filipino that, "the attendance in person or by proxy of shareholders owning
in its management. one-half plus one of the shareholders shall be necessary to constitute a
quorum for the election of directors. At the general annual meetings of the El
The work of managing real estate belonging to non-borrowing Hogar Filipino held in the years 1911 and 1912, there was a quorum of
shares present or represented at the meetings and directors were duly
shareholders administered by El Hogar Filipino is carried on by
the same members of the staff who attend to the details of the elected accordingly. As the corporation has grown, however, it has been fond
increasingly difficult to get together a quorum of the shareholders, or their
management of properties administered by the manager of El
Hogar Filipino under the provisions of paragraph 8 of the proxies, at the annual meetings; and with the exception of the annual meeting
held in 1917, when a new directorate was elected, the meetings have failed
standard mortgage form, and of properties bought in on
for lack of quorum. It has been foreseen by the officials in charge of the
foreclosure of mortgage.
respondent that this condition of affairs would lead to embarrassment, and a
special effort was made by the management to induce a sufficient number of
The practice described in the passage above quoted from the agreed facts shareholders to attend the annual meeting for February, 1923. In addition to
is in our opinion unauthorized by law. Such was the view taken by the bank the publication of notices in the newspapers, as required by the by-laws, a
examiner of the Treasury Bureau in his report to the Insular Treasurer on letter of notification was sent to every shareholder at his last known address,
December 21, 1925, wherein the practice in question was criticized. The together with a blank form of proxy to be used in the event the shareholder
administration of property in the manner described is more befitting to the could not personally attend the meeting. Notwithstanding these special
business of a real estate agent or trust company than to the business of a efforts the meeting was attended only by shareholders, in person and by
building and loan association. The practice to which this criticism is directed proxy, representing 3,889 shares, out of a total of 106,491 then outstanding
relates of course solely to the management and administration of properties and entitled to vote.
which are not mortgaged to the association. The circumstance that the owner
of the property may have been required to subscribe to one or more shares
Owing to the failure of a quorum at most of the general meetings since the
of the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such respondent has been in existence, it has been the practice of the directors to
fill vacancies in the directorate by choosing suitable persons from among the
express powers. The management and administration of the property of the
shareholders of the corporation is not expressly authorized by law, and we stockholders. This custom finds its sanction in article 71 of the by-laws, which
are unable to see that, upon any fair construction of the law, these activities reads as follows:
are necessary to the exercise of any of the granted powers. The corporation,
upon the point now under the criticism, has clearly extended itself beyond ART. 71. The directors shall elect from among the shareholders
the legitimate range of its powers. But it does not result that the dissolution members to fill the vacancies that may occur in the board of
of the corporation is in order, and it will merely be enjoined from further directors until the election at the general meeting.
activities of this sort.
It is supposed in the statement of the fifth cause of action in the complaint 1915
that the failure of the corporation to hold annual meetings and the filling of ............................. 24,032.85 25 961.31
vacancies in the directorate in the manner described constitute .....
misdemeanors on the part of the respondent which justify the resumption of
the franchise by the Government and dissolution of the corporation; and in 1916
this connection it is charge that the board of directors of the respondent has ............................. 27,539.50 28 983.55
become a permanent and self perpetuating body composed of wealthy men .....
instead of wage earners and persons of moderate means. We are unable to
see the slightest merit in the charge. No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual 1917
1,204.8
meetings; and their non-attendance at such meetings is doubtless to be ............................. 31,327.00 26
8
interpreted in part as expressing their satisfaction of the way in which things .....
have been conducted. Upon failure of a quorum at any annual meeting the
directorate naturally holds over and continues to function until another 1918
directorate is chosen and qualified. Unless the law or the charter of a 1,642.9
............................. 32,858.35 20
corporation expressly provides that an office shall become vacant at the 1
.....
expiration of the term of office for which the officer was elected, the general
rule is to allow the officer to holdover until his successor is duly qualified.
Mere failure of a corporation to elect officers does not terminate the terms of 1919
1,729.4
existing officers nor dissolve the corporation (Quitman Oil Company vs. ............................. 36,318.78 21
6
Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New .....
York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining
Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 1920
2,268.4
Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. ............................. 63,517.01 28
R., 486). The doctrine above stated finds expressions in article 66 of the by- 6
.....
laws of the respondent which declares in so many words that directors shall
hold office "for the term of one year on until their successors shall have been
1921
elected and taken possession of their offices." 1,472.6
............................. 36,815.33 25
1
.....
It result that the practice of the directorate of filling vacancies by the action
of the directors themselves is valid. Nor can any exception be taken to then 1922
personality of the individuals chosen by the directors to fill vacancies in the 1,725.3
............................. 43,133.73 25
body. Certainly it is no fair criticism to say that they have chosen competent 4
.....
businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man
for filling positions of responsibility in corporate affairs. 1923
1,473.0
............................. 39,773.61 27
9
.....
Sixth cause of action. — Under the sixth cause of action it is alleged that the
directors of El Hogar Filipino, instead of serving without pay, or receiving 1924
nominal pay or a fixed salary, — as the complaint supposes would be proper, 1,486.6
............................. 38,651.92 26
— have been receiving large compensation, varying in amount from time to 1
.....
time, out of the profits of the respondent. The facts relating to this cause of
action are in substance these:
1925
1,373.8
............................. 35,719.27 26
1
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net .....
profit shown by the annual balance sheet is distributed to the directors in
proportion to their attendance at meetings of the board. The compensation
paid to the directors from time to time since the organization was organized
It will be note that the compensation above indicated as accruing to the
in 1910 to the end of the year 1925, together with the number of meetings of
directorate as a whole has been divided among the members actually
the board held each year, is exhibited in the following table:
present at the different meetings. As a result of this practice, and the liberal
measure of compensation adopted, we find that the attendance of the
membership at the board meetings has been extraordinarily good. Thus,
Rate during the years 1920 to 1925, inclusive, when the board was composed of
Compensatio Number
per nine members, the attendance has regularly been eight meeting with the
n of
meeting exception of two years when the average attendance was seven. It is insisted
Year paid meeting
in the brief for the Attorney-General that the payment of the compensation
directors s
as a indicated is excessive and prejudicial to he interests of the shareholders at
as a whole held
whole large. For the respondent, attention is directed to the fact that the liberal
policy adopted by the association with respect to the compensation of the
1911 directors has had highly beneficial results, not only in securing a constant
P attendance on the part of the membership, but in obtaining their intelligent
............................. P 4,167.96 25
166.71 attention to the affairs of the association. Certainly, in this connection, the
.....
following words from the report of the government examiners for 1918 to the
Insular Treasurer contain matter worthy of consideration:
1912
............................. 10,511.87 29 362.47
..... The management of the association is entrusted to men of recognized ability
in financial affairs and it is believed that they have long foreseen all possible
future contingencies and that under such men the interests of the
stockholders are duly protected. The steps taken by the directorate to curtail
the influx of unnecessary capital into the association's coffers, as mentioned
above, reveals how the men at grasp the situation and to apply the necessary in favor of the association, in accordance with this contract, shall
remedy as the circumstances were found in the same excellent condition as and does constitute a condition precedent to the acquisition by
in the previous examination. Señor Melian of the right to the said participation in the profits of
the association, unless the non-performance of such obligations
shall be due to a fortuitous event or force majeure.
In so far as this court is concerned the question here before us is not one
concerning the propriety and wisdom of the measure of compensation
adopted by the respondent but rather the question of the validity of the In conformity with this agreement there was inserted in section 92 of the by-
measure. Upon this point there can, it seems to us, be no difference of laws of the association a provision recognizing the rights of Melian, as
intelligent opinion. The Corporation Law does not undertake to prescribe the founder, to 5 per centum of the net profits shown by the annual balance
rate of compensation for the directors of corporations. The power to fixed the sheet, payment of the same to be made to him or his heirs during the life of
compensation they shall receive, if any, is left to the corporation, to be the association. It is declared in said article that this portion of the earnings
determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority of the association is conceded to him in compensation for the studies, work
the compensation for the directors of El Hogar Filipino has been fixed in and contributions made by him for the organization of El Hogar Filipino and
section 92 of its by-laws, as already stated. The justice and property of this the performance on his part of the contract of January 11, 1911, above
provision was a proper matter for the shareholders when the by-laws were quoted. During the whole life of the association, thus far, it has complied with
framed; and the circumstance that, with the growth of the corporation, the the obligations assumed by it in the contract above- mentioned; and during
amount paid as compensation to the directors has increased beyond what the years 1911 to 1925, inclusive, it paid to him as founder's royalty the sum
would probably be necessary to secure adequate service from them is matter of P459,011.19, in addition to compensation received from the association
that cannot be corrected in this action; nor can it properly be made a basis by him in to remuneration of services to the association in various official
for depriving the respondent of its franchise, or even for enjoining it from capacities.
compliance with the provisions of its own by-laws. If a mistake has been
made, or the rule adopted in the by-laws meeting to change the rule. The
remedy, if any, seems to lie rather in publicity and competition, rather than in As a seventh cause of action it is alleged in the complaint that this royalty of
a court proceeding. The sixth cause of action is in our opinion without merit. the founder is "unconscionable, excessive and out of all proportion to the
services rendered, besides being contrary to and incompatible with the spirit
and purpose of building and loan associations." It is not alleged that the
Seventh cause of action. — It appears that the promoter and organizer of El making of this contract was beyond the powers of the association (ultra
Hogar Filipino was Mr. Antonio Melian, and in the early stages of the vires); nor it alleged that it is vitiated by fraud of any kind in its procurement.
organization of the association the board of directors authorized the Nevertheless, it is pretended that in making and observing said contract the
association to make a contract with him with regard to the services him respondent committed an offense requiring its dissolution, or, as is otherwise
therefor. Pursuant to this authority the president of the corporation, on suggested, that the association should be enjoined from performing the
January 11, 1911, entered into a written agreement with Mr. Melian, which is agreement.
reproduced in the agreed statement of facts and of which the important
clauses are these:
It is our opinion that this contention is entirely without merit. Stated in its true
simplicity, the primary question here is whether the making of a (possibly)
1. The corporation "El Hogar Filipino Sociedad Mutua de indiscreet contract is a capital offense in a corporation, — a question which
Construccion y Prestamos," and on its behalf its president, Don answers itself. No possible doubt exists as to the power of a corporation to
Antonio R. Roxas, hereby confers on Don Antonio Melian the contract for services rendered and to be rendered by a promoter in
office of manager of said association for the period of one year connection with organizing and maintaining the corporation. It is true that
from the date of this contract. contracts with promoters must be characterized by good faith; but could it be
said with certainty, in the light of facts existing at the time this contract was
made, that the compensation therein provided was excessive? If the amount
2. Don Antonio Melian accepts said office and undertakes to of the compensation now appears to be a subject of legitimate criticism, this
render the services thereto corresponding for the period of one must be due to the extraordinary development of the association in recent
year, as prescribed by the by-laws of the corporation, without years.
salary.
If the Melian contract had been clearly ultra vires — which is not charged and
3. Don Antonio Melian furthermore undertakes to pay for his own is certainly untrue — its continued performance might conceivably be
account, all the expenses incurred in the organization of the enjoined in such a proceeding as this; but if the defect from which it suffers
corporation. is mere matter for an action because Melian is not a party. It is rudimentary
in law that an action to annul a contract cannot be maintained without joining
both the contracting parties as defendants. Moreover, the proper party to
4. Don Antonio Melian further undertakes to lend to the
bring such an action is either the corporation itself, or some shareholder who
corporation, without interest the sum of six thousand pesos
has an interest to protect.
(P6,000), Philippine Currency, for the purpose of meeting the
expense of rent, office supplies, etcetera, until such time as the
association has sufficient funds of its own with which to return The mere fact that the compensation paid under this contract is in excess of
this loan: Provided, nevertheless, That the maximum period what, in the full light of history, may be considered appropriate is not a proper
thereof shall not exceed three (3) years. consideration for this court, and supplies no ground for interfering with its
performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995),
which was before this court nearly ten years ago, this court held that the El
5. Don Antonio Melian undertakes that the capital of the
Hogar Filipino is contract with Mr. Melian did not affect the association's legal
association shall amount to the sum of four hundred thousand
character. The inference is that the contract under consideration was then
pesos (P400,000), Philippine currency, par value, during the first
considered binding, and it occurred to no one that it was invalid. It would be
year of its duration.
a radical step indeed for a court to attempt to substitute its judgment for the
judgment of the contracting parties and to hold, as we are invited to hold
6. In compensation of the studies made and services rendered under this cause of action, that the making of such a contract as this removes
by Don Antonio Melian for its organization, the expenses incurred the respondent association from the pale of the law. The majority of the court
by him to that end, and in further consideration of the said loan is of the opinion that our traditional respect for the sanctity of the contract
of six thousand pesos (P6,000), and of the services to be obligation should prevail over the radical and innovating tendencies which
rendered by him as manager, and of the obligation assumed by find acceptance with some and which, if given full rein, would go far to sink
him that the nominal value of the capital of the association shall legitimate enterprise in the Islands into the pit of populism and bolshevism.
reach the sum of four hundred thousand pesos (P400,000) The seventh count is not sustainable.
during the first year of its duration, the corporation 'El Hogar
Filipino Sociedad Mutua de Construccion y Prestamos' hereby
Eight cause of action. — Under the fourth cause of action we had case where
grants him five per centum (5%) of the net profits to be earned
the alleged ground for the revocation of the respondent's charter was based
by it in each year during the period fixed for the duration of the
upon the presence in the by-laws of article 10 that was found to be
association by its articles of incorporation; Provided, that this
inconsistent with the express provisions of law. Under the eight cause of
participation in the profits shall be transmitted to the heirs of
action the alleged ground for putting an end to the corporate life of the
Señor Melian in the event of his death; And provided further, that
respondent is found in the presence of other articles in the by-laws, namely,
the performance of all the obligations assumed by Señor Melian
articles 70 and 76, which are alleged to be unlawful but which, as will
presently be seen, are entirely valid. Article 70 of the by-laws in effect
requires that persons elected to the board of directors must be holders of Preferred shares .................................. 1,503
shares of the paid up value of P5,000 which shall be held as security may be
put up in the behalf of any director by some other holder of shares in the Special shares ..................................... 20,884
amount stated. Article 76 of the by-laws declares that the directors waive
their right as shareholders to receive loans from the association.
Ordinary shares .................................. 103,363
El Hogar Filipino places real estate so purchased in its inventory at actual Upon careful consideration of the questions involved we find no reason to
cost, as determined by the amount bid on foreclosure sale; and thereafter doubt the right of the respondent to maintain these reserves. It is true that
until sold the book value of such real estate is depreciated at the rate fixed the corporation law does not expressly grant this power, but we think it is to
by the directors in accordance with their judgment as to each parcel, the be implied. It is a fact of common observation that all commercial enterprises
annual average depreciation having varied from nothing to a maximum of encounter periods when earnings fall below the average, and the prudent
14.138 per cent. The sales thereof, but sales are made for the best prices manager makes provision for such contingencies. To regard all surplus as
obtainable, whether greater or less than the book value. profit is to neglect one of the primary canons of good business practice.
Building and loan associations, though among the most solid of financial
institutions, are nevertheless subject to vicissitudes. Fluctuations in the
It is alleged in the complaint that depreciation is charged by the association dividend rate are highly detrimental to any fiscal institutions, while uniformity
at the rate of 10 per centum per annum. The agreed statement of facts on in the payments of dividends, continued over long periods, supplies the
this point shows that the annual average varies from nothing to a maximum surest foundations of public confidence.
of something over 14 per centum. We are thus left in the dark as to the
precise depreciation allowed from year to year. It is not claimed for the
Government that the association is without power to allow some The question now under consideration is not new in jurisprudence, for the
depreciation; and it is quite clear that the board of directors possesses a American courts have been called upon more than once to consider the
discretion in this matter. There is no positive provision of law prohibiting the legality of the maintenance of reserves by institutions of this or similar
association from writing off a reasonable amount for depreciation on its character.
assets for the purpose of determining its real profits; and article 74 of its by-
laws expressly authorizes the board of directors to determine each year the
In Greeff vs. Equitable Life Assurance Society, the court had under
amount to be written down upon the expenses of installation and the property
consideration a charter provision of a life insurance company, organized on
of the corporation. There can be no question that the power to adopt such a
the mutual plan, in its relation to the power of the company to provide
by-law is embraced within the power to make by-laws for the administration
reserves. There the statute provided that "the officers of the company, within
of the corporate affairs of the association and for the management of its
sixty days from the expiration of the first five years, from December 31, 1859,
business, as well as the care, control and disposition of its property (Act No.
and within the first sixty days of every subsequent period of five years, shall
1459, sec. 13 [7]). But the Attorney-General questions the exercise of the
cause a balance to be struck of the affairs of the company, which shall exhibit
direction confided to the board; and it is insisted that the excessive
its assets and liabilities, both present and contingent, and also the net
depreciation of the property of the association is objectionable in several
surplus, after deducting a sufficient amount to cover all outstanding risks and
respects, but mainly because it tends to increase unduly the reserves of the
other obligations. Each policy holder shall be credited with an equitable share
association, thereby frustrating the right of the shareholders to participate
of the said surplus."
annually and equally in the earnings of the association.
Thirteenth cause of action. — The specification under this head is, in effect, In the brief of the plaintiff a number of excerpts from textbooks and decisions
that the respondent association has made loans which, to the knowledge of have been collated in which the idea is developed that the primary design of
the associations officers were intended to be used by the borrowers for other building and loan associations should be to help poor people to procure
purposes than the building of homes. In this connection it appears that, homes of their own. This beneficent end is undoubtedly served by these
though loans have been made by the association exclusively to its associations, and it is not to be denied that they have been generally fostered
shareholders, no attempt has been made by it to control the borrowers with with this end in view. But in this jurisdiction at least the lawmaker has taken
respect to the use made of the borrowed funds, the association being content care not to limit the activities of building and loan associations in an exclusive
to see that the security given for the loan in each case is sufficient. On manner, and the exercise of the broader powers must in the end approve
December 31, 1925, the respondent had five hundred forty-four loans itself to the business community. Judging from the past history of these
outstanding secured by mortgages upon real estate and by the pledge of the institutions it can be truly said that they have done more to encourage thrift,
borrowers' shares in an amount sufficient at maturity to amortize the loans. economy and saving among the people at large than any other institution of
With respect to the nature of the real estate upon which these loans were modern times, not excepting even the saving banks. In this connection Mr.
made it appears that three hundred fifty-one loans were secured by Sundheim, in a late treatise upon the subject of the law of building and loan
mortgages upon city residences, seven by mortgages upon commercial associations, makes the following comment:
building in cities, and three mortgages upon unimproved city lots. At the
same time one hundred eighty-three of the loans were secured by mortgages
upon groves, sugar land, and rice land, with a total area of about 7,558 They have grown to such an extent in recent years that they no
hectares. From information gathered by the association from voluntary longer restrict their money to the home buyer, but loan their
statements of borrowers given at the time of application with respect to the money to the mere investor or dealer in real estate. They are the
use intended to be made of the borrowed funds, it appears that the amount holder of large mortgages secured upon farms, factories and
of P693,200 was borrowed to redeem real property from existing mortgages other business properties and rows of stores and dwellings. This
or pactos de retro, P280,800 to buy real estate, P449,100 to erect buildings, is not an abuse of their powers or departure from their main
P24,000 to improve and repair buildings, P1,480,900 for agricultural purposes, but only a natural and proper expansion along healthy
purposes, while the amount of P5,763,700 was borrowed for purposes not and legitimate lines. (Sundheim, Building and Loan Associations,
disclosed. sec. 7.)
Upon these facts an elaborate argument has been constructed in behalf of Speaking of the purpose for which loans may be made, the same author
the plaintiff to the effect that in making loans for other purposes than the adds:
building of residential houses the association has illegally departed from its
character and made itself amenable to the penalty of dissolution. Aside from
Loans are made for the purpose of purchasing a homestead, or
being directly opposed to the decision of this court in Lopez and Javelona vs.
other real estate, or for any lawful purpose or business, but there
El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil.,
is no duty or obligation of the association to inquire for what
249), this contention finds no substantial support in the prevailing decisions
purpose the loan is obtained, or to require any stipulation from
the borrower as to what use he will make of the money, or in any franchise of the association through the effluxion of time, or earlier liquidation
manner to supervise or control its disbursement. (Sundheim, of its business, the accumulated reserves and other properties will accrue to
Building and Loan Association, sec. 111.) the founder, or his heirs, and the then directors of the corporation and to
those persons who may at that time to be holders of the ordinary and special
shares of the corporation. In this connection we note that article 95 of the by-
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of laws reads as follows:
Occidental Negros, this court had before it the question whether a loan made
by the respondent association upon the security of a mortgage upon
agricultural land, — where the loan was doubtless used for agricultural ART. 95. The funds obtained by the liquidation of the association
purposes, — was usurious or not; and the case turned upon the point shall be applied in the first place to the repayment of shares and
whether, in making such loans, the association had violated the law and the balance, if any, shall be distribute in accordance with the
departed from its fundamental purposes. The conclusion of the court was system established for the distribution of annual profits.
that the loan was valid and could be lawfully enforced by a nonjudicial
foreclosure in conformity with the terms of the contract between the
association and the borrowing member. We now find no reason to depart It will be noted that the cause of action with which we are now concerned is
from the conclusion reached in that case, and it is unnecessary to repeat not directed to any positive misdemeanor supposed to have been committed
what was then said. The thirteenth cause of action must therefore be by the association. It has exclusive relation to what may happen some thirty-
pronounced unfounded. five years hence when the franchise expires, supposing of course that the
corporation should not be reorganized and continued after that date. There
is nothing in article 95 of the by-laws which is, in our opinion, subject to
Fourteenth cause of action. — The specification under this head is that the criticism. The real point of criticism is that upon the final liquidation of the
loans made by the defendant for purposes other than building or acquiring corporation years hence there may be in existence a reserve fund out of all
homes have been extended in extremely large amounts and to wealthy proportion to the requirements that may then fall upon it in the liquidation of
persons and large companies. In this connection attention is directed to eight the company. It seems to us that this is matter that may be left to the prevision
loans made at different times in the last several years to different persons or of the directors or to legislative action if it should be deemed expedient to
entities, ranging in amounts from P120,000 to P390,000 and to two large require the gradual suppression of the reserve funds as the time for
loans made to the Roxas Estate and to the Pacific Warehouse Company in dissolution approaches. It is no matter for judicial interference, and much less
the amounts of P1,122,000 and P2,320,000, respectively. In connection with could the resumption of the franchise on this ground be justified. There is no
the larger of the two after this loan was made the available funds of El Hogar merit in the fifteenth cause of action.
Filipino were reduced to the point that the association was compelled to take
advantage of certain provisions of its by-laws authorizing the postponement
of the payment of claims resulting from withdrawals, whereas previously the Sixteenth cause of action. — This part of the complaint assigns as cause of
association had always settled these claims promptly from current funds. At action that various loans now outstanding have been made by the
no time was there apparently any delay in the payment of matured shares; respondent to corporations and partnerships, and that these entities have in
but in four or five cases there was as much as ten months delay in the some instances subscribed to shares in the respondent for the sole purpose
payment of withdrawal applications. of obtaining such loans. In this connection it appears from the stipulation of
facts that of the 5,826 shareholders of El Hogar Filipino, which composed its
membership on December 31, 1925, twenty-eight are juridical entities,
There is little that can be said upon the legal aspects of this cause of action. comprising sixteen corporations and fourteen partnerships; while of the five
In so far, as it relates to the purposes for which these loans were made, the hundred forty-four loans of the association outstanding on the same date,
matter is covered by what was said above with reference to the thirteenth nine had been made to corporations an five to partnerships. It is also
cause of action; and in so far as it relates to the personality of the borrowers, admitted that some of these juridical entities became shareholders merely
the question belongs more directly to the discussion under the sixteenth for the purpose of qualifying themselves to take loans from the association,
cause of action, which will be found below. The point, then, which remains and the same is said with respect to many natural persons who have taken
for consideration here is whether it is a suicidal act on the part of a building shares in the association. Nothing is said in the agreed statement of facts on
and loan association to make loans in large amount. If the loans which are the point whether the corporations and partnerships that have taken loans
here the subject of criticism had been made upon inadequate security, from the respondent are qualified by law governing their own organization to
especially in case of the largest two, the consequences certainly would have enter into these contracts with the respondent.
been disastrous to the association in the extreme; but no such fact is alleged;
and it is to be assumed that none of the ten borrowers have defaulted in their
contracts. In section 173 of the Corporation Law it is declared that "any person" may
become a stockholder in building and loan associations. The word "person"
appears to be here used in its general sense, and there is nothing in the
Now, it must be admitted that two of these loans at least are of a very large context to indicate that the expression is used in the restricted sense of both
size, considering the average range of financial transaction in this country; natural and artificial persons, as indicated in section 2 of the Administrative
and the making of the largest loan was followed, as we have already see, Code. We would not say that the word "person" or persons," is to be taken in
with unpleasant consequences to the association in dealing with current this broad sense in every part of the Corporation Law. For instance, it would
claims. Nevertheless the agreed statement of facts shoes that all of the loan seem reasonable to say that the incorporators of a corporation ought to be
referred to are only ten out of a total of five hundred forty-four outstanding on natural persons, although in section 6 it is said that five or more "persons",
December 31, 1925; and the average of all the loans taken together is although in section 6 it is said that five or more "persons," not exceeding
modest enough. It appears that the chief examiner of banks and corporations fifteen, may form a private corporation. But the context there, as well as the
of the Philippine Treasury, after his examination of El Hogar Filipino at the common sense of the situation, suggests that natural persons are meant.
end of the year 1925, made a report concerning this association as of When it is said, however, in section 173, that "any person" may become a
January 31, 1926, in which he criticized the Pacific Warehouse Company stockholder in a building and loan association, no reason is seen why the
loan as being so large that it temporarily crippled the lending power of the phrase may not be taken in its proper broad sense of either a natural or
association for some time. This criticism was apparently justified as proper artificial person. At any rate the question whether these loans and the
comment on the activities of the association; but the question for use here to attendant subscriptions were properly made involves a consideration of the
decide is whether the making of this and the other large loans constitutes power of the subscribing corporations and partnerships to own the stock and
such a misuser of the franchise as would justify us in depriving the take the loans; and it is not alleged in the complaint that they were without
association of its corporate life. This question appears to us to be so simple power in the premises. Of course the mere motive with which subscriptions
as almost to answer itself. The law states no limit with respect to the size of are made, whether to qualify the stockholders to take a loan or for some other
the loans to be made by the association. That matter is confided to the reason, is of no moment in determining whether the subscribers were
discretion of the board of directors; and this court cannot arrogate to itself a competent to make the contracts. The result is that we find nothing in the
control over the discretion of the chosen officials of the company. If it should allegations of the sixteenth cause of action, or in the facts developed in
be thought wise in the future to put a limit upon the amount of loans to be connection therewith, that would justify us in granting the relief.
made to a single person or entity, resort should be had to the Legislature; it
is not a matter amenable to judicial control. The fourteenth cause of action is
therefore obviously without merit. Seventeenth cause of action. — Under the seventeenth cause of action, it is
charged that in disposing of real estates purchased by it in the collection of
its loans, the defendant has no various occasions sold some of the said real
Fifteenth cause of action. — The criticism here comes back to the supposed estate on credit, transferring the title thereto to the purchaser; that the
misdemeanor of the respondent in maintaining its reserve funds, — a matter properties sold are then mortgaged to the defendant to secure the payment
already discussed under the eleventh and twelfth causes of action. Under of the purchase price, said amount being considered as a loan, and carried
the fifteenth cause of action it is claimed that upon the expiration of the as such in the books of the defendant, and that several such obligations are
still outstanding. It is further charged that the persons and entities to which
said properties are sold under the condition charged are not members or
shareholders nor are they made members or shareholders of the defendant.
At the hearing of this claim, the claimant admitted such pending obligations,
EN BANC alleging at the same time that to guarantee the payment of drafts accepted
by him, he pledged his bank book No. 2266, which also answered for the
payment of any credit which the said bank may extend to him.
G.R. No. L-43682 March 31, 1938
IMPERIAL, J.: Having established the existence of such deposits in the name of the bank
alleged by the Bank Commissioner, for the securities of which he constituted
the savings deposit in the amount of P20,000, it is recommended that from
In the proceedings for the liquidation of the Mercantile Bank of China, the
this amount there be deducted the amount of the obligation of P13,778.90
appellant presented a written claim alleging: that when this bank ceased to
which the claimant acknowledge in favor of the Mercantile Bank of China,
operate on September 19, 1931, his current account in said bank showed a
and that the difference, plus the other current account deposit of P7,390.11,
balance of P9,657.50 in his favor; that on the same date his savings account
be considered as ordinary credits subject to the equal division of the funds
in the said bank also showed a balance in his favor of P20,000 plus interest
of the said bank.
then due amounting to P194.78; that on the other hand, he owed the bank in
the amount of P13,262.58, the amount of the trust receipts which he signed
because of his withdrawal from the bank of certain merchandise consigned As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the
to him without paying the drafts drawn upon him by the remittors thereof; that rejection thereof is recommended in view of the fact that the Bank
the credits thus described should be set off against each other according to Commissioner has not credited any interest to the current and savings
law, and on such set off being made it appeared that he was still the creditor account of the Merchantile Bank of China, and would be unfair that interest,
of the bank in the sum of P16,589.70. And he asked that the court order the not credited to the others, be allowed to this claimant.
Bank Commissioner to pay him the aforesaid balance and that the same be
declared as preferred credit. The claim was referred to the commissioner
appointed by the court, who at the same time acted as referee, and this It will be noted that in the report of the commissioner the credit of the claimant
officer recommended that the balance claimed be paid without interest and for the balance of his deposit on current account has been reduced to
as an ordinary credit. The court approved the recommendation and entered P7,390.11, instead of P9,657.50 alleged in his claim, the total balance
judgment in the accordance therewith. The claimant took an appeal. recommended in favor of the appellant being P13,611.21, without including
interest, instead of P16,589.70. In his brief the appellant admits the figures
appearing in the report, with the exception of the interest on which we shall
In his report the commissioner classified the claims presented under the presently dwell.
following six groups: "(First) Current accounts, savings and fixed deposits.
(Second) Checks or drafts sold by the Mercantile Bank of China and not paid
by the correspondents or banks against which they were drawn. (Third) 1. Resolving the claims under the first group the recommendation of this
Checks or drafts issued by the Mercantile Bank of China in payment or official to the effect that they declared ordinary credits only, and approved
reimbursement of drafts or goods sent to it for collection by banks and foreign them as preferred credits. However, in considering the other claims among
commercial houses against merchants or commercial entities of Manila. them that of that of the appellant, classified under the fifth group, the court
(Fourth) Drafts for collection received by the Mercantile Bank of China to be approved the recommendation of the commissioner that they be declared
collected from merchants and commercial entities in Manila and which were ordinary credits; in otherwords, the court considered and declared the claim
pending collection on the date of the suspension of payments. (Fifth) Claims of the appellant as an ordinary credit just because the latter is at the same
of depositors who are at the same time debtor of the Mercantile Bank of time a debtor of the bank, notwithstanding the fact that his claim is of the
China.(Sixth Various claims." And referring to the claims of the appellant, he same kind as those classified under the first group, inasmuch as they are
states: also current account and savings deposits. To this part of the decision is
addressed the appellant's first assignment of error.
Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of
P 27,597.80, the total amount of the following sums which he has in his favor In truth if the current account, savings, and fixed deposits are preferred
in said bank including the corresponding interest: credits for the reason states by the court in its decision, we see no reason
why the preference should disappear when the depositors are at the same
time debtors of the bank less than their credits. If the ground to declare them
preferred credits is sound, the balances resulting after the set should likewise
Balance on the current account . . . . . . . . . . . P7,390.11
be preferred, unless there be a law providing that a set off, when it take place,
produces such an effect, a law which does not exist as far as we know.
Balance of savings account No. 2266 . . . . . 20,000.00
But we are of the opinion, for the reason presently to be stated, that current
account and savings deposits are not preferred credits in the cases, like the
Total . . . . . . . . . . . . . . . . . . 27,390.11 present, involving the insolvency and liquidation of a bank, where there are
various creditors and it becomes necessary to ascertain the preference of
various credits.
Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is,
P194.78 on the saving account and P12.91 on the current account, the
The court held that these deposits should be governed by the Civil Code,
amount claimed makes a total of P27,597.80.
and applying articles 1758 and 1868 of the said Code, ruled that the so-called
irregular deposits being still in vogue, as Manresa, the commentator,
Notwithstanding the fact that the Bank Commissioner found the claim in maintain and as held by this court in the case Rogers vs. Smith, Bell &
accordance with the books of the Mercantile Bank of China, he declined to Co. (10 Phil., 319), the former are preferred credits because partaking of the
issue the corresponding certificate of proof of claim because the said nature of the irregular deposits.
In our opinion, these deposits are essentially merchantile contracts and are payable on demand and of its fixed deposits coming due
should, therefore, be governed by the provisions of the Code of Commerce, within thirty days. Such commercial banking corporations shall
pursuant to its article 2 reading: also at all times maintain equal in amount to at least five per
centum of its total savings deposits. The said reserve may be
maintained in the form of lawful money of the Philippines Islands
ART. 2 Commercial transactions, be they performed by of the United States, or in bonds issued or guaranteed by the
merchants or not, whether they are specified in this Code or not, Government of the Philippines Islands or to the United States. . .
shall be governed by the provisions contained in the same; in the .
absence of such provisions, by the commercial customs
generally observed in each place; and in the absence of such
provisions, by the commercial customs generally observed in The percentage of reserve to deposits in the case of the
each place; and in the absence of both, by those of the common Philippine National Bank and Bank of the Philippine Islands is
law. hereby fixed at eighteen per centum of demand deposits and
fixed deposits payable within thirty days and five per centum of
savings deposits, in the same manner as is prescribed in this
Commercial transactions shall be considered those enumerated section for commercial banking corporations in general, which
in this Code and any others of a similar character. reserve against savings deposit may consists of Philippine
Government of United States Government Bonds.
There is cited in support of the application of the Civil Code to these deposits
article 310 of the Code of Commerce providing: SEC. 9. Every bank organized under this Act shall at all times
have on hand, in lawful money of the Philippine Islands of the
United States, an amount equal to at least twenty per centum of
ART. 310. Notwithstanding the provisions of the foregoing
the aggregate amount of its deposits. The Treasury certificates
articles, deposits made banks, with general warehouse, with loan
authorized by Act Numbered Three thousand and fifty-eight, and
or any other associations, shall be governed in the place by the
the term lawful money of the United States shall include gold and
by-laws of the same in the second by the provisions of this Code,
silver certificates of the United States and bank notes issued by
and finally by the rules of common law, which are applicable to
the Federal Reserve Bank.
all deposits.
Therefore, the bank, without the necessity of the claimant consent, was by
But apparently there was a failure to consider that, according to the order
law authorized to dispose of the deposits, subject to the limitations indicated.
established by the article, the Civil Code or the common law is mentioned
after Code of Commerce, which means that the provisions of the latter Code
should first be applied before resorting to those of the Civil Code which are We, therefore, conclude that the law applicable to the appellant's claim is the
supplementary in character. Code of Commerce and that his current and savings account have converted
into simple commercial loans.
The Code of Commerce contains express provisions regulating deposits of
the nature under consideration, and they are articles 303 to 310. The first 2. The next point to decide is the applicable law, if any, to determine the
and the second to the last of the said articles are as follows: preference of the appellant's credits, considering that there happens to be
other creditors. Section V of Title I Book IV of the Code of Commerce
contains provisions relative to the rights of creditors in case of bankruptcy
ART. 303. In order that a deposit may be considered commercial,
and their respective gradations, but these provisions have been repealed by
it is necessary —
section 524 of the Code of Civil Procedure reading as follows:
The Philippine Legislature subsequently enacted Act No. 1956, also known
ART. 309. Whatever, with the consent of the depositor, the as the Insolvency Law, which took effect on May 20, 1909, containing
depositary disposes of the articles on deposit either for himself provisions regarding preference of credits; but its section 52 provides that all
or for his business, or for transactions intrusted to him by the the provisions of the law shall not apply to corporations engaged principally
former, the rights and obligations of the depositary and of the in the banking business, and among them should be understood included the
depositor shall cease, and the rules and provisions applicable to Merchantile Bank of China. Said section provide:
the commercial loans, commissions, or contract which took the
place of the deposit shall be observed.
SEC. 48. Merchantile, effect, and any other kind of property
found among the property of the insolvent, the ownership of
In accordance with article 309, the so-called current account and savings which has not been conveyed to him by a legal and irrevocable
deposits have lost the character of deposits properly so-called, and are title, shall be considered to be the property of other persons shall
converted into simple commercial loans, because the bank disposed of the be placed at the disposal of its lawful owners on order of the court
funds deposited by the claimant for its ordinary transactions and for the made at the hearing in section forty-three or at any ordinary
banking business in which it was engaged. That the bank had the authority hearing, if the assignee or any creditor whose right in the estate
of the claimant to make use of the money deposited on current and savings of the insolvent has been established shall petition in writing for
account is deducible from the fact that the bank has been paying interest on such hearing and the court in its discretion shall so order, the
both deposits, and the claimant himself asks that he be allowed interest up creditors, however, retaining such rights in said property as
to the time when the bank ceased its operations. Moreover, according to belong to the insolvent, and subrogating him whenever they shall
section 125 of the Corporation Law and 9 of Act No. 3154, said bank is have with all obligations concerning said property.
authorized to make use of the current account, savings, and fixed deposits
provided it retains in its treasury a certain percentage of the amounts of said
deposits. Said sections read: The following shall be included in this section:
SEC. 125. Every such commercial banking corporation shall at 1. Drowy property inestimado and such
all times have on hand in lawful money of the Philippines Islands property estimado which may remain in the
or of the United States, an amount equal to at least eighteen per possession of the husband where the receipt thereof
centum of the aggregate amount of its deposits in current which is matter of record in a public instrument registered
under the provisions of section twenty-one and court, or otherwise held, for the benefit of the party entitled
twenty-seven of the Code of Commerce in force. thereto, as the court may direct.
2. Paraphernal property which the wife may have SEC. 50. The following are preferred claims which shall be paid
acquired by inheritance, legacy, or donation whether in the order named:
remaining in the form in which it was received or
subrogated or invested in other property, provided
that such investment or subrogation has been (a) Necessary funeral expenses of the debtor, or of
registered in the registro mercantile in accordance his wife, or children who are under their parental
with the provisions of the sections of the Code of authority and have no property of their own, when
Commerce mentioned in the next preceding approved by the court;
paragraph.
(b) Debts due for personal services rendered the
3. Property and effects deposited with the bankrupt, insolvent by employees, laborers, or domestic
or administered, least, rented, or held in usufruct by servants immediately preceding the commencement
him. of proceedings in insolvency;
4. Merchandise in the possession of the bankrupt, on (c) Compensation due the laborers or their
commission, for purchase, sale, forwarding, or dependents under the provisions of Act Numbered
delivery. Thirty-four hundred and twenty-eight, known as the
Workmen's Compensation Act, as amended by Act
Numbered Thirty-eight hundred and twelve, and
5. Bills of exchange or promissory notes without under the provisions of Act Numbered Eighteen
indorsement or other expression transferring hundred and seventy-four known as the Employers'
ownership remitted to the insolvent for collection and Liability Act, and of the other laws providing for
all other acquired by him for the account of another payment of indemnity for damages in cases of labor
person, drawn or indorsed to the remitter direct. accidents;
6. Money remitted to the insolvent, otherwise than on (d) Legal expenses, and expenses incurred in the
current account, and which is in his possession for administration of the insolvent estate for the common
delivery to a definite person in the name and for the interest of the creditors, when properly authorized
account of the remitter or for the settlement of claims and approved by the court;
which are to be met at the insolvent domicile.
Examining now the claims of the appellant, it appears that none of them falls
under any of the cases specified by section 48, 49 and 50 of the Insolvency
Law; wherefore, we conclude that the appellant's claims, consisting of his
current and savings account, are not preferred credits.
3. The commissioner set off the claims of the appellant against what the bank
had against him. The court approved this set off over the objection of the
appellant. The appellees contend that the set off does not lie in this case
because otherwise it would prejudice them and the other creditors in the
liquidation. We hold that the court's ruling is not error. "It may be stated as a
general rule that when a depositor is indebted to a bank, and the debts are
mutual — that is, between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be necessary, to the
payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specially applicable to some
other particular purposes." (7 Am. Jur., par. 629, p.455; United States vs.
Butterworth-Judson Corp., 267 U.S., 387; National Bank vs. Morgan, 207
Ala.., 65; Bank of Guntersville vs. Crayter, 199 Ala., 699; Tatum vs.
Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co. vs. Quilling,
118 Ark., 114; Holloway vs. First Nat. Bank, 45 Idaho, 746; Wyman vs. Ft.
Dearborn Nat Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517;
First Nat Bank vs. Stapf., 165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind.,
584.) The situation referred to by the appellees is inevitable because section
1639 of the Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the assets of the bank
into cash and this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this individual liquidation
the debtors are entitled to set off, by way of compensation, their claims
against the bank.
4. The court held that the appellant is not entitled to charge interest on the
amounts of his claims, and this is the object of the second assignment of
error. Upon this point a distinction must be made between the interest which
the deposits should ear from their existence until the bank ceased to operate,
and that which they may earn from the time the bank's operations were
stopped until the date of payment of the deposits. As to the first class, we
hold that it should be paid because such interest has been earned in the
ordinary course of the bank's business and before the latter has been
declared in a state or liquidation. Moreover, the bank being authorized by law
to make us of the deposits, with the limitation stated, to invest the same in its
business and other operations, it may be presumed that it bound itself to pay
interest to the depositors as in fact it paid interest prior to the date of the said
claims. As to the interest which may be charged from the date the bank
ceased to do business because it was declared in a state of liquidation, we
hold that the said interest should not be paid. Under articles 1101 and 1108
of the Civil Code, interest is allowed by way of indemnity for damages
suffered, in the cases wherein the obligation consists in the payment of
money. In view of this, we hold that in the absence of any express law or any
applicable provision of the Code of Commerce, it is not proper to pay this last
kind of interest to the appellant upon his deposits in the bank, for this would
be anomalous and unjustified in a liquidation or insolvency of a bank. This
rule should be strictly observed in the instant case because it is understood
that the assets should be prorated among all the creditors as they are
insufficient to pay all the obligations of the bank.
5. The last assignment of error has to do with the denial by the court of the
claimant's motion for new trial. No new arguments have been made in its
support and it appears that the assigned error was inserted as a mere
corollary of the preceding ones.
In view of all the foregoing considerations, we affirm the part of the appealed
decision for the reasons stated herein, and it is ordered that the net claim of
the appellant, amounting to P13,611.21, is an ordinary and not a preferred
credit, and that he is entitled to charge interest on said amount up to
September 19, 1931, without special pronouncement up to September 19,
1931, without special pronouncement as to the costs. So ordered.
Avanceña, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.
Republic of the Philippines DENOMINATED CUSTODIAN RECEIPT
SUPREME COURT
Manila
This confirms that as a duly Custodian Bank, and
upon instruction of PHILIPPINE UNDERWRITES
THIRD DIVISION FINANCE CORPORATION, we have in our custody
the following securities to you [sic] the extent herein
indicated.
April 6, 1981 As petitioner had failed to collect his investment and interest thereon, he filed
———————— on 28 September 1982 an action for damages with the Regional Trial Court
MATURITY DATE ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.5The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action,
NO. 10805
with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. Philfinance sold "without recourse" to petitioner, to the extent of
15195. In a Decision dated 21 March 1989, the Court of Appeals denied the P304,533.33. The Court of Appeals said on this point:
appeal and held:6
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not only The Court is not persuaded. We find nothing in the DCR that establishes an
of the money market placement made by petitioner but also of both DMC PN obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33
No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified nor any assumption of liability in solidum with Philfinance and Delta under
Delta of his rights as assignee after compensation had taken place by DMC PN No. 2731. We read the DCR as a confirmation on the part of
operation of law because the offsetting instruments had both reached Pilipinas that:
maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee acquires his (1) it has in its custody, as duly constituted custodian
rights subject to the equities — i.e., the defenses — which the debtor could bank, DMC PN No. 2731 of a certain face value, to
have set up against the original assignor before notice of the assignment was mature on 6 April 1981 and payable to the order of
given to the debtor. Article 1285 of the Civil Code provides that: Philfinance;
Art. 1285. The debtor who has consented to the (2) Pilipinas was, from and after said date of the
assignment of rights made by a creditor in favor of a assignment by Philfinance to petitioner (9 February
third person, cannot set up against the assignee the 1981), holding that Note on behalf and for the benefit
compensation which would pertain to him against the of petitioner, at least to the extent it had been
assignor, unless the assignor was notified by the assigned to petitioner by payee Philfinance;24
debtor at the time he gave his consent, that he
reserved his right to the compensation.
(3) petitioner may inspect the Note either "personally
or by authorized representative", at any time during
If the creditor communicated the cession to him but regular bank hours; and
the debtor did not consent thereto, the latter may set
up the compensation of debts previous to the
(4) upon written instructions of petitioner, Pilipinas
cession, but not of subsequent ones.
would physically deliver the DMC PN No. 2731 (or a
participation therein to the extent of
If the assignment is made without the knowledge of P307,933.33) "should this Denominated
the debtor, he may set up the compensation of all Custodianship receipt remain outstanding in
credits prior to the same and also later ones until he [petitioner's] favor thirty (30) days after its maturity."
had knowledge of the assignment. (Emphasis
supplied)
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms of
Article 1626 of the same code states that: "the debtor who, before having DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any
knowledge of the assignment, pays his creditor shall be released from the other time. We note that both in his complaint and in his testimony before the
obligation." In Sison v. Yap-Tico,21 the Court explained that: trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No.
2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary
[n]o man is bound to remain a debtor; he may pay to obligation to pay the amount represented by a portion of the Note assigned
him with whom he contacted to pay; and if he pay to him by Philfinance, appears to be a new theory constructed only after the
before notice that his debt has been assigned, the trial court had ruled against him. The solidary liability that petitioner seeks to
law holds him exonerated, for the reason that it is the impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of
duty of the person who has acquired a title by transfer the Civil Code, "there is a solidary liability only when the law or the nature of
to demand payment of the debt, to give his debt or the obligation requires solidarity," The record here exhibits no express
notice.22 assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed to us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship
At the time that Delta was first put to notice of the assignment in petitioner's assumed by private respondent Pilipinas necessarily implies solidary liability
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by under the securities, custody of which was taken by Pilipinas. Accordingly,
compensation. Since the assignor Philfinance could not have then compelled we are unable to hold Pilipinas solidarily liable with Philfinance and private
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of respondent Delta under DMC PN No. 2731.
Philfinance, is similarly disabled from collecting from Delta the portion of the
Note assigned to him.
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary,
It bears some emphasis that petitioner could have notified Delta of the we find, after prolonged analysis and deliberation, that private respondent
assignment or sale was effected on 9 February 1981. He could have notified Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.
Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again We believe and so hold that a contract of deposit was constituted by the act
petitioner could have notified Delta on 26 March 1981 when petitioner of Philfinance in designating Pilipinas as custodian or depositary bank. The
received from Philfinance the Denominated Custodianship Receipt ("DCR") depositor was initially Philfinance; the obligation of the depository was owed,
No. 10805 issued by private respondent Pilipinas in favor of petitioner. however, to petitioner Sesbreño as beneficiary of the custodianship or
Petitioner could, in fine, have notified Delta at any time before the maturity depository agreement. We do not consider that this is a simple case of a
date of DMC PN No. 2731. Because petitioner failed to do so, and because stipulation pour autri. The custodianship or depositary agreement was
the record is bare of any indication that Philfinance had itself notified Delta established as an integral part of the money market transaction entered into
of the assignment to petitioner, the Court is compelled to uphold the defense by petitioner with Philfinance. Petitioner bought a portion of DMC PN No.
of compensation raised by private respondent Delta. Of course, Philfinance 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
remains liable to petitioner under the terms of the assignment made by order that the thing sold would be placed outside the control of the vendor.
Philfinance to petitioner. Indeed, the constituting of the depositary or custodianship agreement was
equivalent to constructive delivery of the Note (to the extent it had been sold
or assigned to petitioner) to petitioner. It will be seen that custodianship
II. agreements are designed to facilitate transactions in the money market by
providing a basis for confidence on the part of the investors or placers that
the instruments bought by them are effectively taken out of the pocket, as it
We turn now to the relationship between petitioner and private respondent
were, of the vendors and placed safely beyond their reach, that those
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
instruments will be there available to the placers of funds should they have
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the
need of them. The depositary in a contract of deposit is obliged to return the
following words:
security or the thing deposited upon demand of the depositor (or, in the affairs of the other two (2) were administered and managed for the benefit of
presented case, of the beneficiary) of the contract, even though a term for one. There is simply not enough evidence of record to justify disregarding
such return may have been established in the said contract.26 Accordingly, the separate corporate personalities of delta and Pilipinas and to hold them
any stipulation in the contract of deposit or custodianship that runs counter liable for any assumed or undetermined liability of Philfinance to petitioner.28
to the fundamental purpose of that agreement or which was not brought to
the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer. WHEREFORE, for all the foregoing, the Decision and Resolution of the Court
of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July
1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that
We believe that the position taken above is supported by considerations of such Decision and Resolution had dismissed petitioner's complaint against
public policy. If there is any party that needs the equalizing protection of the Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to
law in money market transactions, it is the members of the general public indemnify petitioner for damages in the amount of P304,533.33, plus legal
whom place their savings in such market for the purpose of generating interest thereon at the rate of six percent (6%) per annum counted from 2
interest revenues.27 The custodian bank, if it is not related either in terms of April 1981. As so modified, the Decision and Resolution of the Court of
equity ownership or management control to the borrower of the funds, or the Appeals are hereby AFFIRMED. No pronouncement as to costs.
commercial paper dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against SO ORDERED.
the placer of funds. The providers of such funds must be safeguarded from
the impact of stipulations privately made between the borrowers or dealers
and the custodian banks, and disclosed to fund-providers only after trouble
has erupted.
The conclusion we have reached is, of course, without prejudice to such right
of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III.
In the first place, as already noted, jurisdiction over the person of Philfinance
was never acquired either by the trial court nor by the respondent Court of
Appeals. Petitioner similarly did not seek to implead Philfinance in the
Petition before us.
QUISUMBING, J.: On December 19, 1977, plaintiff's Citibank Check No. SN-04867,
together with the Revenue Tax Receipt No. 18747002, was
deposited with defendant IBAA, through its Ermita Branch. The
These consolidated petitions involve several fraudulently negotiated latter accepted the check and sent it to the Central Clearing
checks. House for clearing on the samd day, with the indorsement at the
back "all prior indorsements and/or lack of indorsements
The original actions a quo were instituted by Ford Philippines to recover from guaranteed." Thereafter, defendant IBAA presented the check
for payment to defendant Citibank on same date, December 19,
the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and 1977, and the latter paid the face value of the check in the
amount of P4,746,114.41. Consequently, the amount of
America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized P4,746,114.41 was debited in plaintiff's account with the
syndicate.1âwphi1.nêt defendant Citibank and the check was returned to the plaintiff.
On June 15, 1989, the trial court rendered its decision, as follows: PCIBank sets forth the following issues for consideration:
"Premises considered, judgment is hereby rendered as follows: I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on the
said respondent's instructions, it nevertheless found the
"1. Ordering the defendants Citibank and IBAA (now
petitioner liable to the said respondent for the full amount of the
PCI Bank), jointly and severally, to pay the plaintiff
said check.
the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, II. Did the respondent court err when it did not find prescription in
1983, the date when the original complaint was filed favor of the petitioner.8
until the amount is fully paid, plus costs;
In a counter move, Ford filed its petition docketed as G.R. No. 121479,
"2. On defendant Citibank's cross-claim: ordering the questioning the same decision and resolution of the Court of Appeals, and
cross-defendant IBAA (now PCI Bank) to reimburse praying for the reinstatement in toto of the decision of the trial court which
defendant Citibank for whatever amount the latter found both PCIBank and Citibank jointly and severally liable for the loss.
has paid or may pay to the plaintiff in accordance with
next preceding paragraph;
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are I. Respondent Citibank is liable to petitioner Ford considering
dismissed, for lack of merits; and that:
"4. With costs against the defendants. 1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute
SO ORDERED."6 and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the
Commissioner of Internal Revenue.
Not satisfied with the said decision, both defendants, Citibank and PCIBank,
elevated their respective petitions for review on certiorari to the Courts of
Appeals. On March 27, 1995, the appellate court issued its judgment as 2. Respondent Citibank failed to observe its duty as
follows: banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
"WHEREFORE, in view of the foregoing, the court AFFIRMS the
appealed decision with modifications. 3. Respondent Citibank raises an issue for the first
time on appeal; thus the same should not be
considered by the Honorable Court.
The court hereby renderes judgment:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of Several other persons and entities were utilized by the syndicate
P5,851,706.37 representing the percentage tax due for the second quarter as conduits in the disbursements of the proceeds of the two
of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue checks, but like the aforementioned participants in the
Tax Receipt No. 28645385 was issued for the said purpose. conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are
traceable from the record of checks drawn against the original
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for "Reynaldo Reyes" account and indubitably identify the parties
who illegally benefited therefrom and readily indicate in what
the first quarter of 1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for amounts they did so."14
the said purpose.
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
drawee-bank, Citibank, liable for the value of the two checks while adsolving
Both checks were "crossed checks" and contain two diagonal lines on its
upper corner between, which were written the words "payable to the payee's PCIBank from any liability, disposing as follows:
account only."
"WHEREFORE, judgment is hereby rendered sentencing
defendant CITIBANK to reimburse plaintiff FORD the total
The checks never reached the payee, CIR. Thus, in a letter dated February
28, 1980, the BIR, Region 4-B, demanded for the said tax payments the amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full
corresponding periods above-mentioned.
payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its counterclaim to
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts crossclaim) the sum of P300,000.00 as attorney's fees and costs
were considered "fake and spurious". This anomaly was confirmed by the of litigation, and pay the costs.
NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a
new, while an action was filed against Citibank and PCIBank for the recovery
of the amount of Citibank Check Numbers SN-10597 and 16508. SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in
The Regional Trial Court of Makati, Branch 57, which tried the case, made
toto, the decision of the trial court. Hence, this petition.
its findings on the modus operandi of the syndicate, as follows:
Petitioner Ford prays that judgment be rendered setting aside the portion of
"A certain Mr. Godofredo Rivera was employed by the plaintiff
the Court of Appeals decision and its resolution dated March 5, 1997, with
FORD as its General Ledger Accountant. As such, he prepared
respect to the dismissal of the complaint against PCIBank and holding
the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-
Citibank solely responsible for the proceeds of Citibank Check Numbers SN-
10597] for payment to the BIR. Instead, however, fo delivering
the same of the payee, he passed on the check to a co- 10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
conspirator named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with one Ford avers that the Court of Appeals erred in dismissing the complaint
Winston Dulay, Castro himself subsequently opened a Checking against defendant PCIBank considering that:
Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay
works as Assistant Manager. I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a banking
insitution.
After an initial deposit of P100.00 to validate the account, Castro
deposited a worthless Bank of America Check in exactly the
same amount as the first FORD check (Exh. "A", P5,851,706.37) II. Defendant PCIBank clearly failed to observe the diligence
while this worthless check was coursed through PCIB's main required in the selection and supervision of its officers and
office enroute to the Central Bank for clearing, replaced this employees.
worthless check with FORD's Exhibit 'A' and accordingly
tampered the accompanying documents to cover the
replacement. As a result, Exhibit 'A' was cleared by defendant III. Defendant PCIBank was, due to its negligence, clearly liable
CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' for the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
Section 5 of Central Bank Circular No. 580 series of 1977. Court of Appeals,17 Ford argues that even if there was a finding therein that
the drawer was negligent, the drawee bank was still ordered to pay damages.
The main issue presented for our consideration by these petitions could be
simplified as follows: Has petitioner Ford the right to recover from the On this point, jurisprudence regarding the imputed negligence of employer in
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the a master-servant relationship is instructive. Since a master may be held for
checks intended as payment to the Commissioner of Internal Revenue? Or his servant's wrongful act, the law imputes to the master the act of the
has Ford's cause of action already prescribed? servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the negligence
or wrongful conduct of the master, for which he is liable.18 The general rule
Note that in these cases, the checks were drawn against the drawee bank, is that if the master is injured by the negligence of a third person and by the
but the title of the person negotiating the same was allegedly defective concuring contributory negligence of his own servant or agent, the latter's
because the instrument was obtained by fraud and unlawful means, and the negligence is imputed to his superior and will defeat the superior's action
proceeds of the checks were not remitted to the payee. It was established against the third person, asuming, of course that the contributory negligence
that instead of paying the checks to the CIR, for the settlement of the was the proximate cause of the injury of which complaint is made.19
approprite quarterly percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the mmbers of the syndicate.
As to the unlawful negotiation of the check the applicable law is Section 55 Accordingly, we need to determine whether or not the action of Godofredo
of the Negotiable Instruments Law (NIL), which provides: Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his
assistant, was the proximate cause of the loss or damage. AS defined,
proximate cause is that which, in the natural and continuous sequence,
"When title defective -- The title of a person who negotiates an unbroken by any efficient, intervening cause produces the injury and without
instrument is defective within the meaning of this Act when he the result would not have occurred.20
obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under It appears that although the employees of Ford initiated the transactions
such circumstances as amount to a fraud." attributable to an organized syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as the proximate cause
Pursuant to this provision, it is vital to show that the negotiation is made by of the injury to the parties.
the perpetator in breach of faith amounting to fraud. The person negotiating
the checks must have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the performance of his The Board of Directors of Ford, we note, did not confirm the request of
duties, he may set up the personal defense to escape liability and recover Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
from other parties who. Though their own negligence, alowed the instruction to replace the said check with PCIBank's Manager's Check was
commission of the crime. not in theordinary course of business which could have prompted PCIBank
to validate the same.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
have, even if temporarily, escaped liability for the embezzlement of millions established that these checks were made payable to the CIR. Both were
of pesos. We are thus left only with the task of determining who of the present crossed checks. These checks were apparently turned around by Ford's
parties before us must bear the burden of loss of these millions. It all boils emploees, who were acting on their own personal capacity.
down to thequestion of liability based on the degree of negligence among the
parties concerned.
Given these circumstances, the mere fact that the forgery was committed by
a drawer-payor's confidential employee or agent, who by virtue of his position
Foremost, we must resolve whether the injured party, Ford, is guilty of the had unusual facilities for perpertrating the fraud and imposing the forged
"imputed contributory negligence" that would defeat its claim for paper upon the bank, does notentitle the bank toshift the loss to the drawer-
reimbursement, bearing ing mind that its employees, Godofredo Rivera and payor, in the absence of some circumstance raising estoppel against the
Alexis Marindo, were among the members of the syndicate. drawer.21 This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their possession.
Citibank points out that Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering With respect to the negligence of PCIBank in the payment of the three checks
them to the designated authorized collecting bank (Metrobank-Alabang) of involved, separately, the trial courts found variations between the negotiation
the payee, CIR. Citibank bewails the fact that Ford was remiss in the of Citibank Check No. SN-04867 and the misapplication of total proceeds of
supervision and control of its own employees, inasmuch as it only discovered Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately,
the syndicate's activities through the information given by the payee of the PCIBank's share of negligence when the syndicate achieved its ultimate
checks after an unreasonable period of time. agenda of stealing the proceeds of these checks.
PCIBank also blames Ford of negligence when it allegedly authorized G.R. Nos. 121413 and 121479
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of unds
of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita
proximate cause of the damge to Ford lies in its own officers and employees Branch. It was coursed through the ordinary banking transaction, sent to
who carried out the fradulent schemes and the transactions. These Central Clearing with the indorsement at the back "all prior indorsements
circumstances were not checked by other officers of the company including and/or lack of indorsements guaranteed," and was presented to Citibank for
its comptroller or internal auditor. PCIBank contends that the inaction of Ford payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
despite the enormity of the amount involved was a sheer negligence and prepared two of its Manager's checks and enabled the syndicate to encash
stated that, as between two innocent persons, one of whom must suffer the the same.
consequences of a breach of trust, the one who made it possible, by his act
of negligence, must bear the loss.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate
the checks. The neglect of PCIBank employees to verify whether his letter
For its part, Ford denies any negligence in the performance of its duties. It requesting for the replacement of the Citibank Check No. SN-04867 was duly
avers that there was no evidence presented before the trial court showing authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the permitted to retain the proceeds of the check from the drawee whose sole
payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is fault was that it did not discover the forgery or the defect in the title of the
duty bound to consult its principal regarding the unwarranted instructions person negotiating the instrument before paying the check. For this reason,
given by the payor or its agent. As aptly stated by the trial court, to wit: a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the
"xxx. Since the questioned crossed check was deposited with proceeds of the checks were afterwards diverted to the hands of a third party.
IBAA [now PCIBank], which claimed to be a depository/collecting In such cases the drawee bank has a right to believe that the cashing bank
bank of BIR, it has the responsibility to make sure that the check (or the collecting bank) had, by the usual proper investigation, satisfied itself
in question is deposited in Payee's account only. of the authenticity of the negotiation of the checks. Thus, one who encashed
a check which had been forged or diverted and in turn received payment
thereon from the drawee, is guilty of negligence which proximately
xxx xxx xxx
contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check.26
As agent of the BIR (the payee of the check), defendant IBAA
should receive instructions only from its principal BIR and not
Having established that the collecting bank's negligence is the proximate
from any other person especially so when that person is not
cause of the loss, we conclude that PCIBank is liable in the amount
known to the defendant. It is very imprudent on the part of the
corresponding to the proceeds of Citibank Check No. SN-04867.
defendant IBAA to just rely on the alleged telephone call of the
one Godofredo Rivera and in his signature considering that the
plaintiff is not a client of the defendant IBAA." G.R. No. 128604
It is a well-settled rule that the relationship between the payee or holder of The trial court and the Court of Appeals found that PCIBank had no official
commercial paper and the bank to which it is sent for collection is, in the act in the ordinary course of business that would attribute to it the case of the
absence of an argreement to the contrary, that of principal and agent.22 A embezzlement of Citibank Check Numbers SN-10597 and 16508, because
bank which receives such paper for collection is the agent of the payee or PCIBank did not actually receive nor hold the two Ford checks at all. The trial
holder.23 court held, thus:
Even considering arguendo, that the diversion of the amount of a check "Neither is there any proof that defendant PCIBank contributed
payable to the collecting bank in behalf of the designated payee may be any official or conscious participation in the process of the
allowed, still such diversion must be properly authorized by the payor. embezzlement. This Court is convinced that the switching
Otherwise stated, the diversion can be justified only by proof of authority from operation (involving the checks while in transit for "clearing")
the drawer, or that the drawer has clothed his agent with apparent authority were the clandestine or hidden actuations performed by the
to receive the proceeds of such check. members of the syndicate in their own personl, covert and private
capacity and done without the knowledge of the defendant
PCIBank…"27
Citibank further argues that PCI Bank's clearing stamp appearing at the back
of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank In this case, there was no evidence presented confirming the conscious
liable because it made it pass through the clearing house and therefore particiapation of PCIBank in the embezzlement. As a general rule, however,
Citibank had no other option but to pay it. Thus, Citibank had no other option a banking corporation is liable for the wrongful or tortuous acts and
but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury declarations of its officers or agents within the course and scope of their
is the gross negligence of PCIBank. Since the questione dcrossed check was employment.28 A bank will be held liable for the negligence of its officers or
deposited with PCIBank, which claimed to be a depository/collecting bank of agents when acting within the course and scope of their employment. It may
the BIR, it had the responsibility to make sure that the check in questions is be liable for the tortuous acts of its officers even as regards that species of
deposited in Payee's account only. tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by
a syndicate in which its own management employees had particiapted.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is
a warning that the check should be deposited only in the account of the CIR.
Thus, it is the duty of the collecting bank PCIBank to ascertain that the check The pro-manager of San Andres Branch of PCIBank, Remberto Castro,
be deposited in payee's account only. Therefore, it is the collecting bank received Citibank Check Numbers SN-10597 and 16508. He passed the
(PCIBank) which is bound to scruninize the check and to know its depositors checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco
before it could make the clearing indorsement "all prior indorsements and/or Branch, who helped Castro open a Checking account of a fictitious person
lack of indorsement guaranteed". named "Reynaldo Reyes." Castro deposited a worthless Bank of America
Check in exactly the same amount of Ford checks. The syndicate tampered
with the checks and succeeded in replacing the worthless checks and the
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
Corporation,24 we ruled:
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity or
"Anent petitioner's liability on said instruments, this court is in full authority but for their personal and private gain or benefit.
accord with the ruling of the PCHC's Board of Directors that:
A bank holding out its officers and agents as worthy of confidence will not be
'In presenting the checks for clearing and for payment, the permitted to profit by the frauds these officers or agents were enabled to
defendant made an express guarantee on the validity of "all prior perpetrate in the apparent course of their employment; nor will t be permitted
endorsements." Thus, stamped at the back of the checks are the to shirk its responsibility for such frauds, even though no benefit may accrue
defedant's clear warranty: ALL PRIOR ENDORSEMENTS to the bank therefrom. For the general rule is that a bank is liable for the
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without fraudulent acts or representations of an officer or agent acting within the
such warranty, plaintiff would not have paid on the checks.' course and apparent scope of his employment or authority.29 And if an officer
or employee of a bank, in his official capacity, receives money to satisfy an
evidence of indebetedness lodged with his bank for collection, the bank is
No amount of legal jargon can reverse the clear meaning of liable for his misappropriation of such sum.30
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
the falsity of its representation."25 Moreover, as correctly pointed out by Ford, Section 531 of Central Bank
Circular No. 580, Series of 1977 provides that any theft affecting items in
transit for clearing, shall be for the account of sending bank, which in this
Lastly, banking business requires that the one who first cashes and case is PCIBank.
negotiates the check must take some percautions to learn whether or not it
is genuine. And if the one cashing the check through indifference or othe
circumstance assists the forger in committing the fraud, he should not be
But in this case, responsibility for negligence does not lie on PCIBank's Our laws on the matter provide that the action upon a written contract must
shoulders alone. be brought within ten year from the time the right of action accrues.41 hence,
the reckoning time for the prescriptive period begins when the instrument
was issued and the corresponding check was returned by the bank to its
The evidence on record shows that Citibank as drawee bank was likewise depositor (normally a month thereafter). Applying the same rule, the cause
negligent in the performance of its duties. Citibank failed to establish that its of action for the recovery of the proceeds of Citibank Check No. SN 04867
payment of Ford's checjs were made in due course and legally in order. In would normally be a month after December 19, 1977, when Citibank paid the
its defense, Citibank claims the genuineness and due execution of said face value of the check in the amount of P4,746,114.41. Since the original
checks, considering that Citibank (1) has no knowledge of any informity in complaint for the cause of action was filed on January 20, 1984, barely six
the issuance of the checks in question (2) coupled by the fact that said years had lapsed. Thus, we conclude that Ford's cause of action to recover
checks were sufficiently funded and (3) the endorsement of the Payee or lack the amount of Citibank Check No. SN 04867 was seasonably filed within the
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the period provided by law.
obligation to honor and pay the same.
Finally, we also find thet Ford is not completely blameless in its failure to
For its part, Ford contends that Citibank as the drawee bank owes to Ford detect the fraud. Failure on the part of the depositor to examine its passbook,
an absolute and contractual duty to pay the proceeds of the subject check statements of account, and cancelled checks and to give notice within a
only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable reasonable time (or as required by statute) of any discrepancy which it may
Instruments Law, Ford argues that by accepting the instrument, the acceptro in the exercise of due care and diligence find therein, serves to mitigate the
which is Citibank engages that it will pay according to the tenor of its banks' liability by reducing the award of interest from twelve percent (12%)
acceptance, and that it will pay only to the payee, (the CIR), considering the to six percent (6%) per annum. As provided in Article 1172 of the Civil Code
fact that here the check was crossed with annotation "Payees Account Only." of the Philippines, respondibility arising from negligence in the performance
of every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. In quasi-delicts, the
As ruled by the Court of Appeals, Citibank must likewise answer for the
contributory negligence of the plaintiff shall reduce the damages that he may
damages incurred by Ford on Citibank Checks Numbers SN 10597 and
recover.42
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the latter. WHEREFORE, the assailed Decision and Resolution of the Court of Appeals
On this score, we agree with the respondent court's ruling. in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know formerly as
Insular Bank of Asia and America, id declared solely responsible for the loss
of the proceeds of Citibank Check No SN 04867 in the amount
Citibank should have scrutinized Citibank Check Numbers SN 10597 and
P4,746,114.41, which shall be paid together with six percent (6%) interest
16508 before paying the amount of the proceeds thereof to the collecting
thereon to Ford Philippines Inc. from the date when the original complaint
bank of the BIR. One thing is clear from the record: the clearing stamps at
was filed until said amount is fully paid.
the back of Citibank Check Nos. SN 10597 and 16508 do not bear any
initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless checks However, the Decision and Resolution of the Court of Appeals in CA-G.R.
to Citibank Check Nos. 10597 and 16508 would have been discovered in No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged
time. For this reason, Citibank had indeed failed to perform what was liable for and must share the loss, (concerning the proceeds of Citibank
incumbent upon it, which is to ensure that the amount of the checks should Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-
be paid only to its designated payee. The fact that the drawee bank did not fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
discover the irregularity seasonably, in our view, consitutes negligence in P6,081,649.05, with six percent (6%) interest thereon, from the date the
carrying out the bank's duty to its depositors. The point is that as a business complaint was filed until full payment of said amount.1âwphi1.nêt
affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.33 Costs against Philippine Commercial International Bank and Citibank N.A.
Thus, invoking the doctrine of comparative negligence, we are of the view SO ORDERED.
that both PCIBank and Citibank failed in their respective obligations and both
were negligent in the selection and supervision of their employees resulting
in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we
are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR.
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor
notice of the payment, which is ordinarily when the check is returned to the
alleged drawer as a voucher with a statement of his account,39 and an action
upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40
Republic of the Philippines Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew
SUPREME COURT her earlier offer to purchase the lots; as a consequence thereof, the petitioner
Manila allegedly failed to realize the expected profit of P280,500.00. Hence, the
latter filed on 1 September 1980 a complaint2 for damages against the
respondent Bank with the Court of First Instance (now Regional Trial Court)
THIRD DIVISION of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner
has no cause of action because of paragraphs 13 and 14 of the contract of
lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in
G.R. No. 90027 March 3, 1993
the box could not give rise to an action against it. It then interposed a
counterclaim for exemplary damages as well as attorney's fees in the amount
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.4
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND
In due course, the trial court, now designated as Branch 161 of the Regional
TRUST COMPANY, respondents.
Trial Court (RTC) of Pasig, Metro Manila, rendered a decision5 adverse to
the petitioner on 8 December 1986, the dispositive portion of which reads:
Dolorfino & Dominguez Law Offices for petitioner.
WHEREFORE, premises considered, judgment is
Danilo B. Banares for private respondent. hereby rendered dismissing plaintiff's complaint.
Is the contractual relation between a commercial bank and another party in With costs against plaintiff.6
a contract of rent of a safety deposit box with respect to its contents placed
by the latter one of bailor and bailee or one of lessor and lessee?
The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for
This is the crux of the present controversy. the loss of the certificates of title. The court declared that the said provisions
are binding on the parties.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the
spouses Ramon and Paula Pugao entered into an agreement whereby the Its motion for reconsideration7 having been denied, petitioner appealed from
former purchased from the latter two (2) parcels of land for a consideration the adverse decision to the respondent Court of Appeals which docketed the
of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to
the balance was covered by three (3) postdated checks. Among the terms reverse the challenged decision because the trial court erred in (a) absolving
and conditions of the agreement embodied in a Memorandum of True and the respondent Bank from liability from the loss, (b) not declaring as null and
Actual Agreement of Sale of Land were that the titles to the lots shall be void, for being contrary to law, public order and public policy, the provisions
transferred to the petitioner upon full payment of the purchase price and that in the contract for lease of the safety deposit box absolving the Bank from
the owner's copies of the certificates of titles thereto, Transfer Certificates of any liability for loss, (c) not concluding that in this jurisdiction, as well as under
Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit American jurisprudence, the liability of the Bank is settled and (d) awarding
box of any bank. The same could be withdrawn only upon the joint signatures attorney's fees to the Bank and denying the petitioner's prayer for nominal
of a representative of the petitioner and the Pugaos upon full payment of the and exemplary damages and attorney's fees.8
purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private respondent Security Bank and
Trust Company, a domestic banking corporation hereinafter referred to as In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the
the respondent Bank. For this purpose, both signed a contract of lease appealed decision principally on the theory that the contract (Exhibit "2")
(Exhibit "2") which contains, inter alia, the following conditions: executed by the petitioner and respondent Bank is in the nature of a contract
of lease by virtue of which the petitioner and its co-renter were given control
over the safety deposit box and its contents while the Bank retained no right
13. The bank is not a depositary of the contents of to open the said box because it had neither the possession nor control over
the safe and it has neither the possession nor control it and its contents. As such, the contract is governed by Article 1643 of the
of the same. Civil Code 10 which provides:
14. The bank has no interest whatsoever in said Art. 1643. In the lease of things, one of the parties
contents, except herein expressly provided, and it binds himself to give to another the enjoyment or use
assumes absolutely no liability in connection of a thing for a price certain, and for a period which
therewith.1 may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.
After the execution of the contract, two (2) renter's keys were given to the
renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A It invoked Tolentino vs. Gonzales 11 — which held that the owner
guard key remained in the possession of the respondent Bank. The safety of the property loses his control over the property leased during
deposit box has two (2) keyholes, one for the guard key and the other for the the period of the contract — and Article 1975 of the Civil Code
renter's key, and can be opened only with the use of both keys. Petitioner which provides:
claims that the certificates of title were placed inside the said box.
There is, however, some support for the view that the
The prevailing rule appears to be that where a safe-
relationship in question might be more properly
deposit company leases a safe-deposit box or safe
characterized as that of landlord and tenant, or lessor
and the lessee takes possession of the box or safe
and lessee. It has also been suggested that it should
and places therein his securities or other valuables,
be characterized as that of licensor and licensee. The
the relation of bailee and bail or is created between
relation between a bank, safe-deposit company, or
the parties to the transaction as to such securities or
storage company, and the renter of a safe-deposit
other valuables; the fact that the
box therein, is often described as contractual,
safe-deposit company does not know, and that it is
express or implied, oral or written, in whole or in part.
not expected that it shall know, the character or
But there is apparently no jurisdiction in which any
description of the property which is deposited in such
rule other than that applicable to bailments governs
safe-deposit box or safe does not change that
questions of the liability and rights of the parties in
relation. That access to the contents of the safe-
respect of loss of the contents of safe-deposit
deposit box can be had only by the use of a key
boxes. 22 (citations omitted)
retained by the lessee ( whether it is the sole key or
one to be used in connection with one retained by the
lessor) does not operate to alter the foregoing rule. In the context of our laws which authorize banking institutions to rent out
The argument that there is not, in such a case, a safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in
delivery of exclusive possession and control to the the United States has been adopted. Section 72 of the General Banking
deposit company, and that therefore the situation is Act 23pertinently provides:
entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the
ground that as possession must be either in the Sec. 72. In addition to the operations specifically
depositor or in the company, it should reasonably be authorized elsewhere in this Act, banking institutions
considered as in the latter rather than in the former, other than building and loan associations may
since the company is, by the nature of the contract, perform the following services:
given absolute control of access to the property, and
(a) Receive in custody funds, violation of law or public policy. It must clearly appear
documents, and valuable that there actually was such a special contract,
objects, and rent safety however, in order to vary the ordinary obligations
deposit boxes for the implied by law from the relationship of the parties;
safeguarding of such effects. liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The
company, in renting
xxx xxx xxx safe-deposit boxes, cannot exempt itself from liability
for loss of the contents by its own fraud or negligence
or that of its agents or servants, and if a provision of
The banks shall perform the services permitted under
the contract may be construed as an attempt to do
subsections (a), (b) and (c) of this section
so, it will be held ineffective for the purpose. Although
as depositories or as agents. . . . 24 (emphasis
it has been held that the lessor of a safe-deposit box
supplied)
cannot limit its liability for loss of the contents thereof
through its own negligence, the view has been taken
Note that the primary function is still found within the parameters of a contract that such a lessor may limits its liability to some
of deposit, i.e., the receiving in custody of funds, documents and other extent by agreement or stipulation. 30 (citations
valuable objects for safekeeping. The renting out of the safety deposit boxes omitted)
is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing 25 and,
Thus, we reach the same conclusion which the Court of Appeals arrived at,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish
that is, that the petition should be dismissed, but on grounds quite different
such stipulations, clauses, terms and conditions as they may deem
from those relied upon by the Court of Appeals. In the instant case, the
convenient, provided they are not contrary to law, morals, good customs,
respondent Bank's exoneration cannot, contrary to the holding of the Court
public order or public policy. The depositary's responsibility for the
of Appeals, be based on or proceed from a characterization of the impugned
safekeeping of the objects deposited in the case at bar is governed by Title
contract as a contract of lease, but rather on the fact that no competent proof
I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in
was presented to show that respondent Bank was aware of the agreement
performing its obligation, it is found guilty of fraud, negligence, delay or
between the petitioner and the Pugaos to the effect that the certificates of
contravention of the tenor of the agreement. 26 In the absence of any
title were withdrawable from the safety deposit box only upon both parties'
stipulation prescribing the degree of diligence required, that of a good father
joint signatures, and that no evidence was submitted to reveal that the loss
of a family is to be observed. 27 Hence, any stipulation exempting the
of the certificates of title was due to the fraud or negligence of the respondent
depositary from any liability arising from the loss of the thing deposited on
Bank. This in turn flows from this Court's determination that the contract
account of fraud, negligence or delay would be void for being contrary to law
involved was one of deposit. Since both the petitioner and the Pugaos agreed
and public policy. In the instant case, petitioner maintains that conditions 13
that each should have one (1) renter's key, it was obvious that either of them
and 14 of the questioned contract of lease of the safety deposit box, which
could ask the Bank for access to the safety deposit box and, with the use of
read:
such key and the Bank's own guard key, could open the said box, without
the other renter being present.
13. The bank is not a depositary of the contents of
the safe and it has neither the possession nor control
Since, however, the petitioner cannot be blamed for the filing of the complaint
of the same.
and no bad faith on its part had been established, the trial court erred in
condemning the petitioner to pay the respondent Bank attorney's fees. To
14. The bank has no interest whatsoever in said this extent, the Decision (dispositive portion) of public respondent Court of
contents, except herein expressly provided, and it Appeals must be modified.
assumes absolutely no liability in connection
therewith. 28
WHEREFORE, the Petition for Review is partially GRANTED by deleting the
award for attorney's fees from the 4 July 1989 Decision of the respondent
are void as they are contrary to law and public policy. We find Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
Ourselves in agreement with this proposition for indeed, said pronouncement We made above on the nature of the relationship between
provisions are inconsistent with the respondent Bank's the parties in a contract of lease of safety deposit boxes, the dispositive
responsibility as a depositary under Section 72(a) of the General portion of the said Decision is hereby AFFIRMED and the instant Petition for
Banking Act. Both exempt the latter from any liability except as Review is otherwise DENIED for lack of merit.
contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be
No pronouncement as to costs.
admitted to any rented safe, to wit:
SO ORDERED.
8. The Bank shall use due diligence that no
unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from
it. 29